<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 1996
REGISTRATION NO. 333-06703
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 4
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>
<S> <C> <C>
DELAWARE 3841 77-012490
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</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................. 2,415,000 $8.00 $19,320,000 $5,854.55
==================================================================================================
</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 NOVEMBER 1, 1996
2,100,000 SHARES
[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 $8.00. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Common Stock has been 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 $800,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
315,000 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 is developing a proprietary consumable enrichment kit 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 trade names of other companies.
<PAGE>
PROSPECTUS SUMMARY
This Prospectus contains certain statements of a forward-looking nature re-
lating 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 fac-
tors 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 clini-
cal analysis systems used by laboratories for prenatal and other genetic test-
ing. The Company's cytogenetic instrumentation business, which has sold systems
to approximately 500 sites in more than 30 countries since its inception, in-
cludes 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 instrumentation business, the Company is de-
veloping 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 ex-
tracting, culturing and analyzing fetal cells taken from amniotic fluid or pla-
cental 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 short-
comings associated with existing screening methods. Invasive procedures, which
include amniocentesis (extracting fetal cells from the amniotic sac) and chori-
onic villus sampling (extracting tissues from the placenta), involve direct ex-
traction of fetal cells. These procedures can accurately detect a broad range
of chromosomal disorders but pose a risk of fetal loss of between 0.5-1.0%. 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 disor-
ders and false positive rates of approximately 5%.
The Company's prenatal screening system under development is intended to pro-
vide 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 instru-
mentation 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 sys-
tem is currently in preclinical evaluation and application for FDA approval has
not yet been submitted.
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 di-
rectly analyzed using available DNA probe technology. As of August 1996, the
Company and its collaborators have used the fetal blood cell enrichment proce-
dure 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 clini-
cal evaluation of this system and anticipates beginning a multi-site interna-
tional 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 sys-
tem as a broad-based prenatal screening procedure nor can there be any assur-
ance 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 ap-
proved by the FDA, will include both its proprietary consumable enrichment
kits, used to separate fetal blood cells from maternal blood samples and imag-
ing instrumentation used to analyze the cells. These new image analysis systems
are contemplated to be compatible with the Company's existing installed cytoge-
netic instrument base. The Company believes that it can leverage its existing
infrastructure, worldwide distribution capabilities and extensive laboratory
relationships to support the worldwide introduction of this fetal cell screen-
ing system under development. Furthermore, the Company believes that its new
cell enrichment and image analysis system could have clinical utility for can-
cer applications and the prenatal diagnosis of single gene disorders, and it
intends to pursue the development of these other potential applications. Sig-
nificant 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.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock to be offered by the Company....... 2,100,000 shares
Common Stock to be outstanding after the
Offering(1).................................... 7,214,166 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>
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 $17,464
Working capital......................................... 2,238 17,062
Total assets............................................ 8,089 22,317
Long-term debt.......................................... 223 223
Accumulated deficit..................................... 10,375 10,375
Total stockholders' equity(4)........................... 3,615 18,439
</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) 508,734 shares issuable upon exercise of outstanding warrants
to purchase Common Stock, (iii) 200,000 shares reserved for issuance under
the Company's Employee Stock Purchase Plan (the "Purchase Plan"), (iv)
120,000 shares reserved for issuance under the Company's 1994 Director
Option Plan (the "Director Plan") and (v) an additional 632,113 shares
reserved for issuance under the 1988 Option Plan. See "Management--
Incentive Stock Plans" and "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 2,100,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $8.00 per share and the receipt of the estimated net proceeds therefrom
and repayment of short-term debt. See "Use of Proceeds" and
"Capitalization."
(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 occurred on October 8, 1996,
(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 63,489 shares of Common Stock and (v) no exercise of the
Underwriters' over-allotment option. See "Description of Capital Stock" and
"Underwriting."
4
<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. The Company has not
yet determined how many fetal cells, if any, can be obtained using its
process. 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 1995 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. There can be no
assurance that the modified gel used in the later 1996 studies will not
encounter stability problems 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 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.
5
<PAGE>
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 the
maternal AFP test or the 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 September 30, 1996, the Company has
generated an accumulated deficit of approximately $11.1 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 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
6
<PAGE>
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--Sales, Distribution and Marketing."
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."
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
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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. (a wholly-owned
subsidiary of Genzyme Corp.), 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 the AFP test, the 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 does 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 technical 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 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.
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In September 1996, the Company recognized that some of the Company's
labeling, advertising, marketing and promotional materials and sales and
distribution practices for certain of its products for use in the United
States may not have, in the past, adequately distinguished between clinical
and research use only indications, and may therefore be determined by the FDA
not to have been in compliance with its requirements. The Company believes
these practices first occurred for Genevision in the late 1980's, for Cytoscan
in the late 1980's and early 1990's, and for CytoVision in the mid-1990's. In
October 1996, the Company revised its procedures to ensure that such materials
conspicuously indicate the indications for which the products may be used, as
well as ensuring that its sales and distribution practices and the
documentation of the sale and distribution of its products, comply with FDA
requirements. There can be no assurance, however, that the FDA will not take
or recommend enforcement action against the Company or its products for past,
present or future labeling, advertising, marketing or promotional materials or
sales or distribution practices.
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 component 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. The FDA has stated that
the DNA probe component of the Company's prenatal screening system will
require at least a 510(k) tier III level of review, and in its draft guidance
for in vitro diagnostic devices utilizing cytogenetic in situ hybridization
technology for the detection of genetic mutations, the FDA states that when
such devices are intended for use as a "stand-alone" for test reporting based
on interphase analysis, they will require 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 with a
tier III level of review 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 ("EU") 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.
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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 or 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 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 under another Directive, 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.
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
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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.
Recently Public Law 104-208 was signed by President Clinton into law and
limits the enforcement of patents relating to the performance of surgical or
medical procedures on a body. This law precludes medical practitioners and
health care entities, who practice these procedures, from being sued for
patent infringement. Therefore, depending upon how these limitations are
interpreted by the courts, they could have a material adverse effect on the
Company's ability to enforce any of its proprietary methods or procedures
deemed to be surgical or medical procedures on a body.
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. 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. 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,
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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 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.
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. See "Business--
Manufacturing."
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
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resolved or settled. See "Risk Factors--Uncertainty of FDA or Other Regulatory
Clearances or Approvals," Dependence upon Patents and Proprietary Technology;
Risk of Infringement," "Business--Applied Imaging's Prenatal Screening
System," "--Current Cytogenetic Products," "--Sales, Distribution and
Marketing" and "--Manufacturing."
RELIANCE ON INTERNATIONAL SALES AND OPERATIONS
The Company has significant international operations based in the United
Kingdom employing at June 30, 1996, 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.
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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Sales, Distribution and Marketing," "--Manufacturing"
and "--Facilities."
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
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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.
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. There can be no assurance that any
international reimbursement 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, 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 prenatal 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
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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."
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 70.9% 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 Stockholders."
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 $14.8 million net proceeds from this offering, approximately
$1.1 million, or 7.2%, 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 ADVERSE 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
7,214,166 shares of Common Stock outstanding, of which the 2,100,000 shares
offered hereby will be freely tradeable (unless held by affiliates of the
Company) without restriction. The remaining 5,114,166 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 95% 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 not subject to
lock-up agreements, approximately 263,147 will be freely tradeable (unless
held by affiliates of the Company) without restriction. Upon expiration of the
180-day lock-up agreements, approximately 4,004,138 additional shares of
Common Stock (including approximately 261,686 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."
15
<PAGE>
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 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 $5.45 in the net tangible book
value per share of their Common Stock from the initial public offering price,
assuming an initial public offering price of $8.00 per share. 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."
16
<PAGE>
THE COMPANY
The Company was incorporated in California in July 1986, and reincorporated
in Delaware in October, 1996. Unless the text otherwise requires, references
in this Prospectus to "Applied Imaging" and the "Company" refer to Applied
Imaging Corp., a Delaware corporation, and its California predecessor,
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 $14,824,000 (approximately
$17,167,600 if the Underwriters' over-allotment option is exercised in full)
assuming an initial public offering price of $8.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses.
The Company estimates that approximately $9 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 $4.5 million will be used to
fund research and development related to additional applications of its
prenatal screening technology, an aggregate of $258,000 will be used for
repayment of the Company's bank line of credit bearing interest at 9.75% due
in November 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.
17
<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 2,100,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $8 per share and
the repayment of short-term debt:
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of debt(1)..................... $ 622 $ 622 $ 26
======== ======== ========
Long-term debt less current portion............ 223 223 223
-------- -------- --------
Stockholders' equity:(2)
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, 5,114,166 shares issued and
outstanding, pro forma; 20,000,000 shares
authorized, 7,214,166 shares issued and
outstanding, as adjusted.................... 1 5 7
Additional paid-in capital..................... 15,729 15,729 30,551
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 18,439
-------- -------- --------
Total capitalization..................... $ 3,838 $ 3,838 $ 18,662
======== ======== ========
</TABLE>
- --------
(1) As adjusted current portion of debt also reflects the Company's payment of
$338,000 in bank debt after June 30, 1996.
(2) 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) 508,734
shares issuable upon exercise of outstanding warrants to purchase Common
Stock (iii) 200,000 shares reserved for issuance under the Purchase Plan,
(iv) 120,000 shares reserved for the Company's 1994 Director Plan, and (v)
632,113 shares reserved for issuance under the 1988 Option Plan. See
"Management--Incentive Stock Plans" and "Description of Capital Stock--
Warrants."
18
<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
into 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 2,100,000 shares in this offering at an assumed initial public
offering price of $8.00 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
$18,414,000 or $2.55 per share. This represents an immediate increase of net
tangible book value of $1.85 per share to existing stockholders and an
immediate dilution in net tangible book value of $5.45 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................. $8.00
Pro forma net tangible book value per share before the
offering..................................................... $ .70
Increase attributable to new investors........................ 1.85
-----
Pro forma net tangible book value per share after the offering.. 2.55
-----
Dilution per share to new investors............................. $5.45
=====
</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 $8.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 5,114,166 70.9% $14,900,000 47.0% $2.91
New investors................ 2,100,000 29.1% 16,800,000 53.0% 8.00
--------- ----- ----------- -----
Total...................... 7,214,166 100.0% $31,700,000 100.0%
========= ===== =========== =====
</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, (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 63,489 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."
19
<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
and Preferred Stock.
20
<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 prenatal
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 prenatal 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.
21
<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.
22
<PAGE>
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 cost of revenues
as a percentage of total 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.
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.
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.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues increased approximately 12% to $8.7 million for the nine months
ended September 30, 1996 from $7.8 million for the corresponding period of the
prior year. Cost of revenues increased approximately 12% to $4.4 million for
the nine months ended September 30, 1996 from $4.0 million for the
corresponding period of the prior year, and the Company's net loss increased
approximately 11% to $1.9 million for the nine months ended September 30, 1996
from $1.7 million in the corresponding period of the prior year.
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 $14.8 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
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<PAGE>
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 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,
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 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 November 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
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<PAGE>
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 Revenue 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
instrumentation 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 worldwide
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
26
<PAGE>
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 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,
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<PAGE>
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:
[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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<PAGE>
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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<PAGE>
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
300,000
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 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
30
<PAGE>
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:
APPLIED IMAGING PRENATAL SCREENING SYSTEM
[ART GRAPHIC APPEARS HERE]
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. In
four 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. 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 six of these samples no fetal cells were found, and in
three samples in which fetal cell identification was achieved only one fetal
cell was found.
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 clearance or approval has been
submitted with respect to the fetal cell enrichment system, and there can be
no assurance that FDA clearance or 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"
"--Uncertainty of FDA or Other Regulatory Clearances or Approvals," 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 "Risk Factors--Uncertainty of FDA or Other Regulatory
Clearances or Approvals," and "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
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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.
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 has sold systems to 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
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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 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 Ltd., 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
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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."
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 of the protocols for
the planned clinical trials. In addition, the Company is analyzing different
methods for facilitating image analysis of fetal cell enriched samples. 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 Israel--United States Binational Industrial Research and Development
Foundation 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.
Also in 1996, the Company entered into an agreement to acquire an invention
for the use of certain antibodies in the identification of fetal cells from
maternal blood. The agreement provides for the Company to pay certain expenses
associated with obtaining a U.S. patent for the invention and a royalty of not
more than 2% of net sales. 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.
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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.
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
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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 the maternal AFP test, the 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 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.
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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 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 ordinarily 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
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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.
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 lengthy, 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 technical 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, 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.
In September 1996, the Company recognized that some of the Company's
labeling, advertising, marketing and promotional materials and sales and
distribution practices for certain of its products for use in the United
States may not have, in the past, adequately distinguished between clinical
and research use only indications, and may therefore be determined by the FDA
not to have been in compliance with its requirements. The Company believes
these practices first occurred for Genevision in the late 1980's, for Cytoscan
in the late 1980's and early 1990's, and for CytoVision in the mid-1990's. In
October 1996, the Company revised its procedures to ensure that such materials
conspicuously indicate the applications for which the products can be used, as
well as ensuring that its sales and distribution practices and the
documentation of the sale and distribution of its products, comply with FDA
requirements. There can be no assurance, however, that the FDA will not take
or recommend enforcement action against the Company or its products for past,
present or future labeling, advertising, marketing or promotional materials or
sales or distribution practices.
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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. The FDA has stated that the DNA probe component
of the Company's prenatal screening system will require at least a 510(k) tier
III level of review, and in its draft guidance for in vitro diagnostic devices
utilizing cytogenetic in situ hybridization technology for the detection of
genetic mutations, the FDA states that when such devices are intended for use
as a "stand-alone" for test reporting based on interphase analysis, they will
require 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 with a tier III level of review
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.
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.
40
<PAGE>
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 prenatal 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. This regulation
requires, among other things, that (i) the manufacturing process be regulated,
controlled and documented 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 of 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. On October 7, 1996, the FDA published a
revision of its GMP requirements, incorporating them into a new regulation
called the quality system ("QS") regulation. The QS regulation requires, among
other things, pre-production design controls, purchasing controls, and
maintenance of service records. The QS regulation is effective June 1, 1997,
except that the FDA has stated that as long as manufacturers are taking
reasonable steps to come into compliance with the design control requirements,
the FDA will not initiate action (including enforcement cases) based on a
failure to comply with these requirements before June 1, 1998. Once in effect,
the QS regulation is expected to increase the cost of complying with FDA GMP
and related 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.
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
41
<PAGE>
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 prenatal 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, 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, 38 of the employees were based in the
United Kingdom, 41 in the United States, 4 in Israel, and 2 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.
42
<PAGE>
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 through mid-
1997.
43
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
As of October 15, 1996, 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 50 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
44
<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.
45
<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
46
<PAGE>
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.
BOARD COMPOSITION
The Company currently has authorized eight directors. In accordance with the
terms of the Company's Restated Certificate 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 stockholders to be held in 1997; Class II, whose term will
expire at the annual meeting of stockholders to be held in 1998; and Class
III, whose term will expire at the annual meeting of stockholders 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 stockholders 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 Certificate of Incorporation provides 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
stockholders 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 stockholders, provided such Outside Director is
re-elected. Each option granted under the Director Option Plan will become
exercisable ratably over a four-year period.
47
<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 Operating 1994 92,256 17,298(3) 13,172(10) -- 17,079(11)
Officer Cytogenics Division 1995 102,570 39,450(5)(12) -- -- 16,197(13)
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) 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
$1,539 in insurance premiums paid by the Company on behalf of Mr.
Woodruff.
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<PAGE>
Option Grants in Last Fiscal Year. The following table sets forth each grant
of stock options made during the fiscal year ended December 31, 1995 to each
of the Named Executive Officers:
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED DURING OPTION TERM (4)
OPTIONS FISCAL EXERCISE PRICE EXPIRATION ---------------------
NAME GRANTED (#)(1) 1995 (%) (2) ($/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 0 279,000 0
-- -- 7,500 2,500 46,500 15,500
Neil E. Woodruff........ 40,000 58,800 -- -- -- --
-- 2,500 7,500 15,500 46,500
</TABLE>
- --------
(1) Based on a value of $8.00 per share, the assumed initial public offering
price, minus the per share exercise price, multiplied by the number of
shares underlying the option.
49
<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 non-employee 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 non-employee directors, upon re-
election to the Board of Directors at the first annual meeting of the
stockholders following this offering. Thereafter, each non-employee 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 stockholders, 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.
50
<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 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 1994 and 1995, the Company made
contributions to the 401(k) Plan totalling approximately $38,000 and $51,000,
respectively, and during 1993 the Company contributed $18,000 to a predecessor
plan. 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.
51
<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% stockholders that purchased shares of Series I Preferred
Stock and the number of shares each 5% stockholder 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%
stockholders that purchased shares of Series J Preferred Stock and the number
of shares each 5% stockholder 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.
52
<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 31.2% 22.5%
Holding Inc.(1)................................
711 Fifth Avenue
New York, NY 10022
Entities Affiliated with Thompson Clive
Ventures/Midland Bank Trustee.................. 706,077 13.8% 9.8%
(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
Associates (3)................................. 679,756 13.1% 9.3%
2490 Sand Hill Road
Menlo Park, CA 94025
CV Sofinnova Ventures Partners II (4)........... 283,266 5.5% 3.9%
c/o Alix Marduel, M.D.
Stuart Tower, Suite 2630
San Francisco, CA 94105
Michael S. Elias (2)............................ 706,077 13.8% 9.8%
Robert C. Miller (1)............................ 1,704,972 31.2% 22.5%
Abraham I. Coriat (5)........................... 464,568 9.1% 6.4%
Thomas C. McConnell (3)......................... 679,756 13.1% 9.3%
John F. Blakemore, Jr. (6)...................... 79,262 1.5% 1.1%
Gilbert J.R. McCabe (7)......................... 63,571 1.2% *
G. Kirk Raab.................................... -- * *
Andre Marion (8)................................ 6,269 * *
Leslie G. Grant, Ph.D. (9)...................... 52,500 1.0% *
Neil E. Woodruff (10)........................... 45,000 * *
All executive officers and directors as a group
(11 persons) (1)(2)(3)(5)(6)(7)(8)(9)(10)...... 3,801,975 67.9% 49.4%
</TABLE>
53
<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 & Partners Ltd., and 488,479 shares held by
Midland Bank Trustee (Jersey) Limited (the "Thompson Clive entities).
Midland Bank Trustee (Jersey) Limited acts as the nominee for Thompson
Clive Ventures and Thompson Clive Ventures LP. Therefore, Thompson Clive
Ventures and Thompson Clive Ventures LP are deemed the beneficial owners
of the shares held by Midland Bank Trustee (Jersey) Limited. Mr. Elias
disclaims beneficial ownership of the shares held by the Thompson Clive
entities except to the extent of his proportional 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 10,000 shares within 60 days 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) Includes a warrant to purchase 1,567 shares.
(9) Consists of options to purchase 52,500 shares within 60 days after June
30, 1996.
(10) Includes an option to purchase 2,500 shares within 60 days after June 30,
1996.
54
<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 Certificate 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
Certificate of Incorporation which is 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 5,114,166 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 stockholders. 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 stockholders, 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
stockholders, 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."
55
<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 in
which the person became an "interested
56
<PAGE>
stockholder," unless (i) the transaction is approved by the Board of Directors
prior to the date the interested 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.
57
<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 7,214,166 shares
of Common Stock outstanding, assuming no exercise of options after June 30,
1996. Of these shares, the 2,100,000 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 5,114,166 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 263,147 shares will be eligible
for immediate sale on the date of this Prospectus, (ii) approximately
4,004,138 additional shares (including approximately 261,686 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 95% 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 72,000 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 shares upon exercise of options granted prior to the
effective date of this offering are entitled to sell such shares
58
<PAGE>
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.
59
<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............................................................ 2,100,000
==========
</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 315,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 2,100,000 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 95% 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,
60
<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, 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 option and
purchase plans and the issuance of shares of Common Stock pursuant to the
exercise of outstanding options or warrants.
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 June 30, 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.
61
<PAGE>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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.
KPMG Peat Marwick LLP
San Jose, California
February 26, 1996, except as
to Note 14, which is as of
October 8, 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, 5,114,166
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 63,489 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
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 November 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>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 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 Israel-United States
Binational Industrial Research and Development (BIRD) Foundation. With the
funding received from the grant, the Company began research
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.)
operations in its 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 63,489 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. On October 8,
1996, the reincorporation in the state of Delaware was effected. The
accompanying consolidated financial statements have been retroactively
restated to give effect to the reincorporation.
F-17
<PAGE>
AUTOMATED SOLUTIONS FOR CYTOGENETICS
The Company currently manufactures, markets and sells a family of automated
cytogenetic systems for prenatal and cancer applications.
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.
KARYOTYPE IMAGE
A karyotype produced from a metaphase image.
METAPHASE CHROMOSOMES
Image of chromosomes from a cell in metaphase.
WORLDWIDE CUSTOMER BASE
The Company has sold cytogenetic products to 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 worldwide
distribution channels and that its current customers could add the Company's
prenatal screening system to their existing installations.
<PAGE>
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- -------------------------------------------------------------------------------
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.............................................................. 5
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Dilution.................................................................. 19
Selected Consolidated Financial Information............................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 26
Management................................................................ 44
Certain Transactions...................................................... 52
Principal Stockholders.................................................... 53
Description of Capital Stock.............................................. 55
Shares Eligible for Future Sale........................................... 58
Underwriting.............................................................. 60
Legal Matters............................................................. 61
Experts................................................................... 61
Additional Information.................................................... 61
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,100,000 SHARES
[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............................................ 250,000
Accounting Fees and Expenses....................................... 225,000
Blue Sky Fees and Expenses......................................... 15,000
Transfer Agent and Registrar Fees.................................. 15,000
Miscellaneous...................................................... 110,675
--------
Total............................................................ $800,000
========
</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 for an aggregate purchase price of $95,774.10,
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
for an aggregate purchase price of $4,705,109.59, 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* Certificate of Incorporation of the Registrant.
3.2* Form of Restated Certificate of Incorporation, to be filed after the
closing of the offering made under this Registration Statement.
3.3* Bylaws of the Registrant.
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.
10.20* Security and Loan Agreement dated September 5, 1995 between Registrant
and Imperial Bank.
10.21* Extension to Security and Loan Agreement dated September 16, 1996
between Registrant and Imperial Bank.
10.22* Agreement dated October 3, 1996 between Mitchell S. Golbus and the
Registrant.
11.1* Calculation of pro forma net loss per common share.
21.1* List of Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountants and 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.
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed
+ 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.
II-3
<PAGE>
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 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 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 there which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar volume of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(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 AMENDMENT NO. 4 TO THE 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 1ST DAY OF NOVEMBER, 1996.
Applied Imaging Corp.
By: /s/ Abraham I. Coriat
------------------------------
Abraham I. Coriat
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 4 TO
THE 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 November 1, 1996
_________________________________ and Director (Principal
(Abraham I. Coriat) Executive Officer)
Neil E. Woodruff* Chief Financial Officer November 1, 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)
Thomas C. McConnell* Director November 1, 1996
_________________________________
(Thomas C. McConnell)
Andre F. Marion* Director November 1, 1996
_________________________________
(Andre F. Marion)
Robert C. Miller* Director November 1, 1996
_________________________________
(Robert C. Miller)
G. Kirk Raab* Director November 1, 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>
EXHIBIT
NO. DESCRIPTION
-------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Form of Restated Certificate of Incorporation, to be filed after the
closing of the offering made under this Registration Statement.
3.3* Bylaws of the Registrant.
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>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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.
10.20* Security and Loan Agreement dated September 5, 1995 between Registrant
and Imperial Bank.
10.21* Extension to Security and Loan Agreement dated September 16, 1996
between Registrant and Imperial Bank.
10.22* Agreement dated October 3, 1996 between Mitchell S. Golbus and the
Registrant.
11.1* Calculation of pro forma net loss per common share.
21.1* List of Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountants and 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.
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed
+ Confidential Treatment Requested.
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' AND REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Applied Imaging Corp.:
The audits referred to in our report dated February 26, 1996, except as to
Note 14, which is as of October 8, 1996, included the related financial
statement schedule as of December 31, 1995, and for each of the years in the
three-year period ended December 31, 1995, included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Information" and
"Experts" in the Prospectus.
KPMG Peat Marwick LLP
San Jose, California
November 1, 1996
