<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1996
REGISTRATION NO. 333- 06703
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
APPLIED IMAGING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
3841 77-012490
<S> <C> <C>
CALIFORNIA (PRIOR TO REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DELAWARE (AFTER REINCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
</TABLE>
2380 WALSH AVENUE, BUILDING B
SANTA CLARA, CALIFORNIA 95051
(408) 562-0250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ABRAHAM I. CORIAT
CHIEF EXECUTIVE OFFICER
APPLIED IMAGING CORP.
2380 WALSH AVENUE, BUILDING B
SANTA CLARA, CALIFORNIA 95051
(408) 562-0250
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
J. CASEY MCGLYNN, ESQ. ROBERT V. GUNDERSON, JR., ESQ.
DAVID J. SEGRE, ESQ. DAVID T. YOUNG, ESQ.
WILSON SONSINI GOODRICH & ROSATI GUNDERSON DETTMER STOUGH VILLENEUVE
PROFESSIONAL CORPORATION FRANKLIN & HACHIGIAN, LLP
650 PAGE MILL ROAD 600 HANSEN WAY, SECOND FLOOR
PALO ALTO, CA 94304 PALO ALTO, CA 94304
(415) 493-9300 (415) 843-0500
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(1)(2) REGISTRATION FEE(3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 2,645,000 $16.00 $42,320,000 14,593.11
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) promulgated under the Securities
Act of 1933, as amended.
(3) A registration fee of $14,593.11 was previously paid.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 26, 1996
2,300,000 SHARES
APPLIED IMAGING
[LOGO OF APPLIED IMAGING APPEARS HERE]
COMMON STOCK
All the shares of Common Stock offered hereby are being sold by Applied
Imaging Corp. ("Applied Imaging" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$14.00 and $16.00. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. Application has
been made to have the Common Stock approved for quotation on the Nasdaq
National Market under the symbol "AICX."
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total (3)..................................... $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $750,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
345,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the offices of Montgomery Securities on or about , 1996.
-----------
MONTGOMERY SECURITIES
DILLON, READ & CO. INC.
VECTOR SECURITIES INTERNATIONAL, INC.
, 1996
<PAGE>
SOLUTIONS FOR PRENATAL SCREENING
FETAL CELL LABORATORY
The Company's prenatal screening system, if approved, will be sold to prenatal
diagnostic laboratories where genetic analysis is typically done.
CONSUMABLE ENRICHMENT KIT
The Company's proprietary consumable enrichment kit is designed to enrich the
concentration of fetal blood cells in a maternal blood sample.
FETAL CELL SLIDE SCANNING SYSTEM
The Company is developing an automated system to rapidly identify fetal blood
cells based on adaptations of its image analysis, pattern recognition and
slide scanning technologies incorporated in the Company's current cytogenetic
products.
FETAL CELL
This fetal blood cell was identified using the Company's proprietary
technology. In laboratory studies, the Company has enriched the concentration
of fetal blood cells in maternal blood samples taken during early gestation.
After identification, this fetal cell was subjected to a DNA probe assay.
--------------
THE COMPANY'S PRENATAL SCREENING SYSTEM HAS NOT BEEN APPROVED FOR MARKETING BY
THE UNITED STATES FOOD AND DRUG ADMINISTRATION ("FDA") OR ANY INTERNATIONAL
REGULATORY AUTHORITIES.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
CYTOSCAN(R) is a registered United States trademark of the Company and APPLIED
IMAGING(TM), GENEVISION(TM) and CYTOVISION(TM) are trademarks of the Company.
This Prospectus also contains trademarks and tradenames of other companies.
<PAGE>
PROSPECTUS SUMMARY
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under
the caption "Risk Factors," which would cause actual results to differ
materially from those indicated by such forward-looking statements. The
following summary is qualified in its entirety by the more detailed
information, including the Consolidated Financial Statements and Notes thereto,
appearing elsewhere in this Prospectus.
THE COMPANY
Applied Imaging designs, develops, manufactures and markets automated
clinical analysis systems used by laboratories for prenatal and other genetic
testing. The Company's cytogenetic instrumentation business, which has sold
systems to approximately 500 sites in more than 30 countries since its
inception, includes systems that enable laboratories to automate aspects of the
detection of chromosomal abnormalities associated with conditions such as
Down's Syndrome. In addition to the Company's core instrument business, the
Company is developing a proprietary genetic screening system designed to enable
prenatal screening for genetic abnormalities by isolating fetal red blood cells
("fetal blood cells") from a routine maternal blood sample. This new system is
designed to improve current prenatal screening techniques by providing an
accurate, timely and cost-effective procedure without the risks of miscarriage
or fetal damage associated with invasive prenatal testing.
Prenatal genetic testing is currently performed either invasively by
extracting, culturing and analyzing fetal cells taken from amniotic fluid or
placental tissue, or non-invasively by analysis of serum markers derived from a
maternal blood sample. The Company estimates approximately 2.3 million pregnant
women in the United States undergo some form of prenatal screening each year.
Despite the widespread use of prenatal screening, there are significant
shortcomings associated with existing screening methods. Invasive procedures,
which include amniocentesis (extracting fetal cells from the amniotic sac) and
chorionic villus sampling (extracting tissues from the placenta), involve
direct extraction of fetal cells. These procedures can accurately detect a
broad range of chromosomal disorders but pose a risk of fetal loss of between
0.5-1%. Due to this risk, these invasive procedures are usually only
recommended for women age 35 or older, at which ages, the risk of having a
child with a chromosomal disorder is greater than the risk of spontaneous
miscarriage associated with these procedures. The Company estimates that these
procedures are performed on approximately 300,000 women annually in the United
States. The non-invasive screening procedures, which include alpha-fetoprotein
("AFP") and the "triple test," both of which are blood chemistry tests, are
currently broadly used for pregnant women including those under the age of 35
with approximately 2 million tests performed annually in the United States.
While these tests present no risk to the fetus since they do not directly
analyze fetal cells, they are much less accurate with detection rates of
approximately 60% for chromosomal disorders and false positive rates of
approximately 5%.
The Company's prenatal screening system under development is intended to
provide an accurate, non-invasive test by directly analyzing fetal blood cells
isolated from a routine maternal blood sample. The Company's proprietary
screening system incorporates (i) a patented blood-based procedure to enrich
the concentration of fetal blood cells, (ii) automated image analysis
instrumentation to identify the fetal blood cells and (iii) the use of third-
party DNA probes to identify certain chromosomal disorders present in fetal
blood cells. This system is expected to be accurate because it evaluates actual
fetal cells while posing no risk to the fetus. The Company's prenatal screening
system is currently in preclinical evaluation and application for FDA approval
has not yet been submitted.
3
<PAGE>
The Company believes that a key aspect of its prenatal screening system is
its ability to enrich and identify fetal blood cells so that they can be
directly analyzed using available DNA probe technology. As of August 1996, the
Company and its collaborators have used the fetal blood cell enrichment
procedure on a total of 133 maternal blood samples. The Company's system has
achieved fetal blood cell identification in 120 of the 133 samples tested, or
90% of cases. In 13 maternal blood samples (10% of the total samples), no fetal
blood cells were found. The Company intends to continue preclinical and
clinical evaluation of this system and anticipates beginning a multi-site
international clinical trial during the first half of 1997. Additionally, the
Company intends to file two separate 510(k) applications for the fetal cell
enrichment and automated imaging system components of its system before the end
of 1996, and an additional application (either a 510(k), tier III or a PMA) for
the DNA-probe component of its prenatal screening system. There can be no
assurance that the Company will be successful in establishing its prenatal
screening system as a broad-based prenatal screening procedure nor can there be
any assurance that the prenatal screening system will be approved for marketing
by the FDA or, if approved, that clinical acceptance will be achieved.
The Company's strategy is to establish its system as a broad-based prenatal
screening procedure. The Company anticipates that sales of this system, if
approved by the FDA, will include both its proprietary consumable enrichment
kits, used to separate fetal blood cells from maternal blood samples and
imaging instrumentation used to analyze the cells. These new image analysis
systems are contemplated to be compatible with the Company's existing installed
cytogenetic instrument base. The Company believes that it can leverage its
existing infrastructure, worldwide distribution capabilities and extensive
laboratory relationships to support the world-wide introduction of this fetal
cell screening system under development. Furthermore, the Company believes that
its new cell enrichment and image analysis system could have clinical utility
for cancer applications and the prenatal diagnosis of single gene disorders,
and it intends to pursue the development of these other potential applications.
Significant additional research and development will be necessary to establish
the clinical utility of the Company's cell enrichment techniques and image
analysis system for these other potential applications.
THE OFFERING
<TABLE>
<C> <S>
Common Stock to be offered by the Company....... 2,300,000 shares
Common Stock to be outstanding after the
Offering(1).................................... 7,436,064 shares
Use of proceeds................................. For research and development
and clinical trials related
to the prenatal screening
system; repayment of
indebtedness; working capital
and general corporate
purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.......... AICX
</TABLE>
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $10,781 $11,711 $ 8,681 $ 9,571 $10,798 $ 5,215 $ 5,995
Cost of revenues........ 5,783 6,184 4,965 5,350 5,484 2,611 3,122
------- ------- ------- ------- ------- ------- -------
Gross profit.......... 4,998 5,527 3,716 4,221 5,314 2,604 2,873
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 1,164 1,316 1,756 2,821 2,919 1,380 1,698
Sales and marketing.... 2,565 3,279 2,543 2,524 2,918 1,335 1,476
General and
administrative........ 1,453 1,642 1,229 1,898 2,094 996 949
Restructuring and
reorganization costs.. 396 -- -- -- -- -- --
Write-off of research
and development in
process............... 1,285 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 6,863 6,237 5,528 7,243 7,931 3,711 4,123
------- ------- ------- ------- ------- ------- -------
Operating loss......... $(1,865) $ (710) $(1,812) $(3,022) $(2,617) $(1,107) $(1,250)
======= ======= ======= ======= ======= ======= =======
Net loss............... $ (977) $ (480) $(1,773) $(2,970) $(2,546) $(1,101) $(1,235)
======= ======= ======= ======= ======= ======= =======
Pro forma net loss per
common share(2)........ $ (0.45) $ (0.22)
======= =======
Shares used in computing
pro forma net loss per
common share(2)........ 5,635 5,687
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $ 3,236 $33,975
Working capital......................................... 2,238 33,573
Total assets............................................ 8,089 38,828
Long-term debt.......................................... 223 223
Accumulated deficit..................................... 10,375 10,375
Total stockholders' equity(4)........................... 3,615 34,950
</TABLE>
- --------
(1) Based upon shares outstanding as of June 30, 1996. Excludes (i) 497,250
shares issuable upon exercise of options outstanding under the Company's
Amended and Restated 1988 Incentive Stock Option Plan (the "1988 Option
Plan"), (ii) 120,000 shares reserved for issuance under the Company's 1994
Director Option Plan (the "Director Plan"), (iii) 200,000 shares reserved
for issuance under the Company's Employee Stock Purchase Plan (the
"Purchase Plan"), (iv) 508,734 shares issuable upon exercise of outstanding
warrants to purchase Common Stock and (v) an additional 632,113 shares
reserved for issuance under the 1988 Option Plan. See "Management--
Incentive Stock Plans," "Description of Capital Stock--Warrants."
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
(3) As adjusted to reflect the sale of the 2,300,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $15.00 per share and the receipt of the estimated net proceeds therefrom
and repayment of $596,000 of short-term debt. See "Use of Proceeds."
(4) No cash dividends have been declared with respect to the Company's Common
and Preferred Stock.
----------------
Except as set forth in the Consolidated Financial Statements or as otherwise
indicated, all information in this Prospectus assumes (i) the reincorporation
of the Company from California to Delaware which will occur prior to this
offering, (ii) the filing of the Company's Restated Certificate of
Incorporation authorizing a class of undesignated Preferred Stock, to be
effective upon the closing of this offering, (iii) the conversion of all
outstanding shares of Preferred Stock into Common Stock upon the closing of
this offering, (iv) the net exercise of certain outstanding warrants to
purchase Series F Preferred Stock into 85,387 shares of Common Stock and (v) no
exercise of the Underwriters' over-allotment option. See "Description of
Capital Stock" and "Underwriting."
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. The following principal factors should be carefully
considered in evaluating the Company and its business before purchasing the
Common Stock offered hereby.
PRENATAL SCREENING SYSTEM IN EARLY STAGE OF DEVELOPMENT; NO ASSURANCE OF
SUCCESSFUL DEVELOPMENT OR COMMERCIALIZATION
The Company's prenatal screening system is in an early stage of development
and testing, and application for FDA approval has not yet been submitted. To
date, the Company's technology for enriching the concentration of nucleated
fetal red blood cells in maternal blood samples has been subjected only to
preclinical testing by the Company. The isolation, enrichment and analysis of
fetal cells from a maternal blood sample is difficult and poses a significant
technical challenge due to their rarity in maternal blood. Estimates of the
frequency of fetal cells in maternal blood generally range from 1 in 1 million
to 1 in 10 billion. Preclinical testing of the Company's prenatal screening
system has only recently shown progress in fetal cell isolation and detection.
As of August 1996, the Company and its collaborators have used the fetal blood
cell enrichment procedure on a total of 133 maternal blood samples. In these
studies, the Company's system achieved fetal cell identification in 120 of the
133 samples tested. In 13 of these 133 samples, no fetal blood cells were
found. In seven of the 120 samples in which fetal cell identification was
achieved, the Company's investigators identified and counted only one fetal
cell. The Company has not yet determined how many fetal cells, if any, can be
obtained using its process and whether its results can be duplicated in larger
studies. There can be no assurance that the Company's prenatal screening
system will be able to detect fetal cells in amounts sufficient to allow for
the detection and analysis of chromosomal abnormalities. In addition, the
Company's preclinical testing in analyzing cells has almost exclusively been
limited to detecting male and female chromosomes and has not yet focused on
chromosomal abnormalities such as Down's Syndrome. There can be no assurance
that the Company's prenatal screening system will be able to effectively and
accurately detect Down's Syndrome or other chromosomal abnormalities. The
development and potential commercialization of the Company's prenatal
screening system will require significant research and development,
substantial investment and clinical testing and regulatory clearances or
approvals. The Company plans to continue to conduct preclinical testing in
order to analyze the feasibility of its prenatal screening system. Such
efforts may disclose significant technical obstacles that need to be overcome
prior to pursuing clinical trials and seeking necessary regulatory approvals.
For example, during preclinical testing the Company discovered that the gel in
the preformed density gradients portion of its prenatal screening system
destabilized if not properly stored at cool temperatures and, in any event,
destabilized within two weeks even if properly stored. Although the Company
believes it has identified a modified gel with greater stability and longer
shelf life, there can be no assurance that this instability will be resolved
or that other problems will not be detected. Such problems could have the
effect of delaying or preventing the successful development of the Company's
prenatal screening system. There can be no assurance that the Company will be
able to develop this technology into a reliable and effective prenatal
screening system, that required regulatory clearances or approvals for
commercialization of its system will be obtained in a timely manner, or at
all, or that the Company's prenatal screening system or other products under
development, if introduced commercially, will be successful. If the Company is
unable to successfully develop and market its prenatal screening system, the
Company's business, financial condition and results of operations would be
materially and adversely affected. See "Business--Applied Imaging's Prenatal
Screening System."
LACK OF CLINICAL DATA
The Company has conducted no clinical trials of its prenatal screening
system pursuant to FDA reviewed or FDA approved protocols. There can be no
assurance that the Company will commence such clinical testing, or once
commenced, that such testing can be completed successfully within the
Company's expected time frame and budget, if at all, or that the Company's
products will prove to be reliable and effective in clinical trials. If
clinical trials are initiated, such trials may disclose significant technical
obstacles having the effect of delaying
6
<PAGE>
or preventing the development, testing, regulatory approval and
commercialization of the Company's prenatal screening system. There can be no
assurance that the results of such clinical trials will be consistent with the
Company's limited preclinical results to date or would be sufficient to obtain
regulatory clearance or approval or clinical acceptance. If the Company is
unable to initiate and conclude successfully clinical trials of its prenatal
screening system, the Company's business, financial condition and results of
operations would be materially and adversely affected.
NO ASSURANCE OF CLINICAL ACCEPTANCE
The isolation of fetal cells from maternal blood is a new and novel
development. The clinical acceptance of the Company's prenatal screening
system will depend upon its acceptance by the medical community and third-
party payors as clinically useful, reliable, accurate, and cost-effective
compared to existing and future procedures. Clinical acceptance will depend on
numerous factors, including the establishment of the system's ability to
isolate sufficient numbers of fetal cells during the early stages of
pregnancy, to adequately enrich the concentration of nucleated fetal cells,
and to reliably analyze and detect the presence of chromosomal abnormalities.
Clinical acceptance will also depend on the receipt of regulatory clearances
in the United States and internationally, the availability of third-party
reimbursement and the Company's ability to adequately train laboratory
technicians and cytogeneticists on how to use the prenatal screening system.
In addition, there can be no assurance that the Company's prenatal screening
system will be a preferable alternative to existing procedures such as
maternal AFP or triple test which detect neural tube defects in addition to
chromosomal abnormalities, or that the prenatal screening system will not be
rendered obsolete or noncompetitive by products under development by other
companies. The Company's system is intended to initially screen for Down's
Syndrome and may not compete favorably with widely accepted methodologies such
as amniocentesis or CVS that are highly accurate and diagnose a broader range
of abnormalities from one sample of fetal cells. Patient acceptance of the
Company's prenatal testing system will depend in part upon physician
recommendations as well as other factors, including the effectiveness and
reliability of the procedure as compared to amniocentesis, CVS and serum
marker procedures. Even if the Company's prenatal screening system is
clinically adopted, physicians may elect not to recommend the procedure unless
acceptable reimbursement from health care payors is available. There can be no
assurance that the Company's prenatal screening system under development will
be accepted by the medical community or that market demand for such system
will be sufficient to allow the Company to achieve profitable operations.
Failure of the Company's prenatal screening procedure, for whatever reason, to
achieve significant clinical adoption or failure of the Company's system to
achieve any significant market acceptance would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Applied Imaging's Prenatal Screening System."
ACCUMULATED DEFICIT; FUTURE LOSSES
From its inception in July 1986 through June 30, 1996, the Company has
generated an accumulated deficit of approximately $10.4 million. The Company
expects its operating losses to continue to increase as it continues its
efforts to develop and test its prenatal screening system. There can be no
assurance that its prenatal screening system under development will be
commercially marketed or, if commercially marketed, that the Company will ever
receive sufficient revenue to achieve profitability and failure to do so would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
QUARTERLY FLUCTUATIONS
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly operating results. Factors which may
have an influence on the Company's operating results in a particular quarter
include (i) demand for the Company's products, new product introductions by
the Company or its competitors or transitions to new products; (ii) the
results of preclinical or planned clinical trials and, if ever received, the
timing
7
<PAGE>
of regulatory and third-party reimbursement approvals; (iii) the timing of
orders and shipments; (iv) the mix of sales between distributors and the
Company's direct sales force; (iv) competition, including pricing pressures;
(v) the timing and amount of research and development expenses, including
clinical trial-related expenditures; (vi) seasonal factors; (vii) foreign
currency fluctuation; and (viii) the delay between incurrence of expenses to
develop new products, including related marketing and service capabilities,
and realization of benefits from such efforts. The Company typically has
experienced increased sales in its first and fourth quarter. The Company
believes this pattern of fluctuating revenues reflects the budgetary spending
practices of the Company's customer base which consists primarily of public
and private cytogenetic laboratories, research organizations and hospitals
operating on annual budgets. There can be no assurance that this trend will
continue. Due to all the foregoing factors, it is likely that in some future
quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "Business--Manufacturing."
ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE
The Company has expended and will continue to expend substantial funds for
research and development, preclinical testing, planned clinical
investigations, capital expenditures, and manufacturing and marketing of its
products. The timing and amount of spending of such capital resources cannot
be accurately determined at this time and will depend upon several factors,
including the progress of its research and development efforts and planned
clinical investigations, competing technological and market developments,
commercialization of products currently under development, and market
acceptance and demand for the Company's products. To the extent required, the
Company may seek to obtain additional funds through equity or debt financing,
collaborative or other arrangements with other companies and from other
sources. If additional funds are raised by issuing equity securities, further
dilution to stockholders could occur. There can be no assurance that
additional financing will be available when needed or on terms acceptable to
the Company. If adequate funds are not available, the Company could be
required to delay development or commercialization of certain of its products,
to license to third parties the rights to commercialize certain products or
technologies that the Company would otherwise seek to commercialize for
itself, or to reduce the marketing, customer support or other resources
devoted to certain of its products each of which could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Use of Proceeds," "Dilution" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DEPENDENCE ON PRENATAL SCREENING SYSTEM; RAPID TECHNOLOGICAL CHANGE AND RISK
OF TECHNOLOGICAL OBSOLESCENCE
The Company is dependent on the successful development and commercialization
of the Company's prenatal screening system. Unfavorable preclinical or
clinical results, failure to obtain regulatory clearances or approvals in a
timely manner, or at all, or failure to gain widespread market acceptance for
the system would have a material adverse effect on the Company's business,
financial condition and results of operations.
The medical device industry, particularly the prenatal testing, diagnostic,
and screening markets, is characterized by rapid and significant technological
change. The sale of the Company's current products is largely dependent upon
the continued use of prenatal testing methodologies that require the location
of fetal cells in metaphase and the karyotyping of chromosomes identified in
the metaphase cells. In addition, the Company's current products require a
testing laboratory to make a large one-time investment, and the availability
of less expensive automated cytogenetic equipment could have a material
adverse effect on the Company's business financial condition, and results of
operations. The Company's future success will depend in large part on the
Company's ability to continue to respond to such changes. There can be no
assurance that the Company will be able to respond to such changes or that new
or improved competing products will not be developed that render the Company's
products obsolete. Product research and development will require substantial
expenditures and will be subject to inherent risks, and there can be no
assurance that the Company will be successful in developing products that have
the characteristics necessary to screen or diagnose particular indications or
that any new product introduced will receive regulatory clearance or approval
or will be successfully commercialized. See "Business--Research and
Development."
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HIGHLY COMPETITIVE MARKET; RISK OF COMPETING SCREENING APPROACHES
The market for the Company's current cytogenetic products is highly
competitive, and the Company expects competition to increase. With respect to
its current cytogenetic products, the Company's current competitors include
Vysis Corp., a biotechnology subsidiary of Amoco Technology Company,
Perceptive Scientific, Inc. (acquired by International Remote Imaging Systems,
Inc.) and manual laboratory procedures. The market for the Company's current
cytogenetic products is limited to laboratories and institutions performing
prenatal and other genetic testing. There can be no assurance that the
Company's competitive position in cytogenetic products will be maintained.
The medical diagnostic and biotechnology industries are subject to intense
competition. The Company knows of certain companies that are in the process of
developing genetic screening products based on competing technologies designed
to enrich the concentration of nucleated fetal cells in maternal blood
samples. These companies include Integrated Genetics, Inc., CellPro,
Incorporated, Aprogenex, Inc. and Centocor, Inc. Many of the Company's
competitors have greater financial and technical resources and production and
marketing capabilities than the Company. There can be no assurance that these
competitors will not succeed in developing technologies and products that are
more accurate and effective, easier to use or less expensive than those which
are currently offered or being developed by the Company or that would render
the Company's technology and products obsolete and noncompetitive. In
addition, many of the Company's competitors have significantly greater
experience than the Company in conducting clinical investigations of new
screening and diagnostic products and in obtaining FDA and other clearances or
regulatory approvals of products. Accordingly, the Company's competitors may
succeed in developing and obtaining regulatory approvals for such products
more rapidly than the Company. The Company's prenatal screening system under
development, if commercially marketed, will be subject to intense competition
from existing prenatal screening and diagnostic approaches, such as AFP,
triple test, CVS and amniocentesis. These competing approaches are widely
accepted and screen and/or diagnose a broad range of abnormalities. There can
be no assurance that the Company's prenatal screening system under development
will replace or supplement any of these or other existing procedures. Such
competition from new, developing or existing products or failure of the
Company to successfully develop its prenatal screening system would have a
material, adverse effect on the Company's business, financial condition and
results of operations. See "Business--Competition."
UNCERTAINTY OF FDA OR OTHER REGULATORY CLEARANCES OR APPROVALS
The preclinical and clinical testing, manufacturing, labeling, distribution,
sale, marketing, advertising and promotion of the Company's research,
investigational and clinical screening and diagnostic products are subject to
extensive and rigorous government regulation in the United States and certain
other countries. In the United States and certain other countries, the process
of obtaining and maintaining required regulatory clearances or approvals is
lengthy, expensive and uncertain. The Company's future success will be
significantly dependent upon commercial sales of its prenatal screening system
under development. The Company will not be able to market this prenatal
screening system for clinical diagnostic use in the United States unless and
until the Company obtains clearance or approval from the United States Food
and Drug Administration ("FDA") for each device within the system and will not
be able to market such system overseas until it meets the safety and quality
regulations of each foreign jurisdiction in which the Company, its agents or
distributors seek to sell such system. Noncompliance with applicable FDA
requirements can result in severe administrative, civil and criminal
sanctions.
The Company's Cytoscan products were marketed until 1994 in the United
States pursuant to pre-market notifications to the FDA under Section 510(k) of
the Federal Food, Drug and Cosmetic Act ("510(k)"). A 510(k) pre-market
notification must be supported by appropriate data establishing, to the
satisfaction of the FDA, that a newly developed device is "substantially
equivalent" to a legally marketed device that did not itself require FDA
approval of a premarket approval application ("PMA"). The PMA process is
significantly more complex, expensive and time consuming than the 510(k)
process. The decision whether to seek 510(k) clearance for a changed or
modified device is left to the manufacturer in the first instance. The Company
to date has not sought 510(k) clearance for its CytoVision system, which has
been marketed since 1993, on the basis of the Company's conclusion, reflected
in the Company's scientific report addressing this matter, that CytoVision is
a new model of Cytoscan and there have not been any changes or modifications
in design, components, method of manufacture or intended use, which could
significantly affect the safety or effectiveness of the original 510(k)-
cleared
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Cytoscan device. There can be no assurance that the FDA will agree with the
Company's decision not to seek 510(k) clearance for CytoVision, that it will
not require the Company to cease sales and distribution of and seek 510(k)
clearance for the CytoVision system, or that such clearance, if required, will
be obtained in a timely manner or at all.
The Company intends to apply for two separate 510(k) clearances for the
fetal cell enrichment and scanning components of its prenatal screening
system. The DNA probe components of the Company's prenatal screening system
will require either FDA clearance of a 510(k) with a tier III level of review
(the most extensive level of FDA review of a 510(k), equivalent to the FDA
review of a PMA in thoroughness and time) or FDA approval of a PMA.
The Company intends to submit a protocol for clinical trials of the DNA
probe component of its prenatal screening system to the FDA before the end of
1996 and to initiate a multisite U.S. and international clinical trial of the
DNA probe component of its prenatal screening system to detect chromosomal
disorders in isolated fetal cells during the first half of 1997, based upon
the response from the FDA. There can be no assurance regarding the timing or
nature of the FDA response regarding the DNA probe related protocol or the
timing for the commencement of clinical trials. There can be no assurance that
510(k) clearance for any portion of the fetal cell screening system under
development or any other future product or modification of an existing product
will be granted or that the clearance process will not be unduly lengthy and
subjected to a thorough internal review equivalent to that ordinarily reserved
for devices requiring premarket approval by the FDA. If substantial
equivalence cannot be established or if the FDA determines that the device or
the particular application for the device requires a more rigorous review,
which the FDA has stated is possible for the Company's prenatal screening
system under development, the FDA will require that the Company submit a PMA
that must be reviewed and approved by the FDA prior to sales, distribution and
marketing of these products in the United States. Currently, the DNA probes
that the Company intends to purchase from third parties to incorporate into
its prenatal screening system are sold on a research basis without FDA
approval for commercial sale. The FDA requires DNA probes to have 510(k)
clearance or PMA approval for commercial sale for clinical diagnostic use,
which could cause the price of DNA probes to increase, making the Company's
prenatal screening system less price competitive compared to existing prenatal
genetic test procedures.
The regulation of medical devices continues to develop and there can be no
assurance that new laws or regulations will not have a material adverse effect
on the Company's business, financial condition and results of operations.
Delays in receipt of clearance or approvals to market its products, failure to
receive these clearances or approvals, the loss of previously received
clearances or approvals, the determination that 510(k) clearance, pre-market
approval or other approval is required for a product being marketed without
such clearance or approval, or failure to comply with existing or future
regulatory requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Government Regulation."
NEED TO COMPLY WITH INTERNATIONAL GOVERNMENT REGULATION
The regulatory review process varies from country to country. Currently, the
Company's products are subject to pre-market approval in several of the
countries that are members of the European Union and subject to other
regulatory requirements in those and other countries. In addition, the
regulation of in vitro diagnostic devices ("IVDs") and other medical devices
continues to change. The Company may rely, in some circumstances, on its
international distributors for compliance with clinical trial requirements in
those countries where the Company intends to use distributors. Any enforcement
action by regulatory authorities with respect to past or future regulatory
noncompliance would have a material adverse effect on the Company's business,
financial condition and results of operations.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements
may differ. In addition, there may be foreign regulatory barriers other than
pre-market approval.
The Company plans to bring its instruments, when required, into compliance
with the European Parliament's Electromagnetic Emissions Requirement
(89/336/EEC) (the "EER") and to be entitled to apply the CE mark, with respect
to the EER, to its instruments. The European Parliament has made a distinction
between Medical Devices (MDs) and IVDs. The Company's instruments are not now
subject to the requirements nor
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advantages of the Medical Device Directive (93/42/EEC). There can be no
assurance, however, that some or all of the Company's products will not be
redefined as MDs and made subject to this Directive by the EU or its member
states, which would have a material adverse effect on the Company's business,
financial condition, and results of operations. Currently the European Union
("EU") and its member states have not adopted an EU-wide directive
specifically regulating IVDs. A "Draft" EU IVD Directive (95/0013/EEC[COD])
has been prepared but has not been adopted into law either in the European
Parliament or by any member state. To the Company's knowledge, there is no
date established at this time for its enactment. Transposition into law in the
member states may take up to two years to five years or longer following
enactment by the European Parliament. Under the terms of the "Draft" IVD
Directive a company (if it is in compliance) would be permitted to self-
certify compliance with 95/0013/EEC[COD] without the intervention of a
Competent Authority (a governmental agency of a member state with jurisdiction
over matters pertaining to the directive) or a Notified Body (a private entity
authorized by a Competent Authority to verify the compliance of a regulated
entity with a particular directive) and thus apply the CE mark to its products
with respect to this Directive. There can be no assurance, however, that the
Draft IVD Directive will be adopted, or if adopted, will be implemented as
drafted, or at all, that if adopted self-certification will be permitted, or
that more extensive and more burdensome requirements will not be imposed under
the IVD Directive (as adopted) or in the laws of the member states when
implemented, or that any such requirements will not have a material adverse
effect on the Company's business, financial condition, or results of
operations. There can be no assurance, moreover, that member states, or any
other European country, will not adopt other statutes or regulations that
require premarket approval of the Company products, or that will otherwise
have a material adverse effect on the Company's business, financial condition,
or results of operations.
DEPENDENCE UPON PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
The Company relies on trade secret protection and on its unpatented
proprietary know-how in the development and manufacturing of its products.
While the Company generally enters into confidentiality agreements with its
employees and consultants, there can be no assurance that the Company's trade
secrets or proprietary technology will not become known or be independently
developed by competitors in such a manner that the Company has no practical
recourse. Nor can there be any assurance that others will not develop or
acquire equivalent expertise or develop products which render the Company's
current or future products noncompetitive or obsolete. There can be no
assurance that the claims allowed under its patents will be sufficiently broad
to protect what the Company believes to be its proprietary rights. In
addition, there can be no assurance that issued patents will not be disallowed
or circumvented by competitors, or that the rights granted thereunder will
provide competitive advantages to the Company. Companies have filed
applications for, or have been issued patents relating to, products or
processes that may be competitive with certain of the Company's products or
processes. The Company is unable to predict how the courts would resolve
issues relating to the validity and scope of such patents.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.
No assurance can be given that any issued patent or patents based on pending
patent applications or any future patent application will exclude competitors,
that any of the Company's patent or patents in which it has licensed rights
will be held valid if subsequently challenged or that others will not claim
rights in or ownership of the patents and other proprietary rights held or
licensed by the Company. Furthermore, no assurance can be given that others
have not developed or will not develop similar products, duplicate any of the
Company's products or design around any patents issued to or licensed by the
Company or that may be issued in the future to the Company. Since patent
applications in the United States are maintained in secrecy until patents
issue, the Company also cannot be certain that others did not first file
applications for inventions covered by the Company's pending patent
applications, nor can the Company be certain that it will not infringe any
patents that may issue to others on such applications.
Legislation is pending in Congress that may limit the ability of medical
device manufacturers in the future to obtain patents on surgical and medical
procedures. While the Company cannot predict whether the legislation will be
enacted, or precisely what limitations will result from the law if enacted,
any limitation or reduction in
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the patentability of medical and surgical technology could have a material
adverse effect on the Company's ability to protect its proprietary methods and
procedures.
In addition, patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and the
filing of related patent applications. The Company has not conducted an
extensive search of patents issued to other companies, research or academic
institutions, or others, and no assurances can be given that such patents do
not exist, have not been filed, or could not be filed or issued, which contain
claims relating to the Company's technology, products or processes. Patents
issued and patent applications filed in the United States or internationally
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the
future will not receive, patents or obtain additional proprietary rights
relating to products or processes used or proposed to be used by the Company.
There are pending applications, which if issued with claims in their present
form, might provide proprietary rights to third parties relating to products
or processes used or proposed to be used by the Company. The Company may be
required to obtain licenses to patents or proprietary rights of others.
The medical device industry in general, and the industry segment that
includes products for prenatal diagnostic screening in particular, have been
characterized by substantial competition. Litigation regarding patent and
other intellectual property rights, whether with or without merit, could be
time-consuming and expensive to respond to and could divert the Company's
technical and management personnel. The Company may be involved in litigation
to defend against claims of infringement by the Company, to enforce patents
issued to the Company, or to protect trade secrets of the Company. If any
relevant claims of third-party patents are held as infringed and not invalid
in any litigation or administrative proceeding, the Company could be prevented
from practicing the subject matter claimed in such patents, or would be
required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. The Company has
recently received a letter from Vysis Corp. informing the Company that its
products might fall within the claims of a United States patent exclusively
licensed to Vysis Corp. Vysis Corp. offered the Company the right to obtain a
sublicense to such patent. The Company does not believe it is necessary to
obtain such a sublicense and does not believe it is infringing the patent .
However, there can be no assurance that the Company will not ultimately be
required to seek a license from Vysis Corp. or any other third party or that
such license would be available or, if available, would be available on terms
commercially-acceptable to the Company. In addition, in the event of any
possible infringement, there can be no assurance that the Company would be
successful in any attempt to redesign its products or processes to avoid such
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could
prevent the Company from manufacturing and selling its products, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company intends to vigorously protect and
defend its intellectual property. Costly and time-consuming litigation brought
by the Company may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, or to determine the
enforceability, scope and validity of the proprietary rights of others. See
"Business--Patents and Proprietary Rights" and "--Competition."
LIMITED MANUFACTURING EXPERIENCE; NO MANUFACTURING EXPERIENCE FOR THE
CONSUMABLE ENRICHMENT KIT
To date, the Company's manufacturing activities have consisted primarily of
the assembly and testing of its cytogenetic products. If the Company obtains
necessary regulatory clearances, registrations and approvals for its prenatal
screening system and such systems are successfully introduced, the Company
will be required to increase its manufacturing capacity. The Company has no
experience in manufacturing the consumable enrichment kit portion of its
prenatal screening system. Manufacturers often encounter difficulties in
commencing and increasing production, including problems involving production
yields, adequate supplies of components, quality control and assurance
(including failure to comply with the FDA's and State of California's GMP
regulations, international quality standards and other regulatory
requirements) and shortages of qualified personnel. Difficulties experienced
by the Company in manufacturing could have a material adverse effect on its
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business, financial condition and results of operations. There can be no
assurance that the Company will be successful in commencing manufacture of the
prenatal screening system in commercial quantities, increasing manufacturing
capacity or that it will not experience manufacturing difficulties or product
recalls in the future. See "Business--Manufacturing."
The Company plans to initially subcontract third parties to manufacture the
consumable enrichment kit component of its prenatal screening system under
development and may ultimately manufacture such components on its own. For
clinical trials, the Company will purchase the consumable enrichment kit from
a third party. The Company may encounter difficulties in scaling up production
of the consumable enrichment kit of its prenatal screening system under
development or in hiring and training additional personnel to manufacture its
consumable enrichment kit products in commercial quantities.
NEED TO MANAGE GROWTH
Significant future growth in the Company's sales and expansion in the scope
of its operations, should they occur, may place considerable strain on the
Company's management, financial, manufacturing and other capabilities,
procedures and controls. There can be no assurance that any existing or
additional capabilities, procedures or controls will be adequate to support
the Company's operations or that its capabilities, procedures or controls will
be designed, implemented or improved in a timely and cost-effective manner.
Failure to implement, improve and expand such capabilities, procedures and
controls in an efficient manner at an appropriate pace could have a material
adverse effect on the Company's business, financial condition and results of
operations.
SINGLE SOURCE COMPONENTS; DEPENDENCE ON KEY DISTRIBUTORS
Certain components of the Company's prenatal screening system under
development are expected to be in consumable enrichment kit form. The Company
intends to initially subcontract the manufacture of such consumable enrichment
kits; however, given the stage of the product's development, neither internal
nor third-party manufacturing processes have been established. The Company
currently relies on a sole supplier for a certain component of its consumable
enrichment kit. There can be no assurance that reliable, high volume
commercial supplies of such component can be established at commercially
reasonable costs or that a new supplier could be qualified in a timely manner
if the supply of such component were interrupted. The Company also relies on a
sole source supplier for its preformed density gradients, an essential
component for its consumable enrichment kit. There can be no assurance that
reliable high volume manufacturing of such gradients can be established at
commercially reasonable costs or that a new supplier could be qualified in a
timely manner if the supply of such gradients were interrupted. In addition,
the Company proposes to incorporate DNA probes into its prenatal screening
system under development, which are currently provided by a limited number of
vendors. The Company has an obligation to purchase certain types of DNA probes
from a particular supplier subject to such supplier meeting various
performance standards. Such probes require FDA clearance or approval for
marketing for clinical diagnostic procedures in the United States and may
require FDA approval for export. The DNA probe market is characterized by
extensive patent litigation and any court order with respect to infringement
of intellectual property could adversely affect the supply of available and
cost-effective DNA probes. While the Company believes that other sources for
such DNA probes are available, if there were to be interruptions in obtaining
supplies from its present source, the Company would have to qualify new
sources of approved supply. Outside of North America and the United Kingdom,
the Company relies substantially on independent distributors and sales agents
to market and sell its products. There can be no assurance that distributors
and agents will devote adequate resources to support sales of the Company's
products. Moreover, agreements with a number of its distributors require that
the Company indemnify such distributors against costs, expenses and
liabilities relating to litigation regarding the Company's products and,
despite these obligations of the company, distributors may decide to reduce or
end their selling efforts until an infringement dispute is resolved or
settled. See "Risk Factors--Patents and Proprietary Technology; Risk of
Infringement," "Business--Applied Imaging's Prenatal Screening System," "--
Current Cytogenetic Products," "--Sales, Distribution and Marketing" and "--
Manufacturing."
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RELIANCE ON INTERNATIONAL SALES AND OPERATIONS
The Company has significant international operations based in the United
Kingdom employing approximately 40 employees. In 1993, 1994 and 1995, and in
the six-months ended June 1996 approximately 64%, 62% and 61% and 58%,
respectively, of the Company's total revenues were derived from customers and
distributors outside of the United States and Canada. Until such time, if
ever, as the FDA clears or approves the Company's fetal cell screening system
for marketing in the United States, the Company expects that international
sales of cytogenetic products will continue to account for a significant
portion of its revenues. Changes in overseas economic conditions, currency
exchange rates, foreign tax laws, or tariffs or other trade regulations could
have a material adverse effect on the Company's business, financial condition
and results of operations. The international nature of the Company's business
subjects it and its representatives, agents and distributors to laws and
regulations of the foreign jurisdictions in which it operates or in which its
products are sold. The regulation of medical devices in a number of such
jurisdictions, particularly in the European Community, continue to develop and
there can be no assurance that new laws or regulations will not have a
material adverse effect on the Company's business. The laws of certain foreign
countries may not protect the Company's intellectual property rights to the
same extent as do the laws of the United States. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business--
Sales, Distribution and Marketing," "--Manufacturing" and "--Facilities."
Currently, most of the Company's international sales are denominated in U.S.
dollars or the U.K. pound sterling. The Company has significant operations in
the U.K., and therefore, incurs significant operating expenses denominated in
U.K. pounds. Accordingly, the Company has not historically attempted to reduce
the risk of currency fluctuations by hedging, as changes in exchange rates
between the U.S. dollar and the U.K. pound sterling immaterially affect the
Company's results of operations. However, there can be no assurance that the
Company will not be disadvantaged with respect to its competitors operating in
a foreign country by foreign currency exchange rate fluctuations that make the
Company's products more expensive relative to those of local competitors. See
"Business--Sales, Distribution and Marketing."
INTERNATIONAL UNCERTAIN AVAILABILITY OF THIRD-PARTY REIMBURSEMENT; HEALTH CARE
REFORM AND RELATED MATTERS
In the United States, hospitals, physicians and other health care providers
that purchase medical devices generally rely on third-party payors,
principally Medicare, Medicaid, private health insurance plans, health
maintenance organizations and other sources of reimbursement for health care
costs ("Third-Party Payors"), to reimburse all or part of the cost of the
procedure in which the medical device is being used. Certain Third-Party
Payors are moving toward a managed care system in which they contract to
provide comprehensive health care for a fixed cost per person. The fixed cost
per person established by these Third-Party Payors may be independent of the
hospital's cost incurred for the specific case and the specific devices used.
Medicare and other Third-Party Payors are increasingly scrutinizing whether to
cover new products and the level of reimbursement for covered products.
Because the Company's fetal cell screening system is currently under
development and has not received FDA clearance or approval, uncertainty exists
regarding the availability of third-party reimbursement for procedures that
would use the Company's fetal cell screening system. Failure by physicians,
hospitals and other potential users of the Company's products or products
currently under development to obtain sufficient reimbursement from Third-
Party Payors for the procedures in which the Company's products or products
currently under the development are intended to be used could have a material
adverse effect on the Company's business, financial condition and results of
operation.
Third-Party Payors that do not use prospectively fixed payments increasingly
use other cost-containment processes that may pose administrative hurdles to
the use of the Company's products and products currently under development. In
addition, Third-Party Payors may deny reimbursement if they determine that the
device used in a treatment is unnecessary, inappropriate, experimental, used
for a non-approved indication or is not cost-effective. Potential purchasers
must determine that the clinical benefits of the Company's products justify
the additional cost or the additional effort required to obtain prior
authorization or coverage and the uncertainty of actually obtaining such
authorization or coverage.
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If the Company obtains the necessary foreign regulatory registrations or
approvals, market acceptance of the Company's products and products currently
under development in international markets would be dependent, in part, upon
the availability of reimbursement within prevailing health care payment
systems. Reimbursement and health care payment systems in international
markets vary significantly by country, and include both government sponsored
health care and private insurance. Although the Company intends to seek
international reimbursement approvals, there can be no assurance that any such
approvals will be obtained in a timely manner, if at all. Failure to receive
international reimbursement approvals could have a material adverse effect on
market acceptance of the Company's products in the international markets in
which such approvals are sought.
The Company believes that in the future reimbursement will be subject to
increased restrictions both in the United States and in international markets.
The Company believes that the overall escalating cost of medical products and
services will continue to lead to increased pressures on the health care
industry, both foreign and domestic, to reduce the cost of products and
services, including the Company's products and products currently under
development. There can be no assurance in either United States or
international markets that third-party reimbursement and coverage will be
available or adequate, that future legislation, regulation or reimbursement
policies of Third-Party Payors will not otherwise adversely affect the demand
for the Company's products or products currently under development or its
ability to sell its products on a profitable basis. The unavailability of
Third-Party Payor coverage or the inadequacy of reimbursement could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, fundamental reforms in the health care
industry in the United States and Europe continue to be considered, although
the Company cannot predict whether or when any health care reform proposals
will be adopted and there can be no assurance that such reform will not
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Third-Party Reimbursement and Health
Care Reform."
DEPENDENCE UPON KEY PERSONNEL
The Company's future success depends in significant part upon the continued
service of certain key scientific, technical and management personnel, and its
continuing ability to attract and retain highly qualified scientific,
technical and managerial personnel. Competition for such personnel is intense
and there can be no assurance that the Company can retain its key scientific,
technical and managerial personnel or that it can attract, assimilate or
retain other highly qualified scientific, technical and managerial personnel
in the future. The loss of key personnel, especially if without advanced
notice, or the inability to hire or retain qualified personnel could have a
material adverse effect upon the Company's business, results of operations and
financial condition.
RISK OF SOFTWARE DEFECTS
The Company's cytogenetic products and fetal cell screening system currently
under development involve a software component that facilitates the detection
of chromosomal and genetic abnormalities through the interaction of certain
imaging algorithms with the genetic sample under examination. The software,
including any new versions that may be released, may contain undetected errors
or failures. There can be no assurance that, despite testing by the Company
and current and potential customers, errors will not be found in the software
components of the Company's cytogenetic products or prenatal screening system,
resulting in loss or delay in market acceptance, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
PRODUCT LIABILITY RISK; POSSIBLE INSUFFICIENCY OF INSURANCE
The manufacture and sale of the Company's products involves the risk of
product liability claims. There can be no assurance that the coverage limits
of the Company's insurance policies will be adequate. The Company intends to
evaluate its coverage on a regular basis and in connection with the
introduction of products currently under development. Such insurance is
expensive and may not be available on acceptable terms, in sufficient amount
of coverage, or at all. A successful claim brought against the Company in
excess of its insurance coverage would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--Product Liability and Insurance."
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<PAGE>
CONTROL BY EXISTING STOCKHOLDERS
After the completion of this offering, current stockholders, including
certain executive officers and directors of the Company and their affiliates,
will own approximately 69.1% of the outstanding Common Stock. As a result,
these stockholders will, to the extent they act together, continue to have the
ability to exert significant influence and control over matters requiring the
approval of the Company's stockholders, including the election of a majority
of the Company's Board of Directors. See "Principal Shareholders."
RISK OF UNALLOCATED PROCEEDS
The Company expects that it will use a portion of the net proceeds of this
offering for general corporate purposes, including working capital. Of the
approximately $31.3 million net proceeds from this offering, approximately
$15.7 million, or 50%, will be used for such general corporate purposes. The
Company has no specific plans as to the use of the unallocated proceeds from
this offering. Pending use, the Company plans to invest the net proceeds in
investment-grade, interest-bearing securities. Accordingly, management will
have significant discretion in applying a portion of the net proceeds of this
offering. See "Use of Proceeds."
POTENTIAL IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after this offering could materially
and adversely affect the market price of the Common Stock. Such sales also
might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate. Upon the completion of this offering, the Company will have
7,436,064 shares of Common Stock outstanding, of which the 2,300,000 shares
offered hereby will be freely tradeable (unless held by affiliates of the
Company) without restriction. The remaining 5,136,064 shares will be
restricted securities within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"). The Company's directors, executive officers
and certain of its stockholders, who in the aggregate hold more than 94% of
the shares of Common Stock of the Company outstanding immediately prior to the
completion of this offering, have entered into lock-up agreements under which
they have agreed not to sell, directly or indirectly, any shares owned by them
for a period of 180 days after the date of this Prospectus without the prior
written consent of Montgomery Securities. Montgomery Securities may, in its
sole discretion and at any time without notice, release all or any portion of
the shares subject to such lock-up agreements. Of such shares, approximately
271,617 will be freely tradeable (unless held by affiliates of the Company)
without restriction. Upon expiration of the 180-day lock-up agreements,
approximately 4,014,253 additional shares of Common Stock (including
approximately 258,373 shares subject to outstanding vested options) will
become eligible for public resale, subject in some cases to volume limitations
pursuant to Rule 144. The remaining approximately 1,617,301 shares held by
existing stockholders (including up to 508,734 shares of Common Stock issuable
upon exercise of certain outstanding warrants) will become eligible for public
resale at various times over a period of less than two years following the
completion of this offering, subject in some cases to vesting provisions and
volume limitations. In addition, 4,105,674 of the shares outstanding
immediately following the completion of this offering (including up to 508,734
shares of Common Stock issuable upon exercise of certain outstanding warrants)
will be entitled to registration rights with respect to such shares upon
termination of lock-up agreements. The number of shares sold in the public
market could increase if registration rights are exercised and such sales may
have an adverse effect on the market price of the Common Stock. See "Shares
Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK; DILUTION
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop
and continue upon the completion of this offering or that the market price of
the Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock has been determined by
negotiations between the Company and the Underwriters, in conformity with
Schedule E of the By-Laws of the National Association of Securities Dealers
(the "NASD"). As such, the initial public offering price is not necessarily
related to the Company's net worth or any other
16
<PAGE>
established criteria of value and may not bear any relationship to the market
price of the Common Stock following the completion of the offering. The market
prices for securities of medical diagnostic instrument companies have
historically been highly volatile. Announcements of technological innovations
or new products by the Company or its competitors, developments concerning
proprietary rights, including patents and litigation matters, publicity
regarding actual or potential results with respect to products under
development by the Company or others, regulatory developments in both the
United States and foreign countries and public concern as to the safety of new
technologies changes in financial estimates by securities analysts or failure
of the Company to meet such estimates and other factors, may have a
significant impact on the market price of the Common Stock. In addition, the
Company believes that fluctuations in its operating results may cause the
market price of its Common Stock to fluctuate, perhaps substantially.
Purchasers of shares of Common Stock offered hereby will experience an
immediate dilution of $10.30 in the net tangible book value per share of their
Common Stock from the initial public offering price. See "Underwriting" and
"Dilution."
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAWS PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws may have the effect of making it more difficult for a third party
to acquire, or discouraging a third party from attempting to acquire control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common
Stock. Certain of these provisions provide for the elimination of the right of
stockholders to act by written consent without a meeting and specify
procedures for director nominations by stockholders and submission of other
proposals for consideration at stockholder meetings. In addition, the
Company's Board of Directors has the authority to issue up to 6,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Certain provisions of Delaware law applicable to the Company could also delay
or make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years unless certain
conditions are met. The inability of stockholders to act by written consent
without a meeting, the procedures required for director nominations and
stockholder proposals and Delaware law could have the effect of delaying,
deferring or preventing a change in control of the Company, including without
limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's Common Stock. These
provisions could also limit the price that investors might be willing to pay
in the future for shares of the Company's Common Stock. See "Description of
Capital Stock--Preferred Stock," "--Certain Provisions of the Restated
Certificate of Incorporation and Bylaws" and "--Certain Provisions of Delaware
Law."
17
<PAGE>
THE COMPANY
The Company was incorporated in California in July 1986, and will be
reincorporated in Delaware in September, 1996. Unless the text otherwise
requires, references in this Prospectus to "Applied Imaging" and the "Company"
refer to Applied Imaging Corp., a California corporation, and its Delaware
successor, together with their subsidiaries. The Company's principal executive
offices are located at 2380 Walsh Avenue, Building B, Santa Clara, California
95051, and its telephone number at that address is (408) 562-0250.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $31,335,000 (approximately
$36,147,750 if the Underwriters' over-allotment option is exercised in full)
assuming an initial public offering price of $15.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses.
The Company estimates that approximately $10 million of the net proceeds
from this offering will be used for the development and commercialization of
the Company's prenatal screening system, including costs related to clinical
trials and regulatory approvals, approximately $5 million will be used to fund
research and development related to additional applications of its prenatal
screening technology, an aggregate of $596,000 will be used for repayment of
the Company's bank line of credit bearing interest at 9.75% due in September
1996 and the Company's bank note payable bearing interest at 9.50% due in
October 1996, and the remainder will be used for working capital and general
corporate purposes. Although the Company believes the proceeds of this
offering, together with its existing resources will be adequate to satisfy its
capital needs through 1998, the timing and amount of spending of such capital
resources cannot be accurately determined at this time and will depend upon
several factors, including the timing of regulatory approvals or clearances,
progress of its research and development efforts and clinical investigations,
competing technological and market developments, commercialization of products
currently under development, and market acceptance and demand for the
Company's products. The Board of Directors has broad discretion in determining
how the proceeds of this offering will be applied. In the event opportunities
arise, proceeds also may be used to acquire businesses, technologies or
products that complement the business of the Company, although the Company is
not currently in negotiations regarding any such acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Pending such uses, the Company intends to invest the net proceeds in short-
term, interest-bearing investment grade securities.
DIVIDEND POLICY
The Company has not paid any cash dividends since its inception and does not
intend to pay any cash dividends in the foreseeable future. Under the
Company's line of credit agreement, the Company is prohibited from paying cash
dividends without the bank's prior approval.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996, on a pro forma basis after giving effect to the conversion of all
outstanding shares of Preferred Stock into Common Stock upon the closing of
the offering made hereby and the restatement of the Company's Restated
Certificate of Incorporation to provide for authorized capital stock
consisting of 20,000,000 shares of Common Stock and 6,000,000 shares of
undesignated Preferred Stock, and as adjusted to reflect the application of
the estimated net proceeds from the sale of 2,300,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $15 per share
and the repayment of $596,000 of short-term debt:
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of debt........................ $ 622 $ 622 $ 26
======== ======== ========
Long-term debt less current portion............ 223 223 223
-------- -------- --------
Stockholders' equity:(1)
Preferred Stock; $0.001 par value; 6,000,000
shares authorized; 3,919,179 shares issued
and outstanding, actual; 6,000,000 shares
authorized, none issued and outstanding, pro
forma and as adjusted....................... 4 -- --
Common Stock; $0.001 par value; 20,000,000
shares authorized; 1,090,660 shares issued
and outstanding, actual; 20,000,000 shares
authorized, 5,136,064 shares issued and
outstanding, pro forma; 20,000,000 shares
authorized, 7,436,064 shares issued and
outstanding, as adjusted.................... 1 5 7
Additional paid-in capital..................... 15,729 15,729 47,062
Accumulated deficit............................ (10,375) (10,375) (10,375)
Deferred stock compensation.................... (1,377) (1,377) (1,377)
Cumulative translation adjustment.............. (367) (367) (367)
-------- -------- --------
Total stockholders' equity................. 3,615 3,615 34,950
-------- -------- --------
Total capitalization..................... $ 3,838 $ 3,838 $ 35,173
======== ======== ========
</TABLE>
- --------
(1) Based upon shares outstanding as of June 30, 1996. Excludes (i) 497,250
shares issuable upon exercise of options outstanding at a weighted average
exercise price of $1.95 per share under the 1988 Option Plan, (ii) 120,000
shares reserved for the Company's 1994 Director Plan, (iii) 200,000 shares
reserved for issuance under the Purchase Plan, (iv) 508,734 shares
issuable upon exercise of outstanding warrants to purchase Common Stock
and (v) 632,113 shares reserved for issuance under the 1988 Option Plan.
See "Management--Incentive Stock Plans," "Description of Capital Stock--
Warrants."
19
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996 was
approximately $3,590,000 or $.70 per share of Common Stock. Pro forma net
tangible book value per share represents the Company's total tangible assets
less total liabilities, divided by the pro forma number of outstanding shares
of Common Stock (after giving effect to the conversion of the Preferred Stock
to Common Stock). Dilution per share represents the difference between the
amount per share paid by investors in this offering and the pro forma net
tangible book value per share after the offering. After giving effect to the
sale of 2,300,000 shares in this offering at an assumed initial public
offering price of $15.00 per share and after deducting the estimated
underwriting discounts and commissions and offering expenses, the pro forma
net tangible book value of the Company as of June 30, 1996 would have been
$34,925,000 or $4.70 per share. This represents an immediate increase of net
tangible book value of $4.00 per share to existing stockholders and an
immediate dilution in net tangible book value of $10.30 per share to new
investors purchasing shares at the assumed initial public offering price. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $15.00
Pro forma net tangible book value per share before the
offering.................................................... $ .70
Increase attributable to new investors....................... 4.00
-----
Pro forma net tangible book value per share after the offering 4.70
------
Dilution per share to new investors............................ $10.30
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the difference between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid at an assumed initial
public offering price of $15.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 5,136,064 69.1% $14,900,000 30.2% $2.90
New investors................ 2,300,000 30.9 34,500,000 69.8% 15.00
--------- ----- ----------- -----
Total...................... 7,436,064 100.0% $49,400,000 100.0%
========= ===== =========== =====
</TABLE>
The computations in the above table (i) are determined before deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company, (ii) assume no exercise of outstanding stock options, and
(iii) assume the conversion of all outstanding shares of Preferred Stock into
Common Stock upon the closing of this offering, and (iv) assume the net
exercise of certain outstanding warrants into 85,387 shares of Common Stock.
As of June 30, 1996, there were options outstanding to purchase 497,250 shares
of Common Stock at a weighted average exercise price of $1.95 per share under
the Company's 1988 Option Plan. As of June 30, 1996, there were warrants
outstanding to purchase 508,734 shares of Common Stock at a weighted average
exercise price of $4.97 per share. To the extent outstanding options are
exercised or warrants are further exercised, there will be further dilution to
new investors. See "Management--Incentive Stock Plans," "Description of
Capital Stock--Warrants" and "Underwriting."
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information presented below under the
captions "Statement of Operations Data" and "Balance Sheet Data" for, and as
of the end of, each of the years in the five-year period ended December 31,
1995, are derived from the consolidated financial statements of Applied
Imaging Corp. and its subsidiaries, which financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.
The consolidated financial statements as of December 31, 1994 and 1995, and
for each of the years in the three-year period ended December 31, 1995, and
the report thereon, are included elsewhere in this Prospectus. The selected
consolidated financial data set forth below as of June 30, 1996 and for the
six months ended June 30, 1995 and 1996 were derived from unaudited
consolidated financial statements of the Company, which are included elsewhere
in this Prospectus, and include, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position at that date and results
of operations for those periods. The results for the six months ended June 30,
1996 are not necessarily indicative of the results for any future period. The
selected consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with, the Consolidated
Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product sales.......... $ 8,995 $ 9,215 $ 6,182 $ 7,021 $ 8,106 $ 3,893 $ 4,662
Software maintenance
and service........... 1,786 2,496 2,499 2,550 2,692 1,322 1,333
------- ------- ------- ------- ------- ------- -------
Total revenues....... 10,781 11,711 8,681 9,571 10,798 5,215 5,995
Cost of revenues........ 5,783 6,184 4,965 5,350 5,484 2,611 3,122
------- ------- ------- ------- ------- ------- -------
Gross profit......... 4,998 5,527 3,716 4,221 5,314 2,604 2,873
Operating Expenses:
Research and
development........... 1,164 1,316 1,756 2,821 2,919 1,380 1,698
Sales and marketing.... 2,565 3,279 2,543 2,524 2,918 1,335 1,476
General and
administrative........ 1,453 1,642 1,229 1,898 2,094 996 949
Restructuring and
reorganization costs.. 396 -- -- -- -- -- --
Write off of acquired
research and
development in
process............... 1,285 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 6,863 6,237 5,528 7,243 7,931 3,711 4,123
------- ------- ------- ------- ------- ------- -------
Operating loss....... (1,865) (710) (1,812) (3,022) (2,617) (1,107) (1,250)
Other (expense) income.. 307 (23) 39 52 71 6 15
------- ------- ------- ------- ------- ------- -------
Loss before income
taxes............... (1,558) (733) (1,773) (2,970) (2,546) (1,101) (1,235)
Income tax expense
(benefit).............. 65 (253) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net loss before
extraordinary item.. (1,623) (480) (1,773) (2,970) (2,546) (1,101) (1,235)
Extraordinary item...... 646 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net loss............. $ (977) $ (480) $(1,773) $(2,970) $(2,546) $(1,101) $(1,235)
======= ======= ======= ======= ======= ======= =======
Pro forma net loss per
share.................. $ (.45) $ (.22)
======= =======
Shares used in
calculation of pro
forma net loss per
share.................. 5,635 5,687
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
JUNE 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments........... $ 1,188 $ 1,151 $ 4,461 $ 2,503 $ 5,156 $ 3,236
Working capital........ 1,877 1,715 4,756 1,712 3,249 2,238
Total assets........... 7,442 6,567 9,666 7,441 9,373 8,089
Long-term debt......... 353 263 173 336 231 223
Accumulated deficit.... (1,372) (1,852) (3,625) (6,594) (9,140) (10,375)
Total stockholders'
equity(1)............. 2,590 2,595 5,813 2,811 4,714 3,615
</TABLE>
- --------
(1) No cash dividends have been declared with respect to the Company's Common
or Preferred Stock.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
Since its inception in 1986, the Company has principally been engaged in the
design, development, manufacture and marketing of automated clinical analysis
systems used by cytogenetic laboratories for prenatal and other genetic
screening. The Company's cytogenetic instrumentation products include systems
that enable laboratories to automate aspects of the detection of chromosomal
abnormalities associated with conditions such as Down's Syndrome. The
Company's CytoVision family of products includes an automated metaphase finder
which identifies cells in metaphase, a karyotyper which automates the
classification and presentation of chromosomes within cells and a DNA probe
analysis system which detects DNA probes within cell nuclei. The Company sells
its cytogenetic systems to government and private clinical cytogenetic
laboratories, research institutions, universities and pharmaceutical
companies, and has sold such systems to approximately 500 sites in over 30
countries.
Historically, the Company has grown through both internal expansion and
acquisitions. In 1989 and 1991, the Company acquired two separate companies
based in the United Kingdom with complementary technologies and worldwide
market presence. In 1991, the Company restructured its U.K. operations to
combine the two acquired companies. In 1993, the Company eliminated certain
unprofitable product lines in order to focus its efforts on the cytogenetic
screening market.
In 1993, the Company established a research project to develop a proprietary
prenatal screening system to detect chromosomal genetic disorders through the
enrichment and analysis of fetal blood cells from a routine maternal blood
sample. Since that time, the Company has devoted substantial resources to the
development of this prenatal screening system. The Company's proprietary
screening system, which the Company is developing, incorporates (i) a patented
hematologically-based procedure to enrich and separate the fetal blood cells,
(ii) automated image analysis instrumentation to identify the fetal cells and
(iii) the use of third-party DNA probes to identify certain chromosomal
disorders present in fetal cells. This prenatal screening system under
development is currently in preclinical evaluation, and the Company intends to
continue preclinical and clinical evaluation of this system to establish it as
a broadly applicable prenatal screening procedure. The Company anticipates
that sales of this system, if cleared or approved by the FDA, will include
both a consumable enrichment kit used to separate fetal blood cells from
maternal blood and imaging instrumentation used to analyze these cells. The
implementation of the Company's strategy is dependent upon the successful
development and commercialization of the Company's prenatal screening system.
The operating results of the Company have fluctuated significantly in the
past on an annual and quarterly basis. The Company expects that its operating
results will fluctuate significantly from quarter to quarter and year to year
in the future and will depend on a number of factors, some of which may affect
future sales of the Company's cytogenic products. These factors include, but
are not limited to, demand for the Company's products, timing of orders and
shipments, competition and its related pricing pressures, and seasonal
factors, many of which are outside the Company's control. If FDA clearance or
approval is received, the Company intends to increase the amount of
expenditures for research and development and sales and marketing activities,
principally for the commercial launch of its prenatal screening system. The
Company intends to increase its research and development expenses related to
follow-on products and additional applications of its fetal cell screening
technology. The Company also intends to increase the amount of expenditures
related to marketing and administrative activities. Management's plans
discussed above assume the receipt of the net proceeds of this offering.
22
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues. The Company's revenues are derived primarily from the sale of
products and software maintenance and instrument service contracts. Revenues
increased by 15% to approximately $6.0 million for the six months ended June
30, 1996 from $5.2 million for the corresponding period of the prior year.
This increase in revenues was primarily attributable to sales of the Company's
CytoVision products to both new and existing customers, who were either adding
capacity or replacing earlier generation systems. Software maintenance and
service contract revenue as a percentage of total revenue decreased to 22% for
the six months ended June 30, 1996 from 25% for the corresponding period of
the prior year. This decrease was primarily attributable to an increased rate
of new system sales. Revenues from new system sales are recognized upon
shipment, whereas revenues from the related maintenance and service contracts
are deferred and recognized ratably over one year.
Cost of Revenues. Cost of revenues includes direct material and labor costs,
manufacturing overhead, installation costs, warranty related expenses and
post-warranty service and application support expenses. Cost of revenues as a
percentage of total revenues increased to 52% for the six months ended June
30, 1996 from 50% in the corresponding period of the prior year, due to an
inventory provision taken in the 1996 period relating to a component upgrade
and an increase in service and application support expenses.
Research and Development Expenses. Research and development expenses consist
of development of new products and software development costs to upgrade
existing products. Research and development expenses increased by 23% to $1.7
million for the six months ending June 30, 1996 from $1.4 million in the
corresponding period of the prior year. This increase was attributable to
increased expenditures in 1996 for the development of the prenatal screening
system.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries, commissions and related travel expenses of the Company's direct
sales force, as well as commissions paid to independent sales agents. Sales
and marketing expenses increased by 11% to approximately $1.5 million for the
six months ended June 30, 1996 from approximately $1.3 million for the
corresponding period of the prior year. This increase was related to the
incremental revenues during the six months ended June 30, 1996 as compared
with the corresponding period of the prior year.
General and Administrative Expenses. General and administrative expenses
consist primarily of payroll costs associated with the Company's management
and support personnel, travel expenses, and legal and accounting fees. General
and administrative expenses decreased by 5% to $949,000 for the six months
ended June 30, 1996 from $996,000 in the corresponding period of the prior
year. This decrease was primarily attributable to stock option compensation
recorded in the six months ended June 30, 1995 relating to a transaction with
certain officers that took place during that period.
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Revenues. Revenues increased to $10.8 million in 1995 from $9.6 million in
1994, and from $8.7 million in 1993, or annual increases of 13% and 10%,
respectively. The 1995 and 1994 increases in revenues were primarily
attributable to the introduction of the new CytoVision family of products in
the fourth quarter of 1993. Software and service contract revenues as a
percentage of total revenues remained relatively consistent from 1994 to 1995
at 27% and 25% of total revenues, respectively. In 1993, software and service
contract revenues were 29% of total revenues due to higher priced service
contracts associated with earlier-generation products. For the years ended
1995, 1994 and 1993, revenues derived outside of North America represented
approximately 61%, 62% and 64% of total revenues, respectively.
Cost of Revenues. Cost of revenues increased to $5.5 million in 1995 from
$5.4 million in 1994 and from $5.0 million in 1993, or 51%, 56% and 57% as a
percentage of total revenues, respectively. This decrease in revenues as a
percentage of total revenues increased to 52% for the six months ended June
30, 1996 from 50% in the corresponding period of the prior year, due to an
inventory provision taken in the 1996 period relating to a component upgrand
and an increase in service and application support expenses.
23
<PAGE>
Research and Development Expenses. Research and development expenses
increased to approximately $2.9 million in 1995 from $2.8 million in 1994 and
from $1.8 million in 1993. These year to year increases were due to increasing
expenditures on the development of the prenatal screening system which were
partially offset by reduced expenditures on the base cytogenetic
instrumentation business. cost of revenues as a percentage of revenues from
year to year was attributable to increased sales volume, engineering design
changes to reduce production costs, and the consolidation of worldwide
manufacturing operations in 1994.
Sales and Marketing Expenses. Sales and marketing expenses increased to $2.9
million in 1995 from $2.5 million in 1994, which remained unchanged from 1993.
In 1995, 1994 and 1993, sales and marketing expenses as a percentage of total
revenues remained relatively consistent ranging from 26% to 29%.
General and Administrative Expenses. General and administrative expenses
increased to $2.1 million in 1995, from $1.9 million in 1994, and from $1.2
million in 1993, or 19%, 20% and 14% of total revenues, respectively. This
increased level of general and administrative expenses in 1994 was
attributable primarily to costs associated with the Company's effort to
complete an initial public offering, which was abandoned due to unfavorable
market conditions. In addition, the 1994 amounts include certain patent and
legal costs associated with the prenatal screening system and expenses related
to the addition of quality assurance and regulatory personnel.
LIQUIDITY AND CAPITAL RESOURCES
From inception in July 1986 through June 1996, the Company has generated an
accumulated deficit of approximately $10.4 million. The Company has financed
its operations primarily through the private placement of equity securities
and bank loans. From its inception, the Company has raised a total of
approximately $14.9 million in net proceeds from such private equity
financings. The Company's primary uses of cash were to fund working capital
requirements, for capital expenditures and to consummate acquisitions of
companies with complementary products, technology, and marketing and sales
organizations.
Net cash used for operating activities was $1.9 million in the six months
ended June 30, 1996 and $593,000, $1.2 million and $1.0 million for 1995, 1994
and 1993, respectively. For the six months ended June 30, 1996, accounts
receivable increased to $2.1 million from $1.5 million at 1995 year end,
reflecting a slight increase in accounts receivable aging, coupled with the
effect of a 15% increase in revenues over the corresponding prior year period.
For the year ended 1995, the Company had an approximate $2.5 million net loss,
which was offset to a large extent by $556,000 in depreciation and
amortization expenses, a $439,000 decrease in trade accounts receivable, a
$253,000 decrease in inventories, and a $497,000 increase in accrued expenses.
Despite the 13% increase in the Company's revenues in 1995, accounts
receivable decreased 23% to $1.5 million at the end of 1995 from $1.9 million
at the prior year end. This decrease was primarily attributable to a
significant reduction in accounts receivable aging due to increased collection
efforts. In addition, inventories decreased 22% to $880,000 at the end of 1995
from $1.1 million at the prior year end. Significant factors contributing to
this inventory decrease include the consolidation of worldwide manufacturing
activities and the introduction of the CytoVision product family in 1994, both
of which substantially reduced direct material costs. Accrued expenses totaled
$1.4 million at the end of 1995, a 70% increase over the $839,000 level at the
end of 1994. This increase was primarily attributable to accrued compensation
costs, consisting of bonus accruals and a significant severance accrual which
were paid for the most part, during the first quarter of 1996. In addition,
the Company had customer deposits totaling $198,000 as of December 31, 1995.
Net cash used for investing activities has been primarily impacted by the
purchases and subsequent sales of short-term investments in U.S. Treasury
instruments with varying maturities. Such purchases have resulted from
investment of private placement proceeds in excess of short-term cash
requirements. In the six months ended June 30, 1996, net cash provided by
investing activities was $720,000, which consisted of the $972,000 maturity of
a short-term investment offset in part by $300,000 in capital expenditures.
For the year ended December 31, 1995, net cash used by investing activities
was $3.8 million, $3.0 million of which was related to the purchase of such
U.S. Treasury instruments following the Company's most recent private equity
financing. In addition, the Company invested $808,000 in capital expenditures.
For the year ended December 31, 1994, net cash provided by investing
activities was $2.5 million primarily attributable to the maturity of $3.4
million in short-term investments purchased during the prior year, offset in
part by $653,000 in capital expenditures and $259,000
24
<PAGE>
associated with the purchase of real property. Net cash used by investing
activities was $4.0 million for the year ended 1993, $3.4 million of which was
related to the purchase of U.S. Treasury instruments following a private
equity financing.
Net cash provided by financing activities was $183,000 for the six months
ended June 30, 1996, and $4.0 million, $389,000 and $4.9 million in 1995, 1994
and 1993, respectively. The significant contributions of cash from financing
activities occurred as a result of the Company's sale of preferred stock in
private rounds of financing in 1993 and again in 1995. Less significantly,
cash provided by or used for financing activities has been impacted by bank
borrowings or repayment of such debt.
The Company currently has a $1.0 million credit facility with a U.S. bank
consisting of a term note and revolving credit line, of which approximately
$596,000 was outstanding as of June 30, 1996. Under the line of credit
agreement, the Company cannot pay cash dividends without the bank's prior
approval. The term note, which matures in October 1996 and is subject to
monthly payments of principal and interest, bears interest at the bank's prime
rate plus 1.25% (9.50% at June 30, 1996). The line of credit bears interest at
the bank's prime rate plus 1.5% (9.75% at June 30, 1996). The credit line
expires by its current terms in September 1996 and the Company expects to
negotiate a new bank credit facility after the closing of the offering made
hereby. This credit line is currently secured by the Company's domestic
assets, including two-thirds of the shares of Applied Imaging International,
Ltd. held by the Company. See Note 5 of Notes to Consolidated Financial
Statements. The Company's wholly-owned subsidiary, Applied Imaging
International, Ltd. has a (Pounds)500,000 ($775,000) unsecured line of credit
with a United Kingdom bank guaranteed by the Company. No amounts were
outstanding under this facility as of June 30, 1996.
As of June 30, 1996 cash equivalents and short-term investments were
approximately $3.2 million, compared to approximately $5.2 million as of
December 31, 1995. As of June 30, 1996, the Company also had approximately
$189,000 available under its secured domestic line of credit and
(Pounds)500,000 ($775,000) available under its unsecured international line of
credit. Based upon its current plans, the Company believes the proceeds of
this offering, together with its existing resources, will be adequate to
satisfy its capital needs through 1998. The timing and amount of spending of
such capital resources cannot be accurately determined at this time and will
depend on several factors, including, but not limited to, the progress of its
research and development efforts and clinical investigations, the timing of
regulatory approvals or clearances, competing technological and market
developments, commercialization of products currently under development, and
market acceptance and demand for the Company's products. In addition, as
opportunities arise, proceeds may also be used to acquire businesses,
technologies or products that complement the business of the Company, although
the Company is not currently in negotiations regarding any such acquisitions.
The Company may seek to obtain additional funds through equity or debt
financing, collaborative or other arrangements with other companies and from
other sources. After December 1998, the Company will likely need to raise
additional funds through public or private financings. No assurance can be
given that additional financing will be available when needed or on terms
acceptable to the Company. If adequate funds are not available, the Company
could be required to delay development or commercialization of certain of its
products, to license to third parties the rights to commercialize certain
products or technologies that the Company would otherwise seek to
commercialize itself, or to reduce the marketing, customer support or other
resources devoted to certain of its products.
The Internal Revenues Code of 1986 and the California Conformity Act of 1987
substantially restrict the ability of a corporation to utilize existing net
operating losses carryforwards and credits in the event of an "ownership
change." The several issuances of preferred stock have resulted in multiple
ownership changes since the inception of the Company. The majority of the
federal net operating loss carryforwards are limited by an ownership change
occurring in July 1995. Approximately $6,700,000 of the $7,700,000 federal net
operating loss carryforward will be subject to an annual limitation of
$850,000. Any unused annual limitation can be carried over and added to the
succeeding year's annual limitation within the allowable carryforward period.
Management believes that the initial public offering of the Company's stock
will most likely result in an ownership change, however, the July 1995 change
will continue to be the most restrictive limitation because the majority of
the Company's net operating losses were incurred prior to July 1995.
25
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors," and
elsewhere in this Prospectus.
THE COMPANY
Applied Imaging designs, develops, manufactures and markets automated
clinical analysis systems used by cytogenetic laboratories where prenatal and
other genetic testing is performed. The Company's cytogenetic instrumentation
business, which has sold systems to approximately 500 sites in more than 30
countries since its inception, includes systems that enable laboratories to
automate aspects of the detection of chromosomal abnormalities associated with
conditions such as Down's Syndrome. In addition to the Company's core
instrument business, the Company is developing a proprietary genetic screening
system designed to enable prenatal screening for genetic abnormalities by
isolating fetal red blood cells ("fetal blood cells") from a routine maternal
blood sample. This new system is designed to improve current prenatal
screening techniques by providing an accurate, timely and cost-effective
procedure without the risks of miscarriage or fetal damage associated with
invasive prenatal testing.
The Company's prenatal screening system under development is intended to
provide an accurate, non-invasive test by directly analyzing fetal blood cells
isolated from a routine maternal blood sample. The Company's proprietary
screening system incorporates (i) a patented blood-based procedure to enrich
the concentration of fetal blood cells, (ii) automated image analysis
instrumentation to identify the fetal blood cells and (iii) the use of third-
party DNA probes to identify certain chromosomal disorders present in fetal
blood cells. This system is expected to be accurate because it evaluates
actual fetal cells while posing no risk to the fetus. The Company's prenatal
screening system is currently in preclinical evaluation and no application for
FDA approval has been submitted.
The Company's strategy is to establish its system as a broad-based prenatal
screening procedure. The Company anticipates that sales of this system, if
approved by the FDA, will include both its proprietary consumable enrichment
kits, used to separate fetal blood cells from maternal blood samples and
imaging instrumentation used to analyze the cells. These new image analysis
systems are contemplated to be compatible with the Company's existing
installed cytogenetic instrument base. The Company believes that it can
leverage its existing infrastructure, worldwide distribution capabilities and
extensive cytogenetic laboratory relationships to support the world-wide
introduction of this fetal cell screening system under development.
Furthermore, the Company believes that its new cell enrichment and image
analysis system could have clinical utility for cancer applications and the
prenatal diagnosis of single gene disorders, and it intends to pursue the
development of these other potential applications.
GENETIC DISORDERS
All genetic information in an organism is contained in chromosomes, made up
of strands of DNA and associated protein molecules. DNA is comprised of paired
nucleotide bases, and genetic information is encoded by the specific order of
the nucleotide bases within units called genes. Genes are organized linearly
along the chromosomes and carry the required information for the synthesis of
the proteins that provide the structural components of cells and tissues, as
well as enzymes for the basic biochemical and physiological functions of the
cells.
Chromosomal Disorders
The nuclei of normal human cells (except sperm and egg cells) contain two
sets of 23 different chromosomes, one set provided by each parent. Sperm and
egg cells are formed in a special cell division process called meiosis, and
they each contain only one set of the 23 individual chromosomes. When these
cells unite during fertilization, each contributes its set of 23 chromosomes
to the genetic information for a new human fetus, and the fertilized egg then
has the two sets of 23 chromosomes. Chromosomal disorders may occur when genes
26
<PAGE>
or portions of genes move between chromosomes (chromosomal translocations) ,
when portions of chromosomes and the genes they contain are missing, or when
an abnormal number of chromosomes are present in the cell. Certain chromosomal
disorders are thought to occur during meiosis when the division of the
chromosomes to form the egg cell or the sperm cell takes place. During this
process the chromosomes may not divide properly resulting in an extra
chromosome being present in the cell, an extra piece of genetic material being
attached to a chromosome, or a piece of chromosome being broken.
Chromosomes can be seen under a light microscope and, when stained with
certain dyes, reveal light and dark bands reflecting regional variations of
certain paired bases comprising the DNA of the cell. Differences in size and
banding pattern allow the chromosomes to be distinguished from each other and
can be used to identify a chromosomal disorder. The most common chromosomal
disorder, Down's Syndrome, also known as Trisomy 21, occurs when there are
three copies of chromosome 21 in the human cell. Syndromes caused by various
chromosomal abnormalities may result in mental retardation, impaired physical
development and abnormal sexual development.
There are approximately four million births in the United States annually.
Of these, approximately 90% are to women under the age of 35. The Company
estimates that there are approximately 11 million births in industrialized
countries where prenatal screening and diagnostic testing is routine.
Approximately 2% of newborns have birth defects, approximately 12% of which
are caused by chromosomal genetic disorders. The risk of bearing a child with
a chromosomal abnormality increases with maternal age and more than doubles
from one in 526 births for mothers of age 20 to more than one in 192 births
for mothers of age 35.
Single Gene Disorders
In addition to chromosomal disorders caused by translocations or an abnormal
number of chromosomes, single gene disorders may occur when the DNA sequences
of individual genes are altered, resulting in incorrect instructions to the
cells and disruption of the normal balance or function of essential proteins.
Single gene disorders are responsible for many inherited diseases such as
cystic fibrosis, sickle cell anemia, Tay-Sachs disease, and may predispose an
individual to cancer, psychiatric illnesses, and other complex diseases.
PRENATAL TESTING
Prenatal testing is the process of detecting certain types of chromosomal
disorders in a fetus at an early stage of pregnancy. Prenatal testing is
currently performed either invasively, by extracting fetal cells or cells
having fetal-cell characteristics and inspecting the chromosomes within such
cells to diagnose chromosomal disorders, or non-invasively, by an analysis of
a maternal blood sample ("serum test").
The invasive diagnostic procedures yield accurate results on a broad range
of chromosomal disorders because actual fetal cells are obtained and analyzed,
however, these procedures involve the risk of spontaneous miscarriage and
other risks. Due to the risk of spontaneous miscarriage, invasive diagnostic
procedures are usually recommended to only those women who are age 35 or
older, at which ages the risk of having a child with a chromosomal disorder is
greater than the risk of spontaneous miscarriage due to the procedure. Those
women younger than 35 may be screened using non-invasive techniques. For this
group, an invasive diagnostic procedure is generally only recommended to
confirm the result of the non-invasive serum test if such test indicates a
heightened risk of a chromosomal disorder. The serum tests present no risk to
the fetus, but are less accurate because they do not diagnose chromosomal
genetic disorders by direct analysis of fetal cells. Such tests have a
relatively high false negative rate resulting in the failure to identify a
significant portion of chromosomal disorders.
Women under the age of 35 have a lower risk of giving birth to an infant
with a chromosomal disorder than do women age 35 or older, but because the
number of births to women under the age of 35 is significantly higher, the
total number of newborns with chromosomal disorders born to women in this age
group is higher than that of women age 35 and older. Consequently, women
younger than 35 bear over 75% of infants with Down's Syndrome. The graph below
illustrates the number of chromesomally abnormal U.S. birth per year by
maternal age:
27
<PAGE>
[GRAPH APPEARS HERE]
CHROMOSOMALLY ABNORMAL U.S. BIRTHS BY MATERNAL AGE
[Graph: Depicts a relationship
showing absolute number of chromosomally
abnormal births by maternal age.]
The most common prenatal testing procedures are described below.
Invasive Diagnostic Procedures
Amniocentesis. Amniocentesis, usually performed between the 14th and 20th
weeks of pregnancy, is the most common procedure used to obtain fetal cell
samples for prenatal genetic testing. In an amniocentesis procedure a small
amount of amniotic fluid is withdrawn from the amniotic sac via a long needle
inserted through the mother's abdominal wall. Simultaneously during the
procedure, the physician uses ultrasound to guide the needle in order to
minimize potential harm to the unborn child. Once the amniotic sample is
extracted, it is forwarded to a cytogenetic laboratory, where the cells are
cultured and deposited on a slide. The slide is then examined under a
microscope in order to locate and analyze a number of fetal cells in metaphase
(undergoing cell division). In metaphase, a cell's chromosomes are
individually visible in its nucleus.
To find a cell in metaphase a laboratory technician scans the slide manually
to locate cells in metaphase. Once metaphase cells are found, they are
photographed using a camera attached to the microscope. This photograph is
printed and each photographed chromosome is manually cut out of the
photograph, arranged in order and pasted on a sheet to show the two sets of 23
chromosomes present in the cell. This presentation of the chromosomes is
called a karyotype. Alternatively, laboratories may eliminate manual
karyotyping by using an automated computer-based karyotyping system to scan
the slides to locate cells in metaphase, classify the chromosomes, present
them in a display and print hard copies.
Once the karyotype is completed it is then visually analyzed by a trained
geneticist or genetic counselor to determine if any chromosomal abnormalities
are present. The processing and analysis of prenatal genetic samples obtained
by amniocentesis generally requires seven to 14 days. A significant portion of
this time is required to culture the fetal cell samples obtained by the
procedure.
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Spontaneous miscarriage occurs in approximately one in every 200
amniocentesis procedures. As a result, only pregnant women who are in a high-
risk group are regularly tested using amniocentesis. In the United States,
amniocentesis generally costs approximately $1,000 per procedure. With an
estimated fetal loss rate of approximately 0.5%, (one in every 200) one normal
fetus will be lost by spontaneous miscarriage resulting from amniocentesis for
every one-to-two fetuses with chromosomal disorders detected by this procedure
for women at age 35.
Amniocentesis is the most common and accurate of all prenatal screening
procedures. All principal chromosomal disorders can be detected and the Down's
Syndrome detection rate is greater than 99%.
Chorionic Villus Sampling (CVS). CVS, typically performed between the 9th
and 11th weeks of pregnancy, involves the extraction of placental tissue
samples, generally through the pregnant woman's cervix. The tissue, which is
genetically representative of the fetus, is analyzed in the same manner as the
fetal cells obtained by amniocentesis to determine if chromosomal disorders
are present. CVS is an alternative to amniocentesis and can be performed
earlier in the pregnancy, but poses a risk of miscarriage that is one in every
100 CVS procedures, double that of amniocentesis. CVS is generally as accurate
as amniocentesis for detecting chromosomal abnormalities. The cost of the CVS
procedure is approximately $1,000. With an estimated fetal loss rate of
approximately 1% (one in every 100), two normal fetuses will be lost by
spontaneous miscarriage resulting from CVS for every one-to-two fetuses with
chromosomal disorders detected by this procedure for women at age 35. Due to
its higher associated risk, CVS is used less frequently than amniocentesis.
Non-invasive Screening Procedures
In the United States, approximately 2,000,000 pregnant women under the age
of 35 are screened for chromosomal disorders. Of those screened, a majority
are screened using non-invasive serum tests due to the risk associated with
invasive prenatal diagnostic procedures.
Alpha-fetoprotein Test. A common serum prenatal screening test for certain
chromosomal disorders involves the analysis of alpha-fetoprotein ("AFP") in
the maternal blood. This test is performed on a standard blood sample taken
from the mother that is tested for levels of serum AFP. Down's Syndrome and
other similar chromosomal disorders are associated with low levels of AFP.
Although this serum test is relatively accurate in detecting open neural tube
defects (such as spina bifida), studies indicate that the AFP test can detect
only 20-30% of fetuses with Down's Syndrome.
Triple Test. In recent years, the accuracy of the AFP test has been improved
by combining it with additional blood chemistry tests. This combination is
commonly referred to as "triple marker screening" or the "triple test." This
test identifies Down's Syndrome in 60% of the pregnancies where Down's
Syndrome is present. In 40% of the cases where Down's Syndrome is present,
this test inaccurately concludes Down's Syndrome is not present (a false
negative result). And in approximately 5% of the cases, the triple test
indicates the presence of Down's Syndrome where Down's Syndrome is not present
(a false positive result).
Women whose serum screening results indicate a heightened risk of
chromosomal disorder are usually recommended to have an amniocentesis to
confirm these results. Due to the high false positive rate of the triple test,
amniocentesis procedures are performed in many cases where no chromosomal
disorder exists. Assuming two million serum screening tests per year and a 5%
false positive rate, as many as 100,000 unnecessary procedures may be
performed on women with healthy fetuses each year in the U.S. In addition,
assuming an average cost of $1,000 per amniocentesis, the unnecessary cost to
the health care system associated with these false positive results could be
as high as $100 million per year. With an estimated fetal loss rate of 0.5%
approximately 500 normal fetuses could be lost each year due to unnecessary
amniocentesis procedures.
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The characteristics of the current prenatal testing procedures are
summarized below:
CURRENT PRENATAL DIAGNOSTIC AND SCREENING PROCEDURES
<TABLE>
<CAPTION>
APPROX.
APPROX. APPROX. APPROX. DOWN'S WEEK OF
ANNUAL DOWN'S RISK OF FALSE TURNAROUND GESTATION APPROXIMATE
ABNORMALITIES U.S. TEST DETECTION FETAL POSITIVE TIME FOR WHEN TEST COST OF
TEST DETECTED VOLUME RATE LOSS RATE RESULTS ADMINISTERED PROCEDURE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVASIVE TESTS:
- ----------------------------------------------------------------------------------------------------------------------
Amniocentesis Chromosomal 99+% 0.5% 0% 1-2 weeks 14-20 weeks $1,000
Disorders
- --------------------------------------3000,000------------------------------------------------------------------------
CVS Chromosomal 99+% 1.0% 0% ~1 week 9-11 weeks $1,000
Disorders
- ----------------------------------------------------------------------------------------------------------------------
NON-INVASIVE TESTS:
- ----------------------------------------------------------------------------------------------------------------------
AFP Neural Tube Defects 20% 0.0% 5% 1-2 days 15-18 weeks $35 to $70
and certain Chromosomal to
Disorders 35%
- ------------------------------------2,000,000-------------------------------------------------------------------------
Triple Test Neural Tube Defects 60% 0.0% 5% 1-2 days 15-18 weeks $60 to $150
and certain Chromosomal
Disorders
</TABLE>
The most accurate prenatal testing involves direct analysis of fetal cells,
which contain the chromosomes of the fetus. The only commercially-available
procedures to extract fetal cells in order to examine the fetal chromosomes
are invasive and pose risks of injury to the fetus and spontaneous
miscarriage. The non-invasive serum screening procedures, which do not pose
such risks, are much less accurate because they do not allow direct
examination of fetal chromosomes. The Company believes that there is a
significant need for a prenatal testing procedure which would allow direct
analysis of the fetal cells without the risks associated with the currently-
available invasive procedures.
Fetal blood cells exist in miniscule proportions in samples of maternal
blood. In contrast to adult red blood cells, many of these fetal red blood
cells are nucleated, that is they contain a nucleus with chromosomes. A number
of companies are attempting to isolate these fetal blood cells for testing
through a variety of methods, including various combinations of
immunologically based separation techniques that use monoclonal antibodies,
flow cytometry, or magnetic separation techniques. Although the feasibility of
genetic analysis of fetal blood cells isolated from maternal blood has been
demonstrated, obtaining a sufficient number of fetal blood cells for analysis
has been difficult and generally not suitable to routine clinical
applications.
APPLIED IMAGING'S PRENATAL SCREENING SYSTEM
The Company is developing a proprietary prenatal screening system to detect
chromosomal abnormalities by identifying fetal blood cells from a routine
maternal blood sample. The Company's proprietary screening system incorporates
(i) a patented hematologically-based procedure to enrich the concentration of
fetal blood cells utilizing the Company's consumable enrichment kit, (ii)
automated image analysis instrumentation to identify the fetal blood cells and
(iii) the use of third-party DNA probes to identify certain chromosomal
disorders present in fetal blood cells. This new system is designed to improve
current prenatal screening techniques by providing an accurate, timely and
cost-effective procedure without the risks of miscarriage or fetal damage
associated with invasive prenatal screening techniques.
In contrast to immunologically-based procedures to isolate fetal blood cells
from maternal blood, the Company is developing a proprietary hematologically-
based procedure for enriching the concentration of fetal blood cells from
maternal blood samples for prenatal genetic testing. The Company's process for
enriching the
30
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concentration of fetal blood cells from a maternal blood sample involves the
following steps: (i) a centrifugation step for bulk separation of the blood
components, utilizing the Company's patented device which removes the vast
majority of the maternal blood cells; (ii) a selective lysis process that
ruptures the remaining maternal red blood cells; and (iii) a second
centrifugation step to remove the majority of maternal white blood cells using
the Company's patented preformed density gradient medium. The enrichment
process is designed to increase the concentration of fetal blood cells in a
maternal sample approximately 10,000 times. The fetal cell enriched sample is
then harvested and deposited on a slide for examination through image analysis.
The Company has developed an automated system to rapidly (under one hour)
identify fetal cells on the slide based on adaptations of its image analysis,
pattern recognition, and slide-scanning technologies incorporated in the
Company's current cytogenetic products. See "Business--Current Cytogenetic
Products."
Once fetal cells are located by the automated scanning system, fluorescent
DNA probes are added that specifically bind to certain DNA sequences within the
fetal cells indicating the presence or absence of chromosomal disorders. DNA
probes can be designed to locate specific chromosomal changes, additions, or
deletions that result in genetic disorders. The results of the DNA probe
analysis are captured and processed using the Company's automated visualization
technology for the detection, analysis, and documentation of the DNA probe
results. The Company's prenatal screening system is illustrated below:
[ART GRAPHIC APPEARS HERE]
[Graphic depicts the steps in the
Company's prenatal screening system].
Preclinical Data
The Company believes that a key aspect of its prenatal screening system is
its ability to enrich and identify fetal blood cells so that they can be
directly analyzed using available DNA probe technology. As of August 1996, the
Company and its collaborators have used its fetal cell enrichment procedure on
a total of 133 maternal blood samples at sites internationally and in the
United States. The Company's system has achieved fetal blood cell
identification in 120 of the 133 samples tested or (90%) of the cases.
During 1995, the Company used its fetal cell enrichment procedure on 37 blood
samples obtained from mothers in their 11th to 20th week of pregnancy shortly
after they had undergone an invasive prenatal procedure (amniocentesis, CVS or
termination of pregnancy). The Company achieved fetal blood cell identification
in 33 of the 37 samples, or 89% of the samples. The Company planned
international evaluations of its fetal cell enrichment procedure in 1995,
however, the gel in the preformed density gradients was found to be
destabilized at the international evaluation sites. Following further
investigation, the Company determined that the gel in its preformed density
gradient required use within two weeks of its manufacture.
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<PAGE>
In the first half of 1996, utilizing new shipment and handling protocols,
the Company commenced further studies to determine if fetal blood cells could
be enriched and identified in maternal blood samples from mothers in their
11th to 21st week of pregnancy who had not undergone an invasive prenatal
procedure. At the Company's Santa Clara and Israel sites, a total of 20
samples were tested and fetal blood cell identification was achieved in all 20
samples. An independent site in the Netherlands used the fetal cell enrichment
procedure on a group of 20 samples and achieved fetal blood cell
identification in 16 samples, or 80% of the samples. At an independent site in
the United Kingdom 12 samples were processed and in 10 samples, or 83% of the
samples, fetal blood cells were found. As of June 1996, of the 52 samples
processed in 1996, fetal cell identification was achieved in 46 samples, or
88% of the samples.
In July 1996, the Company conducted an evaluation at its Santa Clara and
Israel sites, and at two independent sites in the Netherlands on 44 samples
from pregnant women in their 9th to 16th week of pregnancy. This evaluation
used fetal cell enrichment procedures which the Company expects to be similar
to those to be submitted to the FDA for review prior to commencing clinical
trials, and utilized a new formulation of the preformed density gradients.
Fetal cell identification was achieved in 41 of these 44 samples, or 93% of
the samples. In three of these samples no fetal cells were found, and in two
samples in which fetal cell identification was achieved only one fetal cell
was found. To date, no application for FDA approval has been submitted with
respect to the fetal cell enrichment system, and there can be no assurance
that FDA approval will be obtained on a timely basis, or at all. See "Risk
Factors--Prenatal Screening System in Early Stage of Development; No Assurance
of Successful Development or Commercialization" and "--Lack of Clinical Data."
Clinical/Regulatory Matters
The Company intends to apply for two separate 510(k) clearances for the
fetal cell enrichment and scanning components of its system. The DNA probe
components of the Company's system will require either FDA clearance of a
510(k) with a tier III level of review (the most extensive level of FDA review
of a 510(k), equivalent to the FDA review of a PMA in thoroughness and time)
or FDA approval of a PMA. The Company plans to market its prenatal screening
system internationally upon receipt of required regulatory clearances or
approvals. See "Business--Government Regulation."
Commercialization Strategy
The Company's prenatal screening system under development is currently
expected to be introduced in Europe in 1997 and subsequently in the United
States and the Pacific Rim, subject to receipt of required clearances or
approvals in such jurisdictions.
The system is being designed to initially screen for chromosomal
abnormalities resulting in conditions such as Down's Syndrome and certain sex
chromosome abnormalities such as Turner Syndrome, Klinefelter Syndrome, Triple
X Syndrome and certain other conditions. These abnormalities account for
approximately 80% of the incidence of all birth defects which result from
chromosome-based genetic disorders. The proprietary prenatal screening system
under development will consist of (i) a prepackaged kit to enrich the
concentration of nucleated fetal red blood cells in the maternal blood sample,
(ii) the Company's instrumentation to automate the identification of fetal
blood cells and the acquisition and presentation of the DNA probe analysis,
and (iii) may or may not include a DNA probe kit that is comprised of DNA
probes available from third parties. The Company's prenatal screening system
under development is being designed to be compatible with its existing
cytogenetic products so that customers could potentially add the prenatal
screening system to their existing installations.
FUTURE APPLICATIONS OF THE PRENATAL SCREENING TECHNOLOGY
The Company's prenatal screening system is being designed to accommodate
various chromosome-specific DNA probes, which are currently commercially
available. The Company believes that its fetal cell enrichment technology
developed for prenatal screening could have future applications for cancer
diagnosis via the isolation of tumor cells from peripheral blood and the
genetic analysis of such cells. The Company is also developing proprietary
uses for its fetal cell analysis that may facilitate the early detection of
single gene disorders such as cystic fibrosis, hemophilia, thalassemia,
sickle-cell anemia and Tay-Sachs. The Company intends to pursue these
potential additional applications to leverage its proprietary technology.
Because evaluations of future applications are at an early stage, no assurance
can be given when, if ever, the Company's fetal cell enrichment technology may
facilitate the early detection of single gene disorders or cancers.
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CURRENT CYTOGENETIC PRODUCTS
In the United States, approximately 500,000 cytogenetic tests are performed
annually. Cytogenetic testing includes prenatal screening for genetic
disorders using amniotic fluid obtained through amniocentesis and fetal tissue
samples obtained through CVS. Other cytogenetic testing includes screening
tests for diagnosis and prognosis of cancer-related conditions using bone
marrow, blood and tumor tissue samples. The Company currently manufactures,
markets and sells a family of automated instruments for cytogenetic
applications based on the Company's prior generation Cytoscan and GeneVision
product families. The Company's primary cytogenetic products are described
below. The Company currently has an installed base at approximately 500 sites
worldwide in more than 30 countries. The Company's primary cytogenetic
products currently sell for prices ranging from $50,000 to $125,000.
CytoVision Metaphase Finder. The CytoVision Metaphase Finder consists of a
computer-controlled scanning microscope with a patented autofocus mechanism,
image processing hardware, and pattern recognition software. This product
continuously scans laboratory slides for cells in metaphase and records their
location for future identification and analysis of the cells' chromosomes. The
Metaphase Finder uses the Company's patented autofocus system for continuous
scanning. Cytogenetic analysis involves identifying and inspecting a number of
relatively rare metaphase cells on a slide containing a large number of cells,
a majority of which are not in metaphase. This analysis can take a
cytogeneticist up to one hour per slide if performed manually. The Metaphase
Finder is designed to save laboratory time and cost by automating this labor-
intensive process and can identify the cells in metaphase in approximately ten
minutes. This product is fully compatible with the Company's other cytogenetic
products, which have the potential to save laboratories the expense of using
trained technicians to perform routine tasks prior to actual cytogenetic
analysis.
CytoVision Karyotyper. The CytoVision Karyotyper consists of a computerized
image capture and analysis system which incorporates pattern recognition,
automated chromosome classification algorithms and a high resolution output
device. This product supplants many otherwise manual processes in the
preparation of the data for cytogenetic analysis. The CytoVision Karyotyper
provides automated karyotyping, automatic separation of touching and
overlapping chromosomes, image enhancement features, chromosome rotation and
straightening, image zooming for band analysis, annotation capabilities, and
full screen karyotyping display. This product replaces manual photographing of
cells in metaphase, printing of the photograph, manual cutting out of each
chromosome, identifying the chromosomes, arranging the chromosomes in order,
and pasting them on a sheet of paper. In contrast to the automated process
which takes approximately 10 minutes, this manual process takes approximately
thirty minutes to one hour.
CytoVision Probe. The CytoVision Probe consists of a computerized image
capture and image enhancement system which detects and analyzes fluorescent
DNA probes applied to cell nuclei. These probes are designed to attach
themselves to specific DNA sequences which may indicate genetic disorders.
Fluorescent DNA probes are often very faint when viewed by the human eye
through a microscope. This system enhances images of DNA probes and provides a
range of analytical tools. The Company also offers a comparative genomic
hybridization software upgrade package to the CytoVision Probe to detect
genetic amplifications and deletions in tumor cells. The CytoVision Probe
system is not dependent on specific fluorescent DNA probes and may be used in
conjunction with probes from different manufacturers. In the United States the
CytoVision probe is sold for research purposes only.
All of the products in the CytoVision family, a product generation evolving
from the Company's former Cytoscan and GeneVision product lines, are
compatible and can be integrated into a network with common data management
protocols. In addition to the primary products, the Company also sells a
number of peripherals including a range of high quality printers and image
capture workstations. A typical installation will include a number of
interconnected CytoVision systems.
SALES, DISTRIBUTION AND MARKETING
The Company currently sells its cytogenetic products to government and
private clinical cytogenetic laboratories, research institutions, universities
and pharmaceutical companies. The Company has sold such systems to
approximately 500 sites in more than 30 countries. These customers utilize the
Company's cytogenetic
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products for prenatal genetic screening as well as for certain cancer screening
applications. The Company's prenatal screening system under development is
being designed to be compatible with its existing cytogenetic products so that
customers could potentially update their new or existing installations to
accommodate its prenatal screening system. If regulatory clearance or approval
is received, the Company initially plans to sell and distribute its prenatal
screening system directly and through its established worldwide network of
distributors and agents through which it sells and distributes its current
products.
In North America, the Company sells its cytogenetic products directly to its
customers. The North American sales team is comprised of six sales and
application support individuals, four of whom are based in Pittsburgh,
Pennsylvania and two in Santa Clara, California. Outside of North America, the
Company sells its products either directly through local agents who are
remunerated on a commission basis or through independent distributors. The
Company manages its international sales and distribution activities from
Applied Imaging International, the Company's wholly-owned subsidiary located in
the United Kingdom. The international sales team is comprised of eight sales
and application support individuals, all of whom are based in the United
Kingdom. The Applied Imaging International Ltd. sales team supports all
distributors and agents upon request. The Company's distributors are located in
Australia, Hong Kong, Japan, Italy and South Korea. In addition, the Company
has agents selling its cytogenetic products in other countries primarily within
Europe, the Middle East and the Pacific Rim. See "Note 11 of Notes to
Consolidated Financial Statements" for financial information concerning foreign
and domestic operations and export sales.
Because the Company's products are technically sophisticated the Company's
sales staff is supported by scientifically qualified and highly trained product
specialists. The Company offers an annual maintenance program to its customers
through its own support organization. The Company's marketing activities
include telemarketing, product advertising and participation in trade shows and
product seminars.
MANUFACTURING
The Company assembles and tests components and subassemblies made by outside
vendors to the Company's specifications and manufactures only when it believes
significant value can be added. The Company's current products are assembled
from a combination of (i) commodity technology components such as computers and
monitors, (ii) custom subassemblies, such as special image capture circuit
boards, and (iii) operating system and application software. Any disruption or
delay in the supply of components or custom subassemblies will have a material
adverse effect on the Company. While the Company typically uses components and
subassemblies which are available from alternate sources, any unanticipated
interruption of the supply of these components or subassemblies could require
the Company to redesign its products.
The Company orders components and subassemblies to forecast and assembles
specific configurations on receipt of firm orders. The Company's research,
investigational and clinical products are subject to regulation by the FDA and
all products are subject to regulation by the U.S. Department of Commerce
export controls, primarily as they relate to the associated computers and
peripherals. The Company has experienced no material difficulties in obtaining
necessary export licenses to date.
The Company plans to initially subcontract third parties to manufacture the
consumable enrichment kit component of its fetal cell screening system under
development and may ultimately manufacture such components on its own. For
clinical trials, the Company will purchase the consumable enrichment kit from a
third party contracted to manufacture the kit. The Company has no experience
manufacturing such components. The Company may encounter difficulties in
scaling up production of the consumable component of its fetal cell screening
system under development or in hiring and training additional personnel to
manufacture its consumable enrichment kit products in commercial quantities.
Under current law, if the Company manufactures finished devices in the United
States, it will be required to comply with the FDA's and the State of
California's current GMP regulations. In addition, the FDA and/or the
California authorities will inspect the Company's manufacturing facilities on a
regular basis to determine such compliance. Failure to comply with applicable
FDA or other regulatory requirements can result in fines, injunctions, civil
penalties, recalls or seizures of products, total or partial suspensions of
production and criminal prosecutions. See "Business--Government Regulation."
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RESEARCH AND DEVELOPMENT
The Company's research and development efforts include various research,
product development, clinical evaluation and testing, quality assurance and
process development activities. The current focus of the Company's research
and development efforts is the completion of the development of the Company's
prenatal screening system and particularly the initiation of clinical trials.
The Company is using a consultant to assist in the design the protocols for
the planned clinical trials. The Company's future research and development
efforts are expected to include development of additional applications of the
Company's current cytogenetic products and additional applications of the
fetal cell screening system under development. These potential additional
applications include the use of technology developed for fetal cell analysis
for the diagnosis and screening for certain cancers and certain single gene
disorders. Development of these applications will require substantial
additional funds and will be subject to technological, clinical, regulatory
and other risks associated with new medical technologies. There can be no
assurance that the Company will develop its prenatal screening system or any
other future applications of such technology.
In 1995, the Company entered into a clinical testing agreement with the
Academic Medical Center in Amsterdam to evaluate the Company's technology
relating to fetal cell enrichment from maternal blood and associated
instrumentation. The Company has an unrestricted right to use the data
resulting from the evaluation. In 1995, the Company established a wholly-owned
subsidiary in Israel to conduct further research and development focused on
the enrichment aspect of the prenatal screening system. These research
activities are being primarily funded by a $543,000 research grant issued by
the Binational Research and Development ("BIRD") Organization pursuant to
which repayment is required in the form of royalties from the sale of the
prenatal screening system. In 1996, the Company entered into a collaborative
research agreement with Leiden University in the field of enrichment,
isolation and analysis of fetal cells derived from maternal blood. See
"Business--Patents and Proprietary Rights."
Research and development expenses were approximately $2.9 million, $2.8
million and $1.8 million for 1995, 1994 and 1993, respectively.
PATENTS AND PROPRIETARY RIGHTS
The Company actively seeks, when appropriate, protection for its products
and proprietary information by means of United States and foreign patents and
trademarks. The Company has one issued United States patent relating to its
CytoVision Metaphase Finder and has corresponding issued patents in certain
European countries. In addition, the Company has three United States patents
concerning its technology for enriching the concentration of nucleated fetal
red blood cells from maternal blood samples. Corresponding applications were
filed through the Patent Cooperation Treaty and preserve for the Company the
right to file applications in various countries. The Company relies upon trade
secrets, know-how and contractual arrangements to protect certain of its
proprietary information and products.
The fields of life science instrumentation and genetic screening processes
are covered by many issued patents and patent applications. The Company is not
currently aware of any patents which it may be infringing; however, patent
applications in the United States remain confidential until a patent is
issued, and, therefore, the Company's products could infringe patents to be
issued in the future. If the Company's technology is determined to use
products, processes or other subject matter that is claimed under other
existing U.S. or foreign patents, or if other patents claiming subject matter
utilized by the Company are issued, such companies may bring infringement
actions against the Company. The Company has recently received a letter from
Vysis Corp. informing the Company that its products might fall within the
claims of a United States patent exclusively licensed to Vysis Corp. Vysis
Corp. offered the Company the right to obtain a sublicense to such patent. The
Company does not believe it is necessary to obtain such a sublicense and does
not believe it is infringing the patent. However, there can be no assurance
that the Company will not ultimately be required to seek a license from Vysis
Corp. or any other third party. The Company may be required to obtain licenses
to patents or proprietary rights of others. There can be no assurance that any
such license would be made available or, if available, would be available on
commercially acceptable terms. Failure to obtain a required license could
prevent the Company from commercializing its products resulting in a material
adverse affect on the Company's business, financial condition and results of
operations.
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The Company generally enters into confidentiality agreements with its
employees and consultants designed to both protect the Company's confidential
information and prevent the disclosure of confidential information of prior
employers and other parties. There can, however, be no assurance that the
Company's trade secrets or proprietary technology will not become known or be
independently developed by competitors in such a manner that the Company has
no practical recourse. Certain employees of and consultants to the Company are
subject to the terms of confidentiality agreements with respect to proprietary
information of their former employers. The failure of these persons to comply
with the terms of their agreements could result in assertion of claims against
the Company and such persons which, if successful, might restrict their roles
within the Company.
In 1996, the Company entered into a collaborative research agreement with
Leiden University ("Leiden") in the field of enrichment, isolation and
analysis of fetal cells derived from maternal blood. Under the terms of the
agreement, the Company has sole ownership of any jointly developed inventions
and has an exclusive license to any issued patents owned solely by Leiden. The
royalty rate for the exclusive license shall not be more than 5% of associated
sales.
The Company also relies upon trademarks to protect certain of its products,
and holds a United States trademark registration for the mark "CYTOSCAN."
Registration for this mark and the mark "CYTOVISION" are held by the Company
in certain foreign jurisdictions.
The Company also has certain trademark rights in the United States and other
foreign countries. It is possible that third parties may allege superior
rights to one or more of the Company's trademarks, or close variations, for
those countries in which the Company is presently conducting business or may
do so in the future. The Company's rights to use and register its marks in a
given jurisdiction may depend on its rights relative to a third party's rights
as governed by the laws of the pertinent country. Factors utilized to
determine the relevant rights between parties include priority of the use or
registration of the mark, how close the respective marks are in appearance,
sound and/or meaning, as well as the goods to which they are applied. It is
possible that the Company could be prevented from using or registering its
trademarks in certain countries due to a superior third party right.
COMPETITION
The market for the Company's current cytogenetic products is highly
competitive. The Company believes that its primary competitors in this market
include Perceptive Scientific, Inc. (acquired by International Remote Imaging
Systems, Inc.), and Vysis Corp., a biotechnology subsidiary of AMOCO
Technology Company. The principal competitive factors in this market are
product features offered, ease of use, clarity of output, customer service
capabilities, price and installed base. The Company believes it competes
favorably with regard to these factors.
With respect to its prenatal screening system under development, the Company
is aware of a number of companies that are in the process of developing
genetic screening products based on competing technologies designed to enrich
the concentration of fetal blood cells in maternal blood samples. Many of
these companies have greater research and development, marketing and financial
resources than the Company. These companies include Integrated Genetics, Inc.
(a wholly-owned subsidiary of Genzyme Corp.), CellPro, Incorporated,
Aprogenex, Inc., and Centocor, Inc. Integrated Genetics specializes in
providing genetic testing services. CellPro specializes in cell separation and
gene therapy, Aprogenex specializes in providing DNA probes, and Centocor
specializes in providing monoclonal antibodies.
The medical diagnostic and biotechnology industries are subject to intense
competition. The Company's fetal cell screening system under development, if
commercially marketed, will also be subject to intense competition from
existing procedures such as maternal AFP, triple test, CVS and amniocentesis.
There can be no assurance that the Company's fetal cell screening system under
development will replace any existing procedures. The Company expects the
principal competitive factors in the fetal cell screening market to be
reliability, accuracy, range of disorders detected, risk to the fetus and the
price of testing.
Many of the Company's competitors have greater financial and technical
resources and production and marketing capabilities than the Company. There
can be no assurance that these competitors will not succeed in
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developing technologies and products that are more effective, easier to use or
less expensive than those which are currently offered or being developed by
the Company or that would render the Company's technology and products
obsolete and noncompetitive. In addition, many of the Company's competitors
have significantly greater experience than the Company in conducting clinical
investigations of new diagnostic products and in obtaining FDA and other
regulatory clearances and approvals of products. Accordingly, the Company's
competitors may succeed in developing and obtaining regulatory approvals for
such products more rapidly than the Company.
GOVERNMENT REGULATION
The preclinical and clinical testing, manufacturing, labeling, distribution,
sales, marketing, advertising and promotion of the Company's research,
investigational and clinical diagnostic products are subject to extensive and
rigorous government regulation in the United States and in other countries. In
the United States and certain other countries, the process of obtaining and
maintaining required regulatory clearances or approvals is lengthy, expensive
and uncertain. The Company believes that its future success will be
significantly dependent upon commercial sales of its prenatal screening system
under development. The Company will not be able to market this system for
clinical diagnostic use in the United States unless and until the Company
obtains clearance or approval from the FDA and will not be able to market such
system overseas until it meets the safety and quality regulations of each
foreign jurisdiction in which the Company, its agents or distributors seeks to
sell such system. In the United States, the Company's products are also
subject to regulation by state authorities. The State of California's
requirements in this area, in particular, are extensive, and require
registration with the state and compliance with GMP regulations during
clinical trials.
Noncompliance with applicable FDA requirements can result in, among other
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, distribution, sales, and marketing,
refusal of the government to grant approval of a PMA or clearance of a 510(k),
withdrawal of marketing approvals or clearances, a recommendation by the FDA
that the manufacturer or distributor not be permitted to enter into government
contracts, and criminal prosecution. In certain circumstances, the FDA also
has the authority to order the manufacturer or distributor of a device to
repair, replace or refund of the cost of the device. Failure to comply with
regulatory requirements in the United States or abroad could have a material
adverse effect on the company's business, financial condition, and results of
operations.
With exceptions for certain medical devices first marketed before May 28,
1976, prior to their commercial sale in the United States, medical devices
must be cleared or approved by the FDA or be exempted from the requirement of
FDA clearance or approval. In general, the regulatory process can be lengthy,
expensive and uncertain, and securing FDA clearances or approvals may require
the submission of extensive clinical data together with other supporting
information to the FDA.
In the United States, medical devices are classified as Class I, II, or III,
on the basis of the controls deemed by the FDA to be necessary to reasonably
ensure their safety and effectiveness. Class I devices are subject to general
controls (e.g., labeling, premarket notification and adherence to FDA-mandated
current good manufacturing practices ("GMP") requirements), and Class II
devices are subject to general controls and special controls (e.g.,
performance standards, postmarket surveillance, patient registries and FDA
guidelines). Generally, Class III devices are those that must receive
premarket approval by the FDA to ensure their safety and effectiveness (e.g.,
life sustaining, life supporting and implantable devices) and also include
most devices that were not on the market before May 28, 1976 ("new medical
devices") and for which the FDA has not made a finding of "substantial
equivalence" based on a 510(k). Class III devices usually require clinical
testing and FDA approval prior to marketing and distribution.
Before a new medical device can be introduced into the market, the
manufacturer must obtain FDA clearance of a 510(k) or approval of a PMA,
unless the device is exempt from the requirement of such clearance or
approval. A 510(k) clearance will be granted if the submitted information
establishes that the device is substantially equivalent to a legally marketed
Class I or II medical device or to a legally marketed Class III device that
does not itself require an approved PMA prior to marketing ("predicate
device"). A 510(k) must
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contain information to support a claim of substantial equivalence, which may
include laboratory test results or the results of clinical studies of the
device in humans. Such studies can take years to complete, analyze, and
prepare for submission to the FDA. Commercial distribution of a device for
which a 510(k) is required may begin only after the FDA issues an order
finding the device to be "substantially equivalent" to a predicate device. The
FDA has recently been requiring a more rigorous demonstration of substantial
equivalence than in the past and is more likely to require the submission of
data from one or more human clinical trials. A 510(k) for a device
incorporating new technology may be given a tier III level of review, which is
equivalent to the review given to a PMA in thoroughness and time. The FDA has
no specific time limitation by which it must respond to a 510(k). It generally
takes from five to twelve months from the date of submission to obtain 510(k)
clearance from the FDA, but it may take longer and 510(k) clearance may never
be obtained. The FDA may determine that a device is not "substantially
equivalent" to a predicate device, or that additional information is needed
before a substantial equivalence determination can be made.
A PMA must be filed with and approved by the FDA before marketing may begin
if a device is not found by the FDA to be substantially equivalent to a
predicate device. A PMA must be supported by valid scientific evidence that
typically includes extensive data, including data from preclinical testing and
human clinical trials to demonstrate the safety and effectiveness of the
device. The FDA often requires the performance of at least two independent,
statistically significant human clinical trials that must demonstrate the
safety and effectiveness of the device in order to obtain FDA approval of the
PMA. If human clinical trials of a device are required and the device presents
a "significant risk," the sponsor of the trial (usually the manufacturer or
the distributor of the device) is required to file an investigational device
exemption ("IDE") application with the FDA prior to commencing human clinical
trials. The IDE application must be supported by data, typically including the
results of animal and laboratory testing. If the IDE application is approved
by the FDA (or the FDA does not notify the sponsor 30 days after receipt of
the application that the trials may not begin) and the study protocol is
approved by one or more appropriate institutional review boards ("IRBs"),
human clinical trials may begin at a specific number of investigational sites
with a specific number of patients, as approved by the FDA. If the device
presents a "nonsignificant risk" to the patient, a sponsor may begin the human
clinical trials after obtaining approval of the study protocol by one or more
appropriate IRBs, but not by the FDA unless the FDA notifies the sponsor that
an IDE application is required. Sponsors of human clinical trials are
permitted under the FDA's regulations to sell those devices distributed in the
course of the trials provided the price charged is not larger than that
necessary to recover the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to, and approved by, the FDA (or
the FDA does not notify the sponsor 30 days after receipt of the supplement
that the change may not be implemented) before a sponsor or an investigator
may make a change to the investigational plan that may affect its scientific
soundness or the rights, safety or welfare of human subjects. The FDA has the
authority to re-evaluate, alter, suspend or terminate clinical testing based
on its assessment of data collected throughout the trials.
The PMA must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling and promotional labeling. Upon submission of a PMA, the FDA
makes a threshold determination regarding whether the application is
sufficiently complete to permit filing for a substantive review. If the FDA
determines that the PMA application is sufficiently complete to permit such
review, the FDA will accept the application for filing. Once the submission is
accepted for filing, the FDA begins an in-depth review of the PMA. An FDA
review of a PMA generally takes one to two years from the date the PMA is
accepted for filing, but may take significantly longer if the FDA requests
additional information and any major amendments to the PMA are filed. The
review time is often significantly extended by the FDA's asking for more
information or clarification of information already provided in the
submission. During the review period, an advisory committee, typically a panel
of clinicians, will likely be convened to review and evaluate the application
and provide recommendations to the FDA regarding whether the PMA should be
approved. The FDA is not bound by the recommendations of the advisory panel.
Toward the end of the PMA review process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that the facilities are
in compliance with the applicable GMP requirements.
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If the FDA's evaluations of both the PMA and the manufacturing facilities
are favorable, the FDA will issue either an approval letter (order) or an
"approvable letter" containing a number of conditions that must be met in
order to secure approval of a PMA. When and if those conditions have been
fulfilled to the satisfaction of the FDA, the agency will issue an order
approving the PMA, authorizing commercial marketing of the device for certain
indications. If the FDA's evaluation of the PMA or manufacturing facilities is
not favorable, the FDA will deny approval of the PMA or issue a "not
approvable letter." The FDA may also determine that additional preclinical
testing or human clinical trials are necessary, in which case approval of the
PMA could be delayed for several years while additional testing or trials are
conducted and submitted in an amendment to the PMA. The PMA process can be
expensive, uncertain and length, and a number of devices for which FDA
approval has been sought by other companies have never been approved for
marketing.
Under the FDA's regulatory scheme, the decision whether to seek 510(k)
clearance for a changed or modified device is left to the manufacturer in the
first instance. The Company to date has not sought 510(k) clearance for its
CytoVision products on the basis of the Company's conclusion, reflected in the
Company's scientific report addressing this matter, that CytoVision is a new
model of Cytoscan and there have not been any changes or modifications in
design, components, method of manufacture, or intended use, which could
significantly affect the safety or effectiveness of the original device. There
can be no assurance that the FDA will agree with the Company's decision not to
seek 510(k) clearance for CytoVision, and that it will not require the Company
to cease sales and distribution and seek 510(k) clearance for the CytoVision
system, or that such clearance, if required, will be obtained in a timely
manner if at all.
The Company intends to submit a protocol for clinical trials of the DNA
probe component of its prenatal testing system to the FDA before the end of
1996 and to initiate a multisite United States and international clinical
trial of the DNA probe component of its prenatal testing system to detect
chromosomal disorders in isolated fetal cells during the first half of 1997.
There can be no assurance regarding the timing or nature of the FDA response
regarding the DNA probe related protocol or the timing for the commencement of
clinical trials. There can be no assurance that 510(k) clearance for any
portion of the prenatal screening system under development or any other future
product or modification of an existing product will be granted or that the
clearance process will not be unduly lengthy and subjected to a thorough
internal review equivalent to that ordinarily reserved for devices requiring
premarket approval by the FDA. If substantial equivalence cannot be
established or if the FDA determines that the device or the particular
intended use for the device falls within its guideline the FDA may require a
more rigorous review which the FDA has stated is possible for the Company's
prenatal screening system under development, the FDA will require that the
Company submit a PMA that must be reviewed and approved by the FDA prior to
sales, distribution and marketing of these products in the United States. The
PMA process is significantly more complex, expensive and time consuming than
the 510(k) process. While the Company has made determinations regarding the
appropriate form of approval, if any, required for its products, there can be
no assurance that such determinations are correct, that the FDA will concur
with such determinations or that such determinations may not be altered due to
new interpretations or new data that may become available or changes in the
FDA's policies. Currently, the DNA probes that the Company intends to purchase
from third parties to incorporate into its prenatal screening technology are
sold on a research basis without FDA approval for commercial sale. The FDA
requires DNA probes to have 510(k) clearance or PMA approval for commercial
sale for clinical diagnostic use, which could cause the price of DNA probes to
increase, making the Company's prenatal screening system less price
competitive compared to existing prenatal genetic test procedures.
Export sales of investigational devices that are subject to PMA or
investigational device exemption application requirements and have not
received FDA marketing approval generally may be subject to FDA export permit
requirements depending upon, among other things, the purpose of the export
(investigational or commercial), the country to which the device is intended
for export, and on whether the device has valid marketing authorization in a
country listed in the FDA Export Reform and Enhancement Act of 1996. In order
to obtain such a permit, when one is required, the Company must provide the
FDA with documentation from the medical device regulatory authority of the
country in which the purchaser is located, stating that the device has the
approval of the country. In addition, the FDA must find that exportation of
the device is not contrary to the public health and safety of the country in
order for the Company to obtain the permit.
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In addition to domestic regulation of medical devices, the Company's current
products and its products under development are subject to corresponding
regulations governing safety processes, manufacturing processes and quality in
foreign jurisdictions in which it operates or such products are sold. The sale
of the fetal cell screening system under development may be materially
affected by the policies of regulatory bodies or the domestic politics of the
countries involved. There can be no assurance that an early prenatal screening
test for genetic disorders will not be prohibited or restricted in some
jurisdictions. In addition, FDA export permits may be required for shipment of
the Company's fetal cell screening system under development to certain foreign
countries. Failure to comply with applicable regulatory requirements can,
among other consequences, result in fines, injunctions, civil penalties,
suspensions or loss of regulatory approvals, product recalls, seizure of
products, operating restrictions and criminal prosecution. In addition, future
governmental regulations may be established that could prevent or delay
regulatory approval of the Company's products. The regulation of medical
devices in a number of such jurisdictions continues to develop and there can
be no assurance that new laws or regulations will not have a material adverse
effect on the Company's business. The European Community and its member
countries currently are imposing more substantial regulation on in vitro
diagnostic devices and equipment-like medical devices, and such regulation may
affect the Company's current products and products under development.
Delays in receipt of clearances or approvals to market its products, failure
to receive these clearances or approvals, the loss of previously received
clearances or approvals or the determination that 510(k) clearance, pre-market
approval or other approval is required for a product being marketed without
such clearance or approval could have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition, the Company's current products and the fetal cell screening
system under development could be affected by the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA"), which are intended to ensure the
quality and reliability of medical testing in the United States regardless of
where tests are performed. CLIA or regulations thereunder could negatively
affect the Company's ability to market its products.
The Company is also required to register as a medical device manufacturer
with the FDA and state agencies, such as the California Department of Health
Services ("CDHS") and to list its products semi-annually. Marketed devices are
subject to pervasive and continuing regulatory oversight by the FDA and other
agencies, including record-keeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and certain
state agencies and are subject to periodic inspections by the FDA and CDHS.
The Federal Food, Drug and Cosmetic Act requires that medical devices be
manufactured in accordance with the FDA's GMP regulation and documented. This
regulation requires, among other things, that (i) the manufacturing process be
regulated and controlled by the use of written procedures, and (ii) the
ability to produce devices which meet the manufacturer's specifications be
validated by extensive and detailed testing of every aspect of the process.
The regulation also requires investigation of any deficiencies in the
manufacturing process or in the products produced and detailed record keeping.
Manufacturing facilities are subject to FDA inspection on a periodic basis to
monitor compliance with GMP requirements. If violations if the applicable
regulations are noted during FDA inspections of manufacturing facilities, the
FDA can prohibit further manufacturing, distribution and sale of the devices
until the violations are cured. The FDA has proposed changes to the GMP
regulation that would, among other things, subject manufacturers of components
to GMP requirements in certain circumstances, and require pre-production
design controls and maintenance of service records. If finalized these changes
would likely increase the cost of complying with GMP requirements. Other
applicable requirements include the FDA's medical device (manufacturer)
reporting regulation, which requires that the device manufacturer provide
information to the FDA on deaths or serious injuries alleged to have been
associated with the use of its marketed devices, as well as product
malfunctions that would likely cause or contribute to a death or serious
injury if the malfunction were to recur.
Labeling, advertising and promotional activities for investigational and
marketed devices are subject to scrutiny by the FDA and, in certain instances,
by the Federal Trade Commission. The FDA enforces statutory prohibitions
against promoting or marketing products for unapproved uses.
40
<PAGE>
The Company is also subject to other federal, state, local and foreign laws,
regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, including but not limited to the
requirements of the CLIA. The extent of government regulation that might
result from any future legislation or administrative action cannot be
accurately predicted. Failure to comply with any federal or state regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
THIRD-PARTY REIMBURSEMENT AND HEALTH CARE REFORM
In the United States, the Company's products are purchased primarily by
medical institutions which then bill various third-party payors, such as
Medicaid, other government programs and private insurance plans, for the
health care services provided to their patients. Third-party payors may deny
reimbursement if they determine that the device used in a treatment was
unnecessary, inappropriate, experimental or investigational, used for a non-
approved indication, or not cost-effective and typically do not reimburse for
devices used for research and investigational purposes. Accordingly,
physicians must determine that the clinical benefits of genetic screening
procedures justify additional cost. The market for the Company's current
cytogenetic products could be adversely affected by changes in governmental
and private third-party payors' policies and the market for the Company's
fetal cell screening system under development could be materially adversely
effected by the failure of governmental and third-party payors adopting
policies to reimburse health care providers for the use of the Company's fetal
cell screening system under development. The unavailability of third-party
coverage or the inadequacy of the reimbursement for medical procedures using
the Company's products would adversely affect the Company's business,
financial condition and results of operations. In both the United States and
internationally, third-party payors are increasingly challenging the prices
charged for medical products and services. There can be no assurance that
reimbursement for the procedures using the Company's products will be
available or, if currently available, will continue to be available, or that
future reimbursement policies of payors will not adversely affect the
Company's ability to sell its products on a profitable basis. In addition,
there can be no assurance that third-party reimbursement will be available for
diagnostic procedures based on the Company's fetal cell screening system under
development.
The levels of revenues and profitability of medical device companies may be
affected by the continuing efforts of governmental and third-party payors to
contain or reduce the costs of health care through various means. In the
United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement
government regulation of health care costs. It is uncertain what legislative
proposals will be adopted or what actions federal, state or private payers for
health care goods and services may take in response to any health care reform
proposals or legislation. The Company cannot predict the effect health care
reforms may have on its business, and no assurance can be given that any such
reforms will not have a material adverse effect on the Company's business,
financial condition and results of operations. Further, to the extent that
such proposals or reforms have a material adverse effect on the business,
financial condition and profitability of the clinical and research
laboratories, hospitals and other institutions that comprise the Company's
customer base, the Company's business, financial condition and results of
operations could be adversely affected.
PRODUCT LIABILITY AND INSURANCE
The Company's business may involve the risk of product liability claims,
including those relating to inaccurate results from its screening products.
Although the Company has not experienced any product liability claims to date,
any such claims could have a material adverse impact on the Company. The
Company maintains product liability insurance at coverage levels which it
deems commercially reasonable; however, there can be no assurance that product
liability or other claims will not exceed such insurance coverage limits or
that such insurance will continue to be available on commercially acceptable
terms, or at all. The Company intends to evaluate, depending on the
circumstances that exist at the time, whether or not to obtain any additional
product liability insurance coverage prior to the time that the Company
engages in any extensive marketing of its fetal cell screening system under
development. Even if the Company obtains additional product liability
insurance,
41
<PAGE>
there can be no assurance that it would prove adequate or that a product
liability claim, insured or uninsured, would not have a material adverse
effect on the Company's business, financial condition and results of
operations. Even if a product liability claim is not successful, the time and
expense of defending against such a claim may adversely affect the Company's
business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1996, the Company had 85 employees, of whom 32 were involved
in research and development, 9 in manufacturing and manufacturing engineering,
30 in sales, marketing and customer service and 14 in finance and
administration. As of June 30, 1996, 39 of the employees were based in the
United Kingdom, 41 in the United States, 4 in Israel, and 1 in France. A total
of 12 employees hold Ph.Ds, and 2 employees are M.D.s. The Company's employees
include trained cytogeneticists to specify, support and sell its product
range. The Company believes that its relationship with its employees is good.
FACILITIES
In the United States, Applied Imaging leases an approximately 14,000 square
foot facility in Santa Clara, California, under a lease which terminates in
April 1997. The Company also leases an approximately 2,700 square foot
facility in Pittsburgh, Pennsylvania, under a lease which terminates in July
1999. In the United Kingdom, Applied Imaging International Ltd. leases an
approximately 10,000 square foot facility in Sunderland, which lease
terminates in June 1998. In Israel, Applied Imaging Ltd. leases an
approximately 1,500 square foot facility near Tel Aviv under a short-term
lease arrangement. The Company believes that its facilities are adequate to
meet its requirements until at least through mid-1997.
42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Executive Officers and
Directors
Abraham I. Coriat (1) 48 Chief Executive Officer and Chairman of the
Board of Directors
Michael W. Burgett, Ph.D. 51 President, Genetic Diagnostics Division
Leslie G. Grant, Ph.D. 43 President and Chief Operating Officer,
Cytogenetics Division
Neil E. Woodruff 49 Chief Financial Officer and Secretary
John F. Blakemore, Jr. 56 Director
(1)(2)
Michael S. Elias (1) 36 Director
Gilbert J.R. McCabe (2) 51 Director
Thomas C. McConnell (2) 42 Director
Andre F. Marion 60 Director
Robert C. Miller 30 Director
G. Kirk Raab 60 Director
Key Employees
Alex Saunders, M.D. 65 Chief Scientist and Medical Director
Simon B. Goldbard, Ph.D. 44 Director of Product Development
Paddy O'Kelly 38 Director of Engineering
Paul H. Hardiman 50 Manager of Regulatory Affairs and Quality
Assurance
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
ABRAHAM I. CORIAT the founder of the Company, has been with the Company
since 1986. He is Chief Executive Officer and Chairman of the Board. From 1981
to 1986, he served as Business Area Manager and Engineering Manager for
International Imaging Systems in their medical and industrial imaging
divisions. Mr. Coriat has 23 years of experience in the imaging and medical
industry, including various senior engineering positions in England, Belgium
and Italy. He holds an Electrical Engineering degree from INSA (Institut
National de Sciences Appliquees), France.
MICHAEL W. BURGETT PH.D., joined the Company as President of the Genetic
Diagnostics Division in February 1996. Dr. Burgett has 23 years of experience
in the medical diagnostics industry, including 14 years in senior management
positions. From 1987 to 1996, Dr. Burgett held various general management,
operations and product development positions with Ortho Diagnostic System
Inc., a Johnson & Johnson Company, most recently acting as Vice President and
General Manager of their blood bank business. Prior to that, Dr. Burgett held
various research and development and program management positions with
SmithKline Beckman, Inc., International Diagnostics Technology, Inc., and
BioRad Laboratories, Inc. Dr. Burgett holds a B.A. and an M.A. in Biology from
San Francisco State University and a Ph.D. in Chemistry from the University of
Texas at Austin.
LESLIE G. GRANT PH.D., has been President and Chief Operating Officer of the
Company's Cytogenetics Division since February 1992. He joined the Company in
October 1991 as Managing Director of Applied Imaging International Ltd. From
1980 to 1991, Dr. Grant held various general management and senior
43
<PAGE>
engineering positions with GEC-Marconi. Dr. Grant has 20 years experience in
the instrumentation and medical industry, including 11 years in senior
management positions. Dr. Grant holds a B.S. in Mathematics and a Ph.D. in
Mathematics and Electronic Engineering from the University of Hull, United
Kingdom.
NEIL E. WOODRUFF has served as Chief Financial Officer of the Company since
April 1990 and Secretary since 1993. Mr. Woodruff has 25 years experience in
finance and the high technology industry. From 1983 to 1990, Mr. Woodruff held
various financial and general management positions with General Signal Corp.
Prior to that, Mr. Woodruff held various finance posts with Epitaxy, Inc.,
National Semiconductor and General Instrument Corp. Mr. Woodruff holds a B.S.
in Finance from the University of Santa Clara.
JOHN F. BLAKEMORE, JR. has been a director of the Company since December
1987. Since 1987 he has been an independent investor and consultant. At
present he is also a director, Vice President and CFO of Pro-Log Corp., an
industrial computer company. From 1979 to 1987 he worked for Compumotor Corp.,
a company he co-founded. Prior to that, he held three general management
positions including Vice President of Wells Fargo Investment Co. Mr. Blakemore
holds a B.S. in Mechanical Engineering and an M.B.A. from Stanford University.
MICHAEL S. ELIAS became a director of the Company in April 1988. From 1987
to 1995, Mr. Elias was a director of Thompson Clive Inc., an investment
advisor to Thompson Clive Ventures and Thompson Clive Ventures (L.P.). He is
currently a director of Thompson Clive & Partners Limited and Thompson Clive
(Jersey) Limited, the manager of Thompson Clive Ventures. Mr. Elias holds an
A.B. in Biological Anthropology from Harvard University and an M.S. in
Neurobiology from Cambridge University in Great Britain. He currently serves
as a member of the Board of Directors of Applied Osteo Systems, Inc., Com'X
S.A., Esker S.A., Sorediv S.A. and Alpha-MOS S.A.
GILBERT J.R. MCCABE has been a director of the Company since July 1992. Mr.
McCabe has been an independent advisor for the past four years to
international investment partnerships investing in start-up companies in North
America, Europe and Asia. For the previous 20 years he was a Vice President
with Citicorp, where he served in the United States, Asia and Europe working
with international investors. He holds an M.A. in Humanities from Oxford
University.
THOMAS C. MCCONNELL became a director of the Company in August 1990. Mr.
McConnell has been with New Enterprise Associates, a venture capital
investment firm since 1983 where he has been a General Partner since 1989.
Previously, he was a Product Manager in the Lisa Division of Apple Computer,
Inc. and a consultant with the Boston Consulting Group. He received an A.B. in
Engineering Science from Dartmouth College and an M.B.A. from the Stanford
University Graduate School of Business. Mr. McConnell serves on the Board of
Directors of CardioThoracic Systems, Inc., Conceptus, Inc., Sequana
Therapeutics, Inc., Innovasive Devices and a number of private companies.
ANDRE F. MARION has been a director of the Company since November 1995. Mr.
Marion was a founder of Applied Biosystems, Inc., a supplier of instruments
for biotechnology research, and served as its Chief Operating Officer from
1983 to 1986, its Chief Executive Officer from 1986 to 1993, and its Chairman
of the Board from 1987 to February 1993, when it merged with the Perkin Elmer
Corporation, a manufacturer of analytical instruments. Mr. Marion served as
Vice President of Perkin Elmer and President of its Applied Biosystems
Division until his retirement in February 1995. Mr. Marion holds a degree in
engineering from the French Ecole Nationale Superieures d'Ingenieurs Arts et
Metiers in both Mechanical and Electronic Engineering. Mr. Marion is an
independent consultant and also a director of Cygnus Corporation and Molecular
Devices Inc.
ROBERT C. MILLER has been a director of the Company since November 1995. He
is a Vice President and Director of the investment banking firm of Allen &
Company Incorporated and has been associated with the firm since June 1986.
Mr. Miller received his B.A. from Williams College and his M.B.A. from the
Leonard N. Stern School of Business, New York University. Mr. Miller is a
director of Envirogen, Inc., Audits & Surveys Worldwide, Inc., and Mediscience
Technology Corp., as well as a director of a number of private companies.
44
<PAGE>
G. KIRK RAAB became a director of the Company in 1996. Mr. Raab was
President and Chief Operating Officer from 1985 to 1989 and President and
Chief Executive Officer from 1990 to July 1995 of Genentech Inc., a
pharmaceutical company. He was with Abbott Laboratories from 1975 to 1985,
serving as President and Chief Operating Officer from 1981 to 1985. He is
currently Chairman of the Board of Shaman Pharmaceuticals, Inc. and Connective
Therapeutics, Inc., and a director of a number of private companies. He
received his B.A. from Colgate University, where he serves as a Trustee.
ALEX SAUNDERS M.D., has been Chief Scientist and Medical Director of the
Company since April 1993. Dr. Saunders is the founder and President of
Chronomed, Inc., a medical device company, where he was employed from 1986 to
1993. Prior to this, he was Director of Clinical Cytometry Systems for Becton
Dickinson, Vice President of Research and Development and Medical Affairs at
Geometric Data, a division of SmithKline Beckman, and Medical Director and
Technical Director at Technicon Corporation. Dr. Saunders has concentrated on
blood cell separation methods for the past ten years. Prior to this, he taught
pathology for eight years at Stanford University School of Medicine. Dr.
Saunders holds a B.A. from Stanford University and an M.D. from University of
British Columbia.
SIMON B. GOLDBARD PH.D., became a Director of Product Development of the
Company in 1994. From 1991 to 1994, Dr. Goldbard was Director of Research at
MediGene Corp., a clinical genetic testing company. Prior to this, he held
various research and development positions at Lifecode Division of Quantum
Chemical Inc., Genet Corp. and Enzo Biochemical Inc. He has 11 years of
biotechnology research and product development experience. Dr. Goldbard holds
a B.S. in Microbiology from the National University of Mexico and a Ph.D. in
Immunobiology from Iowa State University.
PADDY O'KELLY has been Director of Engineering of the Company since June
1992 with responsibilities in both the United States and United Kingdom
facilities for the engineering of the Company's cytogenetic product line. From
1982 to 1992, he held several positions with the Simulation Division of GEC-
Marconi, a computing and imaging systems company. He holds a B.S. in
Mathematics from Imperial College, University of London.
PAUL H. HARDIMAN has been the Manager of Regulatory Affairs and Quality
Assurance of the Company since May, 1994. From 1992 through 1994 Mr. Hardiman
was employed with Chiron Corporation as Manager of Diagnostic Quality Control.
He has 15 years of medical diagnostics experience, holding various positions
in product development, quality control/quality assurance and regulatory
compliance (domestic and international). He holds a B.Sc. in Biochemistry,
Botany and Zoology from the University College, Dublin, Ireland and a M.S. in
Molecular Genetics from the Michigan Technological University.
EMPLOYMENT AGREEMENTS
Under the terms of a letter dated August 12, 1991 (the "Letter Agreement")
setting forth the terms of Leslie G. Grant's employment with the Company, the
Company has agreed to provide Dr. Grant, in addition to an annual salary and
bonus, medical insurance, vacation time, mortgage interest payments on a new
residence purchased by Dr. Grant in connection with his move from Scotland to
England and an option to purchase 45,000 shares of the Company's Common Stock,
upon a change in control of the Company, with accelerated vesting of Dr.
Grant's option. In February 1996, the Letter Agreement was amended (the
"Amendment"). The Amendment contains a confidential nondisclosure provision
that restricts Dr. Grant's ability to disclose the Company's proprietary
information to third parties and a noncompetition provision that temporarily
restricts Dr. Grant's ability to indirectly complete with the Company
following Dr. Grant's termination from the Company.
Under the terms of a letter dated January 20, 1996 setting forth the terms
of Michael Burgett's employment with the Company, the Company has agreed to
provide Dr. Burgett, in addition to an annual salary and bonus, medical
insurance, vacation time and an option to purchase 70,000 shares of the
Company's Common Stock at an exercise price of $1.80 per share, with (i)
reimbursements for relocation expenses incurred by Dr. Burgett in connection
with his move from New Jersey to California up to a maximum of $70,000, (ii) a
severance payment equal to six times Dr. Burgett's then existing monthly
salary in the event his employment is terminated by the Company and (iii) upon
a change in control of the Company, accelerated vesting of Dr. Burgett's
option.
45
<PAGE>
BOARD COMPOSITION
The Company currently has authorized eight directors. In accordance with the
terms of the Company's Restated Articles of Incorporation, effective upon the
closing of this offering, the terms of office of the Board of Directors will
be divided into three classes; Class I, whose term will expire at the annual
meeting of shareholders to be held in 1997; Class II, whose term will expire
at the annual meeting of shareholders to be held in 1998; and Class III, whose
term will expire at the annual meeting of shareholders to be held in 1999. The
Class I directors are Michael S. Elias, Thomas C. McConnell and Gilbert J. R.
McCabe, the Class II directors are John F. Blakemore, Jr., Robert C. Miller
and G. Kirk Raab, and the Class III directors are Abraham I. Coriat and Andre
F. Marion. At each annual meeting of shareholders after the initial
classification, the successors to directors whose term will then expire will
be elected to serve from the time of election and qualification until the
third annual meeting following election. In addition, the Company's Restated
Articles of Incorporation provide that the authorized number of directors may
be changed only by resolution of the Board of Directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the Board
of Directors may have the effect of delaying or preventing changes in control
or management of the Company.
Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than
nonemployee directors, devote substantially full time to the affairs of the
Company. The Company's nonemployee directors devote such time to the affairs
of the Company as is necessary to discharge their duties. There are no family
relationships among any of the directors, officers or key employees of the
Company.
BOARD COMMITTEES
The Audit Committee of the Board of Directors reviews the internal
accounting procedures of the Company and consults with and reviews the
services provided by the Company's independent accountants. The members of the
Audit Committee are Messrs. John F. Blakemore, Jr., Michael S. Elias and
Abraham I. Coriat. The Compensation Committee of the Board of Directors
reviews and recommends to the Board the compensation and benefits of all
officers of the Company and establishes and reviews general policies relating
to compensation and benefits of employees of the Company. The members of the
Compensation Committee are Messrs. Thomas C. McConnell, Gilbert J. R. McCabe
and John F. Blakemore.
DIRECTOR COMPENSATION
Gilbert J. R. McCabe, G. Kirk Raab, John F. Blakemore, and Andre F. Marion
receive $800 per meeting attended, and all Directors receive reimbursement of
travel expenses from the Company for their service as members of the Board of
Directors. Under the Company's Director Option Plan, each director who is not
also an employee or consultant of the Company (an "Outside Director") will
automatically receive an option to purchase 5,000 shares of Common Stock upon
joining the Board of Directors or, in the case of current Outside Directors,
upon re-election to the Board of Directors at the first annual meeting of the
shareholders following this offering. Thereafter, each Outside Director who
has served on the Board of Directors for at least six months shall receive an
option to acquire 5,000 shares of Common Stock on the date of each of the
Company's annual meetings of shareholders, provided such Outside Director is
re-elected. Each option granted under the Director Option Plan will become
exercisable ratably over a four-year period.
46
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the information
for the years ended December 31, 1993, 1994 and 1995 regarding the
compensation of the Company's Chief Executive Officer and each of the
Company's two other most highly compensated executive officers whose total
annual salary and bonus for such fiscal years were in excess of $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS COMPENSATION($)
- --------------------------- ---- --------- -------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Abraham I. Coriat........ 1993 $120,000 $30,000(1) $ -- -- $2,400(2)
Chief Executive Officer 1994 140,000 37,500(3) -- -- 7,950(4)
and Chairman of the
Board
1995 147,000 37,500(5) -- -- 8,373(6)
Leslie G. Grant, Ph.D.... 1993 89,400 -- 36,706(7) 10,000(8) 16,351(9)
President, and Chief 1994 92,256 17,298(3) 13,172(10) -- 17,079(11)
Operating
Officer Cytogenics Divi- 1995 102,570 39,450(5)(12) -- -- 16,197(13)
sion
Neil E. Woodruff......... 1994 92,524 23,200(3)(14) -- -- 4,133(15)
Chief Financial Officer 1995 98,000 15,000(5) -- 10,000(16) 4,465(17)
and Secretary
</TABLE>
- --------
(1) Consists of bonuses earned during the year ended December 31, 1993 but
paid in the year ended December 31, 1994.
(2) Consists of amounts contributed to the Company's retirement plan.
(3) Consists of bonuses earned during the year ended December 31, 1994 but
paid in the year ended December 31, 1995.
(4) Consists of $4,000 contributed to the Company's retirement plan and
$3,950 in insurance premiums paid by the Company on behalf of Mr. Coriat.
(5) Consists of bonuses earned during the year ended December 31, 1995 and
paid in the year ending December 31, 1996.
(6) Consists of $4,392 contributed to the Company's retirement plan and
$3,981 in insurance premiums paid by the Company on behalf of Mr. Coriat.
(7) Consists of a mortgage interest reimbursement paid by the Company to Dr.
Grant.
(8) One-fourth (1/4) of the shares subject to the option became exercisable
on each of October 1, 1993, October 1, 1994 and October 1, 1995. The
remaining one-fourth ( 1/4) of the shares subject to the option shall be
exercisable on October 1, 1996, based upon Dr. Grant's continued
relationship with the Company.
(9) Consists of $9,387 contributed to a private pension scheme, $5,468 paid
by the Company for operating expenses of a car leased by the Company and
used by Dr. Grant and $1,496 in insurance premiums paid by the Company on
behalf of Dr. Grant.
(10) Consists of a mortgage reimbursement paid by the Company to Dr. Grant.
(11) Consists of $9,687 contributed to a private pension scheme, $5,784 paid
by the Company for operating expenses of a car leased by the Company and
used by Dr. Grant and $1,608 in insurance premiums paid by the Company on
behalf of Dr. Grant.
(12) Consists of bonus earned during the year ended December 31, 1994 but paid
in the year ended December 31, 1995. Does not include the Board's
currently outstanding offer to pay a bonus to Dr. Grant equal to $81,000
solely for the purpose of exercising his stock option to purchase 45,000
shares of Common Stock at $1.80.
(13) Consists of $9,941 contributed to a private pension scheme, $4,500 paid
by the Company for operating expenses of a car leased by the Company and
used by Dr. Grant and $1,756 in insurance premiums paid by the Company on
behalf of Dr. Grant.
(14) Consists of bonus earned during the year ended December 31, 1994 but paid
in the year ended December 31, 1995. Consists of $10,000 paid in cash and
$13,200 as payment of the exercise price on certain options granted to
Mr. Woodruff.
(15) Consists of $2,658 contributed to the Company's retirement plan and
$1,475 in insurance premiums paid by the Company on behalf of Mr.
Woodruff.
(16) One-fourth (1/4) of the shares subject to the option became exercisable
on October 24, 1995. One-fourth of the shares subject to the option shall
become exercisable at the end of each full year following October 24,
1995 until all such shares have become exercisable, based upon Mr.
Woodruff's continued relationship with the Company.
(17) Consists of $2,926 contributed to the Company's retirement plan and
$1,539 in insurance premiums paid by the Company on behalf of Mr.
Woodruff.
47
<PAGE>
Option Grants in Last Fiscal Year. The following table sets forth each grant
of stock options made during the fiscal year ended December 31, 1995 to each
of the Named Executive Officers:
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (4)
------------------------------------------------------- ---------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED DURING
OPTIONS FISCAL EXERCISE PRICE EXPIRATION
NAME GRANTED (#)(1) 1995 (%) (2) ($/SH) (3) DATE 5% ($) 10% ($)
---- -------------- -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Abraham I. Coriat....... -- --% $ -- -- $ -- $ --
Leslie G. Grant, Ph.D... -- -- -- -- -- --
Neil E. Woodruff........ 10,000 15.0 1.80 4/27/05 11,320 28,687
</TABLE>
- --------
(1) Options were granted under the Company's Amended and Restated 1988
Incentive Stock Option Plan and generally vest over four years from the
date of commencement of employment.
(2) Based on an aggregate of 66,500 options granted by the Company in the year
ended December 31, 1995 to employees of and consultants to the Company,
including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that
the fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values. The
following table sets forth the information with respect to stock option
exercises during the year ended December 31, 1995 by each of the Named
Executive Officers, and the number and value of securities underlying
unexercised options held by the Named Executive Officers at December 31, 1995:
AGGREGATE OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1995 AND
OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE DECEMBER 31, 1995 (#) DECEMBER 31, 1995 ($) (1)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Abraham I. Coriat....... -- -- -- --
Leslie G. Grant, Ph.D... -- -- 45,000 0 594,000 0
-- -- 7,500 2,500 99,000 33,000
Neil E. Woodruff........ 40,000 58,800 -- -- -- --
-- 2,500 7,500 33,000 99,000
</TABLE>
- --------
(1) Based on a value of $15.00 per share, the assumed initial public offering
price, minus the per share exercise price, multiplied by the number of
shares underlying the option.
48
<PAGE>
INCENTIVE STOCK PLANS
Amended and Restated 1988 Incentive Stock Option Plan. The Company's Amended
and Restated 1988 Incentive Stock Option Plan (the "1988 Option Plan") was
adopted by the Board of Directors in October 1988 and approved by the
stockholders in October 1989. As of June 30, 1996, 497,250 shares were subject
to outstanding options at exercise prices ranging from $0.15 to $3.00 per
share and 632,113 shares were available for future grant under the 1988 Option
Plan. In June 1996 the Board of Directors approved an increase of 450,000
shares available for grant under the 1988 Option Plan subject to approval of
the stockholders within twelve months of the approval by the Board of
Directors. The purposes of the 1988 Option Plan are to attract and retain
qualified personnel, to provide additional incentives to employees, officers
and consultants of the Company and to promote the success of the Company's
business. Pursuant to the 1988 Option Plan, the Company may grant options
which qualify as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), to employees (including
officers and directors who are employees) and nonqualified stock options to
employees, officers, directors and consultants.
The Compensation Committee is authorized to administer the 1988 Option Plan,
including the selection of the employees, directors and consultants of the
Company to whom stock options may be granted and the interpretation and
adoption of rules for the operation of the 1988 Option Plan. Options granted
under the 1988 Option Plan generally become exercisable at the rate of 25% of
the shares one year from the grant date and approximately 25% of the shares at
the end of each one-year period thereafter such that the option is fully
exercisable four years from the grant date. However, the vesting schedule is
subject to modification by the Board of Directors. The maximum term for
options granted under the 1988 Option Plan is ten years, except that if at the
time of the grant the optionee possesses more than 10% of the combined voting
power of the Company or is an affiliate (as defined in the Code) of the
Company (a "10% Stockholder"), the maximum term of an option is five years.
The exercise price of incentive stock options granted to a 10% Stockholder
must be at least 110% of the fair market value of the stock subject to the
option on the date of grant. The exercise price of nonqualified stock options
granted under the 1988 Option Plan must be at least 85% of the fair market
value of the stock subject to the option on the date of grant. Payment of the
exercise price may be made by cash, promissory note or other consideration as
determined by the Board of Directors. The 1988 Option Plan may be amended at
any time by the Board of Directors, although certain amendments would require
stockholder approval. The 1988 Option Plan will terminate in 1998, unless
earlier terminated by the Board of Directors.
1994 Director Option Plan. The Company's 1994 Director Option Plan (the
"Director Plan") was adopted by the Board of Directors and approved by the
stockholders in February 1994. As of March 31, 1996, 50,000 shares of Common
Stock were reserved for issuance under the Director Plan. In June 1996, the
Board of Directors approved an increase of 70,000 shares of Common Stock
available for grant under the Director Plan subject to approval by the
stockholders within twelve months of Board of Directors approval of such
increase. Each nonemployee director who becomes a director after the date of
this Prospectus will be automatically granted a nonstatutory option to
purchase 5,000 shares of Common Stock on the date on which such person first
becomes a director or in the case of current nonemployee directors, upon re-
election to the Board of Directors at the first annual meeting of the
stockholders following this offering. Thereafter, each nonemployee director
who has served on the Board of Directors for at least six months shall receive
an option to acquire 5,000 shares of Common Stock on the date of each of the
Company's annual meetings of the shareholders, provided such nonemployee
director is re-elected. Each option granted under the Director Plan will
become exercisable ratably over a four-year period. In the event of a change
in control of the Company, including a merger or sale of substantially all of
the Company's assets, outstanding options must be assumed by any successor
corporation, or they will become fully vested and exercisable. The exercise
price of all options granted under the Director Plan after the date of this
Prospectus will be equal to the fair market value of the Common Stock on the
date of grant. Each option grant under the Director Plan will vest on a
cumulative yearly basis over a four-year period. All such options will expire
ten years from the date of grant unless terminated sooner pursuant to the
provisions of the Director Plan. The Board of Directors may amend the Director
Plan at any time. The Director Plan will terminate in February 2004. No
options have been granted under the Director Plan to date.
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<PAGE>
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan") was adopted by the Company's Board of Directors in June
1996 and it is anticipated that the Purchase Plan will be approved by the
stockholders prior to the closing of this offering. The Purchase Plan is
intended to qualify under Section 423 of the Code. The Company has reserved
200,000 shares of Common Stock for issuance under the Purchase Plan. Under the
Purchase Plan, an eligible employee may purchase shares of Common Stock from
the Company through payroll deductions of up to 10% of his or her
compensation, at a price per share equal to 85% of the lower of (i) the fair
market value of the Company's Common Stock on the first day of an offering
period under the Purchase Plan or (ii) the fair market value of the Common
Stock on the last day of an offering period. Except for the first offering
period, each offering period will last for six months and will commence the
first day on which the national stock exchanges and The Nasdaq Stock Market
are open for trading, on or after May 1 and November 1 of each year. The first
offering period will begin upon the effective date of this offering and will
end on April 30, 1997. Any employee who is customarily employed for at least
20 hours per week and more than five months per calendar year, and who has
been so employed for at least three consecutive months on or before the
commencement date of an offering period is eligible to participate in the
Purchase Plan. No shares have been purchased under the Purchase Plan to date.
EMPLOYEE RETIREMENT PLANS
United States. In January 1994, the Company implemented a Retirement Savings
and Investment Plan that is intended to qualify under Section 401(k) of the
Code (the "401(k) Plan") covering all of the Company's United States based
employees who have completed three months of service and have attained age 21.
An employee may elect to defer, in the form of contributions to the 401(k)
Plan on his or her behalf, up to 15% of the total compensation that would
otherwise be paid to the employee, not to exceed the amount allowed by
applicable Internal Revenue Service guidelines. The Company will match 100% of
amounts deferred by the employee participants up to 3% of such employee's
total compensation and such matching amounts vest over a three year period
from the initial participation date. During 1993, 1994 and 1995, the Company
made contributions to the 401(k) Plan totalling approximately $18,000, $38,000
and $51,000, respectively. Contributions by employees or by the Company to the
401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan. Contributions by the Company
are deductible by the Company when made.
United Kingdom. The Company's United Kingdom based employees are covered by
retirement savings plans (the "International Retirement Plans"). Under such
plans, an employee may elect to make contributions of 3.5% of such employee's
earnings. Amounts contributed by the Company range from 5.5% to 10.5% of such
employee's earnings. During 1993, 1994 and 1995, the Company paid or accrued
contributions to the International Retirement Plans totaling $83,000, $60,000
and $43,000, respectively. Contributions by employees or by the Company to the
International Retirement Plans, and income earned on plan contributions, are
not taxable to employees until withdrawn from such plans. Contributions by the
Company are deductible by the Company when made.
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<PAGE>
CERTAIN TRANSACTIONS
In August 1993, the Company issued and sold 1,016,407 shares of Series I
Preferred Stock at a purchase price of $5.25 per share to a total of 33
investors. The 5% shareholders that purchased shares of Series I Preferred
Stock and the number of shares each 5% shareholder purchased are (i) Allen &
Company Incorporated and affiliates, 339,300 shares, (ii) New Enterprise
Associates V, Limited Partnership, 11,905 and (iii) the Thompson Clive Funds,
9,524 shares. In connection with the Series I Preferred Stock Financing, the
Company issued to Allen & Company Incorporated a warrant to purchase 140,000
shares of the Company's Common Stock at a purchase price of $5.25 per share
and the Company paid to Allen & Company Incorporated a placement agent fee in
the amount of $252,504.
In connection with Dr. Grant's relocation from Edinburgh, Scotland to
Sunderland, England, the Company initially agreed to pay the mortgage interest
payments on Dr. Grant's new residence while Dr. Grant sought to sell his prior
residence. Mortgage interest payments made by the Company pursuant to this
arrangement totalled $21,263 and $36,706 in 1992 and 1993, respectively. In
March 1994, this arrangement was replaced as the Company purchased Dr. Grant's
former Edinburgh residence for $262,500 by obtaining a new mortgage on the
residence and discontinued payment of mortgage interest on his new residence.
The Company has incurred and expects to continue to incur reduced interest
costs as a result of this transaction.
In July and September 1995, the Company issued and sold 1,106,217 shares of
Series J Preferred Stock at a purchase price of $4.25 per share and issued
warrants for the purchase of 368,734 shares of the Common Stock at a purchase
price of $5.25 per share to a total of 30 investors pursuant to the terms of
the Series J Preferred Stock and Warrant Purchase Agreement. The 5%
shareholders that purchased shares of Series J Preferred Stock and the number
of shares each 5% shareholder purchased are (i) Allen & Company Incorporated
and affiliates, 524,038 and (ii) New Enterprise Associates V, Limited
Partnership, 176,332. Allen & Company Incorporated and affiliates and New
Enterprise Associates V, Limited Partnership were issued warrants to purchase
174,678 and 58,777 shares of Common Stock, respectively. In addition, pursuant
to the terms of the Series J Preferred Stock and Warrant Purchase Agreement,
the Company issued to Allen & Company Incorporated a warrant to purchase
140,000 shares of Common Stock at a purchase price of $4.25 per share in
exchange for the warrant to purchase 140,000 shares of Common Stock at a
purchase price of $5.25 per share issued to Allen & Company Incorporated
pursuant to the Series I Preferred Stock Financing. Additionally, the Company
paid to Allen & Company Incorporated a placement agent fee in the amount of
$238,307.
In January 1996, the Company paid the sum of $77,666 to a former officer of
the Company in connection with a severance agreement.
In January 1996, the Company granted Dr. Grant an option to purchase 35,000
shares of the Company's Common Stock at an exercise price of $1.80 per share.
One-fourth of the shares subject to the option shall become exercisable at the
end of each full year following January 15, 1996 until all such shares have
become exercisable, based upon Dr. Grant's continued relationship with the
Company.
In March 1996, the Company granted an option to Michael W. Burgett,
President, Genetic Diagnostics Division of the Company, to purchase 70,000
shares of Common Stock at an exercise price of $1.80 per share. One-fourth of
the shares subject to the option shall become exercisable at the end of each
full year following March 28, 1996, until all such shares have become
exercisable, based upon Dr. Burgett's continued relationship with the Company.
In March 1996, the Company granted options to certain non-employee members
of the Board of Directors exercisable at $1.80 per share. The following
directors were granted options to acquire the following number of shares of
Common Stock: Mr. Raab, 35,000; Mr. Marion, 20,000; Mr. Blakemore, 20,000; Mr.
McConnell, 5,000; Mr. Elias, 5,000; Mr. McCabe, 5,000; and Mr. Miller, 5,000.
One-fourth of the shares subject to each of these options shall become
exercisable at the end of each full year following March 28, 1996, until all
such shares have become exercisable.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of June 30, 1996, and as
adjusted to reflect the sale of Common Stock offered by the Company hereby for
(i) each person who is known by the Company to own beneficially more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) each
executive officer named in the summary compensation table and (iv) all
directors and officers as a group.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
SHARES -----------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
Individuals and Entities Affiliated with Allen 1,704,972 31.0% 21.9%
Holding Inc.(1)................................
711 Fifth Avenue
New York, NY 10022
Entities Affiliated with Thompson Clive 706,077 13.7% 9.5%
Ventures/Midland Bank Trustee..................
(Jersey) Ltd. (2)
c/o Midland Bank International Finance
Corporation Limited
P.O. Box 26
28-34 Hill Street.
St. Helier, Jersey, Channel Islands
Entities Affiliated with New Enterprise 679,756 13.1% 9.1%
Associates (3).................................
2490 Sand Hill Road
Menlo Park, CA 94025
CV Sofinnova Ventures Partners II (4)........... 283,266 5.5% 3.8%
c/o Alix Marduel, M.D.
Stuart Tower, Suite 2630
San Francisco, CA 94105
Michael S. Elias (2)............................ 706,077 13.7% 9.5%
Robert C. Miller (1)............................ 1,704,972 31.0% 21.9%
Abraham I. Coriat (5)........................... 464,568 9.0% 6.2%
Thomas C. McConnell (3)......................... 679,756 13.1% 9.1%
John F. Blakemore, Jr. (6)...................... 76,762 1.5% 1.0%
Gilbert J.R. McCabe (7)......................... 63,571 1.2% *
G. Kirk Raab.................................... -- * *
Andre Marion.................................... 6,269 * *
Leslie G. Grant, Ph.D. (8)...................... 52,500 1.0% *
Neil E. Woodruff (9)............................ 45,000 * *
All executive officers and directors as a group
(11 persons) (1)(2)(3)(5)(6)(7)(8)(9).......... 3,799,475 67.7% 48.0%
</TABLE>
52
<PAGE>
- --------
* Less than 1%.
(1) Consists of 198,678 shares and warrants to purchase 179,216 shares held
by Allen & Company Incorporated, 39,859 shares and a warrant to purchase
6,257 shares held by Allen Value Limited, 333,715 shares and a warrant to
purchase 52,388 shares held by Allen Value Partners, L.P. and an
aggregate of 776,635 shares and warrants to purchase an aggregate of
118,224 shares held by certain officers, directors, employees,
individuals related to officers, directors and employees and shareholders
of Allen Holding Inc. or its affiliated entities. Allen Holding Company
is a holding company of each of Allen & Company Incorporated, Allen Value
Limited and Allen Value Partners, L.P. and disclaims beneficial ownership
of the shares held by such entities except to the extent of its
proportionate ownership interest therein. Robert C. Miller, a director of
the Company and a holder of 1,759 shares and a warrant to purchase 586
shares, is an affiliate of Allen Holding Inc. and the related entities,
and disclaims beneficial ownership of the shares held by such entities
except to the extent of his proportionate ownership interest therein.
(2) Consists of 209,348 shares held by Thompson Clive Investments plc, 5,500
shares held by Thompson Clive, Inc. (collectively, the "Thompson Clive
Entities") and 488,479 shares held by Midland Bank Trustee (Jersey)
Limited. Because Midland Bank Trustee (Jersey) Limited acts as the
nominee for the Thompson Clive Entities, the Thompson Clive Entities are
deemed the beneficial owners of the shares held by Midland Bank Trustee
(Jersey) Limited. Michael S. Elias, a director of the Company and a
holder of 2,750 shares, is an affiliate of the Thompson Clive Entities
and disclaims beneficial ownership of the shares held by the Thompson
Clive Entities and Midland Bank Trustee (Jersey) Limited except to the
extent of his proportionate ownership interest therein.
(3) Consists of 609,214 shares and warrants to purchase 58,777 shares held by
New Enterprise V, Limited Partnership and 11,765 shares held by The
Silverado Fund I, Limited Partnership. Thomas C. McConnell, a director of
the Company, is a general partner of New Enterprise Associates V, Limited
Partnership and The Silverado Fund I, Limited Partnership, and disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate ownership interest therein.
(4) Includes a warrant to purchase 11,755 shares.
(5) Consists of 414,732 shares held as community property by Abraham I.
Coriat and Shira Shamssian and an aggregate of 49,836 shares held by
Abraham I. Coriat and Shira Shamssian as Custodian for each of Salomon
Israel Coriat and Yael Israel Coriat.
(6) Includes an option to purchase 7,500 shares within 60 days of after June
30, 1996.
(7) Consists of 10,000 shares held by Mr. McCabe and 53,571 shares held by
SEFTA Trustees Ltd. for family trusts. Mr. McCabe, a director of the
Company, disclaims beneficial ownership of the shares held by SEFTA
Trustees Ltd. except to the extent of his proportionate ownership
interest therein.
(8) Consists of options to purchase 52,500 shares within 60 days of after
June 30, 1996.
(9) Includes an option to purchase 2,500 shares within 60 days of after June
30, 1996.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will consist of 20,000,000
shares of Common Stock and 6,000,000 shares of Preferred Stock after giving
effect to the conversion of all outstanding shares of Preferred Stock into
Common Stock and the restatement of the Company's Articles of Incorporation
upon the closing of this offering.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Restated
Articles of Incorporation which are included as an exhibit to the Registration
Statement of which this Prospectus is a part, and by the provisions of
applicable law.
COMMON STOCK
As of June 30, 1996, there were 5,136,064 shares of Common Stock outstanding
which were held of record by 137 stockholders, on a pro forma basis to reflect
the conversion of all outstanding shares of Preferred Stock which will occur
upon the closing of this offering.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available for
that purpose. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. The holders of 15,000 shares of Common Stock
issued pursuant to the Series H Preferred Stock Financing or their transferees
are entitled to certain rights with respect to the registration of such shares
under the Securities Act. All outstanding shares of Common Stock are fully
paid and non-assessable, and the shares of Common Stock to be issued upon the
closing of this offering will be fully paid and non-assessable.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue 6,000,000 shares of undesignated Preferred Stock, none of which will
be outstanding upon the closing of this offering. The Board of Directors will
have the authority, without further action by the shareholders, to issue the
undesignated Preferred Stock in one or more series, to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated Preferred Stock and to fix the number of
shares constituting any series and the designation of such series.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company without further action by the
shareholders, may discourage bids for the Company's Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of and the voting and other rights of the holders of Common Stock. At
present, the Company has no plans to issue any of the Preferred Stock.
WARRANTS
As of June 30, 1996, the Company had outstanding a warrant to purchase
140,000 shares of Common Stock at $4.25 per share expiring in July 2000 and
warrants to purchase 368,734 shares of Common Stock at $5.25 per share
expiring in July 1998. The shares underlying these warrants are entitled to
registration rights. See "Description of Capital Stock--Registration Rights of
Certain Holders."
54
<PAGE>
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 3,596,940 shares of Common Stock and warrants to purchase
508,734 shares of Common Stock (the "Registrable Securities") or their
transferees are entitled to certain rights with respect to the registration of
such shares under the Securities Act. These rights are provided under the
terms of an agreement between the Company and the holders of Registrable
Securities. Subject to certain limitations in the agreement, the holders of at
least a majority of the Registrable Securities may require, on two occasions
beginning six months after the date of this Prospectus, that the Company use
its best efforts to register the Registrable Securities for public resale. If
the Company registers any of its Common Stock either for its own account or
for the account of other security holders, the holders of Registrable
Securities are entitled to include their shares of Common Stock in the
registration, subject to the ability of the underwriters to limit the number
of shares included in the offering. The holders of at least five percent of
the Registrable Securities may also require the Company to register all or a
portion of their Registrable Securities on Form S-3 when use of such form
becomes available to the Company, provided, among other limitations, that the
proposed aggregate selling price (net of any underwriters' discounts or
commissions) is at least $1 million. All registration expenses must be borne
by the Company and all selling expenses relating to Registrable Securities
must be borne by the holders of the securities being registered.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws may have the effect of preventing, discouraging or delaying a
change in the control of the Company and may maintain the incumbency of the
Board of Directors and management. The authorization of undesignated Preferred
Stock makes it possible for the Board of Directors to issue Preferred Stock
with voting or other rights or preferences that could impede the success of
any attempt to change control of the Company. In addition, the Company's
Bylaws limit the ability of stockholders of the Company to raise matters at a
meeting of stockholders without giving advance notice.
The Restated Certificate of Incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and cannot
be taken by written consent in lieu of a meeting. The Certificate of
Incorporation and the Bylaws provide that, except as otherwise required by
law, special meetings of the stockholders can only be called pursuant to a
resolution adopted by a majority of the Board of Directors, by the Chief
Executive Officer of the Company, or by stockholders holding shares in the
aggregate entitled to cast not less than 10% of the votes at that meeting.
The Bylaws establish an advance notice procedure for stockholder proposal to
be brought before an annual meeting of stockholders of the Company, including
proposed nominations of persons for election to the Board. Stockholders at an
annual meeting may only consider proposals or nominations specified in the
notice of meeting or brought before the meeting by or at the direction of the
Board or by a stockholder who was a stockholder who was a stockholder of
record on the record date for the meeting, who is entitled to vote at the
meeting and who has given to the Company's Secretary timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. Although the Bylaws do not give the Board the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting, the Bylaws may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
CERTAIN PROVISIONS OF DELAWARE LAW
Following the consummation of the offering, the Company will be subject to
the "Business Combination" provisions of the Delaware General Corporation Law.
In general, such provisions prohibit a publicly held Delaware corporation form
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three year after the date of the transaction
which the person became an "interested stockholder," unless (i) the
transaction is approved by the Board of Directors prior to the date the
interested
55
<PAGE>
stockholder obtained such status, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an "interested stockholder," the
"interested stockholder" owned at least 85% of the voting stock of the
corporation outstanding those shares owned by (a) persons who are directors
and also officers an (b) employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer, or (iii) on or
subsequent to such date the "business combination" is approved by the board of
directors and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the "interested stockholder." A "business combination" is
defined to include mergers, asset sales and other transactions resulting in a
financial benefit to a stockholder. In general, an "interested stockholder" is
a person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of a corporation's voting stock. The statute could
prohibit or delay mergers or other takeover or change in control attempts with
respect to the Company and, accordingly, may discourage attempts to acquire
the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Norwest Bank
Minnesota, N.A.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could materially and adversely affect market prices prevailing from
time to time. Sales of substantial amounts of Common Stock of the Company in
the public market after the restrictions lapse could materially and adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future.
Upon the completion of this offering, the Company will have 7,436,064 shares
of Common Stock outstanding, assuming no exercise of options after June 30,
1996. Of these shares, the 2,300,000 shares sold in this offering will be
freely tradeable without restriction under the Securities Act, unless held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 5,136,064 shares of Common Stock held by
existing stockholders were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act. These
shares may be sold in the public market only if registered, or pursuant to an
exemption from registration such as Rule 144, 144(k) or 701 under the
Securities Act. Such restricted shares will be available for sale in the
public market as follows: (i) approximately 271,617 shares will be eligible
for immediate sale on the date of this Prospectus, (ii) approximately
4,014,253 additional shares (including approximately 258,373 shares subject to
outstanding vested options) will be available for sale 180 days after the date
of this Prospectus upon expiration of lock-up agreements and (iii)
approximately 1,617,301 additional shares (including approximately 508,734
shares of Common Stock issuable upon exercise of certain outstanding warrants)
will be eligible for sale at various times thereafter. The Company's
directors, executive officers and certain of its stockholders, who in the
aggregate hold more than 94% of the shares of Common Stock of the Company
outstanding immediately prior to the completion of this offering, have entered
into lock-up agreements under which they have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, or
agree to dispose of, directly or indirectly, any shares of Common Stock or
options to acquire shares of Common Stock owned by them for a period of 180
days after the date of this Prospectus, without the prior written consent of
Montgomery Securities. Montgomery Securities may, in its sole discretion, and
at any time without notice, release all or any portion of the shares subject
to such lock-up agreements. The Company has entered into a similar agreement,
except that the Company may grant options and issue stock under its current
stock option and stock purchase plans and pursuant to other currently
outstanding options.
As of June 30, 1996, 497,250 shares were subject to outstanding options. All
of these shares are subject to the lock-up agreements described above. In
addition, 3,596,940 of the shares outstanding immediately following the
completion of this offering and up to 508,734 shares of Common Stock subject
to outstanding warrants, if exercised before the expiration of the warrants,
will be entitled to registration rights with respect to such shares upon the
release of lock-up agreements. The number of shares sold in the public market
could increase if such rights are exercised.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
two years (including the holding period of any prior owner, except an
affiliate) is entitled to sell in "broker's transactions" or to market makers,
within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of (i) one
percent of the number of shares of Common Stock then outstanding
(approximately 74,000 shares immediately after this offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least three years (including the holding period of any prior
owner, except an affiliate), is entitled to sell such shares without having to
comply with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Under Rule 701 under the Securities Act,
persons who purchase
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<PAGE>
shares upon exercise of options granted prior to the effective date of this
offering are entitled to sell such shares 90 days after the effective date of
this offering in reliance on Rule 144, without having to comply with the
holding period requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the public information, volume limitation or
notice provisions of Rule 144.
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule
changes will be enacted. If enacted, such modifications will have a material
effect on the times when shares of the Company's Common Stock become eligible
for resale.
58
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Montgomery Securities, Dillon,
Read & Co. Inc. and Vector Securities International, Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company the number of
shares of Common Stock indicated below opposite their respective names below.
The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the shares of Common Stock are subject to
certain conditions precedent, and that the Underwriters are committed to
purchase all of the shares if they purchase any of the shares.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
Montgomery Securities................................................
Dillon, Read & Co. Inc. .............................................
Vector Securities International, Inc. ...............................
----------
Total............................................................ 2,300,000
==========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the initial public
offering, the price and concessions and reallowances to dealers may be changed
by the Representatives. The Common Stock is offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 345,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 2,300,000 shares to be
purchased by the Underwriters. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.
The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may
be required to make in respect thereof.
The holders of more than 94% of the shares of the Company's Common Stock
outstanding immediately prior to the completion of this offering, including
all of the Company's directors and executive officers, have agreed that, for a
period of 180 days after the date of the final Prospectus relating to this
offering, they will not, without the prior written consent of Montgomery
Securities, directly or indirectly sell, offer to sell or otherwise dispose of
any such shares of Common Stock or any right to acquire such shares. The
Company has agreed that,
59
<PAGE>
for a period of 180 days after the date of the final Prospectus relating to
this offering, it will not, without the prior written consent of Montgomery
Securities or each of the Representatives, issue, offer, sell, grant options
to purchase or otherwise dispose of any of the Company's equity securities or
any other securities convertible into or exchangeable for the Common Stock or
other equity security, other than the grant of options to purchase Common
Stock or the issuance of shares of Common Stock reserved for issuance under
the Company's stock plan's and the issuance of shares of Common Stock pursuant
to the exercise of outstanding options.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations between the Company and the Representatives. Among the factors to
be considered in such negotiations are the history of, and the prospects for,
the Company and the industry in which it competes, an assessment of the
Company's management, the Company's past and present operations, its past and
present financial performance, the prospects for future earnings of the
Company, the present state of the Company's development, the general condition
of the securities markets at the time of the offering and the market prices of
and demand for publicly traded common stock of comparable companies in recent
periods.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP Palo Alto, California is acting as counsel for the Underwriters in
connection with certain legal matters relating to the shares of Common Stock
offered hereby. As of March 31, 1996, a certain investment partnership of
Wilson Sonsini Goodrich & Rosati, Professional Corporation beneficially owned
an aggregate of 4,412 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1994 and 1995 and for each of the years in the three-year period
ended December 31, 1995, have been included herein and in the registration
statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein and upon the
authority of said firm as experts in accounting and auditing.
The statements in this Prospectus under the captions "Risk Factors--
Dependence Upon Patents and Proprietary Technology; Risk of Infringement" and
"Business--Patents and Proprietary Rights" have been reviewed and approved by
Townsend and Townsend and Crew, special patent counsel for the Company, as
experts in such matters, and are included herein in reliance upon such review
and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), in Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which is part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and Common Stock offered hereby, reference is made to the Registration
Statement and such exhibits and schedules filed therewith, which may be
inspected without charge at, or copies of such material may be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Registration Statement and such exhibits and schedules are also available on
the Commissions's Web site (http://www.sec.gov). Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
60
<PAGE>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Form of report of Independent Certified Public Accountants ........... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June
30, 1996 (unaudited), and pro forma June 30, 1996 (unaudited)........ F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994, and 1995, and for the six months ended June 30, 1995 and
1996 (unaudited)..................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994, and 1995, and for the six months ended June
30, 1996 (unaudited)................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994, and 1995, and for the six months ended June 30, 1995 and
1996 (unaudited)..................................................... F-6
Notes to Consolidated Financial Statements............................ F-7
</TABLE>
F-1
<PAGE>
FORM OF REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
When the reincorporation referred to in Note 14 of Notes to Consolidated
Financial Statements has been consummated, we will be in a position to render
the following report.
KPMG Peat Marwick LLP
The Board of Directors
Applied Imaging Corp.:
We have audited the accompanying consolidated balance sheets of Applied
Imaging Corp. and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Applied
Imaging Corp. and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
San Jose, California
February 26, 1996, except as
to Note 14, which is as of
July 15, 1996
F-2
<PAGE>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
------------------------ ------------------------
1994 1995 ACTUAL PRO FORMA
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents. $ 2,503,000 $ 2,159,000 $ 1,211,000 $ 1,211,000
Short-term investments.... -- 2,997,000 2,025,000 2,025,000
Trade accounts receivable
(less allowance for
doubtful accounts of
$122,000, $166,000, and
$210,000 as of December
31, 1994 and 1995 and
June 30, 1996,
respectively)............ 1,940,000 1,501,000 2,071,000 2,071,000
Inventories............... 1,133,000 880,000 749,000 749,000
Prepaid expenses and other
current assets........... 430,000 140,000 433,000 433,000
----------- ----------- ----------- -----------
Total current assets.... 6,006,000 7,677,000 6,489,000 6,489,000
Property and equipment..... 995,000 1,319,000 1,271,000 1,271,000
Other assets............... 440,000 377,000 329,000 329,000
----------- ----------- ----------- -----------
$7,441,000 $ 9,373,000 $ 8,089,000 $ 8,089,000
=========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
---------------------
Current liabilities:
Current portion of bank
debt..................... $ 710,000 $ 471,000 $ 622,000 $ 622,000
Accounts payable.......... 1,450,000 1,141,000 924,000 924,000
Accrued expenses.......... 839,000 1,430,000 1,416,000 1,416,000
Deferred revenue.......... 1,295,000 1,386,000 1,289,000 1,289,000
----------- ----------- ----------- -----------
Total current
liabilities............ 4,294,000 4,428,000 4,251,000 4,251,000
----------- ----------- ----------- -----------
Bank debt, less current
portion.................... 336,000 231,000 223,000 223,000
----------- ----------- ----------- -----------
Stockholders' equity:
Preferred stock; $0.001
par value; 6,000,000
shares authorized;
2,812,962, 3,919,179 and
3,919,179 shares issued
and outstanding, as of
December 31, 1994 and
1995 and June 30, 1996,
respectively, actual;
6,000,000 shares
authorized, none issued
and outstanding, pro
forma. Aggregate
liquidation preference of
$11,065,000, $15,766,000,
and, $15,766,000 as of
December 31, 1994 and
1995, and June 30, 1996,
respectively............. 3,000 4,000 4,000 --
Common stock; $0.001 par
value; 20,000,000 shares
authorized; 973,510,
1,067,785 and 1,090,660
shares issued and
outstanding as of
December 31, 1994 and
1995 and June 30, 1996,
respectively, actual;
20,000,000 shares
authorized, 5,136,064
shares issued and
outstanding, pro forma... 1,000 1,000 1,000 5,000
Additional paid-in
capital.................. 9,768,000 14,216,000 15,729,000 15,729,000
Accumulated deficit....... (6,594,000) (9,140,000) (10,375,000) (10,375,000)
Deferred stock
compensation............. -- -- (1,377,000) (1,377,000)
Cumulative translation
adjustment............... (367,000) (367,000) (367,000) (367,000)
----------- ----------- ----------- -----------
Total stockholders'
equity................. 2,811,000 4,714,000 3,615,000 3,615,000
----------- ----------- ----------- -----------
$ 7,441,000 $ 9,373,000 $ 8,089,000 $ 8,089,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales.......... $ 6,182,000 $ 7,021,000 $ 8,106,000 $ 3,893,000 $ 4,662,000
Software maintenance
and service........... 2,499,000 2,550,000 2,692,000 1,322,000 1,333,000
------------ ------------ ------------ ------------ ------------
Total revenues....... 8,681,000 9,571,000 10,798,000 5,215,000 5,995,000
------------ ------------ ------------ ------------ ------------
Cost of revenues:
Product sales.......... 3,893,000 3,937,000 4,171,000 1,953,000 2,340,000
Software maintenance
and service........... 1,072,000 1,413,000 1,313,000 658,000 782,000
------------ ------------ ------------ ------------ ------------
Total cost of
revenues............ 4,965,000 5,350,000 5,484,000 2,611,000 3,122,000
------------ ------------ ------------ ------------ ------------
Gross profit......... 3,716,000 4,221,000 5,314,000 2,604,000 2,873,000
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and
development........... 1,756,000 2,821,000 2,919,000 1,380,000 1,698,000
Sales and marketing.... 2,543,000 2,524,000 2,918,000 1,335,000 1,476,000
General and
administrative........ 1,229,000 1,898,000 2,094,000 996,000 949,000
------------ ------------ ------------ ------------ ------------
Total operating
expenses............ 5,528,000 7,243,000 7,931,000 3,711,000 4,123,000
------------ ------------ ------------ ------------ ------------
Operating loss....... (1,812,000) (3,022,000) (2,617,000) (1,107,000) (1,250,000)
Other income............ 39,000 52,000 71,000 6,000 15,000
------------ ------------ ------------ ------------ ------------
Net loss............. $ (1,773,000) $ (2,970,000) $ (2,546,000) $ (1,101,000) $ (1,235,000)
============ ============ ============ ============ ============
Pro forma net loss per
common share........... $ (0.45) $ (0.22)
============ ============
Shares used in computing
pro forma net loss per
common share........... 5,635,393 5,686,583
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED CUMULATIVE TOTAL
---------------- ----------------- PAID-IN ACCUMULATED STOCK TRANSLATION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION ADJUSTMENT EQUITY
--------- ------ --------- ------- ----------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
December 31, 1992.. 1,796,555 $2,000 934,698 $ 1,000 $ 4,740,000 $ (1,851,000) $ -- $(295,000) $ 2,597,000
Exercise of common
stock options..... -- -- 12,875 -- 2,000 -- -- -- 2,000
Issuance of Series
I preferred stock,
net of $319,100
offering costs.... 1,016,407 1,000 -- -- 5,016,000 -- -- -- 5,017,000
Cumulative
translation
adjustment........ -- -- -- -- -- -- -- (30,000) (30,000)
Net loss........... -- -- -- -- -- (1,773,000) -- -- (1,773,000)
--------- ------ --------- ------- ----------- ------------ ----------- --------- -----------
Balances as of
December 31, 1993.. 2,812,962 3,000 947,573 1,000 9,758,000 (3,624,000) -- (325,000) 5,813,000
Exercise of common
stock options..... -- -- 25,937 -- 10,000 -- -- -- 10,000
Cumulative
translation
adjustment........ -- -- -- -- -- -- -- (42,000) (42,000)
Net loss........... -- -- -- -- -- (2,970,000) -- -- (2,970,000)
--------- ------ --------- ------- ----------- ------------ ----------- --------- -----------
Balances as of
December 31, 1994.. 2,812,962 3,000 973,510 1,000 9,768,000 (6,594,000) -- (367,000) 2,811,000
Exercise of common
stock options..... -- -- 94,275 -- 44,000 -- -- -- 44,000
Compensation
expense related to
employee stock
options........... -- -- -- -- 59,000 -- -- -- 59,000
Issuance of Series
J preferred stock,
net of $356,500
offering costs.... 1,106,217 1,000 -- -- 4,345,000 -- -- -- 4,346,000
Net loss........... -- -- -- -- -- (2,546,000) -- -- (2,546,000)
--------- ------ --------- ------- ----------- ------------ ----------- --------- -----------
Balances as of
December 31, 1995.. 3,919,179 4,000 1,067,785 1,000 14,216,000 (9,140,000) -- (367,000) 4,714,000
Exercise of common
stock options
(unaudited)....... -- -- 22,875 -- 40,000 -- -- -- 40,000
Deferred stock
compensation
(unaudited)....... -- -- -- -- 1,473,000 -- (1,473,000) -- --
Amortization of
deferred stock
compensation
(unaudited)....... -- -- -- -- -- -- 96,000 -- 96,000
Net loss
(unaudited)....... -- -- -- -- -- (1,235,000) -- -- (1,235,000)
--------- ------ --------- ------- ----------- ------------ ----------- --------- -----------
Balances as of June
30, 1996
(unaudited)........ 3,919,179 $4,000 1,090,660 $ 1,000 $15,729,000 $(10,375,000) $(1,377,000) $(367,000) $ 3,615,000
========= ====== ========= ======= =========== ============ =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
---------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (1,773,000) $ (2,970,000) $ (2,546,000) $(1,101,000) $(1,235,000)
Adjustments to
reconcile net loss to
net cash used for
operating activities:
Depreciation and
amortization......... 449,000 602,000 556,000 217,000 341,000
(Gain) loss from
remeasurement........ -- 140,000 (17,000) -- 7,000
Compensation expense
related to employee
stock options........ -- -- 153,000 153,000 96,000
Changes in operating
assets and
liabilities:
Trade accounts
receivable.......... (520,000) 1,025,000 439,000 (2,000) (570,000)
Inventories.......... 494,000 (153,000) 253,000 60,000 131,000
Prepaid expenses and
other assets........ 6,000 (185,000) 290,000 105,000 (293,000)
Accounts payable..... 206,000 187,000 (309,000) (404,000) (217,000)
Accrued expenses..... (80,000) 127,000 497,000 113,000 (14,000)
Deferred revenue..... (67,000) 8,000 91,000 (32,000) (97,000)
Taxes refundable..... 278,000 -- -- -- --
------------ ------------ ------------ ----------- -----------
Net cash used for
operating
activities.......... (1,007,000) (1,219,000) (593,000) (891,000) (1,851,000)
------------ ------------ ------------ ----------- -----------
Cash flows from
investing activities:
Sales of short-term
investments........... -- 3,439,000 -- -- 972,000
Purchase of short-term
investments........... (3,439,000) -- (2,997,000) -- --
Proceeds from sale of
equipment, net........ 87,000 -- -- -- --
Purchases of equipment. (385,000) (653,000) (808,000) (253,000) (300,000)
Other assets........... (249,000) (259,000) 9,000 9,000 48,000
------------ ------------ ------------ ----------- -----------
Net cash provided by
(used for) investing
activities.......... (3,986,000) 2,527,000 (3,796,000) (244,000) 720,000
------------ ------------ ------------ ----------- -----------
Cash flows from
financing activities:
Proceeds from issuance
of preferred stock.... 5,017,000 -- 4,346,000 -- --
Proceeds from issuance
of common stock....... 2,000 10,000 44,000 35,000 40,000
Bank borrowings........ -- 469,000 -- -- 200,000
Payment of bank debt... (130,000) (90,000) (345,000) (44,000) (57,000)
------------ ------------ ------------ ----------- -----------
Net cash provided by
(used for) financing
activities........... 4,889,000 389,000 4,045,000 (9,000) 183,000
------------ ------------ ------------ ----------- -----------
Effect of exchange rate
changes on cash and
cash equivalents....... (25,000) (216,000) -- -- --
------------ ------------ ------------ ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (129,000) 1,481,000 (344,000) (1,144,000) (948,000)
Cash and cash
equivalents at
beginning of period.... 1,151,000 1,022,000 2,503,000 2,503,000 2,159,000
------------ ------------ ------------ ----------- -----------
Cash and cash
equivalents at end of
period................. $ 1,022,000 $ 2,503,000 $ 2,159,000 $ 1,359,000 $ 1,211,000
============ ============ ============ =========== ===========
Supplemental disclosure
of cash paid for
interest............... $ 55,000 $ 86,000 $ 110,000 $ 40,000 $ 64,000
============ ============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995
AND 1996 IS UNAUDITED.)
(1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
The Company
Applied Imaging Corp. (the Company) was incorporated in 1986 to develop,
manufacture, and market automated clinical analysis systems used by
cytogenetic laboratories in prenatal genetic screening. The Company sells its
products to government and private clinical cytogenetic laboratories, research
institutions, universities, and pharmaceutical companies located primarily in
the United States, Canada, Europe, and the Pacific Rim. The Company is
currently devoting significant resources to the development of a new prenatal
screening designed to enable the detection of prenatal chromosomal disorders
through the analysis of fetal blood cells drawn from maternal blood. There
have been no revenues earned in relation to this new prenatal screening
system.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Applied Imaging International,
Limited (United Kingdom) and Applied Imaging, Limited (Israel). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Foreign Exchange
The Company accounts for its foreign operations in accordance with Statement
of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation.
Prior to April 1994, the functional currency for Applied Imaging
International, Limited was the British pound and, accordingly, translation
adjustments resulting from the conversion of the subsidiary's financial
statements into U.S. dollars were accumulated and reported as a separate
component of stockholders' equity. Beginning in April 1994, certain
operational and organizational changes within the Company caused the
functional currency for the Company's subsidiary to become the U.S. dollar.
Therefore, monetary assets and liabilities of the subsidiary are remeasured at
year-end exchange rates while nonmonetary items are remeasured at historical
rates. Most income and expense accounts are remeasured at the average rates in
effect during the year. Translation adjustments resulting from the conversion
of the subsidiary's financial statements into U.S. dollars are currently
recognized in the consolidated statement of operations in the year of
occurrence. The functional currency of Applied Imaging, Limited is also the
U.S. dollar.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Data
The unaudited interim consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements and, in the
opinion of management, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial information
set forth therein, in accordance with generally accepted accounting
principles. The Company's interim results may be subject to fluctuations. As a
result, the Company believes the results of operations for the interim periods
are not necessarily indicative of the results to be expected for any future
period.
F-7
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED.)
Initial Public Offering and Unaudited Pro Forma Financial Information
The Board of Directors (the Board) authorized the filing of a registration
statement with the Securities and Exchange Commission (SEC) permitting the
Company to issue and sell up to 5 million shares of its common stock in
connection with a proposed initial public offering (IPO). The unaudited pro
forma amounts included in the accompanying pro forma balance sheet as of June
30, 1996, reflect the conversion of all outstanding shares of preferred stock
into 3,960,017 shares of common stock and the net exercise of the Series F
warrants into 85,387 shares of common stock.
Revenue Recognition
The Company recognizes revenue on product sales upon shipment and
concurrently accrues for expected hardware warranty expenses, hardware service
costs, and product returns. Revenue on renewed maintenance contracts,
including amounts attributable to software maintenance bundled in original
product sale agreements, is deferred and recognized ratably over the period of
the contract, generally one year.
Research and Development Expenditures
Research and development expenditures are charged to expense as incurred
unless they are reimbursed under a specific contract.
Pro Forma Net Loss Per Common Share
Pro forma net loss per share data has been computed using the weighted
average number of shares of common stock, including common equivalent shares
from stock options and warrants outstanding (when dilutive using the treasury
stock method) and the shares resulting from the conversion of all outstanding
shares of preferred stock at the closing of the IPO. Pursuant to SEC Staff
Accounting Bulletins, common equivalent shares issued during the 12-month
period prior to the initial filing of the Company's proposed IPO have been
included in the calculation as if they were outstanding for all periods
presented (even if antidilutive), using the treasury stock method and the
$15.00 anticipated initial public offering price. Due to the significant
impact of the conversion of preferred shares into common shares at the closing
of the IPO, historical net loss per common share is not meaningful and is
therefore not presented.
Cash Equivalents and Investments
All highly liquid investments with maturities of three months or less when
acquired are considered by the Company to be cash equivalents.
The Company adopted the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, effective January 1, 1994. Under
SFAS No. 115, investments in equity and debt securities are classified in
three categories and accounted for based upon the classification. The Company
has accounted for investments in debt securities, consisting of U.S. Treasury
instruments, as "available-for-sale" and has stated applicable investments at
fair value, which approximates cost. Approximately $1,030,000 and $1,061,000
of investments as of December 31, 1995 and June 30, 1996, respectively,
consisted of a U.S. Treasury Note maturing in January 1997.
Inventories
Inventories are stated at the lower of cost (first in, first out) or market.
F-8
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED.)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three to five years.
Capitalized Software Costs
Computer software development costs incurred subsequent to the determination
of product technological feasibility are capitalized in accordance with the
provisions of SFAS No. 86, Accounting for the Cost of Computer Software to be
Sold, Leased or Otherwise Marketed. Amortization of these capitalized costs is
provided using the greater of the ratio of revenues generated in the period
over total future revenues of the product, or the straight-line method over
the estimated market life of the related products, generally three years,
commencing when the product becomes generally available to customers. For the
years ended December 31, 1993, 1994, and 1995 and the six months ended June
30, 1995 and 1996, software development costs incurred subsequent to the
establishment of technological feasibility have not been material. The net
book value of capitalized costs is not significant and is included in other
assets on the consolidated balance sheets.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which prescribes an asset and liability approach
that results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns. In estimating
future tax consequences, SFAS No. 109 generally considers all expected future
events other than enactment of changes in tax laws or rates.
Fair Value of Financial Instruments
Financial instruments consist principally of cash equivalents, short-term
investments, trade receivables, notes receivable, accounts payable, and bank
debt. The carrying amounts of cash and cash equivalents, notes receivable,
trade receivables, accounts payable and bank debt approximate fair value.
Financial instruments that potentially subject the Company to concentrations
of credit risk are cash equivalents and short-term investments which the
Company places with high-credit qualified financial institutions and, by
policy, limits the amount of credit exposure to any one financial institution.
The Company sells its products to government and private clinical cytogenetic
laboratories, research institutions, universities, and pharmaceutical
companies located primarily in the United States, Canada, Europe, and the
Pacific Rim. The Company's credit risk is concentrated primarily in the United
States and Europe. The Company does not have a significant concentration of
credit risk with any single customer.
Future Adoption of New Accounting Standard
The Financial Accounting Standards Board recently issued SFAS No. 123,
Accounting for Stock-Based Compensation. This statement requires that the
Company either recognize in its consolidated financial statements costs
related to its stock-based employee compensation plans, including employee
stock purchase plans and stock option plans, or make pro forma disclosures of
such costs in a footnote to the consolidated financial statements. The Company
will adopt SFAS No. 123 effective January 1, 1996. Management plans to remain
on APB No. 25, Accounting for Stock Issued to Employees, as allowed under SFAS
No. 123, for purposes of measurement of compensation expense. SFAS No. 123 is
not expected to have a material effect on the Company's consolidated results
of operations.
F-9
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED.)
(2) INVENTORIES
A summary of inventories follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
JUNE 30,
1994 1995 1996
---------- -------- --------
<S> <C> <C> <C>
Raw materials................................ $ 852,000 $734,000 $647,000
Work in process.............................. 112,000 88,000 81,000
Finished goods............................... 169,000 58,000 21,000
---------- -------- --------
$1,133,000 $880,000 $749,000
========== ======== ========
</TABLE>
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Equipment................................. $1,297,000 $1,873,000 $1,943,000
Demonstration equipment................... 688,000 760,000 844,000
Furniture and fixtures.................... 102,000 173,000 319,000
---------- ---------- ----------
2,087,000 2,806,000 3,106,000
Less accumulated depreciation............. 1,092,000 1,487,000 1,835,000
---------- ---------- ----------
$ 995,000 $1,319,000 $1,271,000
========== ========== ==========
</TABLE>
(4) ACCRUED EXPENSES
A summary of accrued expenses follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Warranty.................................. $ 111,000 $ 105,000 $ 133,000
Compensation and related costs............ 352,000 641,000 638,000
Professional fees......................... 131,000 196,000 249,000
Customer deposits......................... -- 198,000 92,000
Royalties................................. 38,000 103,000 59,000
Other..................................... 207,000 187,000 245,000
--------- ---------- ----------
$ 839,000 $1,430,000 $1,416,000
========= ========== ==========
</TABLE>
F-10
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED.)
(5) BANK DEBT
A summary of bank debt follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
---------- -------- --------
<S> <C> <C> <C>
Applied Imaging Corp.:
Advances on bank line of credit, available
through September 1996; bearing interest at
9.5%, 10.25%, and 9.75% as of December 31, 1994
and 1995, and June 30, 1996, respectively....... $ 600,000 $358,000 $558,000
Bank note payable in monthly installments of
$7,500 through October 1996, plus interest at
9.625%, 9.75%, and 9.50% as of December 31, 1994
and 1995, and June 30, 1996, respectively....... 172,000 83,000 38,000
Applied Imaging International, Limited:
Bank note payable in monthly installments through
June 2004; bearing interest at the bank's base
rate plus 3% (7.43%, 6.57%, and 8.75% as of
December 31, 1994 and 1995 and June 30, 1996,
respectively)................................... 274,000 261,000 249,000
---------- -------- --------
1,046,000 702,000 845,000
Less current portion............................. 710,000 471,000 622,000
---------- -------- --------
Long-term portion.............................. $ 336,000 $231,000 $223,000
========== ======== ========
</TABLE>
The line of credit and bank note payable relating to the U.S. Company cannot
exceed $1,000,000 in the aggregate and is subject to a maximum borrowing base
formula based on certain accounts receivable. This bank debt is secured by all
of the Company's domestic assets and the pledge of 660,000 shares of Applied
Imaging International, Limited representing approximately 66% of such
outstanding shares. Under the line of credit agreement, the Company cannot pay
cash dividends without the bank's prior approval. The maximum balance
outstanding during 1995 was $773,000, and the average balance during that year
was $608,000.
The bank note relating to Applied Imaging International, Limited is
denominated in British pounds and relates to the purchase of real property
from a related party in March 1994. The real property is recorded at cost,
which approximates market value, and is included in other assets in the
accompanying consolidated balance sheet. This note is secured by such real
property.
Applied Imaging International, Limited has a (Pounds)500,000 unsecured line
of credit with an international bank which is guaranteed by the Company. No
amounts were outstanding under this facility as of December 31, 1994 and 1995,
and June 30, 1996.
The Company is currently in compliance with all of the covenants contained
in the basic agreements governing these borrowings.
(6) PREFERRED STOCK
As of December 31, 1995 and June 30, 1996, the Company is authorized to
issue 6,000,000 shares of preferred stock.
F-11
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED.)
A summary of preferred stock as of December 31, 1995 and June 30, 1996
follows:
<TABLE>
<CAPTION>
DESIGNATED SHARES NET ORIGINAL
SHARES OUTSTANDING ISSUE PRICE
---------- ----------- ------------
<S> <C> <C> <C>
A...................................... 190,000 180,000 $ 144,000
B...................................... 250,000 198,077 258,000
C...................................... 283,019 220,126 350,000
D...................................... 375,000 200,557 361,000
E...................................... 181,819 181,819 600,000
F...................................... 625,000 460,295 1,551,000
G...................................... 700,000 287,500 1,147,000
H...................................... 300,000 250,000 995,000
I...................................... 1,100,000 1,016,407 5,017,000
J...................................... 1,176,470 1,106,217 4,346,000
Repurchased shares of Series E......... -- (181,819) (727,000)
---------
3,919,179
=========
</TABLE>
The rights, preferences, privileges, and restrictions of the preferred stock
are as follows:
. The holders of preferred stock are entitled to preferential
noncumulative dividends, when, as and if declared by the Board at a rate
of $0.05 per share (in the case of Series A) and at the rate of $0.08
per share (in the case of all other series).
. The holders of Series A, B, C, D, F, G, H, I, and J preferred stock have
liquidation preferences of $0.80, $1.30, $1.59, $1.80, $4.00, $4.00,
$6.50, $5.25, and $4.25 per share, respectively, plus all declared but
unpaid dividends.
. Each share of preferred stock is convertible at any time at the option
of the holder into one share of common stock (or approximately 1.04
shares of common stock in the case of Series I). Conversion is automatic
in the event of certain defined public offerings of common stock, the
achievement by the Company of certain revenue and income goals, or a
majority vote of the holders of outstanding preferred stock.
. The preferred stock is subject to certain antidilutive provisions
relating to stock splits and stock dividends.
. Each share of preferred stock has voting rights on an "as if converted"
basis.
As of December 31, 1995 and June 30, 1996, there were warrants outstanding
and exercisable for 110,416 shares of Series F preferred stock at $3.40 per
share which expire in 1997. However, such warrants will terminate if not
exercised or converted prior to the effective date of the Company's
contemplated IPO (Note 13).
(7) COMMON STOCK
The Company is authorized to issue 20,000,000 shares of common stock. As of
December 31, 1995 and June 30, 1996, there were warrants outstanding to
purchase 368,734 shares of common stock at $5.25 per share and 140,000 shares
at $4.25 per share. These warrants expire in 1998 and 2000, respectively.
As of December 31, 1995, 950,000 shares of common stock were reserved for
issuance under the Company's 1988 Amended and Restated Incentive Stock Option
Plan (the 1988 Option Plan). On June 19, 1996, the Board
F-12
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED.)
authorized, effective upon the closing of the proposed IPO, reserving an
additional 450,000 shares of common stock for issuance under the 1988 Option
Plan. Under the 1988 Option Plan, stock options may be granted to Board
members, officers, key employees, and consultants at the fair market value of
the common stock at the date of the grant, as determined by the Board. Options
are exercisable over 5 to 10 years from the date of grant, and typically vest
ratably over 4 years. In 1994, the Company enacted a Directors Option Plan
designed to encourage participation on the Company's Board. Under this plan,
3,000 shares per year are automatically granted to non-employee directors. The
terms of the plan allow the granting of stock options upon initial election to
the Board and for each subsequent term on the Board. As of June 30, 1996 there
were 50,000 shares reserved for issuance under this plan and no options have
been granted. As of December 31, 1995 and June 30, 1996, 5,000 and 75,000
options were granted to Board members out of the shares reserved under the
1988 Option Plan. On June 19, 1996, the Board amended the Director Option
Plan, effective upon the closing of the proposed IPO, to increase the number
of shares subject to be automatically granted to non-employee directors for
subsequent grants from 3,000 to 5,000 shares per year and to increase the
number of shares reserved for issuance to 120,000 shares.
The Company has recorded for financial statement purposes, a deferred charge
of $1,473,000, representing the difference between the exercise price and the
deemed fair value of the Company's common stock for 246,750 shares subject to
common stock options granted in the 12-month period preceding the IPO, mainly
in the first quarter of 1996. The deferred stock compensation is being
amortized to compensation expense over the period during which the options
become exercisable, generally four years.
Below is a table of stock option activity:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES ----------------------
AVAILABLE PRICE
FOR GRANT SHARES PER SHARE
--------- ------- -------------
<S> <C> <C> <C>
BALANCES AS OF DECEMBER 31, 1992........ 138,275 257,050 $ 0.15 - 1.80
Options granted......................... (106,750) 106,750 1.80 - 2.80
Options canceled........................ 20,375 (20,375) 0.33 - 2.80
Options exercised....................... -- (12,875) 0.15 - 0.33
-------- ------- -------------
BALANCES AS OF DECEMBER 31, 1993........ 51,900 330,550 0.15 - 2.80
Shares authorized....................... 440,000 -- --
Options granted......................... (100,000) 100,000 3.00
Options canceled........................ 8,063 (8,063) 1.80 - 2.80
Options exercised....................... -- (25,937) 0.15 - 1.80
-------- ------- -------------
BALANCES AS OF DECEMBER 31, 1994........ 399,963 396,550 0.15 - 3.00
Options granted......................... (66,500) 66,500 1.80 - 3.00
Options canceled........................ 12,525 (12,525) 1.80 - 3.00
Options exercised....................... -- (94,275) 0.15 - 1.80
-------- ------- -------------
BALANCES AS OF DECEMBER 31, 1995
(143,668 exercisable).................. 345,988 356,250 0.15 - 3.00
Options granted......................... (238,750) 238,750 1.80
Options canceled........................ 74,875 (74,875) 1.80 - 3.00
Options exercised....................... -- (22,875) 1.80
-------- ------- -------------
BALANCES AS OF JUNE 30, 1996
(172,002 exercisable).................. 182,113 497,250 0.15 - 3.00
======== =======
</TABLE>
F-13
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED.)
On June 19, 1996, the Board adopted, effective upon the closing of the
proposed IPO, the Company's Employee Stock Purchase Plan (the Plan) whereby
eligible employees may purchase common stock through payroll deductions of up
to 10% of compensation, at a per share price of 85% of the fair market value
of the Company's common stock on the enrollment date or the exercise date,
whichever is lower. Upon the closing of the IPO there will be 200,000 shares
reserved for issuance under the Plan.
(8) INCOME TAXES
The Company has not recorded an income tax benefit in 1993, 1994, and 1995
due to the recording of a valuation allowance as an offset to net deferred tax
assets. A valuation allowance is provided due to uncertainties relating to the
realization of deferred tax assets.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to the
allowance for doubtful accounts............. $ 45,000 $ 24,000 $ 44,000
Inventories, principally due to the allowance
for obsolete inventory, and additional costs
inventoried for tax purposes................ 134,000 96,000 160,000
Tangible and intangible assets, principally
due to differences in depreciation and
amortization................................ 149,000 45,000 114,000
Revenue deferred for financial statement
purposes, not for tax reporting purposes.... 184,000 241,000 235,000
Accrued expenses, not currently deductible... 70,000 75,000 187,000
Net operating loss carryforwards............. 2,170,000 3,081,000 3,292,000
Business credit carryforwards................ 130,000 282,000 302,000
---------- ---------- ----------
2,882,000 3,844,000 4,334,000
Less valuation allowance................... 2,882,000 3,844,000 4,334,000
---------- ---------- ----------
Net deferred tax assets.................. $ -- $ -- $ --
========== ========== ==========
</TABLE>
As of December 31, 1995, the Company had net operating loss carryforwards
for U.S. federal, U.K., and California state tax return purposes of
approximately $7,700,000, $945,000, and $1,450,000, respectively. The federal
and California net operating loss carryforwards expire in the years 2011 and
1999, respectively. The Company's U.K. net operating loss carryforward is
available indefinitely to offset its U.K. trading profits arising from
distribution operations. The difference between the tax loss carryforwards and
the accumulated deficit primarily relates to timing differences in the
recognition of deferred revenue, accrued compensation, and certain reserves.
The Internal Revenue Code of 1986 and the California Conformity Act of 1987
substantially restrict the ability of a corporation to utilize existing net
operating losses and credits in the event of an "ownership change". The
several issuances of preferred stock have resulted in multiple ownership
changes since inception of the Company. The majority of the federal net
operating loss carryforwards are limited by an ownership change
F-14
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED.)
occurring in July 1995. Approximately $6,700,000 of the federal net operating
loss carryforward will be subject to an annual limitation in the aggregate of
$850,000. Any unused annual limitation can be carried over and added to the
succeeding year's annual limitation within the allowable carryforward period.
Management believes that the IPO of the Company's stock will most likely
result in an ownership change, however, the July 1995 change will continue to
be the most restrictive limitation because the majority of the Company's net
operating losses were incurred prior to July 1995.
(9) COMMITMENTS
The Company has several noncancelable operating leases for equipment,
vehicles, and facilities expiring through 2005. The facilities' leases
generally contain renewal options for periods ranging from two to three years
and require the Company to pay all executory costs such as maintenance,
property taxes, and insurance. Rent expense under operating leases aggregated
$267,000, $287,000, and $326,000 during 1993, 1994, and 1995, respectively,
and $151,000 and $165,000 during the six months ended June 30, 1995 and 1996,
respectively. The Company's primary lease commitments are for its facilities
in the United Kingdom, which aggregate approximately (Pounds)100,000 per year
through 1998, with a six-year renewal option held by the Company, and for its
facilities in the United States, which aggregate approximately $143,000 and
$42,000 for 1996 and 1997, respectively.
(10) EMPLOYEE BENEFIT PLANS
In January 1994, the Company implemented a retirement savings and investment
plan that is intended to qualify under Section 401(k) of the Internal Revenue
Code (the 401(k) Plan) covering all of the Company's United States-based
employees. An employee may elect to defer, in the form of contributions to the
401(k) Plan on his or her behalf, up to 15% of the total compensation that
would otherwise be paid to the employee, not to exceed the amount allowed by
applicable Internal Revenue Service guidelines. The Company matches 100% of
amounts deferred by the employee participants up to 3% of such employee's
total compensation and such matching amounts vest over a three-year period
from the initial participation date. Contributions by employees or by the
Company to the 401(k) Plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) Plan. Contributions by
the Company are deductible by the Company when made. The Company contributed
$38,000, and $51,000 in 1994 and 1995, respectively, and $25,000 and $34,000
in the six months ended June 30, 1995 and 1996, respectively.
The Company's United Kingdom-based employees are covered by retirement
savings plans (the International Retirement Plans). Under such plans, an
employee may elect to make contributions of 3.5% of such employee's earnings.
Amounts contributed by the Company range 5.5% to 10.5% of such employee's
earnings. During 1993, 1994, and 1995, and during the six months ended June
30, 1995 and 1996, respectively, the Company made contributions to the
International Retirement Plans totaling $83,000, $60,000, $43,000, $21,000,
and $22,000. Contributions by employees or by the Company to the International
Retirement Plans, and income earned on plan contributions, are not taxable to
employees until withdrawn from such plans. Contributions by the Company are
deductible by the Company when made.
F-15
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED.)
(11) FOREIGN OPERATIONS
The Company markets its products worldwide from its operations in the United
States and the United Kingdom and performs research and development in the
United States and Israel. Sales from the United States are primarily to
customers within the United States. Revenues in the United Kingdom resulted
from drop shipments of product from the United States directly to customers
for the years ended December 31, 1994 and 1995 and the six months ended June
30, 1995 and 1996. Selected financial data by primary geographic area for the
years ended December 31, 1993, 1994 and 1995, and the six months ended June
30, 1995 and 1996 follow. Operating losses incurred by Israel are offset by
funding received in connection with the grant discussed at Footnote 12.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers:
United States........... $ 3,159,000 $ 3,639,000 $ 4,254,000 $ 2,006,000 $ 2,525,000
United Kingdom.......... 5,522,000 5,932,000 6,544,000 3,209,000 3,470,000
------------ ----------- ----------- ----------- -----------
$ 8,681,000 $ 9,571,000 $10,798,000 $ 5,215,000 $ 5,995,000
============ =========== =========== =========== ===========
Operating income (loss):
United States........... $ (478,000) $(2,069,000) $(2,548,000) $(1,223,000) $(1,278,000)
United Kingdom.......... (1,334,000) (953,000) (69,000) 116,000 28,000
------------ ----------- ----------- ----------- -----------
$ (1,812,000) $(3,022,000) $(2,617,000) $(1,107,000) $(1,250,000)
============ =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- JUNE 30,
1993 1994 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total assets:
United States...................... $6,335,000 $3,977,000 $6,473,000 $4,585,000
United Kingdom..................... 3,331,000 3,464,000 2,755,000 3,151,000
Israel............................. -- -- 145,000 353,000
---------- ---------- ---------- ----------
Total............................ $9,666,000 $7,441,000 $9,373,000 $8,089,000
========== ========== ========== ==========
Net assets:
United States...................... $4,494,000 $1,321,000 $4,183,000 $2,422,000
United Kingdom..................... 1,319,000 1,490,000 491,000 953,000
Israel............................. -- -- 40,000 240,000
---------- ---------- ---------- ----------
Total............................ $5,813,000 $2,811,000 $4,714,000 $3,615,000
========== ========== ========== ==========
</TABLE>
Substantially all of the U.K. sales are denominated in British pounds. The
Company generally does not enter into any arrangements to hedge the effect of
foreign currency changes on its foreign currency denominated assets and
liabilities.
(12) RESEARCH AND DEVELOPMENT ARRANGEMENT
During 1995, the Company was awarded a grant by the Binational Industrial
Research and Development (BIRD) Foundation. With the funding received from the
grant, the Company began research operations in its
F-16
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED.)
Israel subsidiary relating to its fetal cell program. All funds received by
the Company in advance of performing the related research and development are
recorded as a deferred credit in the accompanying consolidated balance sheet
and, as expenses are incurred, the deferred credit is depleted. Over the life
of the grant, the Company will receive up to $543,000 in matching funds. These
funds, as well as any accrued interest, will be required to be paid back to
the BIRD Foundation if future revenues are realized from the related research
and development activities, at the rate of 2 1/2% of such future revenues
generated in the first year such revenues occur, and 5% of revenues in
succeeding years, over a six-year period, up to a maximum of 150% of the funds
received. Of the approximately $362,000 in funding received, the Company has
recognized credits to its expenses of approximately $97,000 during 1995 and
$186,000 during the six months ended June 30, 1996.
(13) PROPOSED INITIAL PUBLIC OFFERING
On June 19, 1996, the Board authorized the filing of a registration
statement with the Securities and Exchange Commission permitting the Company
to issue and sell up to 5 million shares of its common stock in connection
with a proposed IPO. If the offering is consummated under terms presently
anticipated, all of the currently outstanding preferred stock will
automatically convert into 3,960,017 shares of common stock. In addition, the
net exercise of the warrants described in Note 6 into 85,387 shares of common
stock is expected prior to the effectiveness of the Company's public offering.
The effect of the preferred stock conversion and the warrant exercise has been
reflected in the accompanying pro forma consolidated balance sheet as of June
30, 1996.
(14) SUBSEQUENT EVENTS
Reincorporation
On July 15, 1996, the Board approved the Company's reincorporation in the
state of Delaware prior to the IPO, providing for 20,000,000 authorized shares
of common stock with a $.001 par value per share and for 6,000,000 authorized
shares of preferred stock with a $.001 par value per share. The accompanying
consolidated financial statements have been retroactively restated to give
effect to the reincorporation.
F-17
<PAGE>
Caption: AUTOMATED SOLUTIONS FOR CYTOGENETICS
The Company currently manufactures, markets and sells a family of automated
cytogenetic systems for prenatal and cancer applications.
[Graphic: Depicts laboratory technician in front of automated karyotyping
equipment]
Caption: CYTOVISION
KARYOTYPER
A high speed imaging instrument for automated classification (karyotyping) of
chromosomes from cells in a particular phase of the life cycle (metaphase) in
which such chromosomes are individually visible.
[Graphic: Picture of paired chromosomes in display referred to as a karotype]
Caption: KARYOTYPE IMAGE
A karyotype produced from a metaphase image.
[Graphic: Picture of chromosomes]
Caption: METAPHASE CHROMOSOMES
Image of chromosomes from a cell in metaphase.
[Graphic: Picture of part of globe with points showing major cities where
Company customers are located.]
Caption: WORLD WIDE INSTALLED BASE
The Company has an installed base of cytogenetic products at approximately 500
sites in more than 30 countries. The Company believes that it can initially
distribute its prenatal screening system, if approved, through its established
world wide distribution channels and that its current customers could add the
Company's prenatal screening system to their existing installations.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, sales representative, or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the shares of Common Stock to which it relates or an
offer to, or a solicitation of, any person in any jurisdiction where such an
offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that there has been no change in the affairs of the Company
since the date hereof or that information contained herein is correct as of
any time subsequent to the date hereof.
------------------
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Consolidated Financial Information............................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 26
Management................................................................ 43
Certain Transactions...................................................... 51
Principal Shareholders.................................................... 52
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 57
Underwriting.............................................................. 59
Legal Matters............................................................. 60
Experts................................................................... 60
Additional Information.................................................... 60
Index to Selected Consolidated Financial Statements....................... F-1
</TABLE>
Until , 1996 (25 days after the date of this prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in
the distribution, may be required to deliver a Prospectus. This is in addition
to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,300,000 SHARES
APPLIED IMAGING
[LOGO OF APPLIED IMAGING APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
MONTGOMERY SECURITIES
DILLON, READ & CO. INC.
VECTOR SECURITIES INTERNATIONAL, INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable
by the Company in connection with the sale of Common Stock being registered.
All amounts are estimates except the SEC registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 14,593
NASD Filing Fee.................................................... 4,732
Nasdaq National Market Listing Fee................................. 40,508
Printing Fees and Expenses......................................... 150,000
Legal Fees and Expenses............................................ 225,000
Accounting Fees and Expenses....................................... 200,000
Blue Sky Fees and Expenses......................................... 15,000
Transfer Agent and Registrar Fees.................................. 15,000
Miscellaneous...................................................... 110,675
--------
Total............................................................ $750,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and other corporate agents in the terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1993. as amended (the "Act"). The Registrant's Restated
Certificate of Incorporation to be filed upon the closing of the offering to
which this Registration Statement relates (Exhibit 3.3 hereto) and the
Registrant's Bylaws (Exhibit 3.4 hereto) provides for indemnification of the
Registrant's directors, officers, employees and other agents to the extent and
under the circumstances permitted by the Delaware General Corporation Law. The
Registrant also intends to enter into agreements with its directors and
executive officers that will require the Registrant among other things to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors to the fullest extent not prohibited by
Delaware law.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant, its directors and officers, and by the Registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Act, and affords certain rights of contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 1993, the Registrant has issued and sold the following
unregistered securities:
(1) From June 1993 to June 1996, the Registrant issued and sold 151,487
shares of Common Stock to a total of 32 employees in reliance upon Rule 701
promulgated under the Securities Act of 1933, as amended (the "Act") at
purchase prices ranging from $0.15 per share to $1.80 per share upon the
exercise of stock options, pursuant to the Registrant's 1988 Option Plan.
(2) In August 1993, the Registrant issued and sold 1,016,407 shares of
Series I Preferred Stock to a total of 33 accredited investors at a
purchase price of $5.25 per share for an aggregate purchase price of
$5,336,136.75 in reliance upon Rule 506 of Regulation D promulgated under
the Act. In connection with the sale of shares of Series I Preferred Stock,
the Registrant issued a warrant to purchase 140,000 shares of Common Stock
at a purchase price of $5.25 per share to Allen & Company Incorporated (the
"Initial Warrant").
(3) In July and September 1995, the Registrant issued and sold 1,106,217
shares of Series J Preferred Stock at a purchase price of $4.25 per share,
and issued warrants priced at $0.01 per share to purchase 368,734 shares of
Common Stock at an exercise price of $5.25 per share to a total of 30
accredited investors in reliance upon Rule 506 of Regulation D promulgated
under the Act. In addition, the Registrant issued a warrant to purchase
140,000 shares of Common Stock at an exercise price of $4.25 per share to
Allen & Company in exchange for the Initial Warrant.
II-1
<PAGE>
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section
3(b) of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with the Company,
to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1** Form of Underwriting Agreement.
3.1* Restated Articles of Incorporation, as amended as of July 19, 1995.
3.2 Form of Certificate of Incorporation, to be filed prior to the
effective date of the Registration Statement under which the
offering is being made.
3.3 Form of Restated Certificate of Incorporation, to be filed after the
closing of the offering made under this Registration Statement.
3.4* Bylaws, as amended.
3.5 Form of Bylaws of Registrant, to be effective upon consummation of
the Registrant's reincorporation into Delaware.
4.1** Specimen Common Stock Certificate.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1 Form of Indemnification Agreement for directors and officers.
10.2* Amended and Restated 1988 Incentive Stock Option Plan and form of
agreement thereunder.
10.3* 1994 Director Option Plan and form of subsequent agreement
thereunder.
10.4* Employee Stock Purchase Plan.
10.5 Amended and Restated Registration Rights Agreements.
10.6* License Agreement dated December 1, 1993 between the Registrant and
Chronomed, Inc.
10.7* Assignment dated December 1, 1993 by and between the Registrant and
Alex Saunders, M.D.
10.8* Lease dated February 15, 1994 for the Registrant's headquarters in
Santa Clara, CA.
10.9(a)* Lease for Site No. BT.2003/1A, Hylton Park, Sunderland, England,
between English Industrial Estates Corporation and Applied Imaging
International Ltd., dated June 12, 1992.
10.9(b)* Lease for Site No. BT.2003/3A, Hylton Park, Sunderland, England,
between English Industrial Estates Corporation and Applied Imaging
International Ltd., dated June 12, 1992.
10.9(c)* Underlease for Site No. BT.2003/1A between Applied Imaging
International Ltd. and RTC North Limited, dated February 14, 1996.
10.9(d)* Supplement to Underlease for Site No. BT.2003/1A between Applied
Imaging International Ltd. and RTC North Limited, dated February 14,
1996.
10.10* Lease Agreement dated October 31, 1995 between Asaf Harofe Hospital
and Applied Imaging Ltd. for Registrant's Israeli entity in Tzripin,
Israel.
10.11* Employment Letter Agreement dated August 12, 1991 between the
Registrant and Leslie G. Grant.
10.12* Amendment to Employment Letter Agreement between the Registrant and
Leslie G. Grant, dated February 12, 1996.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.13* Employment Letter Agreement dated January 12, 1996 between the
Registrant and Michael W. Burgett, Ph.D., and supplement thereto,
dated January 20, 1996.
10.14*+ Know-How License Agreement dated November 1989 between Medical
Research Council and Shandon Scientific Limited (assigned to the
Registrant in November 1989), as amended, July 5, 1994.
10.15* Cooperative Research and Development Agreement, dated June 10, 1995
between Registrant and the National Institute of Health.
10.16*+ Supply & Distribution Agreement dated March 3, 1994 between Cytocell
Ltd. and Registrant.
10.17*+ Research Purchase Agreement dated March 26, 1996 between Pharmacia
Biotech AB and Registrant.
10.18*+ Development Agreement dated February 5, 1996 between EM Industries and
Registrant.
10.19** Cooperation and Project Funding Agreement dated July 16, 1995 between
the Israel-United States Binational Industrial Research and
Development Foundation, the Registrant and Applied Imaging Ltd.
11.1* Calculation of pro forma net loss per common share.
21.1* List of Subsidiaries of the Registrant.
23.1* Consent and Form of Independent Certified Public Accountants Report on
Financial Statement Schedule
23.2** Consent of Counsel (included in Exhibit 5.1).
23.3* Consent of Special Patent Counsel
24.1* Power of Attorney (see page II-4).
27.1* Financial Data Schedule
</TABLE>
- --------
*Previously filed
**To be filed by amendment.
+Confidential Treatment Requested.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information required
to be set forth therein is not, applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the
II-3
<PAGE>
Securities Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereto which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA CLARA, STATE OF
CALIFORNIA, ON THE 26TH DAY OF AUGUST, 1996.
Applied Imaging Corp.
By: /s/ Abraham I. Coriat
-----------------------------------
Abraham I. Coriat Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Abraham I. Coriat Chief Executive Officer August 26, 1996
- --------------------------------- and Director (Principal
(Abraham I. Coriat) Executive Officer)
/s/ Neil E. Woodruff Chief Financial Officer August 26, 1996
- --------------------------------- (Principal Financial and
(Neil E. Woodruff) Accounting Officer)
Director , 1996
- ---------------------------------
(John F. Blakemore, Jr.)
Director , 1996
- ---------------------------------
(Michael S. Elias)
Director , 1996
- ---------------------------------
(Gilbert J.R. McCabe)
/s/ Thomas C. McConnell* Director August 26, 1996
- ---------------------------------
(Thomas C. McConnell)
/s/ Andre F. Marion* Director August 26, 1996
- ---------------------------------
(Andre F. Marion)
/s/ Robert C. Miller* Director August 26, 1996
- ---------------------------------
(Robert C. Miller)
/s/ G. Kirk Raab* Director August 26, 1996
- ---------------------------------
(G. Kirk Raab)
*By: /s/ Abraham I. Coriat
----------------------------
(Abraham I. Coriat)
(Attorney-in-Fact)
</TABLE>
II-5
<PAGE>
SCHEDULE II
APPLIED IMAGING CORP.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO
BALANCE AT COST AND BALANCE AT
DESCRIPTION BEGINNING OF YEAR EXPENSES DEDUCTIONS END OF YEAR
----------- ----------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Trade accounts Receivable
Year Ended December 31,
1993.................... $ 48 $94 $47 $ 95
==== === === ====
Year Ended December 31,
1994.................... $ 95 $66 $39 $122
==== === === ====
Year Ended December 31,
1995.................... $122 $93 $49 $166
==== === === ====
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
-------- ----------- ------------
<C> <S> <C>
1.1** Form of Underwriting Agreement.
3.1* Restated Articles of Incorporation, as amended as of
July 19, 1995.
3.2 Form of Certificate of Incorporation, to be filed
prior to the effective date of the Registration
Statement under which the offering is being made.
3.3 Form of Restated Certificate of Incorporation, to be
filed after the closing of the offering made under
this Registration Statement.
3.4* Bylaws, as amended.
3.5 Form of Bylaws of Registrant, to be effective upon
consummation of the Registrant's reincorporation into
Delaware.
4.1** Specimen Common Stock Certificate.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
10.1 Form of Indemnification Agreement for directors and
officers.
10.2* Amended and Restated 1988 Incentive Stock Option Plan
and form of agreement thereunder.
10.3* 1994 Director Option Plan and form of subsequent
agreement thereunder.
10.4* Employee Stock Purchase Plan.
10.5 Amended and Restated Registration Rights Agreements.
10.6* License Agreement dated December 1, 1993 between the
Registrant and Chronomed, Inc.
10.7* Assignment dated December 1, 1993 by and between the
Registrant and Alex Saunders, M.D.
10.8* Lease dated February 15, 1994 for the Registrant's
headquarters in Santa Clara, CA.
10.9(a)* Lease for Site No. BT.2003/1A, Hylton Park,
Sunderland, England, between English Industrial
Estates Corporation and Applied Imaging International
Ltd., dated June 12, 1992.
10.9(b)* Lease for Site No. BT.2003/3A, Hylton Park,
Sunderland, England, between English Industrial
Estates Corporation and Applied Imaging International
Ltd., dated June 12, 1992.
10.9(c)* Underlease for Site No. BT.2003/1A between Applied
Imaging International Ltd. and RTC North Limited,
dated February 14, 1996.
10.9(d)* Supplement to Underlease for Site No. BT.2003/1A
between Applied Imaging International Ltd. and RTC
North Limited, dated February 14, 1996.
10.10* Lease Agreement dated October 31, 1995 between Asaf
Harofe Hospital and Applied Imaging Ltd. for
Registrant's Israeli entity in Tzripin, Israel.
10.11* Employment Letter Agreement dated August 12, 1991
between the Registrant and Leslie G. Grant.
10.12* Amendment to Employment Letter Agreement between the
Registrant and Leslie G. Grant, dated February 12,
1996.
10.13* Employment Letter Agreement dated January 12, 1996
between the Registrant and Michael W. Burgett, Ph.D.,
and supplement thereto, dated January 20, 1996.
10.14*+ Know-How License Agreement dated November 1989 between
Medical Research Council and Shandon Scientific
Limited (assigned to the Registrant in November
1989), as amended, July 5, 1994.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.15* Cooperative Research and Development Agreement, dated
June 10, 1995 between Registrant and the National
Institute of Health.
10.16*+ Supply & Distribution Agreement dated March 3, 1994
between Cytocell Ltd. and Registrant.
10.17*+ Research Purchase Agreement dated March 26, 1996
between Pharmacia Biotech AB and Registrant.
10.18*+ Development Agreement dated February 5, 1996 between EM
Industries and Registrant.
10.19** Cooperation and Project Funding Agreement dated July
16, 1995 between the Israel-United States Binational
Industrial Research and Development Foundation, the
Registrant and Applied Imaging Ltd.
11.1* Calculation of pro forma net loss per common share.
21.1* List of Subsidiaries of the Registrant.
23.1* Consent and Form of Independent Certified Public
Accountants Report on Financial Statement Schedule
23.2** Consent of Counsel (included in Exhibit 5.1).
23.3* Consent of Special Patent Counsel
24.1* Power of Attorney (see page II-4).
27.1* Financial Data Schedule
</TABLE>
- --------
*Previously filed
**To be filed by amendment.
+Confidential Treatment Requested.
2
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF INCORPORATION
OF
APPLIED IMAGING CORP.
ARTICLE I
The name of the Corporation is Applied Imaging Corp.
ARTICLE II
The address of the corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of Newcastle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of shares, which shall
be designated "Common Stock" and "Preferred Stock". The total number of shares
of Common Stock which the Corporation is authorized to issue is 20,000,000 with
a par value of $0.001 per share, and the total number of shares of Preferred
Stock which the corporation is authorized to issue is 6,000,000 with a par value
of $0.001 per share. Of the Preferred Stock, 190,000 shares are fixed and
designated as "Series A Preferred Stock", 250,000 shares are fixed and
designated as "Series B Preferred Stock", 283,019 shares are fixed and
designated as "Series C Preferred Stock", 375,000 shares are fixed and
designated as "Series D Preferred Stock", 181,819 shares are fixed and
designated as "Series E Preferred Stock," 625,000 shares are fixed and
designated as "Series F Preferred Stock", 700,000 shares are fixed and
designated "Series G Preferred Stock", 300,000 shares are fixed and designated
"Series H Preferred Stock", 1,100,000 shares are fixed and designated "Series I
Preferred Stock" and 1,176,470 shares are fixed and designated "Series J
Preferred Stock".
ARTICLE V
Preferred Stock may be issued from time to time in one or more series.
Except for Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred
<PAGE>
Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock, Series H Preferred Stock, Series I Preferred Stock and Series J Preferred
Stock, the Board of Directors is authorized to fix the number of shares in any
series of Preferred Stock and to determine the designation of any such series.
The Board of Directors is also authorized to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock and, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series, to increase or decrease
(but not below the number of shares of any such series then outstanding) the
number of shares of any such series subsequent to the issue of shares of that
series.
ARTICLE VI
The rights, preferences, privileges and restrictions granted to or imposed
upon Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock, Series G Preferred Stock, Series H Preferred Stock, Series I Preferred
Stock and Series J Preferred Stock are as follows:
1. Reference. For purposes of this Article Five, the Series A Preferred
---------
Stock is referred to as "Series A", the Series B Preferred Stock is referred to
as "Series B", the Series C Preferred Stock is referred to as "Series C", the
Series D Preferred Stock is referred to as "Series D", the Series E Preferred
Stock is referred to as "Series E", the Series F Preferred Stock is referred to
as "Series F", the Series G Preferred Stock is referred to as "Series G", the
Series H Preferred Stock is referred to as "Series H", the Series I Preferred
Stock is referred to as "Series I" and the Series J Preferred Stock is referred
to as "Series J".
2. Dividends. The holders of Series A, Series B, Series C, Series D,
---------
Series E, Series F, Series G, Series H, Series I and Series J shall be entitled
to receive dividends, out of funds legally available therefor, at the rate of
Five Cents ($0.05), Eight Cents ($0.08), Eight Cents ($0.08), Eight Cents
($0.08), Eight Cents ($0.08), Eight Cents ($0.08), Eight Cents ($0.08), Eight
Cents ($0.08), Eight Cents ($0.08) and Eight Cents ($0.08), respectively, per
share per annum, calculated to the nearest whole cent, payable when, as and if,
and in such manner as may be, declared by the Board of Directors from time to
time; provided, however, that, whenever any dividend is declared or paid, or
other distribution is made, on Series A, Series B, Series C, Series D, Series E,
Series F, Series G, Series H, Series I or Series J, a pro rata dividend or other
distribution shall be concurrently declared, paid, or made, as the case may be,
on the shares of all ten of such series of Preferred Stock in proportion to the
dividend preferences of such series set forth above (i.e., the per share
dividend or other distribution on Series B, Series C, Series D, Series E, Series
F, Series G, Series H, Series I and Series J shall equal 160% of the per share
dividend or other distribution on Series A); and provided, further, that no
dividends may be declared or paid on the Corporation's outstanding shares of
Common Stock in any fiscal year of the Corporation unless dividends in the
amount of $0.05, $0.08, $0.08, $0.08, $0.08, $0.08, $0.08, $0.08, $0.08 and
$0.08 per share have been declared and paid during such fiscal year to the
holders of Series A, Series B, Series C, Series D, Series E, Series F, Series G,
Series H, Series I and Series J, respectively. The right to dividends on
Preferred Stock shall
-2-
<PAGE>
not be cumulative, and no right to dividends shall accrue to holders of
Preferred Stock unless declared by the Board of Directors.
3. Liquidation Rights. In the event of a voluntary or involuntary
------------------
liquidation, dissolution, or winding up of the Corporation:
3.1 (i) The holders of Series A, Series B, Series C, Series D, Series
E, Series F, Series G, Series H, Series I and Series J, shall be entitled to
receive, out of the assets of the Corporation, whether such assets are capital
or surplus, an amount equal to Eighty Cents ($0.80), One Dollar and Thirty Cents
($1.30), One Dollar and Fifty-Nine Cents ($1.59), One Dollar and Eighty Cents
($1.80), Three Dollars and Thirty Cents ($3.30), Four Dollars ($4.00), Four
Dollars ($4.00), Six Dollars and Fifty Cents ($6.50), Five Dollars and Twenty-
Five Cents ($5.25) and Four Dollars and Twenty-Five Cents ($4.25), respectively,
per share of such series of Preferred Stock, and a further amount equal to any
dividends thereon declared and unpaid on the date of such distribution, and no
more, before any payment shall be made on or any assets distributed to the
holders of Common Stock.
(ii) If upon liquidation, dissolution, or winding up of the
Corporation the assets to be distributed among the holders of Series A, Series
B, Series C, Series D, Series E, Series F, Series G, Series H, Series I and
Series J shall be insufficient to permit the payment to such shareholders of the
full preferential amounts to which they are entitled, then the entire assets of
the Corporation available for distribution shall be distributed ratably among
the holders of Series A, Series B, Series C, Series D, Series E, Series F,
Series G, Series H, Series I and Series J, without priority or preference, in
proportion to the full preferential amount each such holder is otherwise
entitled to receive, and no distribution of the Corporation's assets shall be
made to the holders of Common Stock.
(iii) After payment or distribution to the holders of Series A,
Series B, Series C, Series D, Series E, Series F, Series G, Series H, Series I
and Series J of the full preferential amounts aforesaid, the remaining assets of
this Corporation shall be distributed ratably among the holders of the Common
Stock.
3.2 A reorganization, consolidation or merger of the Corporation, or
a sale of all or substantially all of the assets of the Corporation in which all
of the shareholders of the Corporation immediately prior to such transaction own
less than 50% of the voting securities of the surviving or controlling entity
immediately after such transaction, shall be deemed a liquidation, dissolution
or winding up, within the meaning of this Section 3; provided that the holders
of Series A, Series B, Series C, Series D, Series E, Series F, Series G, Series
H, Series I, Series J and Common Stock shall be paid in cash or in securities
received from the acquiring entity or in a combination thereof (in the same
proportions as the consideration received in the transaction). Any securities
to be delivered to the holders of the Series A, Series B, Series C, Series D,
Series E, Series F, Series G, Series H, Series I, Series J and Common Stock upon
a reorganization, consolidation or merger of the Corporation, or a sale of all
or substantially all of the assets of the Corporation, shall be valued as
follows:
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<PAGE>
(i) If traded on a securities exchange, the value shall be
deemed to be the average of the closing prices of the securities on such
exchange over the 30-day period ending three (3) business days prior to the
closing;
(ii) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid prices over the 30-day period ending
three (3) business days prior to the closing; and
(iii) If there is no active public market, the value shall be the
fair market value thereof, as mutually determined by the corporation and the
holders of not less than a majority of the outstanding shares of Preferred
Stock, provided that if the corporation and the holders of a majority of the
outstanding shares of Preferred Stock are unable to reach agreement, then by
independent appraisal by an investment banker hired and paid by the Corporation,
but acceptable to the holders of a majority of the outstanding shares of
Preferred Stock.
4. Voting Rights. Except as otherwise expressly provided herein or as
-------------
required by law, each holder of shares of Series A, Series B, Series C, Series
D, Series E, Series F, Series G, Series H, Series I and Series J shall be
entitled to vote on all matters and shall be entitled to the number of votes
equal to the largest number of full shares of Common Stock into which such
shares of Series A, Series B, Series C, Series D, Series E, Series F, Series G,
Series H, Series I or Series J could be converted, pursuant to the provisions of
Section 5 hereof, at the record date for the determination of shareholders
entitled to vote on such matters or, if no such record date is established, at
the date such vote is taken or any written consent of shareholders is obtained.
Except as otherwise expressly provided herein or as required by law, the holders
of shares of Series A, Series B, Series C, Series D, Series E, Series F, Series
G, Series H, Series I, Series J and Common Stock shall vote together and not as
separate classes.
5. Conversion of Preferred Stock. The holders of Preferred Stock shall
-----------------------------
have the following conversion rights:
5.1 Automatic Conversion.
--------------------
5.1.1 Each share of each series of Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion Price
(as defined below) for such series then in effect, immediately upon either (i)
the sale of Common Stock by the Corporation through an underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, at a per share public offering price (prior to
underwriting commissions and expenses) of not less than $6.00 per share and with
gross proceeds (prior to underwriting commissions and expenses) of $7,500,000,
(ii) the Corporation's reporting audited consolidated revenues of at least
$50,000,000 for a fiscal year and audited consolidated income before taxes and
extraordinary items (determined in accordance with generally accepted accounting
principles) of at least 10% of the revenues for the same period, or (iii) upon
the vote approving such conversion by holders of at least a majority of the
outstanding shares of such series; however, such conversion of each such series
shall be conditioned upon the Corporation paying all declared and unpaid
dividends
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<PAGE>
on such series, to and including the date of conversion. The Corporation, may,
at its option, in lieu of making a cash payment of all declared dividends, make
payment thereof in whole shares of Common Stock, valued at such Conversion Price
for such series, plus cash in lieu of any fractional shares, so that such cash
plus the value of such Common Stock shall equal the amount of accrued and unpaid
dividends.
5.1.2 Upon the occurrence of any event specified in Section
5.1.1 above as to a series of Preferred Stock, the outstanding shares of such
series shall be converted automatically without any further action by the
holders of such shares and whether or not the certificates repre senting such
shares are surrendered to the Corporation or its transfer agent. Upon the
automatic conversion of a series of Preferred Stock, the holders of such series
shall surrender the certificates representing such shares at the office of the
Corporation or transfer agent for the Common Stock as hereinafter provided, or
shall notify the Corporation or transfer agent that such certificates have been
lost, stolen or destroyed and execute an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss incurred by it in
connection therewith. The Corporation shall then cause to be issued and
delivered to such holders, promptly at such office and in their names as shown
on such surrendered certificates, certificates for the number of shares of
Common Stock into which the shares of such series of Preferred Stock, so
surrendered were convertible on the date on which automatic conversion occurred.
5.2 Right to Convert. Each share of each series of Preferred Stock
----------------
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share, at the office of the Corporation or any transfer
agent for such series or for Common Stock, into fully paid and nonassessable
shares of Common Stock, at the Conversion Price for such series (as defined
below) in effect at the time of the conversion determined as provided below.
5.3 Mechanics of Voluntary Conversion.
---------------------------------
5.3.1 A holder of shares of a series of Preferred Stock may
only convert such shares into shares of Common Stock by: (i) surrendering the
certificate or certificates representing the shares of such series to be
converted, duly endorsed, at the office of the Corporation or any transfer agent
for such series or Common Stock, and (ii) giving written notice to the
Corporation at such office stating that such holder elects to convert all or
part of the shares of such series held by such holder. The Corporation shall
promptly issue and deliver at such office to such holder of such series a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled and a certificate or certificates for the number
of shares of such series not converted, if any.
5.3.2 Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of the surrender of the
shares of such series of Preferred Stock to be converted as provided in Section
5.3.1 above, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
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<PAGE>
5.4 Number of Shares; Conversion Price.
----------------------------------
5.4.1 Each share of Series A shall be convertible into the
number of shares of Common Stock which result from dividing the Conversion Price
per share for such series in effect at the time of conversion into Eighty Cents
($0.80) for each share of Series A being converted. The Conversion Price for
Series A shall be Eighty Cents ($0.80) unless adjusted as provided herein.
5.4.2 Each share of Series B shall be convertible into the
number of shares of Common Stock which result from dividing the Conversion Price
per share for such series in effect at the time of conversion into One Dollar
and Thirty Cents ($1.30) for each share of Series B being converted. The
Conversion Price for Series B shall be One Dollar and Thirty Cents ($1.30)
unless adjusted as provided herein.
5.4.3 Each share of Series C shall be convertible into the
number of shares of Common Stock which result from dividing the Conversion Price
per share for such series in effect at the time of conversion into One Dollar
and Fifty-Nine Cents ($1.59) for each share of Series C being converted. The
Conversion Price for Series C shall be One Dollar and Fifty-Nine Cents ($1.59)
unless adjusted as provided herein.
5.4.4 Each share of Series D shall be convertible into the
number of shares of Common Stock which result from dividing the Conversion Price
per share for such series in effect at the time of conversion into One Dollar
and Eighty Cents ($1.80) for each share of Series D being converted. The
Conversion Price for Series D shall be One Dollar and Eighty Cents ($1.80)
unless adjusted as provided herein.
5.4.5 Each share of Series E shall be convertible into the
number of shares of Common Stock which result from dividing the Conversion Price
per share for such series in effect at the time of conversion into Three Dollars
and Thirty Cents ($3.30) for each share of Series E being converted. The
Conversion Price for Series E shall be Three Dollars and Thirty Cents ($3.30)
unless adjusted as provided herein.
5.4.6 Each share of Series F shall be convertible into the
number of shares of Common Stock which result from dividing the Conversion Price
per share for such series in effect at the time of conversion into Three Dollars
and Forty Cents ($3.40) for each share of Series F being converted. The
Conversion Price for Series F shall be Three Dollars and Forty Cents ($3.40)
unless adjusted as provided herein.
5.4.7 Each share of Series G shall be convertible into the
number of shares of Common Stock which result from dividing the Conversion Price
per share for such series in effect at the time of conversion into Four Dollars
($4.00) for each share of Series G being converted. The Conversion Price for
Series G shall be Four Dollars ($4.00) unless adjusted as provided herein.
5.4.8 Each share of Series H shall be convertible into the
number of shares of Common Stock which result from dividing the Conversion Price
per share for such series in effect at
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<PAGE>
the time of conversion into Four Dollars ($4.00) for each share of Series H
being converted. The Conversion Price for Series H shall be Four Dollars
($4.00) unless adjusted as provided herein.
5.4.9 Each share of Series I shall be convertible into the
number of shares of Common Stock which result from dividing the Conversion Price
per share for such series in effect at the time of conversion into Five Dollars
and Twenty-Five Cents ($5.25) for each share of Series I being converted. The
Conversion Price for Series I shall be Five Dollars and Twenty-Five Cents
($5.25) unless adjusted as provided herein.
5.4.10 Each share of Series J shall be convertible into the
number of shares of Common Stock which result from dividing the Conversion Price
per share for such series in effect at the time of conversion into Four Dollars
and Twenty-Five Cents ($4.25) for each share of Series J being converted. The
Conversion Price for Series J shall be Four Dollars and Twenty-Five Cents
($4.25) unless adjusted as provided herein.
5.5 Adjustment for Stock Issuances Below Conversion Price. If the
-----------------------------------------------------
Corporation shall at any time or from time to time after the issuance of any
shares of Series H, Series I or Series J issue (or, pursuant to this Section 5.5
hereof, shall be deemed to have issued) any Common Stock other than "Excluded
Stock" (as defined below) for a consideration per share less than the Conversion
Price for Series H, Series I or Series J in effect immediately prior to the
issuance of such Common Stock (excluding stock dividends, subdivisions, split-
ups, combinations, dividends or recapitalizations which are covered by Sections
5.6, 5.7, 5.8, 5.9, and 5.10), the Conversion Price for Series H, Series I or
Series J (but not any other series of Preferred Stock) in effect immediately
after each such issuance shall forthwith be adjusted to a price equal to the
quotient obtained by dividing:
(i) an amount equal to the sum of
(x) the total number of shares of Common Stock outstanding
(including any shares of Common Stock issuable upon conversion of such series of
Preferred Stock, or deemed to have been issued pursuant to subdivision (3) of
this clause (i) and to clause (ii) below) immediately prior to such issuance
multiplied by the Conversion Price for such series of Preferred Stock in effect
immediately prior to such issuance, plus
(y) the consideration received by the corporation upon such
issuance, by
(ii) the total number of shares of Common Stock outstanding
immediately prior to such issuance of Common Stock (including any shares of
Common Stock issuable upon conversion of Series H, Series I or Series J
Preferred Stock or deemed to have been issued pursuant to subdivision (3) of
this clause (i) and to clause (ii) below) plus the number of shares of Common
Stock actually issued in the transaction which resulted in the adjustment
pursuant to this Section 5.5.
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<PAGE>
For the purposes of any adjustment of the Conversion Price for
Series H, Series I or Series J Preferred Stock pursuant to clauses (i) and (ii),
the following provisions shall apply:
(1) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor after
deducting any discounts or commissions paid or incurred by the corporation in
connection with the issuance and sale thereof.
(2) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as reasonably determined by
the board of directors of the corporation, in accordance with generally accepted
accounting treatment.
(3) In the case of the issuance of (i) options to purchase or
rights to subscribe for Common Stock (other than Excluded Stock), (ii)
securities by their terms convertible into or exchangeable for Common Stock
(other than Excluded Stock), or (iii) options to purchase or rights to subscribe
for such convertible or exchangeable securities:
(A) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such options or
rights were issued and for a consideration equal to the consideration
(determined in the manner provided in subdivisions (1) and (2) above), if any,
received by the corporation upon the issuance of such options or rights plus the
minimum purchase price provided in such options or rights for the Common Stock
covered thereby;
(B) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities, or upon the exercise of options to purchase or rights
to subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof, shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the consideration received by the corporation for any
such securities and related options or rights (excluding any cash received on
account of accrued interest or accrued dividends), plus the additional minimum
consideration, if any, to be received by the corporation upon the conversion or
exchange of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner provided in
subdivisions (1) and (2) above);
(C) on any change in the number of shares of Common Stock
deliverable upon exercise of any such options or rights or conversion of or
exchange for such convertible or exchangeable securities, or on any change in
the minimum purchase price of such options, rights or securities, other than a
change resulting from the antidilution provisions of such options, rights or
securities, the Conversion Price shall forthwith be readjusted to such
Conversion Price as would have obtained had the adjustment made upon (x) the
issuance of such options, rights or securities not exercised, converted or
exchanged prior to such change or (y) the options or rights
-8-
<PAGE>
related to such securities not converted or exchanged prior to such change, as
the case may be, been made upon the basis of such change; and
(D) on the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Conversion Price shall forthwith be readjusted to such Conversion Price as would
have obtained had the adjustment made upon the issuance of such options, rights,
convertible or exchangeable securities or options or rights relate to such
convertible or exchangeable securities, as the case may be, been made upon the
basis of the issuance of only the number of shares of Common Stock actually
issued upon the exercise of such options or rights, upon the conversion or
exchange of such convertible or exchangeable securities or upon the exercise of
the options or rights related to such convertible or exchangeable securities, as
the case may be.
(4) If the Corporation shall issue (or pursuant to Section 5.5 hereof,
shall be deemed to have issued) in the same transaction (or a series of related
transactions) any Common Stock other than Excluded Stock at different prices,
the shares of Common Stock issued in such transaction (or series of related
transactions) shall be deemed to have been issued simultaneously for purposes of
the computations in this Section 5.5.
5.5.1 "Excluded Stock" shall mean:
(i) all shares of Common Stock issued and outstanding on the
date this certificate is filed with the California Secretary of State and all
shares of Common Stock issuable upon exercise of options and warrants
outstanding on the date this certificate is filed with the California Secretary
of State;
(ii) all shares of Preferred Stock outstanding on the date
this certificate is filed with the California Secretary of State and the Common
Stock into which such shares of Preferred Stock are convertible;
(iii) all shares of Common Stock or other securities hereafter
issued to officers, directors, consultants or employees of or scientific
advisors to the corporation which issuances are approved by of the board of
directors of the corporation;
(iv) all shares of Series J Preferred Stock and the Common
Stock into which such shares of Series J Preferred Stock are convertible; and
(v) all shares of Common Stock issuable upon exercise or
conversion of a warrant hereafter issued to Allen & Company Incorporated.
All outstanding shares of Excluded Stock (including shares issuable upon
conversion of the Preferred Stock) shall be deemed to be outstanding for all
purposes of the computations of Section 5.5 above.
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<PAGE>
5.6 Adjustment for Stock Splits and Combinations. If the Corporation
--------------------------------------------
shall at any time or from time to time after the issuance of any shares of a
series of Preferred Stock effect a subdivision of any outstanding Common Stock,
the Conversion Price then in effect for such series immediately before that
subdivision shall be proportionately decreased. Conversely, if the Corpora tion
shall at any time or from time to time after the issuance of any shares of a
series of Preferred Stock combine the outstanding shares of Common Stock, the
Conversion Price then in effect for such series immediately before the
combination shall be proportionately increased. Any adjustment under this
Section 5.6 shall become effective at the close of business on the date the
subdivision or combination becomes effective.
5.7 Adjustment for Certain Dividends and Distributions. If the
--------------------------------------------------
Corporation at any time or from time to time shall make or issue, or fix a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares of Common
Stock, in each such event the Conversion Prices then in effect for each series
of Preferred Stock shall be decreased as of the time of such issuance or, if
such record date shall have been fixed, as of the close of business on such
record date, by multiplying the Conversion Price of each series then in effect
by a fraction:
5.7.1 The numerator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance, or the close of business on such record date, and
5.7.2 The denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance, or the close of business on such record date, plus the number of
shares of Common Stock issuable in payment of such dividend or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Conversion Prices of each series shall be recomputed accordingly
as of the close of business on such record date, and thereafter the Conversion
Price of each series shall be adjusted pursuant to this Section 5.7 as of the
time of actual payment of such dividend or distribution.
5.8 Adjustment for Other Dividends and Distributions. If the
------------------------------------------------
Corporation at any time or from time to time shall make or issue, or fix a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the
Corporation, other than shares of Common Stock, then and in each such event
provisions shall be made so that the holders of each series of Preferred Stock
shall receive upon conversion of their shares, in addition to the number of
shares of Common Stock receivable upon such conversion, the amount of securities
of the Corporation which they would have received had their shares of such
series been converted into Common Stock on the date of such dividend or
distribution and had they thereafter, during the period from the date of such
event to and including the conversion date, retained such securities receivable
by them as provided above during such period, giving application to all
applicable adjustments called for during such periods under this Section 5 with
respect to the rights of the holders of each series of Preferred Stock.
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<PAGE>
5.9 Adjustment for Recapitalizations, Reclassifications, or Other
-------------------------------------------------------------
Changes to Common Stock. If the Common Stock shall be changed into the same or
- -----------------------
a different number of shares of any class or classes of stock, whether by a
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend provided for above, or a capital
reorganization, merger, consolidation or sale of assets provided for below),
then and in each such event the holders of shares of each series of Preferred
Stock shall have the right thereafter to convert such shares into the kind and
amount of shares of stock and other securities and property receivable upon such
reorganization, reclassification or other change, by holders of the number of
shares of Common Stock into which such shares of such series might have been
converted immediately prior to such reorganization, reclassification or change,
all subject to further adjustment as provided in this Certificate.
5.10 Adjustment for Capital Reorganizations, Mergers, Consolidations,
----------------------------------------------------------------
or Sales of Assets. If at any time or from time to time there shall be a
- ------------------
capital reorganization of the capital stock of the Corporation (other than a
subdivision, combination, stock dividend, recapitalization, reclassification or
other change to Common Stock provided for above in this Section 5), or a merger
or consolidation of the Corporation with or into another corporation, or the
sale of all or substantially all of the Corporation's properties and assets to
any other person, then, as a part of such capital reorganization, merger,
consolidation or sale, provision shall be made so that the holders of each
series of Preferred Stock shall thereafter be entitled to receive upon
conversion of the shares of such series the number of shares of stock or other
securities or property of the Corporation, or of the successor corporation
resulting from such merger, consolidation or sale, to which a holder of Common
Stock deliverable upon conversion would have been entitled on such capital
reorganization, merger, consolidation or sale. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 5
with respect to the rights of the holders of each series of Preferred Stock
after such capital reorganization, merger, consolidation or sale so that the
provisions of this Section 5 (including adjustment of the Conversion Prices then
in effect for each series of Preferred Stock and the number of shares issuable
upon conversion of each series of Preferred Stock) shall be applicable after
that event as nearly equivalent as may be practicable.
5.11 Certificate of Adjustment by Chief Financial Officer. In each
----------------------------------------------------
case of an adjustment or readjustment of the Conversion Price, or the number of
shares of Common Stock or other securities issuable upon conversion, of a series
of Preferred Stock, the Corporation shall cause its Chief Financial Officer to
compute such adjustment or readjustment in accordance with the Corporation's
Articles of Incorporation and prepare a certificate showing such adjustment or
readjustment, and shall mail such certificate, by first class mail, post
prepaid, to each registered holder of shares of such series, at the holder's
address as shown in the Corporation's books. The certificate shall set forth
such adjustment or readjustment, showing in detail the facts upon which such
adjustment or readjustment is based including a statement of (i) the Conversion
Price for such series immediately before and immediately after such adjustment,
and (ii) the number of shares of Common Stock and the type and amount, if any,
of other securities and property which, immediately before and immediately after
such adjustment would be receivable upon conversion of such series.
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<PAGE>
5.12 Notice of Record Date. In the event of any recapitalization,
---------------------
reclassification or other change to the Common Stock, any capital
reorganization, any merger or consolidation of the Corporation, any sale of all
or substantially all of the Corporation's properties and assets to another
person, or any voluntary or involuntary liquidation of the Corporation, the
Corporation shall mail to each holder of shares of Preferred Stock at least
thirty (30) days prior to any record date with respect thereto, a notice
specifying the date on which such recapitalization, reclassification or other
change, capital reorganization, merger, consolidation, or liquidation is
expected to be effective, and the time, if any, that is to be fixed, as to when
the holders of record of Common Stock (or other securities) shall be entitled to
exchange their shares of Common Stock (or other securities) for securities or
other property deliverable upon such recapitalization, reclassification or other
change, capital reorganization, merger, consolidation, or liquidation.
5.13 Fractional Shares. No fractional shares of Common Stock shall
-----------------
be issued upon conversion of shares of Preferred Stock. The number of shares of
Common Stock to which a holder of shares of a series of Preferred Stock is
entitled shall be based on the aggregate number of shares of such series being
converted at any one time. In lieu of any fractional share to which such holder
would otherwise be entitled, the Corporation shall pay cash equal to the product
of such fraction multiplied by the fair market value of one share of the
Corporation's Common Stock on the date of conversion, as determined in good
faith by the Board of Directors and calculated to the nearest whole cent.
5.14 Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Preferred Stock, and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such a number of shares as shall be sufficient for such purpose.
5.15 Notices. Any notice required by the provisions of this Section
-------
5 to be given to a holder of record of shares of a series of Preferred Stock
shall be deemed given two (2) business days after the same has been deposited in
the United States mail, certified mail, return receipt requested (or insured if
mailed to an address outside of the United States), postage and charges prepaid,
and addressed to such holder at his address appearing on the books of the
Corporation, or upon delivery if personally delivered, sent by messenger or
private delivery service.
5.16 Payment of Taxes. The Corporation will pay all taxes and other
----------------
governmental charges (other than taxes based on income) that may be imposed in
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of Preferred Stock to the record holder of such shares.
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<PAGE>
5.17 Retirement of Series A, Series B, Series C, Series D, Series E,
---------------------------------------------------------------
Series F, Series G, Series H, Series I and Series J. Upon conversion of any
- ---------------------------------------------------
shares of Preferred Stock, such shares shall be restored to the status of
undesignated, and authorized but unissued, shares of Preferred Stock.
6. Covenants of the Corporation. In addition to any vote or approval of
----------------------------
the shareholders required by law, so long as at least 200,000 shares of
Preferred Stock are outstanding, the Corporation shall not take any of the
following actions set forth below without obtaining the approval (by vote or
written consent, as provided by law) of the holders of more than 50% of the
outstanding shares of Preferred Stock.
6.1 Amendment or repeal of any provision of, or addition of any
provision to, the Corporation's Articles of Incorporation if such action would
(i) alter or change the rights, preferences, privileges or restrictions granted
to or imposed upon any outstanding series of Preferred Stock, or (ii) reclassify
any shares of capital stock which are subordinate to any outstanding series of
Preferred Stock as to dividends or as to distribution of assets on liquidation,
dissolution or winding up of the Corporation into shares having parity with, or
any preference or priority over, any outstanding series of Preferred Stock as to
dividends or as to distribution of assets on liquidation, dissolution or winding
up of the Corporation.
6.2 Disposition of all or a substantial part of all of the
Corporation's business and assets as an entirety in a single transaction or
series of related transactions not in the ordinary course of business, or
disposition of a controlling interest in any subsidiary corporation which
represents a substantial part of the business and assets of the Corporation (a
"Disposition"), unless the Corporation shall immediately after the Disposition,
have sufficient cash legally available for distri bution to the holders of the
outstanding shares of Series A, Series B, Series C, Series D, Series E, Series
F, Series G, Series H, Series I and Series J at least equal to the full
preferential amounts to which such holders are entitled pursuant to Section 3.1.
6.3 Voluntary liquidation, dissolution or winding up of the
Corporation.
6.4 Creation of any new class or series of shares having preferences
over or being on a parity with any outstanding shares of Preferred Stock as to
dividends or assets, or authorization or issuance of shares of stock of any
class or series or any bonds, debentures, notes or other obligations convertible
into or exchangeable for, or having option rights to purchase, any shares of
stock of this corporation having any preference or priority as to dividends or
assets superior to or on a parity with any such preference or priority of any
outstanding shares of Preferred Stock.
6.5 Acquisition of another business entity, whether by merger or
consolidation, purchase of assets, purchase of stock, or otherwise, if, based
upon the most recent financial infor mation available to the Corporation prior
to the acquisition either:
(i) the net worth of the business to be acquired by the
Corporation (i.e., the fair market value of the assets acquired less the amount
of liabilities assumed by the Corporation
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<PAGE>
in the acquisition or to which the assets acquired are subject) exceeds one
third (1/3rd) of the net worth of the Corporation prior to the acquisition, or
(ii) the amount of liabilities assumed by the Corporation in the
acquisition or to which the assets acquired are subject, other than liabilities
secured by assets acquired by the Corporation which have a market value of at
least 125% of the amount of such liabilities, exceeds one third (1/3rd) of the
net worth of the Corporation prior to the acquisition.
7. Certain Repurchases of Common Shares. Notwithstanding any other
------------------------------------
provision of this Article Five, insofar as the rights, preferences, privileges,
and restrictions granted to or imposed upon the Preferred Stock are concerned,
neither Section 502 nor Section 503 of the California Corporations Code shall
apply in whole or in part with respect to purchases by the Corporation of
outstanding shares of Common Stock in connection with the termination of
employment or other cessation of services to or for the benefit of the
Corporation by a holder of such shares or a predecessor in interest of such a
holder.
ARTICLE VII
The Corporation reserves the right to amend, alter, change, or repeal any
provisions contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right.
ARTICLE VIII
The Corporation is to have perpetual existence.
ARTICLE IX
1. Limitation of Liability. To the fullest extent permitted by the
-----------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, a director of the Corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
2. Indemnification. The corporation may indemnify to the fullest extent
---------------
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person or his or her testator or intestate is or
was a director, officer or employee of the corporation, or any predecessor of
the corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the corporation or any predecessor to the
corporation.
-14-
<PAGE>
3. Amendments. Neither any amendment nor repeal of this Article VIII,
----------
nor the adoption of any provision of the corporation's Certificate of
Incorporation inconsistent with this Article VIII, shall eliminate or reduce the
effect of this Article VIII, in respect of any matter occurring, or any action
or proceeding accruing or arising or that, but for this Article VIII, would
accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
ARTICLE X
In the event any shares of Preferred shall be redeemed or converted
pursuant to the terms hereof, the shares so converted or redeemed shall not
revert to the status of authorized but unissued shares, but instead shall be
canceled and shall not be re-issuable by the corporation.
ARTICLE XI
Holders of stock of any class or series of this corporation shall not be
entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders, unless such cumulative voting is
required pursuant to Sections 2115 and/or 301.5 of the California Corporations
Code, in which event each such holder shall be entitled to as many votes as
shall equal the number of votes which (except for this provision as to
cumulative voting) such holder would be entitled to cast for the election of
directors with respect to his shares of stock multiplied by the number of
directors to be elected by him, and the holder may cast all of such votes for a
single director or may distribute them among the number of directors to be voted
for, or for any two or more of them as such holder may see fit, so long as the
name of the candidate for director shall have been placed in nomination prior to
the voting and the stockholder, or any other holder of the same class or series
of stock, has given notice at the meeting prior to the voting of the intention
to cumulate votes.
ARTICLE XII
1. Number of Directors. The board of directors shall consist of not less
-------------------
than five (5) and not more than nine (9) members.
2. Election of Directors. Elections of directors need not be by written
---------------------
ballot unless a stockholder demands election by written ballot at any
stockholder meeting and before voting begins, or unless the Bylaws of the
corporation shall so provide. Elections of directors shall be in accordance
with Article V, Section 4, of this Certificate of Incorporation.
-15-
<PAGE>
ARTICLE XIII
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the corporation.
ARTICLE XIV
Immediately upon the closing of a public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
covering any of the corporation's securities (as that term is defined under the
Securities Act of 1933, as then in effect), no action shall be taken by the
stockholders of the corporation except at an annual or special meeting of the
stockholders called in accordance with the Bylaws of the corporation and no
action shall be taken by the stockholders by written consent.
ARTICLE XV
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XVI
The name and mailing address of the incorporator is:
Jason M. Brady, Esq.
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
* * *
-16-
<PAGE>
The undersigned incorporator hereby acknowledges that the above
Certificate of Incorporation of Applied Imaging Corp. is his act and deed and
that the facts stated therein are true.
-----------------------------------------
Jason M. Brady
Dated: July 17, 1996
-17-
<PAGE>
EXHIBIT 3.3
[This Restated Certificate of Incorporation Will Be Filed after Closing the
Applied Imaging Corp. Initial Public Offering]
RESTATED CERTIFICATE OF INCORPORATION
OF
APPLIED IMAGING CORP.
The following Restated Certificate of Incorporation of Applied Imaging
Corp. (i) restates the provisions of the Certificate of Incorporation of Applied
Imaging Corp. filed with the Secretary of State of the State of Delaware on June
__, 1996, and (ii) supersedes the original Certificate of Incorporation and all
prior restatements thereof and amendments thereto in their entirety.
ARTICLE I
The name of the corporation is Applied Imaging Corp. (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of shares of stock to be
designated, respectively, Common Stock, $0.001 par value, and Preferred Stock,
$0.001 par value. The total number of shares that the Corporation is authorized
to issue is 25,000,000 shares. The number of shares of Common Stock authorized
is 20,000,000. The number of shares of Preferred Stock authorized is 6,000,000.
The Preferred Stock may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the Board of Directors (authority to do so being hereby expressly vested in the
board). The Board of Directors is further authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
<PAGE>
wholly unissued series of Preferred Stock and to fix the number of shares of any
series of Preferred Stock and the designation of any such series of Preferred
Stock. The Board of Directors, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series, may increase or decrease (but not below the
number of shares in any such series then outstanding) the number of shares of
any series subsequent to the issue of shares of that series.
The authority of the Board of Directors with respect to each such class or
series shall include, without limitation of the foregoing, the right to
determine and fix:
(a) the distinctive designation of such class or series and the number of
shares to constitute such class or series;
(b) the rate at which dividends on the shares of such class or series shall
be declared and paid, or set aside for payment, whether dividends at the rate so
determined shall be cumulative or accruing, and whether the shares of such class
or series shall be entitled to any participating or other dividends in addition
to dividends at the rate so determined, and if so, on what terms;
(c) the right or obligation, if any, of the corporation to redeem shares of
the particular class or series of Preferred Stock and, if redeemable, the price,
terms and manner of such redemption;
(d) the special and relative rights and preferences, if any, and the amount
or amounts per share, which the shares of such class or series of Preferred
Stock shall be entitled to receive upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation;
(e) the terms and conditions, if any, upon which shares of such class or
series shall be convertible into, or exchangeable for, shares of capital stock
of any other class or series, including the price or prices or the rate or rates
of conversion or exchange and the terms of adjustment, if any;
(f) the obligation, if any, of the corporation to retire, redeem or
purchase shares of such class or series pursuant to a sinking fund or fund of a
similar nature or otherwise, and the terms and conditions of such obligation;
(g) voting rights, if any, on the issuance of additional shares of such
class or series or any shares of any other class or series of Preferred Stock;
(h) limitations, if any, on the issuance of additional shares of such class
or series or any shares of any other class or series of Preferred Stock; and
(i) such other preferences, powers, qualifications, special or relative
rights and privileges thereof as the Board of Directors of the corporation,
acting in accordance with this Restated Certificate of Incorporation, may deem
advisable and are not inconsistent with law and the provisions of this Restated
Certificate of Incorporation.
-2-
<PAGE>
ARTICLE V
The Corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right.
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
1. Limitation of Liability. To the fullest extent permitted by the
-----------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, a director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
2. Indemnification. The Corporation may indemnify to the fullest extent
---------------
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person or his or her testator or intestate is or
was a director, officer or employee of the Corporation, or any predecessor of
the Corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the Corporation or any predecessor to the
Corporation.
3. Amendments. Neither any amendment nor repeal of this Article VII, nor
----------
the adoption of any provision of the Corporation's Certificate of Incorporation
inconsistent with this Article VII, shall eliminate or reduce the effect of this
Article VII, in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article VII, would accrue or arise,
prior to such amendment, repeal, or adoption of an inconsistent provision.
ARTICLE VIII
In the event any shares of Preferred Stock shall be redeemed or converted
pursuant to the terms hereof, the shares so converted or redeemed shall not
revert to the status of authorized but unissued shares, but instead shall be
canceled and shall not be re-issuable by the Corporation.
-3-
<PAGE>
ARTICLE IX
Holders of stock of any class or series of this corporation shall not
be entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders, unless such cumulative voting is
required pursuant to Sections 2115 and/or 301.5 of the California Corporations
Code, in which event each such holder shall be entitled to as many votes as
shall equal the number of votes which (except for this provision as to
cumulative voting) such holder would be entitled to cast for the election of
directors with respect to his shares of stock multiplied by the number of
directors to be elected by him, and the holder may cast all of such votes for a
single director or may distribute them among the number of directors to be voted
for, or for any two or more of them as such holder may see fit, so long as the
name of the candidate for director shall have been placed in nomination prior to
the voting and the stockholder, or any other holder of the same class or series
of stock, has given notice at the meeting prior to the voting of the intention
to cumulate votes.
ARTICLE X
1. Number of Directors. The number of directors which constitutes
-------------------
the whole Board of Directors of the corporation shall be designated in the
Bylaws of the corporation. The directors shall be divided into three classes
with the term of office of the first class (Class I) to expire at the annual
meeting of stockholders held in 1997; the term of office of the second class
(Class II) to expire at the annual meeting of stockholders held in 1998; the
term of office of the third class (Class III) to expire at the annual meeting of
stockholders held in 1999; and thereafter for each such term to expire at each
third succeeding annual meeting of stockholders after such election.
2. Election of Directors. Elections of directors need not be by
---------------------
written ballot unless the Bylaws of the corporation shall so provide.
ARTICLE XI
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the corporation.
ARTICLE XII
No action shall be taken by the stockholders of the corporation except
at an annual or special meeting of the stockholders called in accordance with
the Bylaws and no action shall be taken by the stockholders by written consent.
The affirmative vote of sixty-six and two-thirds percent (66 2/3%) of the then
outstanding voting securities of the corporation, voting together as a single
class, shall be required for the amendment, repeal or modification of the
provisions of Article IX, Article X or Article XII of this Restated Certificate
of Incorporation or Sections 2.4, 2.5, 2.10 or 3.2 of the Corporation's Bylaws.
-4-
<PAGE>
ARTICLE XIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
This Restated Certificate of Incorporation has been duly adopted by
the Board of Directors of the Corporation in accordance with the provisions of
Sections 242 and 245 of the General Corporation Law of the State of Delaware, as
amended.
The Restated Certificate of Incorporation only restates and integrates
and does not further amend the provisions of the Corporation's Certificate of
Incorporation, as amended and corrected, and there is no discrepancy between
those provisions and the provisions of this Restated Certificate of
Incorporation.
IN WITNESS WHEREOF, Applied Imaging Corp. has caused this certificate
to be signed by Neil E. Woodruff, its Chief Financial Officer and Secretary,
this _____ day of June, 1996.
---------------------------------------
Neil E. Woodruff,
Chief Financial Officer and Secretary
-5-
<PAGE>
Exhibit 3.5
BYLAWS
OF
APPLIED IMAGING CORP.
(a Delaware corporation)
<PAGE>
BYLAWS OF
APPLIED IMAGING CORP.
(a Delaware corporation)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I - CORPORATE OFFICES............................................... 1
1.1 REGISTERED OFFICE............................................. 1
1.2 OTHER OFFICES................................................. 1
ARTICLE II - MEETINGS OF STOCKHOLDERS....................................... 1
2.1 PLACE OF MEETINGS............................................. 1
2.2 ANNUAL MEETING................................................ 1
2.3 SPECIAL MEETING............................................... 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.............................. 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND
STOCKHOLDER BUSINESS........................................ 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................. 3
2.7 QUORUM........................................................ 4
2.8 ADJOURNED MEETING; NOTICE..................................... 4
2.9 VOTING........................................................ 4
2.10 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING.................... 5
2.11 PROXIES....................................................... 5
2.12 ORGANIZATION.................................................. 6
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE......................... 6
2.14 WAIVER OF NOTICE.............................................. 6
ARTICLE III - DIRECTORS..................................................... 7
3.1 POWERS........................................................ 7
3.2 NUMBER OF DIRECTORS........................................... 7
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS...................... 7
3.4 RESIGNATION AND VACANCIES..................................... 7
3.5 REMOVAL OF DIRECTORS.......................................... 8
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................... 9
3.7 REGULAR MEETINGS.............................................. 9
3.8 SPECIAL MEETINGS; NOTICE...................................... 9
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.9 QUORUM....................................................... 9
3.10 WAIVER OF NOTICE............................................. 10
3.11 ADJOURNMENT.................................................. 10
3.12 NOTICE OF ADJOURNMENT........................................ 10
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............ 10
3.14 FEES AND COMPENSATION OF DIRECTORS........................... 10
3.15 APPROVAL OF LOANS TO OFFICERS................................ 11
ARTICLE IV - COMMITTEES.................................................... 11
4.1 COMMITTEES OF DIRECTORS...................................... 11
4.2 MEETINGS AND ACTION OF COMMITTEES............................ 12
4.3 COMMITTEE MINUTES............................................ 12
ARTICLE V - OFFICERS....................................................... 12
5.1 OFFICERS..................................................... 12
5.2 ELECTION OF OFFICERS......................................... 12
5.3 SUBORDINATE OFFICERS......................................... 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS.......................... 13
5.5 VACANCIES IN OFFICES......................................... 13
5.6 CHAIRMAN OF THE BOARD........................................ 13
5.7 PRESIDENT.................................................... 13
5.8 VICE PRESIDENTS.............................................. 14
5.9 SECRETARY.................................................... 14
5.10 CHIEF FINANCIAL OFFICER...................................... 14
5.11 ASSISTANT SECRETARY.......................................... 15
5.12 ADMINISTRATIVE OFFICERS...................................... 15
5.13 AUTHORITY AND DUTIES OF OFFICERS............................. 15
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
OTHER AGENTS................................................. 16
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.................... 16
6.2 INDEMNIFICATION OF OTHERS.................................... 17
6.3 INSURANCE.................................................... 17
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VII - RECORDS AND REPORTS.......................................... 17
7.1 MAINTENANCE AND INSPECTION OF RECORDS........................ 17
7.2 INSPECTION BY DIRECTORS...................................... 18
7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................. 18
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............... 18
7.5 CERTIFICATION AND INSPECTION OF BYLAWS....................... 18
ARTICLE VIII - GENERAL MATTERS............................................. 18
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND
VOTING..................................................... 18
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.................... 19
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED........... 19
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES............. 19
8.5 SPECIAL DESIGNATION ON CERTIFICATES.......................... 20
8.6 LOST CERTIFICATES............................................ 20
8.7 TRANSFER AGENTS AND REGISTRARS............................... 21
8.8 CONSTRUCTION; DEFINITIONS.................................... 21
ARTICLE IX - AMENDMENTS.................................................... 21
</TABLE>
-iii-
<PAGE>
BYLAWS
------
OF
--
APPLIED IMAGING CORP.
---------------------
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the second
Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected, and
any other proper business may be transacted.
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more stockholders holding shares in the
<PAGE>
aggregate entitled to cast not less than ten percent (10%) of the votes at that
meeting. No other person or persons are permitted to call a special meeting.
If a special meeting is called by any person or persons other than the
board of directors, then the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the president, or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.6 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings of stockholders shall be sent or otherwise given
in accordance with Section 2.6 of these bylaws not less than ten (10) nor more
than sixty (60) days before the date of the meeting. The notice shall specify
the place, date and hour of the meeting and (i) in the case of a special
meeting, the purpose or purposes for which the meeting is called (no business
other than that specified in the notice may be transacted) or (ii) in the case
of the annual meeting, those matters which the board of directors, at the time
of giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder meeting
may be made by the board of directors or proxy committee appointed by the board
of directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business proposed is otherwise proper business
before such meeting. However, any such stockholder may nominate one or more
persons for election as directors at a meeting or propose business to be brought
before a meeting, or both, only if such stockholder has given timely notice in
proper written form of their intent to make such nomination or nominations or to
propose such business. To be timely, such stockholder's notice
-2-
<PAGE>
must be delivered to or mailed and received at the principal executive offices
of the corporation not less than one hundred twenty (120) calendar days in
advance of the date specified in the corporation's proxy statement released to
stockholders in connection with the previous year's annual meeting of
stockholders; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received a reasonable time before the solicitation is made. To be in proper
form, a stockholder's notice to the secretary shall set forth:
(i) the name and address of the stockholder who intends to make the
nominations or propose the business and, as the case may be, of the person
or persons to be nominated or of the business to be proposed;
(ii) a representation that the stockholder is a holder of record of
stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;
(iii) if applicable, a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and
(v) if applicable, the consent of each nominee to serve as director of
the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
-3-
<PAGE>
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
------
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.7 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
2.8 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder and stockholders shall not be entitled to
cumulate their votes in the election of directors or with respect to any matter
submitted to a vote of the stockholders.
-4-
<PAGE>
Notwithstanding the foregoing, if the stockholders of the corporation are
entitled, pursuant to Sections 2115 and 301.5 of the California Corporations
Code, to cumulate their votes in the election of directors, each such
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes that such stockholder normally
is entitled to cast) only if the candidates' names have been properly placed in
nomination (in accordance with these bylaws) prior to commencement of the
voting, and the stockholder requesting cumulative voting has given notice prior
to commencement of the voting of the stockholder's intention to cumulate votes.
If cumulative voting is properly requested, each holder of stock, or of any
class or classes or of a series or series thereof, who elects to cumulate votes
shall be entitled to as many votes as equals the number of votes that (absent
this provision as to cumulative voting) he or she would be entitled to cast for
the election of directors with respect to his or her shares of stock multiplied
by the number of directors to be elected by him, and he or she may cast all of
such votes for a single director or may distribute them among the number to be
voted for, or for any two or more of them, as he or she may see fit.
2.10 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
------------------------------------------
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.
2.11 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
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revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.12 ORGANIZATION
------------
The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one of
the corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The secretary of the corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
secretary at any meeting of the stockholders, the chairman of the meeting may
appoint any person to act as secretary of the meeting.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.14 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
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ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
to any limitations in the certificate of incorporation or these bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the board of
directors.
3.2 NUMBER OF DIRECTORS
-------------------
The board of directors shall not be less than five (5) nor more than
nine(9) members. The exact number of directors shall be eight (8) until
changed, within the limits specified above by a bylaw amending this Section 3.2
duly adopted by the board of directors or the stockholders. The indefinite
number of directors may be changed, or a definite number may be fixed without
provision for an indefinite number, by an amendment to this bylaw, duly adopted
by the board of directors or by the stockholders, or by a duly adopted amendment
to the certificate of incorporation. No reduction of the authorized number of
directors shall have the effect of removing any director before that director's
term of office expires.
Upon the closing of the first sale of the corporation's common stock
pursuant to a firmly underwritten registered public offering (the "IPO"), the
directors shall be divided into three classes, with the term of office of the
first class, which class shall initially consist of three directors, to expire
at the first annual meeting of stockholders held after the IPO; the term of
office of the second class, which class shall initially consist of three
directors, to expire at the second annual meeting of stockholders held after the
IPO; the term of office of the third class, which class shall initially consist
of two directors, to expire at the third annual meeting of stockholders held
after the IPO; and thereafter for each such term to expire at each third
succeeding annual meeting of stockholders held after such election.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
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Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the stockholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office
until the next annual meeting of the stockholders and until a successor has been
elected and qualified.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that, if and so long as stockholders of the corporation are entitled to
cumulative voting, if less than the entire board is to be removed, no director
may be removed without cause if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
board of directors.
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3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time as shall from time to time be determined by the board of directors. If
any regular meeting day shall fall on a legal holiday, then the meeting shall be
held at the same time and place on the next succeeding full business day.
3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone, telecopy or telegram, it shall be
delivered personally or by telephone or to the telegraph company at least forty-
eight (48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director or
to a person at the office of the director who the person giving the notice has
reason to believe will promptly communicate it to the director. The notice need
not specify the purpose or the place of the meeting, if the meeting is to be
held at the principal executive office of the corporation.
3.9 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.12
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and applicable law.
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A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the quorum for that meeting.
3.10 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends the
meeting other than for the express purposed of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. All such waivers shall be filed with the corporate records
or made part of the minutes of the meeting. A waiver of notice need not specify
the purpose of any regular or special meeting of the board of directors.
3.11 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting of the board to another time and place.
3.12 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting of the board
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.9 of these
bylaws, to the directors who were not present at the time of the adjournment.
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board of directors.
3.14 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
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3.15 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the certificate of incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the board
of directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
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4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the following provisions of Article III of these
bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.8
(regular meetings), Section 3.9 (special meetings; notice), Section 3.10
(quorum), Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section
3.13 (notice of adjournment) and Section 3.14 (board action by written consent
without meeting), with such changes in the context of those bylaws as are
necessary to substitute the committee and its members for the board of directors
and its members; provided, however, that the time of regular meetings of
committees may be determined either by resolution of the board of directors or
by resolution of the committee, that special meetings of committees may also be
called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
4.3 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The Corporate Officers of the corporation shall be a president, a
secretary and a chief financial officer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more vice
presidents (however denominated), one or more assistant secretaries, a treasurer
and one or more assistant treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 5.3 of these bylaws. Any
number of offices may be held by the same person.
In addition to the Corporate Officers of the Company described above,
there may also be such Administrative Officers of the corporation as may be
designated and appointed from time to time by the president of the corporation
in accordance with the provisions of Section 5.12 of these bylaws.
5.2 ELECTION OF OFFICERS
--------------------
The Corporate Officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board of directors, subject to the rights,
if any, of an officer under any contract of employment, and shall hold their
respective offices for such terms as the board of directors may from time to
time determine.
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5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to
appoint, such other Corporate Officers as the business of the corporation may
require, each of whom shall hold office for such period, have such power and
authority, and perform such duties as are provided in these bylaws or as the
board of directors may from time to time determine.
The president may from time to time designate and appoint Administrative
Officers of the corporation in accordance with the provisions of Section 5.12 of
these bylaws.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of a Corporate Officer under any contract
of employment, any Corporate Officer may be removed, either with or without
cause, by the board of directors at any regular or special meeting of the board
or, except in case of a Corporate Officer chosen by the board of directors, by
any Corporate Officer upon whom such power of removal may be conferred by the
board of directors.
Any Corporate Officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Corporate
Officer is a party.
Any Administrative Officer designated and appointed by the president may
be removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise such other
powers and perform such other duties as may from time to time be assigned to him
by the board of directors or as may be prescribed by these bylaws. If there is
no president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the
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corporation and shall, subject to the control of the board of directors, have
general supervision, direction and control of the business and the officers of
the corporation. He or she shall preside at all meetings of the stockholders
and, in the absence or nonexistence of a chairman of the board, at all meetings
of the board of directors. He or she shall have the general powers and duties
of management usually vested in the office of president of a corporation, and
shall have such other powers and perform such other duties as may be prescribed
by the board of directors or these bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, and if there is no chairman
of the board, the vice presidents, if any, in order of their rank as fixed by
the board of directors or, if not ranked, a vice president designated by the
board of directors, shall perform all the duties of the president and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the president. The vice presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the board of directors, these bylaws, the president or the
chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of the board of directors,
committees of directors and stockholders. The minutes shall show the time and
place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director for a purpose reasonably related to his
position as a director.
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The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
5.12 ADMINISTRATIVE OFFICERS
-----------------------
In addition to the Corporate Officers of the corporation as provided in
Section 5.1 of these bylaws and such subordinate Corporate Officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be such
Administrative Officers of the corporation as may be designated and appointed
from time to time by the president of the corporation. Administrative Officers
shall perform such duties and have such powers as from time to time may be
determined by the president or the board of directors in order to assist the
Corporate Officers in the furtherance of their duties. In the performance of
such duties and the exercise of such powers, however, such Administrative
Officers shall have limited authority to act on behalf of the corporation as the
board of directors shall establish, including but not limited to limitations on
the dollar amount and on the scope of agreements or commitments that may be made
by such Administrative Officers on behalf of the corporation, which limitations
may not be exceeded by such individuals or altered by the president without
further approval by the board of directors.
5.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing powers, authority and duties, all officers of
the corporation shall respectively have such authority and powers and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the board of directors.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
-------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted
by the General Corporation Law of Delaware as the same now exists or may
hereafter be amended, indemnify any person against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred in connection with any threatened, pending or completed
action, suit, or proceeding in which such person was or is a party or is
threatened to be made a party by reason of the fact that such person is or was a
director or officer of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation shall mean any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees)
incurred by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director of officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
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<PAGE>
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the
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<PAGE>
stockholder. The demand under oath shall be directed to the corporation at its
registered office in Delaware or at its principal place of business.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
--------------------------------------
The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the stockholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not
precede the date upon which the resolution fixing the record date is adopted and
which shall not be more than sixty (60) days before any such action. In that
case, only stockholders of record at the close of business on the date so fixed
are entitled to
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<PAGE>
receive the dividend, distribution or allotment of rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any shares on the
books of the corporation after the record date so fixed, except as otherwise
provided by law.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board of directors adopts the applicable
resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize and empower any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such power and authority may be general or confined to specific
instances. Unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
------------------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and, upon request,
every holder of uncertificated shares, shall be entitled to have a certificate
signed by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of such corporation representing the number of shares registered in certificate
form. Any or all of the signatures on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
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<PAGE>
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
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<PAGE>
8.7 TRANSFER AGENTS AND REGISTRARS
------------------------------
The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, as used in these bylaws, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both an entity and a natural person.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
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<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
APPLIED IMAGING CORP.
ADOPTION BY INCORPORATOR
------------------------
The undersigned person appointed in the Certificate of Incorporation to
act as the Incorporator of Applied Imaging Corp. hereby adopts the foregoing
bylaws, comprising twenty-one (21) pages, as the Bylaws of the corporation.
Effective as of ______________, 1996.
---------------------------------
Jason M. Brady
Incorporator
Certificate by Secretary of Adoption by Incorporator
----------------------------------------------------
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Applied Imaging Corp. and that the foregoing Bylaws,
comprising twenty-one (21) pages, were adopted as the Bylaws of the corporation
effective as of ___________, 1996, by the person appointed in the Certificate of
Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this ____ day of __________ 1996.
--------------------------------
Neil E. Woodruff
Secretary
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<PAGE>
EXHIBIT 10.1
APPLIED IMAGING CORP.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of
_______________, 1996 by and between Applied Imaging Corp., a Delaware
corporation (the "Company"), and ___________________________________,
("Indemnitee").
WHEREAS, effective as of the date hereof, Applied Imaging Corp., a
California corporation, is reincorporating into Delaware;
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;
WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and
WHEREAS, in connection with the Company's reincorporation, the Company and
Indemnitee desire to continue to have in place the additional protection
provided by an indemnification agreement to provide indemnification and
advancement of expenses to the Indemnitee to the maximum extent permitted by
Delaware law;
WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein;
NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.
1. Certain Definitions.
-------------------
(a) "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) or group acting in concert, other than a trustee
<PAGE>
or other fiduciary holding securities under an employee benefit plan of the
Company acting in such capacity or a corporation owned directly or indirectly by
the stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of the Company
representing more than 50% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, (iii) the stockholders of the Company
approve a merger or consolidation of the Company with any other corporation
other than a merger or consolidation which would result in the Voting Securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into Voting Securities of
the surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
related transactions) all or substantially all of the Company's assets.
(b) "Claim" shall mean with respect to a Covered Event: any
threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other.
(c) References to the "Company" shall include, in addition to Applied
Imaging Corp., any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger to which Applied Imaging
Corp. (or any of its wholly owned subsidiaries) is a party which, if its
separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees, agents or fiduciaries, so that if
Indemnitee is or was a director, officer, employee, agent or fiduciary of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee, agent or fiduciary of another
corporation, partnership, joint venture, employee benefit plan, trust or other
enterprise, Indemnitee shall stand in the same position under the provisions of
this Agreement with respect to the resulting or surviving corporation as
Indemnitee would have with respect to such constituent corporation if its
separate existence had continued.
(d) "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other
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<PAGE>
enterprise, or by reason of any action or inaction on the part of Indemnitee
while serving in such capacity.
(e) "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of any Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement.
(f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.
(g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other Indemnitees under similar
indemnity agreements).
(h) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
(i) "Reviewing Party" shall mean, subject to the provisions of Section
2(d), any person or body appointed by the Board of Directors in accordance with
applicable law to review the Company's obligations hereunder and under
applicable law, which may include a member or members of the Company's Board of
Directors, Independent Legal Counsel or any other person or body not a party to
the particular Claim for which Indemnitee is seeking indemnification.
(j) "Section" refers to a section of this Agreement unless otherwise
indicated.
(k) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.
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<PAGE>
2. Indemnification.
---------------
(a) Indemnification of Expenses. Subject to the provisions of Section
---------------------------
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by law if Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, any Claim (whether by reason of or arising in part out of
a Covered Event), including all interest, assessments and other charges paid or
payable in connection with or in respect of such Expenses.
(b) Review of Indemnification Obligations. Notwithstanding the
-------------------------------------
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which Independent Legal Counsel is the Reviewing Party)
that Indemnitee is not entitled to be indemnified hereunder under applicable
law, (i) the Company shall have no further obligation under Section 2(a) to make
any payments to Indemnitee not made prior to such determination by such
Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by
Indemnitee (who hereby agrees to reimburse the Company) for all Expenses
theretofore paid to Indemnitee to which Indemnitee is not entitled hereunder
under applicable law; provided, however, that if Indemnitee has commenced or
-------- -------
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee is entitled to be indemnified hereunder
under applicable law, any determination made by any Reviewing Party that
Indemnitee is not entitled to be indemnified hereunder under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expenses theretofore paid in indemnifying Indemnitee until a
final judicial determination is made with respect thereto (as to which all
rights of appeal therefrom have been exhausted or lapsed). Indemnitee's
obligation to reimburse the Company for any Expenses shall be unsecured and no
interest shall be charged thereon.
(c) Indemnitee Rights on Unfavorable Determination; Binding Effect. If
--------------------------------------------------------------
any Reviewing Party determines that Indemnitee substantively is not entitled to
be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.
(d) Selection of Reviewing Party; Change in Control. If there has not
-----------------------------------------------
been a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's Certificate of Incorporation or Bylaws as
now or hereafter in effect, or under any other applicable law, if desired by
Indemnitee, shall be Independent Legal Counsel selected by
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<PAGE>
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent Indemnitee would be
entitled to be indemnified hereunder under applicable law and the Company agrees
to abide by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto. Notwithstanding any other provision of this Agreement, the
Company shall not be required to pay Expenses of more than one Independent Legal
Counsel in connection with all matters concerning a single Indemnitee, and such
Independent Legal Counsel shall be the Independent Legal Counsel for any or all
other Indemnitees unless (i) the employment of separate counsel by one or more
Indemnitees has been previously authorized by the Company in writing, or (ii) an
Indemnitee shall have provided to the Company a written statement that such
Indemnitee has reasonably concluded that there may be a conflict of interest
between such Indemnitee and the other Indemnitees with respect to the matters
arising under this Agreement.
(e) Mandatory Payment of Expenses. Notwithstanding any other provision
-----------------------------
of this Agreement other than Section 10 hereof, to the extent that Indemnitee
has been successful on the merits or otherwise, including, without limitation,
the dismissal of an action without prejudice, in defense of any Claim,
Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in
connection therewith.
3. Expense Advances.
----------------
(a) Obligation to Make Expense Advances. Upon receipt of a written
-----------------------------------
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
therefore by the Company hereunder under applicable law, the Company shall make
Expense Advances to Indemnitee.
(b) Form of Undertaking. Any obligation to repay any Expense Advances
-------------------
hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured
and no interest shall be charged thereon.
(c) Determination of Reasonable Expense Advances. The parties agree
--------------------------------------------
that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitees'
counsel as being reasonable shall be presumed conclusively to be reasonable.
-5-
<PAGE>
4. Procedures for Indemnification and Expense Advances.
---------------------------------------------------
(a) Timing of Payments. All payments of Expenses (including without
------------------
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by Indemnitee therefor is presented to the
Company, but in no event later than thirty (30) business days after such written
demand by Indemnitee is presented to the Company, except in the case of Expense
Advances, which shall be made no later than ten (10) business days after such
written demand by Indemnitee is presented to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
--------------------------------
precedent to Indemnitee's right to be indemnified or Indemnitee's right to
receive Expense Advances under this Agreement, give the Company notice in
writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in writing to Indemnitee). In addition, Indemnitee
shall give the Company such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement,
--------------------------------
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
---------------
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or applicable
law. In addition, neither the failure of any Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
this Agreement under applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by any Reviewing Party or otherwise as to whether the Indemnitee
is entitled to be indemnified hereunder under applicable law, the burden of
proof shall be on the Company to establish that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company
------------------
of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
-6-
<PAGE>
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
hereunder to provide indemnification for or make any Expense Advances with
respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the delivery to
Indemnitee of written notice of the Company's election to do so. After delivery
of such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees or expenses of separate counsel subsequently retained by
or on behalf of Indemnitee with respect to the same Claim; provided that, (i)
Indemnitee shall have the right to employ Indemnitee's separate counsel in any
such Claim at Indemnitee's expense and (ii) if (A) the employment of separate
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not continue to retain such counsel to defend such
Claim, then the fees and expenses of Indemnitee's separate counsel shall be
Expenses for which Indemnitee may receive indemnification or Expense Advances
hereunder.
5. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. The Company hereby agrees to indemnify the Indemnitee to
-----
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof.
(b) Nonexclusivity. The indemnification and the payment of Expense
--------------
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.
-7-
<PAGE>
6. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.
7. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
9. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.
10. Exceptions. Notwithstanding any other provision of this Agreement,
----------
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify or make Expense
----------------------------
Advances to Indemnitee with respect to Claims arising out of acts, omissions or
transactions for which Indemnitee is prohibited from receiving indemnification
under applicable law.
(b) Claims Initiated by Indemnitee. To indemnify or make Expense
------------------------------
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's Certificate of Incorporation or Bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Board of Directors has approved the initiation or bringing of such
Claim, or (iii) as otherwise required under Section 145 of the Delaware General
Corporation Law, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, Expense Advances, or insurance recovery, as
the case may be.
-8-
<PAGE>
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
------------------
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having jurisdiction
over such action determines as provided in Section 13 that each of the material
defenses asserted by Indemnitee in such action was made in bad faith or was
frivolous.
(d) Claims Under Section 16(b). To indemnify Indemnitee for Expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director, officer, employee, agent or fiduciary (as applicable) of the Company
or of any other enterprise at the Company's request.
13. Expenses Incurred in Action Relating to Enforcement or
------------------------------------------------------
Interpretation. In the event that any action is instituted by Indemnitee under
- --------------
this Agreement or under any liability insurance policies maintained by the
Company to enforce or interpret any of the terms hereof or thereof, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee with
respect to such action (including without limitation attorneys' fees),
regardless of whether Indemnitee is ultimately successful in such action, unless
as a part of such action a court having jurisdiction over such action makes a
final judicial determination (as to which all rights of appeal therefrom have
been exhausted or lapsed) that each of the material assertions made by
Indemnitee as a basis for such action was not made in good faith or was
frivolous; provided, however, that until such final judicial determination is
made, Indemnitee shall be entitled under Section 3 to receive payment of Expense
Advances hereunder with respect to such action. In the event of an action
instituted by or in the name of the Company under this Agreement to enforce or
interpret any of the terms of this Agreement, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee in defense of such action
(including without limitation costs and expenses incurred with respect to
Indemnitee's
-9-
<PAGE>
counterclaims and cross-claims made in such action), unless as a part of such
action a court having jurisdiction over such action makes a final judicial
determination (as to which all rights of appeal therefrom have been exhausted or
lapsed) that each of the material defenses asserted by Indemnitee in such action
was made in bad faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action.
14. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
-------- -------
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
15. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
16. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
17. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
18. Choice of Law. This Agreement, and all rights, remedies, liabilities,
-------------
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and to be performed entirely
in the State of Delaware without regard to principles of conflicts of laws.
-10-
<PAGE>
19. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
20. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed to be or shall constitute a waiver of any other provisions
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver.
21. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
22. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
APPLIED IMAGING CORP.
By: _______________________________ AGREED TO AND ACCEPTED
Print Name: ___________________________ INDEMNITEE:
Title: _______________________________ _______________________________
Address: 1820 Embarcadero Road (signature)
Palo Alto, California 94303
Print Name:____________________
Address:_______________________
-11-
<PAGE>
EXHIBIT 10.5
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This Agreement is made as of July 28, 1995 by and between Applied
Imaging Corp., a California corporation ("Applied Imaging" or the "Company"),
and the purchasers of Series C Preferred Stock, Series D Preferred Stock, Series
F Preferred Stock, Series G Preferred Stock, Series H Preferred Stock, Series I
Preferred Stock and Series J Preferred Stock of the Company pursuant to the
Investment Agreements (as defined below).
WHEREAS, the Company intends to enter into a Series J Preferred Stock
and Warrant Purchase Agreement. In connection with this transaction, the
Company wishes to amend and restate the Registration Rights Agreement dated
August 24, 1993 to include the Common Stock issuable upon conversion of the
Series J Preferred Stock and the Common Stock issuable upon exercise or
conversion of the warrants issued pursuant to the Series J Preferred Stock and
Warrant Purchase Agreement as registrable securities.
NOW, THEREFORE, the parties hereto hereby agree as follows:
a. Definitions. In addition to the terms defined above, the
-----------
following terms shall have the meanings ascribed below for purposes of
this Agreement:
i. "Commission" means the Securities and Exchange Commission or
any other federal agency at the time administering the Securities
Act and the Exchange Act.
ii. "Exchange Act" means the 1934 Act or any similar federal
statute, and the rules of the Commission thereunder, all as the
same shall be in effect at the time.
iii. "Holder" means any holder of record of shares of Registrable
Securities or the securities convertible into Registrable
Securities who is an Investor or an Affiliated Assignee as those
terms are defined under the Series C Preferred Stock Purchase
Agreement dated May 13, 1988, the Series D Preferred Stock
Purchase Agreement dated February 22, 1989, Series F Preferred
Stock Purchase Agreement dated as of September 4, 1990, the
Series G Preferred Stock Purchase Agreement dated as of March 21,
1991, the Series H Preferred Stock and Common Stock Purchase
Agreement dated as of September 4, 1992, the Series I Preferred
Stock Purchase Agreement dated as of August 24, 1993 or the
Series J Preferred Stock and Warrant Purchase Agreement dated
July 28, 1995 (the "Investment Agreements").
<PAGE>
iv. The term "person" includes an individual, a legal entity
such as a corporation, partnership, joint venture, associate, or
joint stock company, a trust, an unincorporated organization, and
a government or political subdivision thereof or other
governmental agency.
v. The terms "register", "registered" and "registration" refer
to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act, and the
declaration or ordering of the effectiveness of such registration
statement.
vi. "Registrable Securities" means (i) the Common Stock of
Applied Imaging, issued or issuable with respect to the Stock or
the Conversion Stock as those terms are defined under the
Investment Agreements, (ii) up to 15,000 shares of Common Stock
issued pursuant to the Series H Preferred Stock and Common Stock
Purchase Agreement dated as of September 4, 1992, (iii) up to
140,000 shares of Common Stock issuable upon exercise of a
warrant issued to Allen & Company Incorporated and (iv) up to
392,156 shares of Common Stock issuable upon exercise or
conversion of warrants issued pursuant to the Series J Preferred
Stock and Warrant Purchase Agreement dated as of July 28, 1995.
vii. "Registration Expenses" means all expenses (except Selling
Expenses as defined below) incurred by Applied Imaging in
complying with Sections 1.2 and 1.3, including without limitation
all registration, qualification and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for
Applied Imaging, Blue Sky fees and expenses, and, the expenses of
any special audits incident to or required by any such
registration (but excluding the compensation of regular employees
of Applied Imaging which shall be paid in any event by Applied
Imaging).
viii. "Securities Act" means the Act or any similar federal
statute, and the rules of the Commission thereunder, all as the
same shall be in effect at the time.
ix. "Selling Expenses" means all underwriting discounts and
selling commissions applicable to the sale of Registrable
Securities and all fees and disbursements of counsel for any
Holder(s).
b. Company Registration.
--------------------
i. Except as provided elsewhere in this Section 1, if, at any
time or from time to time, Applied Imaging shall determine to
register any of its securities for its own account, other than
(i) a registration relating to employee benefit
<PAGE>
plans, or (ii) a registration relating to a Commission Rule 145
transaction, Applied Imaging will:
(1) promptly give notice thereof to each Holder; and
(2) include in such registration (and any related
qualification or other compliance under Blue Sky laws), and
in any underwriting involved therein, except as set forth in
Section 1.2.2 below, all the Registrable Securities held of
record (or issuable upon conversion of securities held of
record) by, and specified in a written notice or notices
from, any Holder or Holders received by Applied Imaging
within thirty (30) days after the date of such written
notice from Applied Imaging.
ii. If the registration of which Applied Imaging gives notice is
for a registered public offering involving an underwriting,
Applied Imaging shall so advise the Holder(s) as a part of the
written notice from Applied Imaging given pursuant to Section
1.2.1(i). In such event the right of any Holder to registration
pursuant to this Section 1.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of
such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with
Applied Imaging and the other Holders distributing their
securities through such underwriting) enter into an underwriting
agreement in customary form with the underwriter or underwriters
selected for such underwriting by Applied Imaging.
Notwithstanding any other provision of this Section 1.2, if the
managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, the
managing underwriter may in its discretion exclude some or all of
the Registrable Securities from such registration and
underwriting; provided, however, that the number of shares of
Registrable Securities to be included in such underwriting shall
not be reduced unless all securities held by other holders are
first entirely excluded from such underwriting. In the event of
any such reduction, Applied Imaging shall so advise all Holders,
and the number of shares of Registrable Securities which may be
included in the registration and underwriting shall be allocated
by Applied Imaging among all of the Holders thereof at the time
of filing the registration statement in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities
held by such Holders at the time of filing the Registration
Statement and no Registrable Securities excluded from the
underwriting by reason of the underwriter's marketing limitation
shall be included in such registration. If any Holder dis
approves of the terms of any such underwriting, it may elect to
withdraw therefrom by notice to Applied Imaging and the managing
underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
<PAGE>
c. Request for Registration. If at any time after the earlier of (i)
------------------------
August 31, 1996 or (ii) the date which is six (6) months from the
closing of Applied Imaging's initial underwritten registered public
offering (pursuant to a registration statement on Form S-1 or any
successor form), Applied Imaging shall receive a written request
(specifying that such request is being made pursuant to this Section
1.3) from the Holders of a majority of the Registrable Securities
("Initiating Holders") that Applied Imaging file a registration
statement under the Securities Act (and any related qualification or
other compliance under Blue Sky laws) covering the registration of
Registrable Securities held of record (or issuable upon conversion of
securities held of record) by such Holders equal to the greater of
(i) fifty percent (50%) or more of the total Registrable Securities
(assuming conversion of all securities convertible into Registrable
Securities), or (ii) an amount of Registrable Securities which would
be valued at $3,500,000 or more based on the expected price to the
public in the offering being registered, then Applied Imaging shall
promptly notify all other Holders of such request and, as soon as
practicable, use its best efforts to effect such registration,
qualification or compliance (including, without limitation,
appropriate qualification under applicable regulations issued under
the Securities Act and any other governmental requirements or
regulations) as may be so requested and as would permit or facilitate
the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders
joining in such request as are specified in a written request
received by Applied Imaging within twenty (20) days after receipt of
such written notice from Applied Imaging; provided, however, that
Applied Imaging shall not be obligated to take any action to effect
any such registration, qualification or compliance pursuant to this
Section 1.3 in any particular jurisdiction in which Applied Imaging
would be required to execute a general consent to service of process
in effecting such registration, qualification or compliance unless
Applied Imaging is already generally subject to service in such
jurisdiction and except as may be required by the Securities Act.
i. Notwithstanding the foregoing, (i) Applied Imaging shall
not be obligated to effect a registration pursuant to this
Section 1.3 during the period starting with the date ninety (90)
days prior to Applied Imaging's estimated date of filing of, and
ending on a date six (6) months following the effective date of,
a registration statement pertaining to an underwritten public
offering of its securities (other than a registration relating
to employee benefit plans or to a Commission Rule 145
transaction), provided that Applied Imaging is actively
employing in good faith all reasonable efforts to cause such
registration statement to become effective and that Applied
Imaging's estimate of the date of filing such registration
statement is made in good faith; and (ii) if Applied Imaging
shall furnish to such Holders a certificate signed by the
President or the Chairman of the Board of Applied Imaging
stating that in the good faith judgment of the Board of
Directors it would be seriously
<PAGE>
detrimental to Applied Imaging or its shareholders for a
registration statement to be filed in the near future, then
Applied Imaging's obligation to use its best efforts to file a
registration statement shall be deferred for a period not to
exceed six (6) months.
ii. Applied Imaging shall be obligated to effect only one
registration pursuant to this Section 1.3.
iii. In the event that a registration requested pursuant to
this Section 1.3 is for a registered public offering involving an
underwriting, Applied Imaging shall so advise the Holders as part
of the notice given pursuant to this Section 1.3. In such event,
the right of any Holder to registration pursuant to this Section
1.3 shall be conditioned upon such Holder's participation in the
underwriting arrangements required by this Section 1.3, and the
inclusion of such Holder's Registrable Securities in the
underwriting to the extent requested shall be limited to the
extent provided herein. Applied Imaging shall (together with all
Holders proposing to distribute their securities through such
underwriting) enter into an underwriting agreement in customary
form with a managing underwriter selected for such underwriting
by a majority in interest of the Initiating Holders, but the
managing underwriter and the underwriting agreement shall be
subject to Applied Imaging's reasonable approval. Notwithstanding
any other provision of this Section 1.3, if the managing
underwriter advises the Initiating Holders and Applied Imaging in
writing that marketing factors require a limitation of the number
of shares to be underwritten, then Applied Imaging shall so
advise all Holders electing to participate in the registration
and underwriting and the number of shares of Registrable
Securities that may be included in the registration and
underwriting shall be allocated among all such Holders by Applied
Imaging in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by such Holders
at the time of filing the registration statement. To the extent
any of such Holders elects not to sell the full number of shares
it is entitled to sell pursuant to the preceding sentence, the
other such Holders' respective rights to participate in the
registration and underwriting shall be increased pro rata by a
corresponding number of shares. No Registrable Securities
excluded from the underwriting by reason of the managing
underwriter's marketing limitation shall be included in such
registration. To facilitate the allocation of shares in
accordance with the above provision, Applied Imaging may round
the number of shares allocated to any Holder to the nearest 100
shares. If any Holder of Registrable Securities disapproves of
the terms of the underwriting, it may elect to withdraw therefrom
by written notice to Applied Imaging, the managing underwriter
and the initiating Holders. In the event that such underwriting
represents the initial under written public offering of Applied
Imaging's securities, any securities excluded or withdrawn from
such under-
<PAGE>
writing shall be withdrawn from such registration and shall not
be transferred in a public distribution prior to four (4) months
after the effective date of such registration statement, or such
other shorter period of time as the managing underwriter may
permit in writing, but, however, subject to any longer period
that may be required pursuant to Section 1.10.
d. Registration on Form S-3.
------------------------
i. If any Holder or Holders holding in the aggregate not less
than 5% of the then outstanding Registrable Securities request
that Applied Imaging file a registration statement on Form S-3
(or any successor form to Form S-3) for a public offering of
shares of the Registrable Securities the reasonably anticipated
aggregate price to the public of which, net of underwriting dis
counts and commissions, would exceed $1,000,000 and Applied
Imaging is a registrant entitled to use Form S-3 to register the
Registrable Securities for such an offering, Applied Imaging
shall use its best efforts to cause such Registrable Securities
to be registered for the offering on such form and to cause such
Registrable Securities to be qualified in such jurisdictions as
the Holder or Holders may reasonably request; provided, however,
that Applied Imaging shall not be required to effect more than
one registration pursuant to this Section 1.4 in any twelve month
period or in excess of two registrations under this Section 1.4.
The substantive provisions of Section 1.3.3 shall be applicable
to each registration initiated under this Section 1.4.
ii. Notwithstanding the foregoing, Applied Imaging shall not be
obligated to take any action pursuant to this Section 1.4: (i)
in any particular jurisdiction in which Applied Imaging would be
required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless
Applied Imaging is already subject to service in such
jurisdiction and except as may be required by the Securities Act;
(ii) if Applied Imaging, within ten (10) days of the receipt of
the request of the initiating Holders, gives notice of its bona
fide intention to effect the filing of a registration statement
with the Commission within ninety (90) days of receipt of such
request (other than with respect to a registration statement
relating to a Rule 145 transaction, an offering solely to
employees or any other registration which is not appropriate for
the registration of Registrable Securities); (iii) during the
period starting with the date sixty (60) days prior to Applied
Imaging's estimated date of filing of, and ending on the date six
(6) months immediately following, the effective date of any
registration statement pertain ing to securities of Applied
Imaging (other than a registration of securities in a Rule 145
transaction or with respect to an employee benefit plan),
provided that Applied Imaging is actively employing in good faith
all reasonable efforts to cause such registration statement to
become effective; or (iv) if Applied Imaging shall furnish to
such
<PAGE>
Holder a certificate signed by the President of Applied Imaging
stating that in the good faith judgment of the Board of Directors
it would be detrimental to Applied Imaging or its shareholders
for registration statements to be filed at such time, then
Applied Imaging's obligation to use its best efforts to file a
registration statement shall be deferred for a period not to
exceed 120 days from the receipt of the request to file such
registration by such Holder.
e. Expenses of Registration.
------------------------
i. All Registration Expenses incurred in connection with any
registration, qualification or compliance pursuant to Section 1.2
above shall be borne by Applied Imaging; and all Selling Expenses
related to securities registered by the Holder(s) shall be borne
by the Holder(s) of such securities pro rata on the basis of the
number of shares so registered; provided, however, that (anything
in this Section 1 to the contrary notwithstanding with respect to
the bearing of expenses) if any jurisdiction in which the
securities shall be qualified shall require that expenses
incurred in connection with the qualification of the securities
in that jurisdiction be borne by selling shareholders, then such
expenses shall be payable by the selling shareholders pro rata,
to the extent required by such jurisdiction.
ii. All Registration Expenses incurred in connection with one
registration pursuant to Section 1.3 shall be paid by Applied
Imaging and all Selling Expenses shall be paid by the Holders pro
rata in accordance with the number of Registrable Securities
included in such registration.
iii. All Registration Expenses incurred in connection with two
registrations pursuant to Section 1.4 shall be paid by Applied
Imaging and all Selling Expenses shall be paid by the Holders pro
rata in accordance with the number of Registrable Securities
included in such registration.
f. Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected pursuant to this Section 1,
Applied Imaging will keep each Holder advised in writing as to the
initiation of each registration, qualification and compliance and as
to the completion thereof. At its expense, Applied Imaging will with
all deliberate speed:
i. Prepare and file with the Commission a registration
statement with respect to the Registrable Securities to be
registered and use its best efforts to cause such registration
statement to become and remain effective for at least ninety (90)
days;
<PAGE>
ii. Furnish to the Holders participating in such registration
and to the underwriters of the Registrable Securities being
registered such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectus and such
other documents as such underwriters may reasonably request in
order to facilitate the public offering of such securities;
iii. Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus
used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such
registration statement.
g. Indemnification.
---------------
i. To the extent permitted by law, Applied Imaging will
indemnify and hold harmless each Holder, each of its officers and
directors and partners and such Holder's legal counsel and
independent accountants, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, and each
underwriter, if any, and each person who controls any underwriter
within the meaning of Section 15 of the Securities Act, against
all expenses, claims, losses, damages and liabilities (or actions
in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, with
respect to registration, qualification or compliance which has
been effected pursuant to this Section 1, (i) arising out of or
based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement,
prospectus, offering circular or other document (including any
related registration statement, notification and the like) or any
amendment or supplement thereto, incident to any such
registration, qualification or compliance, or (ii) based on any
omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made,
not misleading, or (iii) any violation by Applied Imaging of any
rule or regulation promulgated under the Securities Act
applicable to Applied Imaging and relating to action or inaction
required of Applied Imaging in connection with any such
registration, qualification or compliance. Applied Imaging will
reimburse such Holder, each of its officers, directors and
partners and such Holder's legal counsel and independent
accountants, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, each such
underwriter and each such person who controls any such
underwriter within the meaning of Section 15 of the Securities
Act, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such
claim, loss, damage, liability or action; provided that Applied
Imaging will not be liable under this Section 1.7.1 to the
<PAGE>
extent that any such claim, loss, damage, liability or expense
arises out of, or is based on, any untrue statement or omission
or alleged untrue statement or omission made in reliance upon and
in conformity with written information furnished to Applied
Imaging by any such Holder or underwriter.
ii. Notwithstanding any other provision of this Section 1, the
obligation of the Applied Imaging to include the Registrable
Securities of any Holder in any registration, and any related
qualification or compliance, shall be conditioned upon such
Holder entering into an indemnification agreement in customary
form with Applied Imaging and any underwriter(s) for the
securities to be registered, satisfactory to Applied Imaging and
such under writer(s), which shall provide for indemnification by
such Holder, to the extent permitted by law, of Applied Imaging,
each of its directors and officers and its legal counsel and
independent accountants, each underwriter, if any, of Applied
Imaging's securities covered by such a registration statement,
each person who controls Applied Imaging or such underwriter
within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and
partners and such other Holder's legal counsel and independent
accountants, and each person controlling such other Holder within
the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any
such registration statement, prospectus, offering circular and
other document (including any registration statement,
notification and the like), or any omission (or alleged omission)
to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, in each
case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in
conformity with written information furnished to Applied Imaging
by an instrument duly executed by such Holder and stated to be
specifically for use therein. Notwithstanding the foregoing, the
liability of the Holders under this Section 1.7.2 shall be
limited to an amount equal to the gross offering proceeds of the
registration.
iii. Each party entitled to indemnification under Section 1.7.1
(the "Indemnified Party") shall give notice to Applied Imaging
promptly after such Indemnified Party has actual knowledge of any
claim as to which indemnity may be sought, and shall permit
Applied Imaging to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for Applied
Imaging, who shall conduct the defense of such claim or
litigation, shall be approved of by the Indemnified Party (which
approval shall not be
<PAGE>
unreasonably withheld), and the Indemnified Party may participate
in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as
provided herein shall not relieve Applied Imaging of its
obligations under this Section 1. In the defense of any such
claim or litigation, Applied Imaging shall not, except with the
consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation.
h. Information by Holder. The Holder(s) of Registrable Securities
---------------------
included in any registration shall furnish to Applied Imaging such
information regarding such Holder(s) and the distribution proposed by
such Holder(s) as Applied Imaging may reasonably request in writing
and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 1.
i. Termination of Applied Imaging's Obligations. Applied Imaging
--------------------------------------------
shall have no obligation pursuant to Sections 1.2, 1.3 and 1.4 with
respect to any request or requests made by any Holder more than five
(5) years after the effective date of Applied Imaging's first
registered and underwritten public offering of securities for its own
account or for the account of Holders pursuant to Section 1.3.
j. "Lock-Up" Agreement. Until termination of Applied Imaging's
-------------------
obligation as provided under Section 1.9 above, each Holder hereby
agrees that it shall not
(1) during the first six (6) months following the effective
date of the registration statement filed under the
Securities Act covering Applied Imaging's initial
underwritten offering of its securities to the general
public for its own account, nor
(2) following the effective date of any registration statement
filed by Applied Imaging under the Securities Act (including
the one covering its initial underwritten offering of its
securities to the general public for its own account), to
the extent and for the period consented to in writing by
Holders holding a majority of the Registrable Securities
(assuming, for this purpose, conversion of all outstanding
shares of the Stock) held by all Holders, sell, make any
short sale of, loan, grant any option for the purchase of,
or otherwise transfer or dispose of (other than to donees
who agree to be similarly bound) any Applied Imaging
securities, without the prior written consent of Applied
Imaging or the managing underwriter in such offering, as the
case may be. Applied Imaging may place an appropriate
legend on all certificates for Registrable Securities and
the securities convertible into Registrable
<PAGE>
Securities referring to the restrictions on transfer set
forth in this Section 1.
The obligations of the Holders under this Section 1.10 are subject to the
agreement by each officer and director of Applied Imaging that owns stock of
Applied Imaging and each holder of at least one percent (1%) of Applied
Imaging's outstanding voting equity securities to abide by the foregoing
restrictions.
1. Amendment to Prior Agreement. The Registration Rights Agreement dated
----------------------------
August 24, 1993 (the "Prior Agreement") is hereby amended and restated in
its entirety to read as set forth herein. The foregoing amendment shall be
effective upon execution of this Agreement by the Company and the holders
of a majority of the Registrable Securities (as such term is defined in the
Prior Agreement).
2. Miscellaneous.
-------------
a. Waivers and Amendments. With the written consent of Applied
----------------------
Imaging and the Holders of more than 50% of the Registrable
Securities, the obligations of Applied Imaging and the rights of the
Holders under this Agreement may be waived (either generally or in a
particular instance, either retroactively or prospectively and either
for a specified period of time or indefinitely), and with the same
consent Applied Imaging, when authorized by resolution of its Board of
Directors, may enter into a supplementary agreement for the purpose of
adding any provisions to or changing in any manner or eliminating any
of the provisions of this Agreement; provided, however, that no such
waiver or supplemental agreement shall reduce the aforesaid percentage
of Registrable Securities, the Holders of which are required to
consent to any waiver or supplemental agreement without the consent of
the Holders of all of the Registrable Securities. Neither this
Agreement nor any provisions hereof may be changed, waived, discharged
or terminated orally, but only by a signed statement in writing. Any
amendment, waiver or supplementary agreement effected in accordance
with this paragraph shall be binding upon each Holder of any
Registrable Securities then outstanding, each future Holder of all
such Registrable Securities and Applied Imaging.
b. Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be
performed entirely within California.
c. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and
administrators of the parties hereto.
<PAGE>
d. Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties with regard to the
subjects hereof and thereof.
e. Notices. All notices and other communications required or
-------
permitted hereunder shall be in writing and may be delivered in
person, by telecopy, overnight delivery service or U.S. mail, in which
event it may be mailed by first-class, certified or registered,
postage prepaid, addressed (a) if to a Holder, at such address as such
Holder shall have furnished the Company in writing, or, until any such
Holder so furnishes an address to the Company, then to and at the
address of the last holder of such securities who has so furnished an
address to the Company, or (b) if to the Company, at 2340A Walsh
Avenue, Building F, Santa Clara, CA 95051, or at such other address as
the Company shall have furnished to the Holders in writing.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid, or if
sent by telecopier with written confirmation, at the earlier of (i) 24 hours
after confirmation of transmission by the sending telecopier machine or (ii)
delivery of written confirmation.
f. Titles and Subtitles. The titles of the paragraphs and
--------------------
subparagraphs of this Agreement are for convenience of reference only
and are not to be considered in construing this Agreement.
g. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
h. Nominees. Securities registered in the name of a nominee for a
--------
Holder shall, for purposes of this Agreement, be treated as being
owned by such Holder.
The foregoing Amended and Restated Registration Rights Agreement is hereby
executed as of the date first above written.
"COMPANY"
APPLIED IMAGING CORP.
By: /s/ Abraham I. Coriat
------------------------------------
<PAGE>
Abraham I. Coriat,
Chairman and Chief
Executive Officer
<PAGE>
"HOLDERS"
Number and Class/
Name of Holder Series of Shares
- ------------------------------------ ------------------
ALLEN & COMPANY INCORPORATED 77,900 Series I
By:/s/ Eugene Protash
_________________________________
Title: AVP
______________________________
/s/ Bruce Allen
____________________________________ 114,000 Series I
Bruce Allen
____________________________________ 47,600 Series I
Herbert Allen
ALLEN VALUE LIMITED 20,273 Series I
By:/s/ Philip Scaturro
_________________________________
Title:______________________________
ALLEN VALUE PARTNERS, L.P. 169,727 Series I
By:/s/ Philip Scaturro
_________________________________
Title:______________________________
<PAGE>
HERBERT ALLEN, HERBERT A. ALLEN AND 23,800 Series I
SUSAN K. WILSON, TRUSTEES OF HERBERT
ALLEN TRUST U/A DATED 12/1/84
By:/s/ Herbert A. Allen
_________________________________
Title:______________________________
ARABALCO SA 5,982 Series I
By:/s/ Illegible
_________________________________
Title: President
______________________________
/s/ John F. Blakemore, Jr.
____________________________________ 6,112 Series D
John F. Blakemore, Jr.
BROWN UNIVERSITY THIRD CENTURY FUND 110,000 Series I
By:/s/ Robert J. Kolger, Jr.
_________________________________
Title: Treasurer
______________________________
____________________________________ 4,700 Series I
Marvyn Carton
/s/ Mary Cullen
____________________________________ 19,000 Series I
Mary Cullen
/s/ J. Michael Egan
____________________________________ 3,800 Series I
<PAGE>
J. Michael Egan
EGGER & CO. (GT BIOTECHNOLOGY AND 110,063 Series C
HEALTH FUND) 12,500 Series G
By:
---------------------------------
Title:
------------------------------
7,500 Series I
- ------------------------------------
Paul A. Gould
HABER PARTNERS II 4,700 Series I
By:
---------------------------------
Title:
------------------------------
19,102 Series I
- ------------------------------------
George Hayim
INTERBAER NOMINEES LIMITED 66,321 Series I
By:
---------------------------------
Title:
------------------------------
19,000 Series I
- ------------------------------------
Donald R. Keough
<PAGE>
TERRY ALLEN KRAMER & IRWIN H. KRAMER, 19,000 Series I
JOINT TENANTS WITH RIGHT OF SURVIVORSHIP
By:
---------------------------------
Title:
------------------------------
TERRY ALLEN KRAMER TRUST 19,000 Series I
By:
---------------------------------
Title:
------------------------------
/s/ Dan W. Lufkin 38,000 Series I
- ------------------------------------
Dan W. Lufkin
MIDLAND BANK TRUSTEE (JERSEY) LIMITED 77,044 Series C
136,111 Series D
61,764 Series F
43,750 Series G
By: /s/ Illegible /s/ Illegible 88,217 Series H
--------------------------------- 6,667 Series I
5,293 Common
Title: Authorized Signatories
------------------------------
NEW ENTERPRISE ASSOCIATES V, 223,530 Series F
LIMITED PARTNERSHIP 62,500 Series G
82,450 Series H
57,158 Series I
By: NEA Partners V, a Limited 4,947 Common
Partnership, its General
Partner
<PAGE>
By: /s/ Thomas C. McConnell
---------------------------------
General Partner
3,800 Series I
- ------------------------------------
Bradley Allen Roberts
47,600 Series I
- ------------------------------------
Stanley S. Shuman
THE SILVERADO FUND I, 11,765 Series F
LIMITED PARTNERSHIP
By: NEA Silverado Fund I, a Limited
Partnership, its General Partner
By: /s/ C. Richard Kramlich
---------------------------------
General Partner
- ------------------------------------ 14,200 Series I
John Simon
<PAGE>
C.V. SOFINOVA VENTURE PARTNERS II 150,000 Series G
41,525 Series H
28,580 Series I
By: /s/ Alix Mardual, M.D. 2,492 Common
---------------------------------
Title: Vice President
------------------------------
THOMPSON CLIVE INVESTMENTS PLC 22,013A Series C
38,889 Series D
17,647 Series F
By: /s/ Illegible /s/ Illegible 12,500 Series G
---------------------------------
25,205 Series H
Title: Director Director 1,512 Common
------------------------------
THOMPSON CLIVE INVESTMENTS PLC 11,006 Series C
THOMPSON CLIVE & PARTNERS LIMITED 19,445 Series D
8,824 Series F
6,250 Series G
By: /s/ Illegible /s/ Illegible 12,603 Series H
---------------------------------
952 Series I
Title: Director Director 756 Common
------------------------------
THOMPSON CLIVE INVESTMENTS PLC 1,905A Series I
A UK PRIVATE LLC
By: /s/ Illegible /s/ Illegible
---------------------------------
Title: Director Director
------------------------------
____________________________________ 22,158 Series I
Patricia Twohill-Lown
<PAGE>
WILLIAM J. VANDEN HEUVEL SELF-EMPLOYED 4,700 Series I
RETIREMENT PLAN & TRUST
By:
---------------------------------
Title:
------------------------------
WESTPAC SECURITIES (JERSEY) LIMITED 5,982 Series I
By: /s/ Illegible
---------------------------------
Title: Director
------------------------------
23,800 Series I
- ------------------------------------
Susan K. Wilson
/s/ Harold M. Wit 9,500 Series I
- ------------------------------------
Harold M. Wit
WS INVESTMENT COMPANY 90B 4,412 Series F
By: /s/ J. Casey McGlynn
---------------------------------
Title: General Partner
------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:/s/ Herbert Allen
-------------------------------------------
Herbert Allen
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By: /s/ Susan Allen
-------------------------------------------
Susan Allen
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:/s/ Samuel Baker
-------------------------------------------
Samuel Baker
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:/s/ Barry Bergman
-------------------------------------------
Barry Bergman
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By: /s/ John P. Birkelund
-------------------------------------------
John P. Birkelund
Title: Chairman
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By: /s/ Marvyn Carton
-------------------------------------------
Marvyn Carton
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:
-------------------------------------------
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
The Cornerhouse Limited Partnership
- ----------------------------------------------
By: /s/ Illegible
-------------------------------------------
Title: General Partner
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:/s/ Philip DiLeo
-------------------------------------------
Philip DiLeo
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:/s/ Paul A. Gould
-------------------------------------------
Paul A. Gould
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:
-------------------------------------------
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity: Haber Partners II
-------------------------------
- ----------------------------------------------
By:/s/ Warren Haber
-------------------------------------------
Title: General Partner
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:
-------------------------------------------
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity: HAGC PARTNERS
-------------------------------
- ----------------------------------------------
By:/s/ Herbert Allen
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By: /s/ Donald R. Keough
-------------------------------------------
Donald R. Keough
Title: Chairman, DMK International, Inc.
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By: /s/ Dan W. Lufkin
-------------------------------------------
Dan W. Lufkin
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:
-------------------------------------------
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity: MARION FAMILY TRUST
-------------------------------
U/T DTD 12/28/89
- ----------------------------------------------
By: /s/ Andre Marion /s/ Linda Marbury Marion
-------------------------------------------
Title: Trustees
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:/s/ Robert C. Miller
-------------------------------------------
Robert C. Miller
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:
-------------------------------------------
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity: Parquet Legend Inc.
-------------------------------
c/o Thomas P. Harrison, Kassler & Feuer,
- ----------------------------------------------
By: /s/ Illegible
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:
-------------------------------------------
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity: Gary William Ross Trust
-------------------------------
- ----------------------------------------------
By: /s/ Illegible
-------------------------------------------
Title: TRUSTEE
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:/s/ Stanley S. Shuman
-------------------------------------------
Stanley S. Shuman
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:/s/ John Simon
-------------------------------------------
John Simon
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:/s/ C. Fred Toney
-------------------------------------------
C. Fred Toney
Title: Managing Director, Pacific Growth Equitites
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity:
-------------------------------
- ----------------------------------------------
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE>
SERIES J INVESTORS:
If and Individual:
By:/s/ William J. Vanden Heuval
-------------------------------------------
William J. Vanden Heuval
Title:
----------------------------------------
If a Partnership, Trust or other Entity:
Name of Entity: William J. Vanden Heuval
-------------------------------
Retirement Plan
- ----------------------------------------------
By: /s/ William J. Vanden Heuval
-------------------------------------------
Title: Trustee
----------------------------------------
