<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1996
REGISTRATION NO. 333-06703
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
APPLIED IMAGING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA (PRIOR TO 3841 77-012490
REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DELAWARE (AFTER CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
REINCORPORATION)
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
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
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<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................. 2,875,000 $13.00 $37,375,000 $12,887.94
</TABLE>
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- -------------------------------------------------------------------------------
(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.
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<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 SEPTEMBER 16, 1996
2,500,000 SHARES
[LOGO OF APPLIED IMAGING]
COMMON STOCK
All the shares of Common Stock offered hereby are being sold by Applied
Imaging Corp. ("Applied Imaging" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$11.00 and $13.00. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. Application has
been made to have the Common Stock approved for quotation on the Nasdaq
National Market under the symbol "AICX."
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
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<S> <C> <C> <C>
Per Share..................................... $ $ $
Total (3)..................................... $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $750,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 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....... 2,500,000 shares
Common Stock to be outstanding after the
Offering(1).................................... 7,629,805 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 $29,790
Working capital......................................... 2,238 29,388
Total assets............................................ 8,089 34,643
Long-term debt.......................................... 223 223
Accumulated deficit..................................... 10,375 10,375
Total stockholders' equity(4)........................... 3,615 30,765
</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 2,500,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $12.00 per share and the receipt of the estimated net proceeds therefrom
and repayment of $596,000 of short-term debt. See "Use of Proceeds."
(4) No cash dividends have been declared with respect to the Company's Common
and Preferred Stock.
---------------
Except as set forth in the Consolidated Financial Statements or as otherwise
indicated, all information in this Prospectus assumes (i) the reincorporation
of the Company from California to Delaware which will occur prior to the effec-
tiveness of the Registration Statement of which this Prospectus is a part, (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 79,128
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 June 30, 1996, the Company has
generated an accumulated deficit of approximately $10.4 million. The Company
expects its operating losses to continue to increase as it continues its
efforts to develop and test its prenatal screening system. There can be no
assurance that its prenatal screening system under development will be
commercially marketed or, if commercially marketed, that the Company will ever
receive sufficient revenue to achieve profitability and failure to do so would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
QUARTERLY FLUCTUATIONS
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly operating results. Factors which may
have an influence on the Company's operating results in a particular quarter
include (i) demand for the Company's products, new product introductions by
the Company or its competitors or transitions to new products; (ii) the
results of preclinical or planned clinical trials and, if ever received, the
timing 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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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 revised its procedures to ensure that such materials, as well as
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 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.
Legislation is pending in Congress that may limit the ability of medical
device manufacturers in the future to obtain patents on surgical and medical
procedures. Any limitation or reduction in the patentability of medical and
surgical technology could have a material adverse effect on the Company's
ability to protect its proprietary methods and procedures.
In addition, patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and the
filing of related patent applications. The Company has not conducted an
extensive search of patents issued to other companies, research or academic
institutions, or others, and no assurances can be given that such patents do
not exist, have not been filed, or could not be filed or issued, which contain
claims relating to the Company's technology, products or processes. Patents
issued and patent applications filed in the United States or internationally
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the
future will not receive, patents or obtain additional proprietary rights
relating to products or processes used or proposed to be used by the Company.
There are pending applications, which if issued with claims in their present
form, might provide proprietary rights to third parties relating to products
or processes used or proposed to be used by the Company. The Company may be
required to obtain licenses to patents or proprietary rights of others.
The medical device industry in general, and the industry segment that
includes products for prenatal diagnostic screening in particular, have been
characterized by substantial competition. Litigation regarding patent and
other intellectual property rights, whether with or without merit, could be
time-consuming and expensive to respond to and could divert the Company's
technical and management personnel. The Company may be involved in litigation
to defend against claims of infringement by the Company, to enforce patents
issued to the Company, or to protect trade secrets of the Company. If any
relevant claims of third-party patents are held as infringed and not invalid
in any litigation or administrative proceeding, the Company could be prevented
from practicing the subject matter claimed in such patents, or would be
required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. The Company has
recently received a letter from Vysis Corp. informing the Company that its
products might fall within the claims of a United States patent exclusively
licensed to Vysis Corp. Vysis Corp. offered the Company the right to obtain a
sublicense to such patent. 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 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 67.2% 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 $27.2 million net proceeds from this offering, approximately
$15.7 million, or 58%, will be used for such general corporate purposes. The
Company has no specific plans as to the use of the unallocated proceeds from
this offering. Pending use, the Company plans to invest the net proceeds in
investment-grade, interest-bearing securities. Accordingly, management will
have significant discretion in applying a portion of the net proceeds of this
offering. See "Use of Proceeds."
POTENTIAL IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after this offering could materially
and adversely affect the market price of the Common Stock. Such sales also
might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate. Upon the completion of this offering, the Company will have
7,629,805 shares of Common Stock outstanding, of which the 2,500,000 shares
offered hereby will be freely tradeable (unless held by affiliates of the
Company) without restriction. The remaining 5,129,805 shares will be
restricted securities within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"). The Company's directors, executive officers
and certain of its stockholders, who in the aggregate hold more than 94% of
the shares of Common Stock of the Company outstanding immediately prior to the
completion of this offering, have entered into lock-up agreements under which
they have agreed not to sell, directly or indirectly, any shares owned by them
for a period of 180 days after the date of this Prospectus without the prior
written consent of Montgomery Securities. Montgomery Securities may, in its
sole discretion and at any time without notice, release all or any portion of
the shares subject to such lock-up agreements. Of such shares not subject to
lock-up agreements, approximately 269,196 will be freely tradeable (unless
held by affiliates of the Company) without restriction. Upon expiration of the
180-day lock-up agreements, approximately 4,013,728 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 $10.30 in the net tangible
book value per share of their Common Stock from the initial public offering
price. See "Underwriting" and "Dilution."
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAWS PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws may have the effect of making it more difficult for a third party
to acquire, or discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common
Stock. Certain of these provisions provide for the elimination of the right of
stockholders to act by written consent without a meeting and specify
procedures for director nominations by stockholders and submission of other
proposals for consideration at stockholder meetings. In addition, the
Company's Board of Directors has the authority to issue up to 6,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Certain provisions of Delaware law applicable to the Company could also delay
or make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years unless certain
conditions are met. The inability of stockholders to act by written consent
without a meeting, the procedures required for director nominations and
stockholder proposals and Delaware law could have the effect of delaying,
deferring or preventing a change in control of the Company, including without
limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's Common Stock. These
provisions could also limit the price that investors might be willing to pay
in the future for shares of the Company's Common Stock. See "Description of
Capital Stock--Preferred Stock," "--Certain Provisions of the Restated
Certificate of Incorporation and Bylaws" and "--Certain Provisions of Delaware
Law."
16
<PAGE>
THE COMPANY
The Company was incorporated in California in July 1986, and will be
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 California corporation, and its Delaware
successor, together with their subsidiaries. The Company's principal executive
offices are located at 2380 Walsh Avenue, Building B, Santa Clara, California
95051, and its telephone number at that address is (408) 562-0250.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $27,150,000 (approximately
$31,335,000 if the Underwriters' over-allotment option is exercised in full)
assuming an initial public offering price of $12.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses.
The Company estimates that approximately $10 million of the net proceeds
from this offering will be used for the development and commercialization of
the Company's prenatal screening system, including costs related to clinical
trials and regulatory approvals, approximately $5 million will be used to fund
research and development related to additional applications of its prenatal
screening technology, an aggregate of $596,000 will be used for repayment of
the Company's bank line of credit bearing interest at 9.75% due in November
1996 and the Company's bank note payable bearing interest at 9.50% due in
October 1996, and the remainder will be used for working capital and general
corporate purposes. Although the Company believes the proceeds of this
offering, together with its existing resources will be adequate to satisfy its
capital needs through 1998, the timing and amount of spending of such capital
resources cannot be accurately determined at this time and will depend upon
several factors, including the timing of regulatory approvals or clearances,
progress of its research and development efforts and clinical investigations,
competing technological and market developments, commercialization of products
currently under development, and market acceptance and demand for the
Company's products. The Board of Directors has broad discretion in determining
how the proceeds of this offering will be applied. In the event opportunities
arise, proceeds also may be used to acquire businesses, technologies or
products that complement the business of the Company, although the Company is
not currently in negotiations regarding any such acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Pending such uses, the Company intends to invest the net proceeds in short-
term, interest-bearing investment grade securities.
DIVIDEND POLICY
The Company has not paid any cash dividends since its inception and does not
intend to pay any cash dividends in the foreseeable future. Under the
Company's line of credit agreement, the Company is prohibited from paying cash
dividends without the bank's prior approval.
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 2,500,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $12 per share
and the repayment of $596,000 of short-term debt:
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of debt........................ $ 622 $ 622 $ 26
======== ======== ========
Long-term debt less current portion............ 223 223 223
-------- -------- --------
Stockholders' equity:(1)
Preferred Stock; $0.001 par value; 6,000,000
shares authorized; 3,919,179 shares issued
and outstanding, actual; 6,000,000 shares
authorized, none issued and outstanding, pro
forma and as adjusted....................... 4 -- --
Common Stock; $0.001 par value; 20,000,000
shares authorized; 1,090,660 shares issued
and outstanding, actual; 20,000,000 shares
authorized, 5,129,805 shares issued and
outstanding, pro forma; 20,000,000 shares
authorized, 7,629,805 shares issued and
outstanding, as adjusted.................... 1 5 8
Additional paid-in capital..................... 15,729 15,729 42,876
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 30,765
-------- -------- --------
Total capitalization..................... $ 3,838 $ 3,838 $ 30,988
======== ======== ========
</TABLE>
- --------
(1) Based upon shares outstanding as of June 30, 1996. Excludes (i) 497,250
shares issuable upon exercise of options outstanding at a weighted average
exercise price of $1.95 per share under the 1988 Option Plan, (ii) 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 2,500,000 shares in this offering at an assumed initial public
offering price of $12.00 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
$30,740,000 or $4.03 per share. This represents an immediate increase of net
tangible book value of $3.33 per share to existing stockholders and an
immediate dilution in net tangible book value of $7.97 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................ $12.00
Pro forma net tangible book value per share before the
offering.................................................... $ .70
Increase attributable to new investors....................... 3.33
-----
Pro forma net tangible book value per share after the offering. 4.03
------
Dilution per share to new investors............................ $ 7.97
======
</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 $12.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 5,129,805 67.2% $14,900,000 33.2% $2.90
New investors................ 2,500,000 32.8 30,000,000 66.8% 12.00
--------- ----- ----------- -----
Total...................... 7,629,805 100.0% $44,900,000 100.0%
========= ===== =========== =====
</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 79,128 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.
LIQUIDITY AND CAPITAL RESOURCES
From inception in July 1986 through June 1996, the Company has generated an
accumulated deficit of approximately $10.4 million. The Company has financed
its operations primarily through the private placement of equity securities and
bank loans. From its inception, the Company has raised a total of approximately
$14.9 million in net proceeds from such private equity financings. The
Company's primary uses of cash were to fund working capital requirements, for
capital expenditures and to consummate acquisitions of companies with
complementary products, technology, and marketing and sales organizations.
Net cash used for operating activities was $1.9 million in the six months
ended June 30, 1996 and $593,000, $1.2 million and $1.0 million for 1995, 1994
and 1993, respectively. For the six months ended June 30, 1996, accounts
receivable increased to $2.1 million from $1.5 million at 1995 year end,
reflecting a slight increase in accounts receivable aging, coupled with the
effect of a 15% increase in revenues over the corresponding prior year period.
For the year ended 1995, the Company had an approximate $2.5 million net loss,
which was offset to a large extent by $556,000 in depreciation and amortization
expenses, a $439,000 decrease in trade accounts receivable, a $253,000 decrease
in inventories, and a $497,000 increase in accrued expenses. Despite the 13%
increase in the Company's revenues in 1995, accounts receivable decreased 23%
to $1.5 million at the end of 1995 from $1.9 million at the prior year end.
This decrease was primarily attributable to a significant reduction in accounts
receivable aging due to increased collection efforts. In addition, inventories
decreased 22% to $880,000 at the end of 1995 from $1.1 million at the prior
year end. Significant factors contributing to this inventory decrease include
the consolidation of worldwide manufacturing activities and the introduction of
the CytoVision product family in 1994, both of which substantially reduced
direct material costs. Accrued expenses totaled $1.4 million at the end of
1995, a 70% increase over the $839,000 level at the end of 1994. This increase
was primarily attributable to accrued compensation costs, consisting of bonus
accruals and a significant severance accrual which were paid for the most part,
during the first quarter of 1996. In addition, the Company had customer
deposits totaling $198,000 as of December 31, 1995.
Net cash used for investing activities has been primarily impacted by the
purchases and subsequent sales of short-term investments in U.S. Treasury
instruments with varying maturities. Such purchases have resulted from
investment of private placement proceeds in excess of short-term cash
requirements. In the six months ended June 30, 1996, net cash provided by
investing activities was $720,000, which consisted of the $972,000 maturity
23
<PAGE>
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
consisting of a term note and revolving credit line, of which approximately
$596,000 was outstanding as of June 30, 1996. Under the line of credit
agreement, the Company cannot pay cash dividends without the bank's prior
approval. The term note, which matures in October 1996 and is subject to
monthly payments of principal and interest, bears interest at the bank's prime
rate plus 1.25% (9.50% at June 30, 1996). The line of credit bears interest at
the bank's prime rate plus 1.5% (9.75% at June 30, 1996). The credit line
expires by its current terms in 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 Company. If adequate funds are not available, the Company
could be required to delay development or commercialization of certain of its
products, to license to third parties the rights to commercialize certain
products or technologies that the Company would otherwise seek to
commercialize itself, or to reduce the marketing, customer support or other
resources devoted to certain of its products.
The Internal Revenues Code of 1986 and the California Conformity Act of 1987
substantially restrict the ability of a corporation to utilize existing net
operating losses carryforwards and credits in the event of an "ownership
change." The several issuances of preferred stock have resulted in multiple
ownership changes since
24
<PAGE>
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,
27
<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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<PAGE>
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.
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
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is not larger than that necessary to recover the costs of manufacture,
research, development and handling. An IDE supplement must be submitted to,
and approved by, the FDA (or the FDA does not notify the sponsor 30 days after
receipt of the supplement that the change may not be implemented) before a
sponsor or an investigator may make a change to the investigational plan that
may affect its scientific soundness or the rights, safety or welfare of human
subjects. The FDA has the authority to re-evaluate, alter, suspend or
terminate clinical testing based on its assessment of data collected
throughout the trials.
The PMA must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling and promotional labeling. Upon submission of a PMA, the FDA
makes a threshold determination regarding whether the application is
sufficiently complete to permit filing for a substantive review. If the FDA
determines that the PMA application is sufficiently complete to permit such
review, the FDA will accept the application for filing. Once the submission is
accepted for filing, the FDA begins an in-depth review of the PMA. An FDA
review of a PMA generally takes one to two years from the date the PMA is
accepted for filing, but may take significantly longer if the FDA requests
additional information and any major amendments to the PMA are filed. The
review time is often significantly extended by the FDA's asking for more
information or clarification of information already provided in the
submission. During the review period, an advisory committee, typically a panel
of clinicians, will likely be convened to review and evaluate the application
and provide recommendations to the FDA regarding whether the PMA should be
approved. The FDA is not bound by the recommendations of the advisory panel.
Toward the end of the PMA review process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that the facilities are
in compliance with the applicable GMP requirements.
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.
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 revised its procedures to ensure that such materials, as well as
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.
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Delays in receipt of clearances or approvals to market its products, failure
to receive these clearances or approvals, the loss of previously received
clearances or approvals or the determination that 510(k) clearance, pre-market
approval or other approval is required for a product being marketed without
such clearance or approval could have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition, the Company's current products and the fetal cell screening
system under development could be affected by the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA"), which are intended to ensure the
quality and reliability of medical testing in the United States regardless of
where tests are performed. CLIA or regulations thereunder could negatively
affect the Company's ability to market its products.
The Company is also required to register as a medical device manufacturer
with the FDA and state agencies, such as the California Department of Health
Services ("CDHS") and to list its products semi-annually. Marketed devices are
subject to pervasive and continuing regulatory oversight by the FDA and other
agencies, including record-keeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and certain
state agencies and are subject to periodic inspections by the FDA and CDHS.
The Federal Food, Drug and Cosmetic Act requires that medical devices be
manufactured in accordance with the FDA's GMP regulation. 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. The FDA has proposed changes to the GMP
regulation that would, among other things, subject manufacturers of components
to GMP requirements in certain circumstances, and require pre-production
design controls and maintenance of service records. If finalized these changes
would likely increase the cost of complying with GMP requirements. Other
applicable requirements include the FDA's medical device (manufacturer)
reporting regulation, which requires that the device manufacturer provide
information to the FDA on deaths or serious injuries alleged to have been
associated with the use of its marketed devices, as well as product
malfunctions that would likely cause or contribute to a death or serious
injury if the malfunction were to recur.
Labeling, advertising and promotional activities for investigational and
marketed devices are subject to scrutiny by the FDA and, in certain instances,
by the Federal Trade Commission. The FDA enforces statutory prohibitions
against promoting or marketing products for unapproved uses.
The Company is also subject to other federal, state, local and foreign laws,
regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, including but not limited to the
requirements of the CLIA. The extent of government regulation that might
result from any future legislation or administrative action cannot be
accurately predicted. Failure to comply with any federal or state regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
THIRD-PARTY REIMBURSEMENT AND HEALTH CARE REFORM
In the United States, the Company's products are purchased primarily by
medical institutions which then bill various Third-Party Payors, such as
Medicaid, other government programs and private insurance plans, for the
health care services provided to their patients. Third-Party Payors may deny
reimbursement if they determine that the device used in a treatment was
unnecessary, inappropriate, experimental or investigational, used for a non-
approved indication, or not cost-effective and typically do not reimburse for
devices used for research and investigational purposes. Accordingly,
physicians must determine that the clinical benefits of genetic screening
41
<PAGE>
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, 39 of the employees were based in the
United Kingdom, 41 in the United States, 4 in Israel, and 1 in France. A total
of 12 employees hold Ph.Ds, and 2 employees are M.D.s. The Company's employees
include trained cytogeneticists to specify, support and sell its product
range. The Company believes that its relationship with its employees is good.
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
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Executive Officers and
Directors
Abraham I. Coriat (1) 48 Chief Executive Officer and Chairman of the
Board of Directors
Michael W. Burgett, Ph.D. 51 President, Genetic Diagnostics Division
Leslie G. Grant, Ph.D. 43 President and Chief Operating Officer,
Cytogenetics Division
Neil E. Woodruff 49 Chief Financial Officer and Secretary
John F. Blakemore, Jr. 56
(1)(2) Director
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 1994 92,256 17,298(3) 13,172(10) -- 17,079(11)
Operating
Officer Cytogenics Divi- 1995 102,570 39,450(5)(12) -- -- 16,197(13)
sion
Neil E. Woodruff......... 1994 92,524 23,200(3)(14) -- -- 4,133(15)
Chief Financial Officer 1995 98,000 15,000(5) -- 10,000(16) 4,465(17)
and Secretary
</TABLE>
- --------
(1) Consists of bonuses earned during the year ended December 31, 1993 but
paid in the year ended December 31, 1994.
(2) Consists of amounts contributed to the Company's retirement plan.
(3) Consists of bonuses earned during the year ended December 31, 1994 but
paid in the year ended December 31, 1995.
(4) Consists of $4,000 contributed to the Company's retirement plan and
$3,950 in insurance premiums paid by the Company on behalf of Mr. Coriat.
(5) Consists of bonuses earned during the year ended December 31, 1995 and
paid in the year ending December 31, 1996.
(6) Consists of $4,392 contributed to the Company's retirement plan and
$3,981 in insurance premiums paid by the Company on behalf of Mr. Coriat.
(7) Consists of a mortgage interest reimbursement paid by the Company to Dr.
Grant.
(8) One-fourth (1/4) of the shares subject to the option became exercisable
on each of October 1, 1993, October 1, 1994 and October 1, 1995. The
remaining one-fourth ( 1/4) of the shares subject to the option shall be
exercisable on October 1, 1996, based upon Dr. Grant's continued
relationship with the Company.
(9) Consists of $9,387 contributed to a private pension scheme, $5,468 paid
by the Company for operating expenses of a car leased by the Company and
used by Dr. Grant and $1,496 in insurance premiums paid by the Company on
behalf of Dr. Grant.
(10) Consists of a mortgage reimbursement paid by the Company to Dr. Grant.
(11) Consists of $9,687 contributed to a private pension scheme, $5,784 paid
by the Company for operating expenses of a car leased by the Company and
used by Dr. Grant and $1,608 in insurance premiums paid by the Company on
behalf of Dr. Grant.
(12) Consists of bonus earned during the year ended December 31, 1994 but paid
in the year ended December 31, 1995. Does not include the Board's
currently outstanding offer to pay a bonus to Dr. Grant equal to $81,000
solely for the purpose of exercising his stock option to purchase 45,000
shares of Common Stock at $1.80.
(13) Consists of $9,941 contributed to a private pension scheme, $4,500 paid
by the Company for operating expenses of a car leased by the Company and
used by Dr. Grant and $1,756 in insurance premiums paid by the Company on
behalf of Dr. Grant.
(14) Consists of bonus earned during the year ended December 31, 1994 but paid
in the year ended December 31, 1995. Consists of $10,000 paid in cash and
$13,200 as payment of the exercise price on certain options granted to
Mr. Woodruff.
(15) Consists of $2,658 contributed to the Company's retirement plan and
$1,475 in insurance premiums paid by the Company on behalf of Mr.
Woodruff.
(16) One-fourth (1/4) of the shares subject to the option became exercisable
on October 24, 1995. One-fourth of the shares subject to the option shall
become exercisable at the end of each full year following October 24,
1995 until all such shares have become exercisable, based upon Mr.
Woodruff's continued relationship with the Company.
(17) Consists of $2,926 contributed to the Company's retirement plan and
$1,539 in insurance premiums paid by the Company on behalf of Mr.
Woodruff.
48
<PAGE>
Option Grants in Last Fiscal Year. The following table sets forth each grant
of stock options made during the fiscal year ended December 31, 1995 to each
of the Named Executive Officers:
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (4)
------------------------------------------------------- ---------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED DURING
OPTIONS FISCAL EXERCISE PRICE EXPIRATION
NAME GRANTED (#)(1) 1995 (%) (2) ($/SH) (3) DATE 5% ($) 10% ($)
---- -------------- -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Abraham I. Coriat....... -- --% $ -- -- $ -- $ --
Leslie G. Grant, Ph.D... -- -- -- -- -- --
Neil E. Woodruff........ 10,000 15.0 1.80 4/27/05 11,320 28,687
</TABLE>
- --------
(1) Options were granted under the Company's Amended and Restated 1988
Incentive Stock Option Plan and generally vest over four years from the
date of commencement of employment.
(2) Based on an aggregate of 66,500 options granted by the Company in the year
ended December 31, 1995 to employees of and consultants to the Company,
including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that
the fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values. The
following table sets forth the information with respect to stock option
exercises during the year ended December 31, 1995 by each of the Named
Executive Officers, and the number and value of securities underlying
unexercised options held by the Named Executive Officers at December 31, 1995:
AGGREGATE OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1995 AND
OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE DECEMBER 31, 1995 (#) DECEMBER 31, 1995 ($) (1)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Abraham I. Coriat....... -- -- -- --
Leslie G. Grant, Ph.D... -- -- 45,000 0 459,000 0
-- -- 7,500 2,500 76,500 25,500
Neil E. Woodruff........ 40,000 58,800 -- -- -- --
-- 2,500 7,500 25,500 76,500
</TABLE>
- --------
(1) Based on a value of $12.00 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, and who has
been so employed for at least three consecutive months on or before the
commencement date of an offering period is eligible to participate in the
Purchase Plan. No shares have been purchased under the Purchase Plan to date.
EMPLOYEE RETIREMENT PLANS
United States. In January 1994, the Company implemented a Retirement Savings
and Investment Plan that is intended to qualify under Section 401(k) of the
Code (the "401(k) Plan") covering all of the Company's United States based
employees who have completed three months of service and have attained age 21.
An employee may elect to defer, in the form of contributions to the 401(k)
Plan on his or her behalf, up to 15% of the total compensation that would
otherwise be paid to the employee, not to exceed the amount allowed by
applicable Internal Revenue Service guidelines. The Company will match 100% of
amounts deferred by the employee participants up to 3% of such employee's
total compensation and such matching amounts vest over a three year period
from the initial participation date. During 1993, 1994 and 1995, the Company
made contributions to the 401(k) Plan totalling approximately $18,000, $38,000
and $51,000, respectively. Contributions by employees or by the Company to the
401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan. Contributions by the Company
are deductible by the Company when made.
United Kingdom. The Company's United Kingdom based employees are covered by
retirement savings plans (the "International Retirement Plans"). Under such
plans, an employee may elect to make contributions of 3.5% of such employee's
earnings. Amounts contributed by the Company range from 5.5% to 10.5% of such
employee's earnings. During 1993, 1994 and 1995, the Company paid or accrued
contributions to the International Retirement Plans totaling $83,000, $60,000
and $43,000, respectively. Contributions by employees or by the Company to the
International Retirement Plans, and income earned on plan contributions, are
not taxable to employees until withdrawn from such plans. Contributions by the
Company are deductible by the Company when made.
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 31.1% 21.4%
Holding Inc.(1)................................
711 Fifth Avenue
New York, NY 10022
Entities Affiliated with Thompson Clive 706,077 13.8% 9.3%
Ventures/Midland Bank Trustee..................
(Jersey) Ltd. (2)
c/o Midland Bank International Finance
Corporation Limited
P.O. Box 26
28-34 Hill Street.
St. Helier, Jersey, Channel Islands
Entities Affiliated with New Enterprise 679,756 13.1% 8.8%
Associates (3).................................
2490 Sand Hill Road
Menlo Park, CA 94025
CV Sofinnova Ventures Partners II (4)........... 283,266 5.5% 3.7%
c/o Alix Marduel, M.D.
Stuart Tower, Suite 2630
San Francisco, CA 94105
Michael S. Elias (2)............................ 706,077 13.8% 9.3%
Robert C. Miller (1)............................ 1,704,972 31.1% 21.4%
Abraham I. Coriat (5)........................... 464,568 9.1% 6.1%
Thomas C. McConnell (3)......................... 679,756 13.1% 8.8%
John F. Blakemore, Jr. (6)...................... 79,262 1.5% 1.0%
Gilbert J.R. McCabe (7)......................... 63,571 1.2% *
G. Kirk Raab.................................... -- * *
Andre Marion.................................... 6,269 * *
Leslie G. Grant, Ph.D. (8)...................... 52,500 1.0% *
Neil E. Woodruff (9)............................ 45,000 * *
All executive officers and directors as a group
(11 persons) (1)(2)(3)(5)(6)(7)(8)(9).......... 3,801,975 67.8% 46.9%
</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, Inc. (collectively, the "Thompson Clive
Entities") and 488,479 shares held by Midland Bank Trustee (Jersey)
Limited. Because Midland Bank Trustee (Jersey) Limited acts as the
nominee for the Thompson Clive Entities, the Thompson Clive Entities are
deemed the beneficial owners of the shares held by Midland Bank Trustee
(Jersey) Limited. Michael S. Elias, a director of the Company and a
holder of 2,750 shares, is an affiliate of the Thompson Clive Entities
and disclaims beneficial ownership of the shares held by the Thompson
Clive Entities and Midland Bank Trustee (Jersey) Limited except to the
extent of his proportionate ownership interest therein.
(3) Consists of 609,214 shares and warrants to purchase 58,777 shares held by
New Enterprise V, Limited Partnership and 11,765 shares held by The
Silverado Fund I, Limited Partnership. Thomas C. McConnell, a director of
the Company, is a general partner of New Enterprise Associates V, Limited
Partnership and The Silverado Fund I, Limited Partnership, and disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate ownership interest therein.
(4) Includes a warrant to purchase 11,755 shares.
(5) Consists of 414,732 shares held as community property by Abraham I.
Coriat and Shira Shamssian and an aggregate of 49,836 shares held by
Abraham I. Coriat and Shira Shamssian as Custodian for each of Salomon
Israel Coriat and Yael Israel Coriat.
(6) Includes an option to purchase 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) Consists of options to purchase 52,500 shares within 60 days after June
30, 1996.
(9) 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 5,129,805 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
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 7,629,805 shares
of Common Stock outstanding, assuming no exercise of options after June 30,
1996. Of these shares, the 2,500,000 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 5,129,805 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 269,196 shares will be eligible
for immediate sale on the date of this Prospectus, (ii) approximately
4,013,728 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 94% of the shares of Common Stock of the Company
outstanding immediately prior to the completion of this offering, have entered
into lock-up agreements under which they have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, or
agree to dispose of, directly or indirectly, any shares of Common Stock or
options to acquire shares of Common Stock owned by them for a period of 180
days after the date of this Prospectus, without the prior written consent of
Montgomery Securities. Montgomery Securities may, in its sole discretion, and
at any time without notice, release all or any portion of the shares subject
to such lock-up agreements. The Company has entered into a similar agreement,
except that the Company may grant options and issue stock under its current
stock option and stock purchase plans and pursuant to other currently
outstanding options.
As of June 30, 1996, 497,250 shares were subject to outstanding options. All
of these shares are subject to the lock-up agreements described above. In
addition, 3,596,940 of the shares outstanding immediately following the
completion of this offering and up to 508,734 shares of Common Stock subject
to outstanding warrants, if exercised before the expiration of the warrants,
will be entitled to registration rights with respect to such shares upon the
release of lock-up agreements. The number of shares sold in the public market
could increase if such rights are exercised.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
two years (including the holding period of any prior owner, except an
affiliate) is entitled to sell in "broker's transactions" or to market makers,
within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of (i) one
percent of the number of shares of Common Stock then outstanding
(approximately 76,000 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............................................................ 2,500,000
==========
</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 375,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 2,500,000 shares to be
purchased by the Underwriters. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.
The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may
be required to make in respect thereof.
The holders of more than 94% of the shares of the Company's Common Stock
outstanding immediately prior to the completion of this offering, including
all of the Company's directors and executive officers, have agreed that, for a
period of 180 days after the date of the final Prospectus relating to this
offering, they will not, without the prior written consent of Montgomery
Securities, directly or indirectly sell, offer to sell or otherwise dispose of
any such shares of Common Stock or any right to acquire such shares. The
Company has agreed that,
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>
Form of report of Independent Certified Public Accountants ........... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June
30, 1996 (unaudited), and pro forma June 30, 1996 (unaudited)........ F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994, and 1995, and for the six months ended June 30, 1995 and
1996 (unaudited)..................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994, and 1995, and for the six months ended June
30, 1996 (unaudited)................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994, and 1995, and for the six months ended June 30, 1995 and
1996 (unaudited)..................................................... F-6
Notes to Consolidated Financial Statements............................ F-7
</TABLE>
F-1
<PAGE>
FORM OF REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
When the reincorporation referred to in Note 14 of Notes to Consolidated
Financial Statements has been consummated, we will be in a position to render
the following report.
KPMG Peat Marwick LLP
The Board of Directors
Applied Imaging Corp.:
We have audited the accompanying consolidated balance sheets of Applied
Imaging Corp. and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Applied
Imaging Corp. and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
San Jose, California
February 26, 1996, except as
to Note 14, which is as of
July 15, 1996
F-2
<PAGE>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
------------------------ ------------------------
1994 1995 ACTUAL PRO FORMA
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents. $ 2,503,000 $ 2,159,000 $ 1,211,000 $ 1,211,000
Short-term investments.... -- 2,997,000 2,025,000 2,025,000
Trade accounts receivable
(less allowance for
doubtful accounts of
$122,000, $166,000, and
$210,000 as of December
31, 1994 and 1995 and
June 30, 1996,
respectively)............ 1,940,000 1,501,000 2,071,000 2,071,000
Inventories............... 1,133,000 880,000 749,000 749,000
Prepaid expenses and other
current assets........... 430,000 140,000 433,000 433,000
----------- ----------- ----------- -----------
Total current assets.... 6,006,000 7,677,000 6,489,000 6,489,000
Property and equipment..... 995,000 1,319,000 1,271,000 1,271,000
Other assets............... 440,000 377,000 329,000 329,000
----------- ----------- ----------- -----------
$ 7,441,000 $ 9,373,000 $ 8,089,000 $ 8,089,000
=========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
---------------------
Current liabilities:
Current portion of bank
debt..................... $ 710,000 $ 471,000 $ 622,000 $ 622,000
Accounts payable.......... 1,450,000 1,141,000 924,000 924,000
Accrued expenses.......... 839,000 1,430,000 1,416,000 1,416,000
Deferred revenue.......... 1,295,000 1,386,000 1,289,000 1,289,000
----------- ----------- ----------- -----------
Total current
liabilities............ 4,294,000 4,428,000 4,251,000 4,251,000
----------- ----------- ----------- -----------
Bank debt, less current
portion.................... 336,000 231,000 223,000 223,000
----------- ----------- ----------- -----------
Stockholders' equity:
Preferred stock; $0.001
par value; 6,000,000
shares authorized;
2,812,962, 3,919,179 and
3,919,179 shares issued
and outstanding, as of
December 31, 1994 and
1995 and June 30, 1996,
respectively, actual;
6,000,000 shares
authorized, none issued
and outstanding, pro
forma. Aggregate
liquidation preference of
$11,065,000, $15,766,000,
and, $15,766,000 as of
December 31, 1994 and
1995, and June 30, 1996,
respectively............. 3,000 4,000 4,000 --
Common stock; $0.001 par
value; 20,000,000 shares
authorized; 973,510,
1,067,785 and 1,090,660
shares issued and
outstanding as of
December 31, 1994 and
1995 and June 30, 1996,
respectively, actual;
20,000,000 shares
authorized, 5,129,805
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 79,128 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>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers:
United States........... $ 3,159,000 $ 3,639,000 $ 4,254,000 $ 2,006,000 $ 2,525,000
United Kingdom.......... 5,522,000 5,932,000 6,544,000 3,209,000 3,470,000
------------ ----------- ----------- ----------- -----------
$ 8,681,000 $ 9,571,000 $10,798,000 $ 5,215,000 $ 5,995,000
============ =========== =========== =========== ===========
Operating income (loss):
United States........... $ (478,000) $(2,069,000) $(2,548,000) $(1,223,000) $(1,278,000)
United Kingdom.......... (1,334,000) (953,000) (69,000) 116,000 28,000
------------ ----------- ----------- ----------- -----------
$ (1,812,000) $(3,022,000) $(2,617,000) $(1,107,000) $(1,250,000)
============ =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- JUNE 30,
1993 1994 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total assets:
United States...................... $6,335,000 $3,977,000 $6,473,000 $4,585,000
United Kingdom..................... 3,331,000 3,464,000 2,755,000 3,151,000
Israel............................. -- -- 145,000 353,000
---------- ---------- ---------- ----------
Total............................ $9,666,000 $7,441,000 $9,373,000 $8,089,000
========== ========== ========== ==========
Net assets:
United States...................... $4,494,000 $1,321,000 $4,183,000 $2,422,000
United Kingdom..................... 1,319,000 1,490,000 491,000 953,000
Israel............................. -- -- 40,000 240,000
---------- ---------- ---------- ----------
Total............................ $5,813,000 $2,811,000 $4,714,000 $3,615,000
========== ========== ========== ==========
</TABLE>
Substantially all of the U.K. sales are denominated in British pounds. The
Company generally does not enter into any arrangements to hedge the effect of
foreign currency changes on its foreign currency denominated assets and
liabilities.
(12) RESEARCH AND DEVELOPMENT ARRANGEMENT
During 1995, the Company was awarded a grant by the 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 79,128 shares of common stock is expected prior to the
effectiveness of the Company's public offering. The effect of the preferred
stock conversion and the warrant exercise has been reflected in the
accompanying pro forma consolidated balance sheet as of June 30, 1996.
(14) SUBSEQUENT EVENTS
Reincorporation
On July 15, 1996, the Board approved the Company's reincorporation in the
state of Delaware prior to the IPO, providing for 20,000,000 authorized shares
of common stock with a $.001 par value per share and for 6,000,000 authorized
shares of preferred stock with a $.001 par value per share. The accompanying
consolidated financial statements have been retroactively restated to give
effect to the reincorporation.
F-17
<PAGE>
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.
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TABLE OF CONTENTS
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<TABLE>
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Page
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<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.
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2,500,000 SHARES
[LOGO OF APPLIED IMAGING]
COMMON STOCK
---------------
PROSPECTUS
---------------
MONTGOMERY SECURITIES
DILLON, READ & CO. INC.
VECTOR SECURITIES INTERNATIONAL, INC.
, 1996
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable
by the Company in connection with the sale of Common Stock being registered.
All amounts are estimates except the SEC registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 14,593
NASD Filing Fee.................................................... 4,732
Nasdaq National Market Listing Fee................................. 40,508
Printing Fees and Expenses......................................... 150,000
Legal Fees and Expenses............................................ 225,000
Accounting Fees and Expenses....................................... 200,000
Blue Sky Fees and Expenses......................................... 15,000
Transfer Agent and Registrar Fees.................................. 15,000
Miscellaneous...................................................... 110,675
--------
Total............................................................ $750,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and other corporate agents in the terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1993. as amended (the "Act"). The Registrant's Restated
Certificate of Incorporation to be filed upon the closing of the offering to
which this Registration Statement relates (Exhibit 3.3 hereto) and the
Registrant's Bylaws (Exhibit 3.4 hereto) provides for indemnification of the
Registrant's directors, officers, employees and other agents to the extent and
under the circumstances permitted by the Delaware General Corporation Law. The
Registrant also intends to enter into agreements with its directors and
executive officers that will require the Registrant among other things to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors to the fullest extent not prohibited by
Delaware law.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant, its directors and officers, and by the Registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Act, and affords certain rights of contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 1993, the Registrant has issued and sold the following
unregistered securities:
(1) From June 1993 to June 1996, the Registrant issued and sold 151,487
shares of Common Stock to a total of 32 employees in reliance upon Rule 701
promulgated under the Securities Act of 1933, as amended (the "Act") at
purchase prices ranging from $0.15 per share to $1.80 per share upon the
exercise of stock options 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* Restated Articles of Incorporation, as amended as of July 19, 1995.
3.2* Form of Certificate of Incorporation, to be filed prior to the
effective date of the Registration Statement under which the
offering is being made.
3.3* Form of Restated Certificate of Incorporation, to be filed after the
closing of the offering made under this Registration Statement.
3.4* Bylaws, as amended.
3.5* Form of Bylaws of the Registrant, to be effective upon consummation
of the Registrant's reincorporation into Delaware.
4.1 Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement for directors and officers.
10.2* Amended and Restated 1988 Incentive Stock Option Plan and form of
agreement thereunder.
10.3* 1994 Director Option Plan and form of subsequent agreement
thereunder.
10.4* Employee Stock Purchase Plan.
10.5* Amended and Restated Registration Rights Agreements.
10.6* License Agreement dated December 1, 1993 between the Registrant and
Chronomed, Inc.
10.7* Assignment dated December 1, 1993 by and between the Registrant and
Alex Saunders, M.D.
10.8* Lease dated February 15, 1994 for the Registrant's headquarters in
Santa Clara, CA.
10.9(a)* Lease for Site No. BT.2003/1A, Hylton Park, Sunderland, England,
between English Industrial Estates Corporation and Applied Imaging
International Ltd., dated June 12, 1992.
10.9(b)* Lease for Site No. BT.2003/3A, Hylton Park, Sunderland, England,
between English Industrial Estates Corporation and Applied Imaging
International Ltd., dated June 12, 1992.
10.9(c)* Underlease for Site No. BT.2003/1A between Applied Imaging
International Ltd. and RTC North Limited, dated February 14, 1996.
10.9(d)* Supplement to Underlease for Site No. BT.2003/1A between Applied
Imaging International Ltd. and RTC North Limited, dated February 14,
1996.
10.10* Lease Agreement dated October 31, 1995 between Asaf Harofe Hospital
and Applied Imaging Ltd. for Registrant's Israeli entity in Tzripin,
Israel.
10.11* Employment Letter Agreement dated August 12, 1991 between the
Registrant and Leslie G. Grant.
10.12* Amendment to Employment Letter Agreement between the Registrant and
Leslie G. Grant, dated February 12, 1996.
</TABLE>
II-2
<PAGE>
<TABLE>
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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.
11.1* Calculation of pro forma net loss per common share.
21.1* List of Subsidiaries of the Registrant.
23.1* Consent and Form of Independent Certified Public Accountants Report on
Financial Statement Schedule
23.2 Consent of Counsel (included in Exhibit 5.1).
23.3* Consent of Special Patent Counsel
24.1* Power of Attorney (see page II-4).
27.1* Financial Data Schedule
</TABLE>
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*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. 2 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 16TH DAY OF SEPTEMBER, 1996.
Applied Imaging Corp.
/s/ Abraham I. Coriat
By: _________________________________
Abraham I. Coriat
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 2 TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Abraham I. Coriat Chief Executive Officer
_________________________________ and Director (Principal September 16,
(Abraham I. Coriat) Executive Officer) 1996
/s/ Neil E. Woodruff Chief Financial Officer
_________________________________ (Principal Financial and September 16,
(Neil E. Woodruff) Accounting Officer) 1996
Director , 1996
_________________________________
(John F. Blakemore, Jr.)
Director , 1996
_________________________________
(Michael S. Elias)
Director , 1996
_________________________________
(Gilbert J.R. McCabe)
/s/ Thomas C. McConnell* Director
_________________________________ September 16,
(Thomas C. McConnell) 1996
/s/ Andre F. Marion* Director
_________________________________ September 16,
(Andre F. Marion) 1996
/s/ Robert C. Miller* Director
_________________________________ September 16,
(Robert C. Miller) 1996
/s/ G. Kirk Raab* Director
_________________________________ September 16,
(G. Kirk Raab) 1996
/s/ Abraham I. Coriat
*By: ____________________________
(Abraham I. Coriat)
(Attorney-in-Fact)
II-5
<PAGE>
SCHEDULE II
APPLIED IMAGING CORP.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO
BALANCE AT COST AND BALANCE AT
DESCRIPTION BEGINNING OF YEAR EXPENSES DEDUCTIONS END OF YEAR
----------- ----------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Trade accounts Receivable
Year Ended December 31,
1993.................... $ 48 $94 $47 $ 95
==== === === ====
Year Ended December 31,
1994.................... $ 95 $66 $39 $122
==== === === ====
Year Ended December 31,
1995.................... $122 $93 $49 $166
==== === === ====
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
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<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1* Restated Articles of Incorporation, as amended as of
July 19, 1995.
3.2* Form of Certificate of Incorporation, to be filed
prior to the effective date of the Registration
Statement under which the offering is being made.
3.3* Form of Restated Certificate of Incorporation, to be
filed after the closing of the offering made under
this Registration Statement.
3.4* Bylaws, as amended.
3.5* Form of Bylaws of the Registrant, to be effective upon
consummation of the Registrant's reincorporation into
Delaware.
4.1 Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
10.1* Form of Indemnification Agreement for directors and
officers.
10.2* Amended and Restated 1988 Incentive Stock Option Plan
and form of agreement thereunder.
10.3* 1994 Director Option Plan and form of subsequent
agreement thereunder.
10.4* Employee Stock Purchase Plan.
10.5* Amended and Restated Registration Rights Agreements.
10.6* License Agreement dated December 1, 1993 between the
Registrant and Chronomed, Inc.
10.7* Assignment dated December 1, 1993 by and between the
Registrant and Alex Saunders, M.D.
10.8* Lease dated February 15, 1994 for the Registrant's
headquarters in Santa Clara, CA.
10.9(a)* Lease for Site No. BT.2003/1A, Hylton Park,
Sunderland, England, between English Industrial
Estates Corporation and Applied Imaging International
Ltd., dated June 12, 1992.
10.9(b)* Lease for Site No. BT.2003/3A, Hylton Park,
Sunderland, England, between English Industrial
Estates Corporation and Applied Imaging International
Ltd., dated June 12, 1992.
10.9(c)* Underlease for Site No. BT.2003/1A between Applied
Imaging International Ltd. and RTC North Limited,
dated February 14, 1996.
10.9(d)* Supplement to Underlease for Site No. BT.2003/1A
between Applied Imaging International Ltd. and RTC
North Limited, dated February 14, 1996.
10.10* Lease Agreement dated October 31, 1995 between Asaf
Harofe Hospital and Applied Imaging Ltd. for
Registrant's Israeli entity in Tzripin, Israel.
10.11* Employment Letter Agreement dated August 12, 1991
between the Registrant and Leslie G. Grant.
10.12* Amendment to Employment Letter Agreement between the
Registrant and Leslie G. Grant, dated February 12,
1996.
10.13* Employment Letter Agreement dated January 12, 1996
between the Registrant and Michael W. Burgett, Ph.D.,
and supplement thereto, dated January 20, 1996.
10.14*+ Know-How License Agreement dated November 1989 between
Medical Research Council and Shandon Scientific
Limited (assigned to the Registrant in November
1989), as amended, July 5, 1994.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.15* Cooperative Research and Development Agreement, dated
June 10, 1995 between Registrant and the National
Institute of Health.
10.16*+ Supply & Distribution Agreement dated March 3, 1994
between Cytocell Ltd. and Registrant.
10.17*+ Research Purchase Agreement dated March 26, 1996
between Pharmacia Biotech AB and Registrant.
10.18*+ Development Agreement dated February 5, 1996 between EM
Industries and Registrant.
10.19 Cooperation and Project Funding Agreement dated July
16, 1995 between the Israel-United States Binational
Industrial Research and Development Foundation, the
Registrant and Applied Imaging Ltd.
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.
11.1* Calculation of pro forma net loss per common share.
21.1* List of Subsidiaries of the Registrant.
23.1* Consent and Form of Independent Certified Public
Accountants Report on Financial Statement Schedule
23.2 Consent of Counsel (included in Exhibit 5.1).
23.3* Consent of Special Patent Counsel
24.1* Power of Attorney (see page II-4).
27.1* Financial Data Schedule
</TABLE>
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*Previously filed
+Confidential Treatment Requested.
2
<PAGE>
==========================
DRAFT SEPTEMBER 13, 1996
==========================
2,875,000 Shares
APPLIED IMAGING CORP.
Common Stock
UNDERWRITING AGREEMENT
October __, 1996
MONTGOMERY SECURITIES
DILLON, READ & CO., INC.
VECTOR SECURITIES INTERNATIONAL, INC.
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. Introductory. Applied Imaging Corp., a Delaware corporation
------------
(the "Company"), proposes to issue and sell 2,500,000 shares of its authorized
but unissued Common Stock, par value $0.001 per share (the "Common Stock") to
the several underwriters named in Schedule A annexed hereto (the
"Underwriters"), for whom you are acting as Representatives. Said aggregate of
2,500,000 shares are herein called the "Firm Common Shares." In addition, the
Company proposes to grant to the Underwriters an option to purchase up to
375,000 additional shares of Common Stock (the "Optional Common Shares"), as
provided in Section 4 hereof. The Firm Common Shares and, to the extent such
option is exercised, the Optional Common Shares are hereinafter collectively
referred to as the "Common Shares." The Company is successor by merger to
Applied Imaging Corp., a California corporation (the "Predecessor"), as a result
of a reincorporation transaction that became effective on __________, 1996 (the
"Reincorporation").
You have advised the Company that the Underwriters propose to make a public
offering of their respective portions of the Common Shares on the effective date
of the registration statement hereinafter referred to, or as soon thereafter as
in your judgment is advisable.
The Company hereby confirms its agreement with respect to the purchase of
the Common Shares by the Underwriters as follows:
<PAGE>
SECTION 2. Representations and Warranties of the Company. The Company
---------------------------------------------
hereby represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-06703) with
respect to the Common Shares has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The Company has prepared and has filed or proposes to file prior to
the effective date of such registration statement an amendment or amendments to
such registration statement, which amendment or amendments have been or will be
similarly prepared. There have been delivered to you two signed copies of such
registration statement and amendments, together with two copies of each exhibit
filed therewith. Conformed copies of such registration statement and amendments
(but without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested for each of
the Underwriters. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a further
amendment thereto, including the form of final prospectus, or (ii) a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations
or (iii) a term sheet (the "Term Sheet") as described in and in accordance with
Rules 434 and 424(b) of the Rules and Regulations. As filed, the final
prospectus, if one is used, or the Term Sheet and Preliminary Prospectus, if a
final prospectus is not used, shall include all Rule 430A Information and,
except to the extent that you shall agree in writing to a modification, shall be
in all substantive respects in the form furnished to you prior to the date and
time that this Agreement was executed and delivered by the parties hereto, or,
to the extent not completed at such date and time, shall contain only such
specific additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company shall have previously advised you
in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean such
registration statement at the time such registration statement becomes effective
and, in the event any post-effective amendment thereto becomes effective prior
to the First Closing Date (as hereinafter defined), shall also mean such
registration statement as so amended; provided, however, that such term shall
also include (i) all Rule 430A Information (as hereinafter defined) deemed to be
included in such registration statement at the time such registration statement
becomes effective as provided by Rule 430A of the Rules and Regulations and (ii)
any registration statement filed pursuant to 462(b) of the Rules and Regulations
relating to the Common Shares. The term "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in the preceding paragraph and any
preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus" as
used in this Agreement shall mean either (i) the prospectus relating to the
Common Shares in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations or, (ii) if a Term Sheet is
not used and if no filing pursuant to Rule 424(b) of the Rules and Regulations
is required, shall mean the form of final prospectus included in the
Registration Statement at the time such registration statement becomes effective
or (iii) if a Term Sheet is used, the Term Sheet in the form in which it is
first filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations together with
2
<PAGE>
the Preliminary Prospectus included in the Registration Statement at the time it
becomes effective. The term "Rule 430A Information" means information with
respect to the Common Shares and the offering thereof permitted to be omitted
from the Registration Statement when it becomes effective pursuant to Rule 430A
of the Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the Rules
and Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement becomes
effective, and at all times subsequent thereto up to and including each Closing
Date hereinafter mentioned, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, will contain all material statements and
information required to be included therein by the Act and the Rules and
Regulations and will in all material respects conform to the requirements of the
Act and the Rules and Regulations, and neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this subsection
2(b) shall be applicable to information contained in or omitted from any
Preliminary Prospectus, the Registration Statement, the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter,
directly or through the Representatives, specifically for use in the preparation
thereof.
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed in
Exhibit 21.1 to the Registration Statement and immediately prior to the
Reincorporation the Predecessor had no subsidiaries other than the Company and
the subsidiaries listed in Exhibit 21.1 to the Registration Statement. The
Company and each of its subsidiaries have been duly incorporated and are validly
existing as corporations in good standing under the laws of their respective
jurisdictions of incorporation, with full power and authority (corporate and
other) to own and lease their properties and conduct their respective businesses
as described in the Prospectus; the Company owns all of the outstanding capital
stock of its subsidiaries free and clear of all claims, liens, charges and
encumbrances; the Company and each of its subsidiaries are in possession of and
operating in compliance with all authorizations, licenses, permits, consents,
certificates and orders required to the conduct of the business of the Company
and its subsidiaries taken as a whole, all of which are valid and in full force
and effect, except where the failure of any such authorization, license, permit,
consent, certificate or order to be valid or in full force would not in any
single case or in the aggregate have a material adverse effect upon the Company;
the Company and each of its subsidiaries are duly qualified to do business and
in good standing as foreign corporations in each jurisdiction in which the
ownership or leasing of properties or the conduct of their respective businesses
requires such qualification, except for jurisdictions in which the failure to so
qualify would not have a material adverse effect upon the Company and its
subsidiaries taken as a whole; and no proceeding has been instituted in any such
jurisdiction,
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revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification. The execution and delivery of the
Agreement and Plan of Merger dated as of [August ____, 1996] (the "Merger
Agreement") between the Company and the Predecessor, effecting the
reincorporation of the Predecessor under the laws of the State of Delaware, was
duly authorized by all necessary corporate action on the part of each of the
Company and the Predecessor. Each of the Company and the Predecessor had all
corporate power and authority to execute and deliver the Merger Agreement, to
file the Merger Agreement with the Secretary of State of California and the
Secretary of State of Delaware and to consummate the reincorporation
contemplated by the Merger Agreement, and the Merger Agreement at the time of
execution and filing constituted a valid and binding obligation of each of the
Company and the Predecessor, enforceable in accordance with its terms.
(d) The Company has authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus; the issued and
outstanding shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable, upon notice of official issuance shall be duly
listed on the Nasdaq National Market, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities,
and conform to the description thereof contained in the Prospectus. Immediately
prior to the Reincorporation, all of the issued and outstanding shares of
capital stock of the Predecessor had been duly authorized and validly issued and
are or were, as applicable, fully paid and nonassessable. All issued and
outstanding shares of capital stock of each subsidiary of the Company have been
duly authorized and validly issued and are fully paid and nonassessable. Except
as disclosed in or contemplated by the Prospectus or the financial statements of
the Company, and the related notes thereto, included in the Prospectus, neither
the Company nor any subsidiary has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations, except for options granted subsequent to
the date of the information provided in the Prospectus pursuant to the Company's
stock option plans, which options shall not exceed ______ options to purchase
______ shares of the Company's stock. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth in
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or purchase
exist with respect to the issuance and sale of the Common Shares by the Company
pursuant to this Agreement. No shareholder of the Company or the Predecessor
has any right which has not been waived to require the Company to register the
sale of any shares owned by such shareholder under the Act in the public
offering contemplated by this Agreement. No further approval or authority of
the shareholders or the Board of Directors of the Company
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will be required for the issuance and sale of the Common Shares to be sold by
the Company as contemplated herein.
(f) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company in accordance with its
terms. The making and performance of this Agreement by the Company and the
consummation of the transactions herein contemplated will not violate any
provisions of the certificate of incorporation or bylaws, or other
organizational documents, of the Company, any of its subsidiaries or the
Predecessor, and will not conflict with, result in the breach or violation of,
or constitute, either by itself or upon notice or the passage of time or both, a
material default under any material agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the Company,
any of its subsidiaries or the Predecessor is a party or by which the Company,
any of its subsidiaries or the Predecessor or any of its respective properties
may be bound or affected, any statute or any authorization, judgment, decree,
order, rule or regulation of any court or any regulatory body, administrative
agency or other governmental body applicable to the Company, any of its
subsidiaries or the Predecessor or any of its respective properties. No consent,
approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the execution
and delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement, except for compliance with the Act, the Blue Sky
laws applicable to the public offering of the Common Shares by the several
Underwriters and the clearance of such offering with the National Association of
Securities Dealers, Inc. (the "NASD").
(g) KPMG Peat Marwick LLP who have expressed their opinion with
respect to the financial statements and schedules filed with the Commission as a
part of the Registration Statement and included in the Prospectus and in the
Registration Statement, are independent accountants as required by the Act and
the Rules and Regulations.
(h) The financial statements and schedules of the Company and the
related notes thereto, included in the Registration Statement and the Prospectus
present fairly the financial position of the Company and as of the respective
dates of such financial statements and schedules, and the results of operations
and changes in financial position of the Company and its subsidiaries for the
respective periods covered thereby. Such statements, schedules and related
notes have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis as certified by the independent
accountants named in subsection 2(g). No other financial statements or
schedules are required to be included in the Registration Statement. The
selected financial data set forth in the Prospectus under the captions
"Capitalization" and "Selected Consolidated Financial Data" fairly present the
information set forth therein on the basis stated in the Registration Statement.
(i) Except as disclosed in the Prospectus, and except as to defaults
which individually or in the aggregate would not be material to the Company and
its subsidiaries, taken as a whole, neither the Company nor any of its
subsidiaries is in violation or default of any
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provision of its articles of incorporation or bylaws, or other organizational
documents, or is in breach of or default with respect to any provision of any
agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument to which it is a party or by
which it or any of its properties are bound; and, except as to defaults which
individually or in the aggregate would be material to the Company and its
subsidiaries taken as whole, there does not exist any state of facts which
constitutes an event of default on the part of the Company or any such
subsidiary as defined in such documents or which, with notice or lapse of time
or both, would constitute such an event of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations that have not
been described or filed as required. The contracts so described in the
Prospectus are accurate and complete; all such contracts are in full force and
effect on the date hereof; and neither the Company nor any of its subsidiaries,
nor the Predecessor, nor to the best of the Company's knowledge, any other party
is in breach of or default under any of such contracts, except as to breaches or
defaults which in any single case or in the aggregate would not have a material
adverse effect on the Company.
(k) There are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened to which the
Company or any of its subsidiaries is, or the Predecessor is or was immediately
prior to the Reincorporation, or may be a party or of which property owned or
leased by the Company or any of its subsidiaries is or may be the subject, or
related to environmental or discrimination matters, which actions, suits or
proceedings might, individually or in the aggregate, prevent or adversely affect
the transactions contemplated by this Agreement or result in a material adverse
change in the condition (financial or otherwise), properties, business, results
of operations or prospects of the Company and its subsidiaries taken as a whole;
and no labor disturbance by the employees of the Company or any of its
subsidiaries exists or is imminent which could reasonably be expected to affect
materially and adversely such condition, properties, business or results of
operations. Neither the Company nor any of its subsidiaries is, nor the
Predecessor is or was immediately prior to the Reincorporation, a party or
subject to the provisions of any material injunction, judgment, decree or order
of any court, regulatory body, administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has good and marketable
title to all the properties and assets reflected as owned by it in the financial
statements hereinabove described (or elsewhere in the Prospectus), subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if
any, reflected in such financial statements (or elsewhere in the Prospectus), or
(ii) those which do not adversely affect the use made and proposed to be made of
such property by the Company and its subsidiaries. The Company or the
applicable subsidiary holds its leased properties under valid and binding
leases, with such exceptions as are not materially significant in relation to
the business of the Company. Except as disclosed in the Prospectus, the Company
owns or leases all such properties as are necessary to its operations as now
conducted or as proposed to be conducted.
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(m) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company, its subsidiaries
and the Predecessor have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or written
agreement or other transaction that is not in the ordinary course of business or
which could reasonably be expected to result in a material reduction in the
future earnings of the Company and its subsidiaries; (ii) the Company and its
subsidiaries have not sustained any material loss or interference with their
respective businesses or properties from fire, flood, windstorm, accident or
other calamity, whether or not covered by insurance; (iii) the Company has not
paid or declared any dividends or other distributions with respect to its
capital stock and the Company and its subsidiaries are not in default in the
payment of principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock (other than upon the sale of the
Common Shares hereunder and upon the exercise of options and warrants described
in the Registration Statement and the automatic conversion of the outstanding
shares of Preferred Stock into Common Stock prior to the First Closing as
described in the Registration Statement) or indebtedness material to the Company
and its subsidiaries (other than in the ordinary course of business); and (v)
there has not been any material adverse change in the condition (financial or
otherwise), business, properties, results of operations or prospects of the
Company and its subsidiaries taken as a whole.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks, trade
names, patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct their businesses as now conducted; and
the Company has no knowledge of any infringement by it, its subsidiaries or the
Predecessor of trademark, trade name rights, patent rights, mask works,
copyrights, licenses, trade secret or other similar rights of others which could
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), business or results of operations of the Company and
its subsidiaries taken as a whole, and there is no claim being made against the
Company or its subsidiaries regarding trademark, trade name, patent, mask work,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company and its subsidiaries taken as
a whole.
(o) Neither the Company nor the Predecessor has been advised, and
has no reason to believe, that either it or any of its subsidiaries is not, or
the Predecessor was not immediately prior to Reincorporation, conducting
business in compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without limitation,
all applicable local, state and federal environmental laws and regulations;
except where failure to be so in compliance would not materially adversely
affect the condition (financial or otherwise), business, results of operations
or prospects of the Company and its subsidiaries taken as a whole.
(p) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown as due thereon; and the Company has no knowledge of any tax
deficiency which has been or could reasonably be
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asserted or threatened against the Company or its subsidiaries which could
materially and adversely affect the business, operations or properties of the
Company and its subsidiaries taken as a whole.
(q) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute prior to
the First Closing Date any offering material in connection with the offering and
sale of the Common Shares other than the Preliminary Prospectus, the Prospectus,
the Registration Statement and the other materials permitted by the Act.
(s) Each of the Company and its subsidiaries maintain insurance of
the types and in the amounts generally deemed adequate for its business,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(t) Neither the Company nor any of its subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any candidate
for foreign office, or failed to disclose fully any such contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that could reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(v) The merger of the Predecessor with and into the Company has been
consummated in compliance with applicable law; the Company has succeeded to all
of the rights, privileges, powers and franchises, and is subject to all of the
restrictions, disabilities and duties, of the Predecessor; the Company has
succeeded to all of the contract rights of the Predecessor, and all required
consents with respect to such contracts have been obtained; all of the
outstanding shares of capital stock of the Predecessor have been converted into
that number of shares of capital stock of the Company having the same rights,
preferences and privileges (except for differences resulting from applicable
law) as described in the Prospectus; all of the outstanding options and warrants
of the Predecessor are exercisable for that number of shares of Common Stock of
the Company as described in the Prospectus; the consummation of the
Reincorporation did not conflict with, or result in any breach of, or constitute
a default under (nor constitute any event which with notice, lapse of time or
both would constitute a breach of or default under), any provision of any
material license, indenture, lease, mortgage, deed of trust, bank loan or credit
agreement or other agreement or instrument to which the Company is, or
immediately prior to the Reincorporation the Predecessor was, a party or by
which the Company or its properties are, or immediately prior to the
Reincorporation the Predecessor or its properties were, bound or
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affected; the consummation of the Reincorporation does not and will not conflict
with, or result in a violation of, any federal, state, local or foreign law,
regulation or rule or any decree, judgment or order applicable to the Company,
or immediately prior to the Reincorporation, the Predecessor, the result of
which could have a material adverse effect on the properties, assets,
operations, business, business prospects or condition (financial or other) of
the Company; and the issuance of capital stock by the Company in the
Reincorporation was in compliance with all applicable state securities or blue
sky laws and was exempt from registration under the Act.
SECTION 3. Representations and Warranties of the Underwriters. The
--------------------------------------------------
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company that the information set forth (i) on the cover page of the
Prospectus with respect to price, underwriting discounts and commissions and
terms of offering and (ii) under "Underwriting" in the Prospectus was furnished
to the Company by and on behalf of the Underwriters for use in connection with
the preparation of the Registration Statement and the Prospectus and is correct
in all material respects. The Representatives represent and warrant that they
have been authorized by each of the other Underwriters as the Representatives to
enter into this Agreement on behalf of each of the other Underwriters and to act
for each of them in the manner herein provided.
SECTION 4. Purchase, Sale and Delivery of Common Shares. On the basis
--------------------------------------------
of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to issue and
sell to the Underwriters 2,500,000 of the Firm Common Shares. The Underwriters
agree, severally and not jointly, to purchase from the Company the number of
Firm Common Shares described below. The purchase price per share to be paid by
the several Underwriters to the Company shall be $_______ per share.
The obligation of each Underwriter to the Company shall be to purchase from
the Company that number of full shares that (as nearly as practicable, as
determined by you) bears to the same proportion as the number of shares set
forth opposite the name of such Underwriter in Schedule A hereto bears to the
total number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be purchased by the
Underwriters and payment therefor shall be made at the offices of Montgomery
Securities, 600 Montgomery Street, San Francisco, California (or such other
place as may be agreed upon by the Company and the Representatives) at such time
and date, not later than the third (or, if the Firm Common Shares are priced, as
contemplated by Rule 15c6-1(c) under the Securities Exchange Act of 1934, as
amended, after 4:30 P.M., Washington, D.C. Time, the fourth) full business day
following the first date that any of the Common Shares are released by you for
sale to the public, as you shall designate by at least 48 hours prior notice to
the Company (the "First Closing Date"); provided, however, that if the
Prospectus is at any time prior to the First Closing Date recirculated to the
public, the First Closing Date shall occur upon the later of the third or
fourth, as the case may be, full business day following the first date that any
of the Common Shares are released by you for sale to the public or the date that
is 48 hours after the date that the Prospectus has been so recirculated.
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Delivery of certificates for the Firm Common Shares shall be made by or on
behalf of the Company to you, for the respective accounts of the Underwriters
against payment by you, for the accounts of the several Underwriters, of the
purchase price therefor by a wire transfer of federal funds to an account
designated by the Company. The certificates for the Firm Common Shares shall be
registered in such names and denominations as you shall have requested at least
two full business days prior to the First Closing Date, and shall be made
available for checking and packaging on the business day preceding the First
Closing Date at a location in New York, New York, as may be designated by you.
Time shall be of the essence, and delivery at the time and place specified in
this Agreement is a further condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 375,000 Optional Common Shares
at the purchase price per share to be paid for the Firm Common Shares, for use
solely in covering any over-allotments made by you for the account of the
Underwriters in the sale and distribution of the Firm Common Shares. The option
granted hereunder may be exercised at any time (but not more than once) within
30 days after the first date that any of the Common Shares are released by you
for sale to the public, upon notice by you to the Company setting forth the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, the names and denominations in which the certificates for
such shares are to be registered and the time and place at which such
certificates will be delivered. Such time of delivery (which may not be earlier
than the First Closing Date), being herein referred to as the "Second Closing
Date," shall be determined by you, but if at any time other than the First
Closing Date shall not be earlier than three nor later than five full business
days after delivery of such notice of exercise. The number of Optional Common
Shares to be purchased by each Underwriter shall be determined by multiplying
the number of Optional Common Shares to be sold by the Company pursuant to such
notice of exercise by a fraction, the numerator of which is the number of Firm
Common Shares to be purchased by such Underwriter as set forth opposite its name
in Schedule A and the denominator of which is 2,500,000 (subject to such
adjustments to eliminate any fractional share purchases as you in your
discretion may make). Certificates for the Optional Common Shares will be made
available for checking and packaging on the business day preceding the Second
Closing Date at a location in New York, New York, as may be designated by you.
The manner of payment for and delivery of the Optional Common Shares shall be
the same as for the Firm Common Shares purchased from the Company as specified
in the two preceding paragraphs. At any time before lapse of the option, you
may cancel such option by giving written notice of such cancellation to the
Company. If the option is canceled or expires unexercised in whole or in part,
the Company will deregister under the Act the number of Option Shares as to
which the option has not been exercised.
You have advised the Company that each Underwriter has authorized you to
accept delivery of its Common Shares, to make payment and to receipt therefor.
You, individually and not as the Representatives of the Underwriters, may (but
shall not be obligated to) make payment for any Common Shares to be purchased by
any Underwriter whose funds shall not have been received by you by the First
Closing Date or the Second Closing Date, as the case may be, for the account
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of such Underwriter, but any such payment shall not relieve such Underwriter
from any of its obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose to
make a public offering of their respective portions of the Common Shares as soon
after the effective date of the Registration Statement as in the judgment of the
Representatives is advisable and at the public offering price set forth on the
cover page of and on the terms set forth in the final Prospectus, if one is
used, or on the first page of the Term Sheet, if one is used.
SECTION 5. Covenants of the Company. The Company covenants and agrees
------------------------
that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
effective, and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such
stop order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. The Company will not
file any amendment or supplement to the Registration Statement (either before or
after it becomes effective), any Preliminary Prospectus or the Prospectus of
which you have not been furnished with a copy a reasonable time prior to such
filing or to which you reasonably object or which is not in compliance with the
Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration Statement
or the Prospectus that in your judgment may be necessary or advisable to enable
the several Underwriters to continue the distribution of the Common Shares and
will use its best efforts to cause the same to become effective as promptly as
possible. The Company will fully and completely comply with the provisions of
Rule 430A of the Rules and Regulations with respect to information omitted from
the Registration Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the Common
Shares is required to be delivered under the Act any event occurs, as a result
of which the Prospectus, including any amendments or supplements, would include
an untrue statement of a material fact, or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
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misleading, or if it is necessary at any time to amend the Prospectus, including
any amendments or supplements, to comply with the Act or the Rules and
Regulations, the Company will promptly advise you thereof and will promptly
prepare and file with the Commission, at its own expense, an amendment or
supplement that will correct such statement or omission or an amendment or
supplement which will effect such compliance and will use its best efforts to
cause the same to become effective as soon as possible; and, in case any
Underwriter is required to deliver a prospectus after such nine-month period,
the Company upon request, but at the expense of such Underwriter, will promptly
prepare such amendment or amendments to the Registration Statement and such
Prospectus or Prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after the end
of the first quarter ending after one year following the "effective date of the
Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement that will satisfy the provisions of the last paragraph of Section
11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company, at
its expense, but only for the nine-month period referred to in Section 10(a)(3)
of the Act, will furnish to you or mail to your order copies of the Registration
Statement, the Prospectus, the Preliminary Prospectus and all amendments and
supplements to any such documents in each case as soon as available and in such
quantities as you may request, for the purposes contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in order
to qualify or register the Common Shares for sale under (or obtain exemptions
from the application of) the Blue Sky laws of such jurisdictions as you
designate, will comply with such laws and will continue such qualifications,
registrations and exemptions in effect so long as reasonably required for the
distribution of the Common Shares. The Company shall not be required to qualify
as a foreign corporation or to file a general consent to service of process in
any such jurisdiction where it is not presently qualified or where it would be
subject to taxation as a foreign corporation. The Company will advise you
promptly of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such purpose,
and in the event of the issuance of any order suspending such qualification,
registration or exemption, the Company, with your cooperation, will use its best
efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request of the Representatives, to each
of the other Underwriters: (i) as soon as practicable after the end of each
fiscal year, copies of the Annual Report of the Company containing the balance
sheet of the Company as of the close of such fiscal year and statements of
income, shareholders' equity and cash flows for the year then ended and the
opinion thereon of the Company's independent public accountants; (ii) as soon as
practicable
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after the filing thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by
the Company with the Commission, the NASD or any securities exchange; and (iii)
as soon as available, copies of any report or communication of the Company
mailed generally to holders of its Common Stock.
(h) During the period of 180 days after the date of the final
Prospectus, without the prior written consent of Montgomery Securities (which
consent may be withheld at the sole discretion of Montgomery Securities), the
Company will not, other than pursuant to outstanding stock options and warrants
or pursuant to the grant or exercise of additional options or rights under the
Company's stock option plans or stock purchase plans disclosed in the Prospectus
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 with its Common Stock or other equity security.
(i) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its statements under
the caption "Use of Proceeds" in the Prospectus.
(j) The shares have been qualified for trading, subject to notice of
issuance on the Nasdaq National Market.
(k) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as would
require the Company or any of its subsidiaries to register as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
You, on behalf of the Underwriters, may, in your sole discretion, waive in
writing the performance by the Company of any one or more of the foregoing
covenants or extend the time for their performance.
SECTION 6. Payment of Expenses. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of its obligations hereunder and in connection
with the transactions contemplated hereby, including without limiting the
generality of the foregoing, (i) all expenses incident to the issuance and
delivery of the Common Shares (including all printing and engraving costs), (ii)
all fees and expenses of the registrar and transfer agent of the Common Stock,
(iii) all necessary issue, transfer and other stamp taxes in connection with the
issuance and sale of the Common Shares to the Underwriters, (iv) all fees and
expenses of the Company's counsel and the Company's independent accountants, (v)
all costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement, each
Preliminary Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, this
Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the
Underwriters' Questionnaire, the Underwriters' Power of Attorney and the Blue
Sky memorandum, (vi) all filing fees, attorneys' fees and expenses incurred by
the Company or the Underwriters in connection with qualifying or
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registering (or obtaining exemptions from the qualification or registration of)
all or any part of the Common Shares for offer and sale under the Blue Sky laws,
(vii) the filing fee of the National Association of Securities Dealers, Inc.,
and (viii) all other fees, costs and expenses referred to in Item 13 of the
Registration Statement. Except as provided in this Section 6, Section 8 and
Section 10 hereof, the Underwriters shall pay all of their own expenses,
including the fees and disbursements of their counsel (excluding those relating
to qualification, registration or exemption under the Blue Sky laws and the Blue
Sky memorandum referred to above).
SECTION 7. Conditions of the Obligations of the Underwriters. The
-------------------------------------------------
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company herein set forth as of the date hereof and
as of the First Closing Date or the Second Closing Date, as the case may be, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M. (or, in the case of a registration statement filed pursuant to
Rule 462(b) of the Rules and Regulations relating to the Common Shares, not
later than 10:00 P.M.), Washington, D.C. Time, on the date of this Agreement, or
at such later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company or you, shall be contemplated by the Commission; and any request of
the Commission for inclusion of additional information in the Registration
Statement, or otherwise, shall have been complied with to your satisfaction.
(b) You shall be satisfied that since the respective dates as of
which information is given in the Registration Statement and Prospectus, (i)
except as set forth in the Registration Statement and Prospectus, there shall
not have been any change in the capital stock other than pursuant to the
exercise of outstanding options and warrants disclosed in the Prospectus of the
Company or any of its subsidiaries or any material change in the indebtedness
(other than in the ordinary course of business) of the Company or any of its
subsidiaries, (ii) except as set forth or contemplated by the Registration
Statement or the Prospectus, no material verbal or written agreement or other
transaction shall have been entered into by the Company or any of its
subsidiaries, which is not in the ordinary course of business or which could
reasonably be expected to result in a material reduction in the future earnings
of the Company and its subsidiaries, (iii) no loss or damage (whether or not
insured) to the property of the Company or any of its subsidiaries shall have
been sustained which materially and adversely affects the condition (financial
or otherwise), business, results of operations or prospects of the Company and
its subsidiaries, (iv) no legal or governmental action, suit or proceeding
affecting the Company or any of its subsidiaries which is material to the
Company and its subsidiaries or
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which affects or may affect the transactions contemplated by this Agreement
shall have been instituted or threatened, and (v) there shall not have been any
material change in the condition (financial or otherwise), business, management,
results of operations or prospects of the Company and its subsidiaries that
makes it impractical or inadvisable in the judgment of the Representatives to
proceed with the public offering or purchase the Common Shares as contemplated
hereby.
(c) There shall have been furnished to you, as Representatives of
the Underwriters, on each Closing Date, in form and substance satisfactory to
you, except as otherwise expressly provided below:
(i) An opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel for the Company, addressed to the Underwriters
and dated the First Closing Date, or the Second Closing Date, as the case may
be, to the effect that:
(1) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, is duly qualified to do business as a
foreign corporation and is in good standing in all other jurisdictions where the
ownership or leasing of properties or the conduct of its business requires such
qualification, except for jurisdictions in which the failure to so qualify would
not have a material adverse effect on the Company and its subsidiaries taken as
a whole, and has full corporate power and authority to own its properties and
conduct its business as described in the Registration Statement; and,
immediately prior to the Reincorporation, the Predecessor was duly qualified or
licensed to do business by and was in good standing as a foreign corporation in
each jurisdiction in which it conducted business or owned property and in which
the failure, individually or in the aggregate, to be so licensed or qualified
could have had a material adverse effect on the properties, assets, operations,
business, business prospects or condition (financial or other) of the Company;
(2) The merger of the Predecessor with and into the
Company has been consummated in compliance with applicable law; the Company has
succeeded to all of the rights, privileges, powers and franchises, and is
subject to all of the restrictions, disabilities and duties of the Predecessor
as provided under Section 259 of the Delaware General Corporation Law; to the
knowledge of such counsel after due inquiry, the Company has succeeded to all of
the rights of the Predecessor with respect to each mortgage, deed of trust, bank
loan or credit agreement or other agreement or instrument of the Predecessor,
and all required consents with respect to such contracts have been obtained; all
of the outstanding shares of capital stock of the Predecessor have been
converted into that number of shares of capital stock of the Company having the
same rights, preferences and privileges (except for differences resulting from
applicable law) as described in the Prospectus; all of the outstanding options
and warrants of the Predecessor outstanding as of the date set forth in the
Prospectus are exercisable for that number of shares of Common Stock of the
Company as described in the Prospectus; the Reincorporation was duly authorized
by the Board of Directors and shareholders of the Predecessor and the Company;
to the knowledge of such counsel after due inquiry, the consummation of the
Reincorporation does not and will not conflict with, or result in any breach
15
<PAGE>
of, or constitute a default under (nor constitute any event which with notice,
lapse of time or both would constitute a breach of or default under), any
provision of any license, indenture, lease, mortgage, deed of trust, bank loan
or credit agreement or other agreement or instrument to which the Company is, or
immediately prior to the Reincorporation the Predecessor was, a party or by
which the Company or its properties are, or immediately prior to the
Reincorporation the Predecessor or its properties were, bound or affected, or
under any federal, California or Delaware law, regulation or rule or any decree,
judgment or order applicable to the Company and known to such counsel, or
immediately prior to the Reincorporation, the Predecessor; and the issuance of
capital stock by the Company in the Reincorporation was in compliance with all
applicable state securities or blue sky laws and was exempt from registration
under the Act.
(3) The authorized, issued and outstanding capital stock
of the Company is as set forth under the caption "Capitalization" in the
Prospectus, as of the date specified therein; all necessary and proper corporate
proceedings have been taken in order to authorize validly such authorized Common
Stock; all outstanding shares of capital stock (including the Firm Common Shares
and any Optional Common Shares) have been duly and validly issued, are fully
paid and nonassessable, have been issued in compliance with federal and state
securities laws and conform to the description thereof contained in the
Prospectus; without limiting the foregoing, there are no preemptive or other
rights to subscribe for or purchase any of the Common Shares to be sold by the
Company hereunder;
(4) To such counsel's knowledge, the Company or any of its
subsidiaries does not, and immediately prior to the Reincorporation the
Predecessor did not, except for its ownership of the Company and its
subsidiaries, own any interest in any corporation, joint venture or partnership;
(5) The certificates evidencing the Common Shares to be
delivered hereunder are in due and proper form under Delaware law, and when duly
countersigned by the Company's transfer agent and registrar, and delivered to
you or upon your order against payment of the agreed consideration therefor in
accordance with the provisions of this Agreement, the Common Shares represented
thereby will be duly authorized and validly issued, fully paid and
nonassessable, will not have been issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities and
will conform in all respects to the description thereof contained in the
Prospectus;
(6) Except as disclosed in or specifically contemplated by
the Prospectus (including options or rights granted pursuant to the Company's
option grants or stock purchase plans subsequent to the date as of which
information is given with respect to outstanding options or rights in the
Prospectus), to such counsel's knowledge, there are no outstanding options,
warrants or other rights calling for the issuance of, and no commitments, plans
or arrangements to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital stock of the Company;
(7) (a) The Registration Statement has become effective
under the Act, and, to such counsel's knowledge, no stop order suspending the
effectiveness of
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the Registration Statement or preventing the use of the Prospectus has been
issued and no proceedings for that purpose have been instituted or are pending
or contemplated by the Commission; any required filing of the Prospectus and any
supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been
made in the manner and within the time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and
each amendment or supplement thereto (except for the financial statements and
notes thereto, financial schedules and other financial data included therein as
to which such counsel need express no opinion) comply as to form in all material
respects with the requirements of the Act or the Exchange Act, as applicable,
and the applicable Rules and Regulations;
(c) The statements in the Registration Statement and
the Prospectus under the captions "Risk Factors--[insert names of applicable
captions]," "Business--[insert names of applicable captions]," "Management,"
"Certain Transactions," "Description of Capital Stock" and "Shares Eligible For
Future Sale," insofar as they are descriptions of laws, regulations and rules,
of legal and governmental proceedings or of contracts, agreements, leases and
other legal documents binding the Company, or expressly refer to statements of
law or legal conclusions, other than with respect to FDA matters and comparable
international regulatory requirements, have been reviewed be such counsel and
are accurate in all material respects;
(d) To such counsel's knowledge, there are no
franchises, leases, contracts, agreements or documents of a character required
to be disclosed in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not disclosed or filed, as
required by Regulation S-K of the Rules and Regulations;
(e) To such counsel's knowledge, there are no legal or
governmental actions, suits or proceedings pending or threatened against the
Company or the Predecessor which are required to be described in the Prospectus
which are not described as required;
(8) The Company has all corporate right, power and
authority to enter into this Agreement and to sell and deliver the Common Shares
to be sold by it to the several Underwriters; this Agreement has been duly and
validly authorized by all necessary corporate action by the Company, has been
duly and validly executed and delivered by and on behalf of the Company, and is
a valid and binding agreement of the Company in accordance with its terms,
except as enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally and except as to those provisions relating to
indemnity or contribution for liabilities arising under the Act as to which no
opinion need be expressed; and no approval, authorization, order, consent,
registration, filing, qualification, license or permit of or with any court,
regulatory, administrative or other governmental body is required for the
execution and delivery of this Agreement by the Company or the consummation of
the transactions contemplated by this Agreement, except such as have been
obtained and are in full force and effect under the Act and such as may be
required
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under applicable Blue Sky laws in connection with the purchase and distribution
of the Common Shares by the Underwriters and the clearance of such offering with
the NASD;
(9) The execution and performance of this Agreement and
the consummation of the transactions herein contemplated will not conflict with,
result in the material breach of, or constitute, either by itself or upon notice
or the passage of time or both, a material default under, any material
agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit
or other instrument known to such counsel to which the Company, any of its
subsidiaries is, or the Predecessor is or was immediately prior to the
Reincorporation, a party or by which the Company or any of its subsidiaries or
any of its or their property may be bound or affected that is material to the
Company and its subsidiaries taken as a whole, or violate any of the provisions
of the certificate of incorporation or bylaws, or other organizational
documents, of the Company or any of its subsidiaries or, so far as is known to
such counsel, violate any statute, judgment, decree, order, rule or regulation
of any court or governmental body having jurisdiction over the Company or any of
its subsidiaries or any of its or their property;
(10) Neither the Company nor any subsidiary is, nor the
Predecessor is or was immediately prior to the Reincorporation, in violation of
its certificate of incorporation or bylaws, or other organizational documents,
or to such counsel's knowledge, in breach of or default with respect to any
provision of any agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument known to such counsel to which the Company
or any such subsidiary is, or the Predecessor is or was immediately prior to the
Reincorporation, a party or by which it or any of its properties may be bound or
affected, except where such default would not materially adversely affect the
Company and its subsidiaries taken as a whole;
(11) To such counsel's knowledge, no holders of securities
of the Company or the Predecessor have rights that have not been waived to the
registration of shares of Common Stock or other securities, because of the
filing of the Registration Statement by the Company or the offering contemplated
hereby;
(12) No transfer taxes are required to be paid in
connection with the sale and delivery of the Common Shares to the Underwriters
hereunder.
(13) The Company is not, and will not become, as a result
of the consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
In rendering such opinion, such counsel may rely as to matters of local
law, on opinions of local counsel, and as to matters of fact, on certificates of
officers of the Company and of governmental officials, in which case their
opinion is to state that they are so doing and that the Underwriters are
justified in relying on such opinions or certificates and copies of said
opinions or certificates are to be attached to the opinion. Such counsel shall
also include a statement to the effect that although they have not independently
verified the accuracy and completeness of the statements contained in the
Registration Statement and/or Prospectus, based upon their participation in the
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preparation of the Registration Statement and Prospectus and their review and
discussion of the contents thereof, nothing has come to such counsel's attention
that would lead such counsel to believe that either at the effective date of the
Registration Statement or at the applicable Closing Date the Registration
Statement or the Prospectus, or any such amendment or supplement except for the
financial statements and schedules and other financial data and the matters
referred to in Section 7(c)(ii), 7(c)(iv), and 7(c)(v) hereof, as to which such
counsel need not express any statement, contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
(ii) An opinion of Dickinson Dees ("United Kingdom Counsel"),
counsel for Applied Imaging International Ltd., a United Kingdom corporation and
the wholly owned subsidiary of the Company (the "UK Subsidiary"), dated the
Closing Date or the Second Closing Date, as the case may be, addressed to the
Underwriters to the effect that:
(1) The UK Subsidiary has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and authority to own or
lease its properties and conduct its business as described in the Prospectus;
the UK Subsidiary is duly qualified to transact business in all jurisdictions in
which the conduct of its business requires such qualification, the outstanding
shares of capital stock of the UK Subsidiary have been duly authorized and
validly issued and are fully paid and nonassessable and are owned by the Company
and were not issued in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase any securities; and, to such counsel's
knowledge, the outstanding shares of capital stock of the UK Subsidiary is owned
free and clear of all liens, encumbrances and security interests, and no
options, warrants or other rights to purchase, agreements or other obligations
to issue or other rights to convert any obligations into any shares of capital
stock or of ownership interests in the UK Subsidiaries are outstanding;
(2) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the UK Subsidiary except
as set forth in the Prospectus;
(3) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under any material agreement or instrument known to such
counsel to which the UK Subsidiary is a party or by which any of the UK
Subsidiary may be bound; and
(4) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the Commission and NASD or as
required by state securities and Blue Sky laws as to which such counsel need
express no opinion) except such as have been obtained or made, specifying the
same.
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(5) All of the issued and outstanding shares of the UK
Subsidiary has been duly and validly authorized and issued, are fully paid and
nonassessable and are owned beneficially by the Company free and clear of all
liens, encumbrances, equities, claims, security interests, voting trusts or
other defects of title whatsoever;
(iii) An opinion of Dan Cohen, Spigelman & Co. ("Israel
Counsel"), counsel for Applied Imaging Ltd., an Israeli corporation and the
wholly owned subsidiary of the Company (the "Israeli Subsidiary"), dated the
Closing Date or the Second Closing Date, as the case may be, addressed to the
Underwriters to the effect that:
(1) The Israeli Subsidiary has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and authority to own or
lease its properties and conduct its business as described in the Prospectus;
the Israeli Subsidiary is duly qualified to transact business in all
jurisdictions in which the conduct of its business requires such qualification,
the outstanding shares of capital stock of the Israeli Subsidiary have been duly
authorized and validly issued and are fully paid and nonassessable and are owned
by the Company and were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase any securities; and, to such
counsel's knowledge, the outstanding shares of capital stock of the Israeli
Subsidiary are owned free and clear of all liens, encumbrances and security
interests, and no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into any
shares of capital stock or of ownership interests in the Israeli Subsidiary are
outstanding.
(2) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Israeli Subsidiary
except as set forth in the Prospectus; and
(3) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under any material agreement or instrument known to such
counsel to which the Israeli Subsidiary is a party or by which any of the
Israeli Subsidiary may be bound.
(4) The Invention Assignment Agreement in the form
reviewed and accepted by Underwriters' counsel is valid, binding and enforceable
under the laws of Israel.
(5) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the Commission and NASD or as
required by state securities and Blue Sky laws as to which such counsel need
express no opinion) except such as have been obtained or made, specifying the
same.
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(6) All of the issued and outstanding shares of the
Israeli Subsidiary has been duly and validly authorized and issued, are fully
paid and nonassessable and are owned beneficially by the Company free and clear
of all liens, encumbrances, equities, claims, security interests, voting trusts
or other defects of title whatsoever;
(iv) An opinion of Townsend & Townsend, intellectual property
counsel for the Company, dated the First Closing Date or the Second Closing
Date, as the case may be, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
(1) Neither the Registration Statement nor the Prospectus,
including but not limited to "Risk Factors - Patents and Proprietary Technology;
Risk of Infringement," and "Business - Patents and Proprietary Rights" (a)
contains any untrue statement of material fact with respect to (1) patents,
patent rights, trade secrets, trademarks, service marks or other proprietary
information or materials owned or used by the Company, or the manner of its use
thereof, or (2) any allegation on the part of any person that the Company is
infringing any patent rights, trade secrets, trademarks, services marks or other
proprietary information or materials of any person, or (b) omits to state any
material fact relating to (1) patents, trade secrets, trademarks, service marks
or other proprietary information or materials owned or used by the Company, or
the manner of its use thereof or (2) any allegation on the part of any person
that the Company is infringing on any patent rights, trade secrets, trademarks,
service marks or other proprietary information or materials of any such person
that is necessary to make the statements therein not misleading;
(2) There are no legal or governmental proceedings pending
relating to patent rights, trade secrets, trademarks, service marks or other
proprietary information or materials of the Company, and to the knowledge of
such counsel after due inquiry, no such proceedings are threatened or
contemplated by governmental authorities or others;
(3) To the knowledge of such counsel after due inquiry,
the Company is not infringing or otherwise violating any patents, trade secrets,
trademarks, service marks or other proprietary information or materials of
others; and
(4) To the knowledge of such counsel after due inquiry,
the Company owns or possesses the rights to use all patents, trade secrets,
trademarks, service marks or other proprietary information or materials that are
necessary to conduct the business now being proposed to be conducted by the
Company as described in the Prospectus.
(v) An opinion of Fenwick and West LLP, special FDA regulatory
counsel for the Company, dated the First Closing Date or the Second Closing
Date, as the case may be, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
(1) The statements in the Prospectus under the captions
"Risk Factors -Limited Manufacturing Experience; Need to Comply with U.S.
Manufacturing Standards; Dependence on Key Suppliers and Distributors," "Risk
Factors -Uncertainty of FDA
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or Other Regulatory Approvals," "Risk Factors - Need to Comply with
International Government Regulation," "Business - Applied Imaging's Prenatal
Testing System - Clinical/Regulatory Matters," and "Business -Government
Regulation," insofar as such statements purport to summarize applicable
provisions of the Federal Food, Drug and Cosmetic Act, as amended (the "FDC
Act") and the regulations promulgated thereunder, are accurate summaries in all
material respects of the provisions purported to be summarized under such
captions in the Prospectus.
(2) No facts have come to such counsel's attention which
cause such counsel to believe that the statements in the Prospectus under the
captions "Risk Factors - Limited Manufacturing Experience; Need to Comply with
U.S. Manufacturing Standards; Dependence on Key Suppliers and Distributors,"
"Risk Factors - Uncertainty of FDA or Other Regulatory Approvals," "Risk
Factors -Need to Comply with International Government Regulation," "Business -
Applied Imaging's Prenatal Testing System - Clinical/Regulatory Matters," and
"Business-Government Regulation," reading such captioned sections together and
not as separate sections and only insofar as such statements relate to FDA
regulatory matters, at the time the Registration Statement became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or as of the date hereof contains an untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(vi) Such opinion or opinions of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, counsel for the Underwriters dated the
First Closing Date or the Second Closing Date, as the case may be, with respect
to the incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the validity of
the Common Shares, the Registration Statement and the Prospectus and other
related matters as you may reasonably require, and the Company shall have
furnished to such counsel such documents and shall have exhibited to them such
papers and records as they may reasonably request for the purpose of enabling
them to pass upon such matters. In connection with such opinions, such counsel
may rely on representations or certificates of officers of the Company and
governmental officials.
(vii) A certificate of the Company executed by the Chairman of
the Board or President and the Chief Financial Officer of the Company, dated the
First Closing Date or the Second Closing Date, as the case may be, to the effect
that:
(1) The representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of the date of this
Agreement and as of the First Closing Date or the Second Closing Date, as the
case may be, and the Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied on or prior to such
Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary Prospectus filed as a
part of the
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Registration Statement or any amendment thereto; no stop order suspending the
effectiveness of the Registration Statement has been issued; and to the best of
the knowledge of the respective signers, no proceedings for that purpose have
been instituted or are pending or contemplated under the Act;
(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the Prospectus; in his or her
opinion and to the best of his or her knowledge, the Registration Statement and
the Prospectus and any amendments or supplements thereto contain all statements
required to be stated therein regarding the Company and its subsidiaries; and
neither the Registration Statement nor the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction or event has
occurred which should have been set forth in an amendment to the Registration
Statement or in a supplement to or amendment of any prospectus which has not
been disclosed in such a supplement or amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as disclosed
in or contemplated by the Prospectus, there has not been any material adverse
change or a development involving a material adverse change in the condition
(financial or otherwise), business, properties, results of operations,
management or prospects of the Company, its subsidiaries and the Predecessor;
and no legal or governmental action, suit or proceeding is pending or threatened
against the Company, any of its subsidiaries or the Predecessor which is
material to the Company, its subsidiaries and the Predecessor, whether or not
arising from transactions in the ordinary course of business, or which may
adversely affect the transactions contemplated by this Agreement; since such
dates and except as so disclosed, neither the Company nor any of its
subsidiaries nor the Predecessor has entered into any verbal or written
agreement or other transaction which is not in the ordinary course of business
or which could reasonably be expected to result in a material reduction in the
future earnings of the Company or incurred any material liability or obligation,
direct, contingent or indirect, made any change in its capital stock (except
pursuant to the Company's stock option or stock purchase plans disclosed in the
Prospectus), made any material change in its short-term debt or funded debt or
repurchased or otherwise acquired any of the Company's or the Predecessor's
capital stock; and neither the Company, nor the Predecessor has declared or paid
any dividend, or made any other distribution, upon its outstanding capital stock
payable to shareholders of record on a date prior to the First Closing Date or
Second Closing Date; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except as disclosed
in or contemplated by the Prospectus, the Company and its subsidiaries have not
sustained a material loss or damage by strike, fire, flood, windstorm, accident
or other calamity (whether or not insured).
23
<PAGE>
(vii) On the date before this Agreement is executed and also on
the First Closing Date and the Second Closing Date letters addressed to you, as
Representatives of the Underwriters, from KPMG Peat Marwick LLP, independent
accountants, the first ones to be dated the day before the date of this
Agreement, the second ones to be dated the First Closing Date and the third ones
(in the event of a Second Closing) to be dated the Second Closing Date, in form
and substance satisfactory to you.
(ix) On or before the First Closing Date, letters from certain
holders of the Company's Common Stock and each director and officer of the
Company, in form and substance satisfactory to you, confirming that for a period
of 180 days after the date of the final Prospectus, such person will not
directly or indirectly sell or offer to sell or otherwise dispose of any shares
of Common Stock or any right to acquire such shares without the prior written
consent of Montgomery Securities, which consent may be withheld at the sole
discretion of Montgomery Securities.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for
the Underwriters. The Company shall furnish you with such manually signed or
conformed copies of such opinions, certificates, letters and documents as you
request. Any certificate signed by any officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the
statements made therein.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon notification by you as Representatives to the
Company without liability on the part of any Underwriter, the Company except for
the expenses to be paid or reimbursed by the Company pursuant to Sections 6 and
8 hereof and except to the extent provided in Section 10 hereof.
SECTION 8. Reimbursement of Underwriters' Expenses. Notwithstanding any
---------------------------------------
other provisions hereof, if this Agreement shall be terminated by you pursuant
to Section 7, or if the sale to the Underwriters of the Common Shares at the
First Closing is not consummated because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or to comply with any
provision hereof, the Company agrees to reimburse you and the other Underwriters
upon demand for all out-of-pocket expenses that shall have been reasonably
incurred by you and them in connection with the proposed purchase and the sale
of the Common Shares, including but not limited to fees and disbursements of
counsel, printing expenses, travel expenses, postage, telegraph charges and
telephone charges relating directly to the offering contemplated by the
Prospectus. Any such termination shall be without liability of any party to any
other party except that the provisions of this Section, Section 6 and Section 10
shall at all times be effective and shall apply.
SECTION 9. Effectiveness of Registration Statement. You and the Company
---------------------------------------
will use your and its best efforts to cause the Registration Statement to become
effective, to prevent the
24
<PAGE>
issuance of any stop order suspending the effectiveness of the Registration
Statement and, if such stop order be issued, to obtain as soon as possible the
lifting thereof.
SECTION 10. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act against any losses, claims, damages, liabilities or expenses,
joint or several, to which such Underwriter or such controlling person may
become subject, under the Act, the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company), insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof
as contemplated below) (i) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or (ii) arise out of or are based upon the omission or
alleged omission to state in any of them a material fact required to be stated
therein or necessary to make the statements in any of them not misleading, or
(iii) arise out of or are based in whole or in part on any inaccuracy in the
representations and warranties of the Company contained herein or any failure of
the Company to perform its respective obligations hereunder or under law; and
will reimburse each Underwriter and each such controlling person for any legal
and other expenses as such expenses are reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with the information furnished to the Company
pursuant to Section 3 hereof; and provided further, that with respect to any
untrue statement or omission or alleged untrue statement or omission made in any
Preliminary Prospectus, the indemnity agreement contained in this paragraph
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages, liabilities, or expenses purchased the Common
Shares concerned (or to the benefit of any price in controlling such
Underwriter) to the extent that any such loss, claim, damage, liability or
expense of such Underwriter or controlling person results from the fact that a
copy of the Prospectus was not sent or given to such person at or prior to the
written confirmation of sale of such Shares to such persons as required by the
Act, and if the untrue statement or omission has been corrected in the
Prospectus unless such failure to deliver the Prospectus was a result of
noncompliance by the Company with its obligations under Section 5(e) hereof. In
addition to its other obligations under this Section 10(a), the Company agrees
that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, or any inaccuracy
in the representations and warranties of the Company herein or failure to
perform its obligations hereunder, all as described in this Section 10(a), it
will reimburse each Underwriter on a quarterly basis for all reasonable legal or
other expenses incurred in connection with
25
<PAGE>
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse each
Underwriter for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, each Underwriter shall promptly return it to the Company together with
interest, compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by Bank of America NT&SA, San Francisco, California (the
"Prime Rate"). Any such interim reimbursement payments that are not made to an
Underwriter within 30 days of a request for reimbursement, shall bear interest
at the Prime Rate from the date of such request. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement and each person, if any, who controls the Company within the meaning
of the Act, against any losses, claims, damages, liabilities or expenses to
which the Company, or any such director, officer or controlling person may
become subject, under the Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
(i) arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or (ii)
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance
upon and in conformity with the information furnished to the Company pursuant to
Section 3 hereof [or arise out of or are based upon any inaccuracy in the
representations of such Underwriters in Section 3 hereof]; and will reimburse
the Company, or any such director, officer or controlling person for any legal
and other expense reasonably incurred by the Company, or any such director,
officer or controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action. In addition to its other obligations under this Section
10(b), each Underwriter severally agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in this Section 10(b) which relates to information
furnished to the Company pursuant to Section 3 hereof [or in any accuracy in the
representations of the Underwriters in Section 3 hereof], it will reimburse the
Company (and, to the extent applicable, each officer, director or controlling
person) on a quarterly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director or controlling
26
<PAGE>
person) for such expenses and the possibility that such payments might later be
held to have been improper by a court of competent jurisdiction. To the extent
that any such interim reimbursement payment is so held to have been improper,
the Company (and, to the extent applicable, each officer, director or
controlling person) shall promptly return it to the Underwriters together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company within 30 days
of a request for reimbursement, shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in this
Section or to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
such counsel in connection with the assumption of legal defenses in accordance
with the proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more than
one separate counsel, approved by the Representatives in the case of paragraph
10(a), representing the indemnified parties who are parties to such action) or
(ii) the indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, in each of which
cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(d) If the indemnification provided for in this Section 10 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
10(a), 10(b), or 10(c) in respect of any losses, claims,
27
<PAGE>
damages, liabilities or expenses referred to herein, then each applicable
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of any losses, claims, damages, liabilities or
expenses referred to herein (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Underwriters from the
offering of the Common Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Underwriters in connection with
the statements or omissions or inaccuracies in the representations and
warranties herein that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The respective
relative benefits received by the Company and the Underwriters shall be deemed
to be in the same proportion, in the case of the Company as the total price paid
to the Company for the Common Shares sold by it to the Underwriters (net of
underwriting commissions but before deducting expenses) bears to the proposed
price to the public set forth on cover of the Prospectus, and in the case of the
Underwriters as the underwriting commissions received by them bears to the
proposed price to the public set forth on cover of the Prospectus. The relative
fault of the Company and the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact or the
inaccurate or the alleged inaccurate representation and/or warranty relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
subparagraph 10(c) of this Section 10, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim. The provisions set forth in subparagraph 10(c) of this
Section 10 with respect to notice of commencement of any action shall apply if a
claim for contribution is to be made under this subparagraph 10(d); provided,
however, that no additional notice shall be required with respect to any action
for which notice has been given under subparagraph 10(c) for purposes of
indemnification. The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 10 were determined
solely by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 10, no Underwriter
shall be required to contribute any amount in excess of the amount of the total
underwriting commissions received by such Underwriter in connection with the
Common Shares underwritten by it and distributed to the public. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 10 are several in proportion to their respective
underwriting commitments and not joint.
(e) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in Sections 10(a) and 10(b)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board
28
<PAGE>
of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 10(a) and 10(b)
hereof and would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of such
Sections 10(a) and 10(b) hereof.
SECTION 11. Default of Underwriters. It shall be a condition to this
-----------------------
Agreement and the obligation of the Company to sell and deliver the Common
Shares hereunder, and of each Underwriter to purchase the Common Shares in the
manner as described herein, that, except as hereinafter in this paragraph
provided, each of the Underwriters shall purchase and pay for all the Common
Shares agreed to be purchased by such Underwriter hereunder upon tender to the
Representatives of all such shares in accordance with the terms hereof. If any
Underwriter or Underwriters default in their obligations to purchase Common
Shares hereunder on either the First or Second Closing Date and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed to purchase on such Closing Date does not exceed 10% of the total
number of Common Shares which the Underwriters are obligated to purchase on such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Common
Shares which such defaulting Underwriters agreed but failed to purchase on such
Closing Date. If any Underwriter or Underwriters so default and the aggregate
number of Common Shares with respect to which such default occurs is more than
the above percentage and arrangements satisfactory to the Representatives and
the Company for the purchase of such Common Shares by other persons are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company except
for the expenses to be paid by the Company pursuant to Section 6 hereof and
except to the extent provided in Section 10 hereof.
In the event that Common Shares to which a default relates are to be purchased
by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than three business days
in order that the necessary changes in the Registration Statement, Prospectus
and any other documents, as well as any other arrangements, may be effected. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 12. Effective Date. This Agreement shall become effective
--------------
immediately as to Sections 6, 8, 10, 13 and 15 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement has
not become effective, at 2:00 P.M., California time, on the first full business
day following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective,
29
<PAGE>
at 2:00 P.M., California time, on the first full business day following the date
of execution of this Agreement; but this Agreement shall nevertheless become
effective at such earlier time after the Registration Statement becomes
effective as you may determine on and by notice to the Company or by release of
any of the Common Shares for sale to the public. For the purposes of this
Section 12, the Common Shares shall be deemed to have been so released upon the
release for publication of any newspaper advertisement relating to the Common
Shares or upon the release by you of telegrams (i) advising Underwriters that
the Common Shares are released for public offering, or (ii) offering the Common
Shares for sale to securities dealers, whichever may occur first.
SECTION 13. Termination. Without limiting the right to terminate this
-----------
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
or by you by notice to the Company at any time prior to the time this Agreement
shall become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company to any Underwriter (except for
the expenses to be paid or reimbursed by the Company pursuant to Sections 6 and
8 hereof and except to the extent provided in Section 10 hereof) or of any
Underwriter to the Company (except to the extent provided in Section 10 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
Exchange or in the over the counter market by the NASD, or a general banking
moratorium shall have been established by federal, New York or California
authorities, (ii) if an outbreak of major hostilities or other national or
international calamity or any substantial change in political, financial or
economic conditions shall have occurred or shall have accelerated or escalated
to such an extent, as, in the judgment of the Representatives, to affect
adversely the marketability of the Common Shares, (iii) if any adverse event
shall have occurred or shall exist which makes untrue or incorrect in any
material respect any statement or information contained in the Registration
Statement or Prospectus or which is not reflected in the Registration Statement
or Prospectus but should be reflected therein in order to make the statements or
information contained therein not misleading in any material respect, or (iv) if
there shall be any action, suit or proceeding pending or threatened, or there
shall have been any development or prospective development involving
particularly the business or properties or securities of the Company or any of
its subsidiaries or the transactions contemplated by this Agreement, which, in
the reasonable judgment of the Representatives, may materially and adversely
affect the Company's business or earnings and makes it impracticable or
inadvisable to offer or sell the Common Shares. Any termination pursuant to this
subsection 13(b) shall without liability on the part of any Underwriter to the
Company or on the part of the Company to any Underwriter (except for expenses to
be paid or
30
<PAGE>
reimbursed by the Company pursuant to Sections 6 and 8 hereof and except to the
extent provided in Section 10 hereof).
(c) This Agreement shall also terminate at 5:00 P.M., California
time, on the tenth full business day after the Registration Statement shall have
become effective if the initial public offering price of the Common Shares shall
not then as yet have been determined as provided in Section 4 hereof. Any
termination pursuant to this subsection 13(c) shall without liability on the
part of any Underwriter to the Company or on the part of the Company to any
Underwriter (except for expenses to be paid or reimbursed the Company pursuant
to Sections 6 and 8 hereof and except to the extent provided in Section 10
hereof.)
SECTION 14. Representations and Indemnities to Survive Delivery. The
---------------------------------------------------
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 15. Notices. All communications hereunder shall be in writing
-------
and, if sent to the Representatives shall be mailed, delivered or faxed and
confirmed to you at 600 Montgomery Street, San Francisco, California 94111,
Attention: Michael G. Dovey, with a copy to Robert V. Gunderson, Jr., Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP, 600 Hansen Way, Second
Floor, Palo Alto, California 94304; and if sent to the Company shall be mailed,
delivered or faxed and confirmed to the Company at Applied Imaging Corporation,
2380 Walsh Avenue Building, Santa Clara, California 95051 with a copy to Wilson,
Sonsini, Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo
Alto, California 94304. The Company or you may change the address for receipt of
communications hereunder by giving notice to the others.
SECTION 16. Successors. This Agreement will inure to the benefit of and
----------
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 11 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 10, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term ''successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 17. Representation of Underwriters. You will act as
------------------------------
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you
jointly or by Montgomery Securities, as Representatives, will be binding upon
all the Underwriters.
SECTION 18. Partial Unenforceability. The invalidity or unenforceability
------------------------
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this
31
<PAGE>
Agreement is for any reason determined to be invalid or unenforceable, there
shall be deemed to be made such minor changes (and only such minor changes) as
are necessary to make it valid and enforceable.
SECTION 19. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 20. General. This Agreement constitutes the entire agreement of
-------
the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and you.
32
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed copies hereof, whereupon it will
become a binding agreement between the Company and the several Underwriters
including you, all in accordance with its terms.
Very truly yours,
APPIED IMAGING CORP.
By:
-----------------------------------------------
Abraham I. Coriat, Chief Executive Officer and
Chairman of the Board
The foregoing Underwriting Agreement is hereby confirmed and accepted by us
in San Francisco, California as of the date first above written.
MONTGOMERY SECURITIES
DILLON, READ & CO. INC.
VECTOR SECURITIES INTERNATIONAL, INC.
Acting as Representatives of the several
Underwriters named in the attached
Schedule A.
By: MONTGOMERY SECURITIES
By:
-------------------------------------
[ ], Partner
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
<S> <C>
Montgomery Securities
Dillon, Read & Co. Inc.
Vector Securities International, Inc..........
-----------------
TOTAL..............................
=================
</TABLE>
<PAGE>
EXHIBIT 4.1
[LOGO OF APPLIED IMAGING]
NUMBER SHARES
AIC
COMMON STOCK CUSIP 03820G 10 6
See Reverse for
Certain Definitions
APPLIED IMAGING CORP.
Incorporated Under the Laws of the State of Delaware
This certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $.001 PER SHARE, OF
APPLIED IMAGING CORP., (the "Corporation"), a Delaware corporation. The shares
represented by this certificate are transferable only on the stock transfer
books of the Corporation by the holder of record hereof, or by the holder's duly
authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed.
This certificate is not valid until countersigned by the Corporation's transfer
agent and registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
Dated:
/s/ Neil E. Woodruff /s/ Abraham I. Coriat
---------------------------- ----------------------------
Secretary Chairman and Chief Executive
Officer
Applied Imaging Corp.
Corporate
SEAL
July 18,
1996
Delaware
Countersigned and Registered:
NORWEST BANK MINNESOTA, N.A.
Transfer Agent and Registrar
By
-----------------------------------------
Authorized Signature
<PAGE>
APPLIED IMAGING CORP.
A statement of the rights, preferences, privileges and restrictions granted
or imposed upon the respective classes or series of shares of stock of the
Corporation, and upon the holders thereof as established by the Certificate of
Incorporation or by any certificate of determination of preferences, and the
number of shares constituting each series or class and the designations thereof,
may be obtained by any stockholder of the Corporation upon request and without
charge from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants in entireties
JF TEN -- as joint tenants with right of survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ________________________ Custodian ________________________
(Cust) (Minor)
under Uniform Gifts to Minors Act _________________________
(State)
UNIF TRF MIN ACT -- ________________________ Custodian (until age _____________)
___________________________________ under Uniform Transfers
(Minor)
to Minors Act _____________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _________________________________ hereby sell, assign
and transfer unto
Please Insert Social Security or Other
Identifying Number of Assignee
- --------------------------------------
- --------------------------------------
________________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ____________________________
_____________________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the
face of the certificate in every particular
without alteration or enlargement on any
change whatever.
Signature(s) Guaranteed:
By
-------------------------------------------------------------
The signature(s) should be guaranteed by an eligible guarantor
institution (banks, stockbrokers, savings and loan associations
and credit unions with membership in an approved signature
guarantee medallion program), pursuant to S.E.C. Rule 17Ad-15
<PAGE>
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI APPEARS HERE]
EXHIBIT 5.1
September 16, 1996
Applied Imaging Corp.
2380 Walsh Avenue
Building B
Santa Clara, CA 95051
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No.
333-06703) to be filed by you with the Securities and Exchange Commission on
September 16, 1996 (the "Registration Statement") in connection with the
registration under the Securities Act of 1933, as amended, of 2,875,000 shares
of Common Stock of Applied Imaging Corp. (the "Shares). As your counsel in
connection with this transaction, we have examined the proceedings proposed to
be taken in connection with said sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of
the Shares, and upon completion of the proceedings being taken in order to
permit such transactions to be carried out in accordance with the securities
laws of the various states, where required, the Shares when issued and sold in
the manner referred to in the Registration Statement will be legally and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part hereof, and
any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
/s/ Wilson Sonsini Goodrich & Rosati
------------------------------------
<PAGE>
EXHIBIT 10.19
COOPERATION AND PROJECT FUNDING AGREEMENT
PREAMBLE
Agreement made this 16 day of July 1995, by and
BETWEEN
The ISRAEL-UNITED STATES BINATIONAL INDUSTRIAL RESEARCH AND DEVELOPMENT
FOUNDATION, a legal entity created by Agreement between the Government of the
State of Israel and the Government of the United States of America, and
promulgated into law by the Israeli Knesset in 1978 under the title of the Law
of the BINATIONAL INDUSTRIAL RESEARCH AND DEVELOPMENT FOUNDATION, effective May
18th, 1977, (hereinafter referred to as the "Foundation"),
AND,
Applied Imaging Ltd.
AND
Applied Imaging Corporation
severally and jointly (hereinafter collectively referred to as the "Proposer"
and separately as the "Participants").
WHEREAS the Foundation has been established under an Agreement between the
Government of the State of Israel and the Government of the United States of
America to promote and support joint nondefense industrial research and
development activities of mutual benefit to Israel and the United States, and
WHEREAS the Proposer has heretofore submitted to the Foundation a proposal
(hereinafter the "Proposal"), entitled "Fetal Cell in Maternal Blood (FCMB)
Program" and on the basis of said Proposal has applied to the Foundation for
certain funding assistance for the development of the products therein described
(and hereinafter referred to collectively as the "Innovation"), and
WHEREAS the Foundation has examined and duly approved the Proposal and is
willing to provide certain funding for the implementation of the Proposal on the
terms and conditions hereinafter set forth;
1
<PAGE>
Now therefore the parties hereto agree as follows:
A. GENERAL
A.1. The preamble to this Agreement shall be deemed an integral part
hereof.
A.2 The Participants shall be bound and obliged jointly and severally, as
herein provided.
A.3. The Executive Director of the Foundation is empowered by its Board of
Governors to execute this Agreement and to perform all acts under the
terms hereof on behalf of the Foundation.
A.4. The following document is incorporated by reference and made a part of
this Agreement:
The Proposal, dated the 17th day of April, 1995, as stamped with
the Foundation's approval of the 7th day of June, 1995.
Nonetheless should any provision of said Proposal be inconsistent
with any other provision of this Agreement, the provisions
otherwise set forth in this document shall control.
A.5. The following document is referenced, and is incorporated by reference
only as portions may be specifically referred to and incorporated
hereafter:
BIRD Foundation Procedures Handbook 1994.
B. PROJECT FINANCING
B.1. The Foundation hereby agrees to fund, by Conditional Grant, the
implementation of the Proposal in the maximum sum of $543,152 or 50%
of the actual expenditures on the project, as contemplated in the
Approved Project Budget set forth in Annex A hereto, whichever is
less, and at the times and as may otherwise be set forth in Annex B
hereto.
B.1.1. The percentage of the actual expenditures on the project which the
Foundation provides shall hereinafter be described as the
"Foundation's pro rata share".
B.2. The Proposer shall provide in timely fashion all budgetary funds in
excess of those provided hereunder by the Foundation.
B.3. Proposer shall make payments to the Foundation based on Gross Sales
derived from the sale, leasing or other marketing or commercial
exploitation of the Innovation, including service or maintenance
contracts, commencing with the first such commercial transaction. In
recognition of the expenses incurred by the Proposer in the
development of the fetal cell system prior to the effective date of
this Agreement, the basis for repayments to the Foundation shall be
25% of the Gross Sales, hereinafter defined as Adjusted Gross Sales.'
Such payments shall be made on the following basis: a) The Conditional
Grant referred to in Sub.Sec.B.1. above (plus any other sums actually
awarded to the Proposer by the Foundation in connection with the
subject matter of the Proposal ("Other Sums")) shall be repaid in U.S.
Dollars at the rate of 2 1/2% of the first year's Adjusted Gross
Sales, and, in succeeding years, at the rate of 5% of the Adjusted
Gross Sales until 100% of the Conditional Grant and Other Sums has
been repaid, whereupon the repayment rate shall decrease to 2 1/2% of
the Adjusted Gross Sales, such repayments to be in equivalent dollars
valued at time of repayment. The rate of change of value shall be that
designated in Annex C hereto. b) When the Proposer shall have repaid
the following maximum percentages in equivalent dollars valued at the
time of repayment (Annex C) of the Conditional Grant and Other Sums in
any of the following years following the first commercial transaction,
2
<PAGE>
no additional payments to the Foundation on account of the Conditional
Grant and Other Sums shall be required.
Years Following Maximum Percentage of
First Commercial Conditional Grant and
Transaction Other Sums to be Repaid
1 116
2 124
3 132
4 141
5 148
6 and more 150
Notwithstanding the above provisions of this Sub.Sec.B.3., Proposer
shall not be required to make payments to the Foundation in excess of
$50,000 in the first year of sales, commencing with the first such
commercial transaction, any additional amount which might otherwise
have been due to be carried forward to the following year, nor shall
the Proposer be required to make payments to the Foundation in excess
of $275,000 in the first two years of sales, any additional amount
which might otherwise have been due to be carried over to the
following year, nor shall Proposer be required to make payments to the
Foundation in excess of $550,000 in the first three-years of sales,
any additional amount which might otherwise have been due to be
carried over to the next year, nor shall the Proposer be required to
make payments to the Foundation in excess of $750,000 in the first
four years of sales, any additional amount which might otherwise have
been due to be carried over to the following year, until all repayment
obligations have been satisfied.
B.3.1. The term "Adjusted Gross Sales" shall include all specific export
incentives or bonuses paid the Proposer on account of sale of the
Innovation for export, but shall not include sums paid for commissions
brokerage value added and sales taxes on the sale of the finished
product, or transportation and associated insurance costs, if same
have been included in the Adjusted Gross Sales price.
B.3.2. The Innovation shall be deemed to have been sold, marketed or
otherwise commercially exploited if the Innovation, or any
improvement, modification or extension of it is put to the benefit of
a third party, whether directly or indirectly, and whether standing
alone or incorporated into or cojoined with other hardware or
processes, and for which benefit the said third party gives something
of value. This provision shall not apply to transactions between the
Participants or between the Participants and their parents or
subsidiaries. Should such parent or subsidiary resell the Innovation
separately identified or incorporated in a system, the sales price
shall be the price to third parties from the parent or subsidiary
making the sale, such sales price being defined by the same criteria
as sales are defined for purposes of "Adjusted Gross Sales" in
Sub.Sec.B.3.1. above.
If the Innovation is a part of a product sold, marketed or otherwise
commercially exploited, the sales price for purposes of payments
according to Sub.Sec.B.3. shall be the sales price of that product
multiplied by a factor whose numerator is the manufacturing cost of
the Innovation and whose denominator is the manufacturing cost of the
product. If there shall have been established a market price for the
Innovation, such price shall be the basis for payments according to
Sub.Sec.B.3., notwithstanding the incorporation of the Innovation in
another product.
3
<PAGE>
B.4. All payments due the Foundation shall be calculated on a semiannual
calendar basis, and statements, consistent with generally accepted
accounting procedures and with the standard accounting procedures of
the Participant and signed by an officer of the Participant, rendered
with payment in and within 90 calendar days following the end of each
semiannual period. Payments to the Foundation per Sub.Sec.B.3. shall
commence at the end of the semiannual period during which the first
sale was made. All late payments shall bear interest at 1% more than
the average prime rate prevailing at the Chase Manhattan Bank, N.Y.C.
during the period from the date payment was due until actually made.
B.5. Should any portion of the technology or Innovation developed in whole
or in part under this Agreement be sold outright to a third party,
one-half of all proceeds of the sale shall be applied as received
until there has been full repayment to the Foundation of a sum equal
to the percentage indicated in Sub.Sec.B.3.b) hereto of the
Conditional Grant and Other Sums actually received by Proposer
hereunder, in equivalent dollars valued at time of repayment (Annex
C). Payments due and not made following receipt of proceeds shall bear
interest at 1% more than the average prime rate prevailing at Chase
Manhattan Bank, N.Y.C.
B.6. License agreements involving patented inventions or technology
developed in whole or in part during this Foundation-supported project
shall be subject to Annex F.
C. CONDUCT OF THE PROJECT
C.1. The Proposer agrees to do the work set out in the Proposal in
accordance with good standards relevant to such undertakings, and
shall expend funds received hereunder only in accordance with such
Proposal and the requirements of this Agreement.
C.2. The Proposer agrees to comply with the Program Plan for the Innovation
as set forth in Annex D hereto.
C.3. The Proposer hereby appoints Dr. Yaron Lapidot as Israel Project
Manager and Dr Alex Saunders as U.S. Project Manager for the
implementation of the project during the period of this Agreement and
in accordance with the Program Plan, Annex D.
C.4. The Proposer shall not make substantial transfers of funds from one
budget item to another, change key personnel or their duties and
responsibilities or diminish their time allocated to the proposed work
hereunder without prior written approval by the Foundation, which
approval shall not be unreasonably withheld.
C.4.1. Should any key person be absent from his work or should such absence
be expected, for 90 days or more, or should there be any significant
reduction in the total personnel force assigned the project under the
Proposal, the Proposer shall forthwith notify the Foundation.
D. REPORTING REQUIREMENTS
D.1. The Proposer shall submit to the Foundation, in writing, the following
reports:
a. interim fiscal and technical reports within 30 days following the
expiration of the first eight-month period;
b. final fiscal and technical reports within 60 days following
termination of this Agreement.
D.1.1. Such reports shall be in form and substance as provided in Formats for
Technical and Fiscal Reports, BIRD Foundation Procedures Handbook
1994, Sections IV.A. and B.
4
<PAGE>
D.2. Proposer shall provide, at its expense, briefings on the progress of
the work hereunder within 45 days following request by the Foundation.
Such briefings shall accord with the form and depth as the Foundation
may reasonably request.
E. PUBLICATIONS
E.1. In any publication in scientific or technical journals of data or
other information derived from the work hereunder, or any publication
related to the work, but not including product literature or manuals,
the support of the Foundation shall be acknowledged.
E.2. To the extent so required to permit the Foundation free dissemination
of such publications or information which the Foundation is privileged
to disseminate subject to the limitation of Sec. F. below, the
Proposer shall be deemed hereby to waive any claim with respect to
such dissemination for infringement of any Copyright it may have or
may obtain.
E.3. The Proposer shall furnish to the Foundation two (2) copies of all
publications resulting from Foundation-supported work as soon as
possible after publication.
F. PROPRIETARY INFORMATION
Proprietary information, clearly identified as such, submitted to the
Foundation in the Proposal, in any report or verbally, or obtained by
Foundation personnel observation pursuant to any request or briefing,
shall be treated by the Foundation as confidential. At the request of
Proposer or either Participant, a confidential disclosure agreement
may separately be entered into by the parties.
Nothing contained in the foregoing shall restrict the right of the
Foundation to make public the fact of the Foundation's support for the
project, and the identification of the Participants therein. The
details of any such publication, however, shall be subject to approval
by the Participants.
G. PATENTS AND ROYALTIES
G. 1. If Proposer or either of the Participants elects to apply for letters
patent on any or all inventions resulting in whole or in part from
performance of Foundation-supported activity, such applicant shall, at
his own expense, so apply in the United States and in Israel, and in
such other countries and at such times as he may deem appropriate.
G.2. Unless Proposer or either Participant is making payments to the
Foundation under Sec. B or Annex F hereto, a Participant who retains
rights in an invention and who obtains a patent thereon in accordance
with Sub.Sec.G.1., shall pay to the Foundation a royalty as set forth
in Annex E hereto, on sales of any product embodying the invention or
any product made by practicing the invention. The Foundation's rights
hereunder shall apply whenever such patents are obtained and shall
survive termination of this Agreement.
H. RIGHTS OF THE GOVERNMENTS OF ISRAEL AND THE UNITED STATES
H.1. Regardless of the patent rights acquired by Participants by mutual
agreement or pursuant to Sub.Sec.G.1., the Governments of Israel and
of the United States shall each have a nonexclusive, irrevocable,
royalty-free license to make or have made, to use or have used, and to
sell or have sold any such invention specified, throughout the world
for all governmental purposes: provided, however, that in any
contracting situation involving an invention made under this
Agreement, the Government of Israel shall give preference to the
Participant retaining the entire right, title, and interest in the
invention in Israel, and provided that "governmental purposes" shall
not include manufacture of such invention where it is commercially
available at reasonable prices.
5
<PAGE>
Notwithstanding the foregoing, except for military purposes or in
emergency situations, neither the Government of Israel nor the
Government of the United States, nor the Foundation, shall have the
right to sell or otherwise dispose of in any third country any product
incorporating an invention or made by practicing an invention without
the prior written permission of the Participant which has acquired the
entire right and interest in the invention in third countries. Such
Participant shall not withhold permission where appropriate royalties
are paid by the Foundation or government(s) concerned.
H.2. In addition to the patent rights specified in Sub.Sec.H.1., the
Foundation reserves for itself and the Governments of Israel and the
United States the right to use the Innovation, technical information,
data and know-how arising out of, or developed under, this Agreement
for any noncommercial purpose, and without charge.
H.3. In order that the rights of the Foundation and the Governments of
Israel and the United States described herein shall be exercisable,
the Participants agree that any component, element or other part of
the system described as the "Innovation" in the Preamble to this
Agreement, whose use is necessary to the full enjoyment of the
Innovation, will be made available, at reasonable prices, by the
Participants either as a commercially purchasable item, or by special
arrangement, and will be sold to the Foundation and/or the Government
of Israel and/or the Government of the United States, also at
reasonable prices.
H.4. Notwithstanding the above provisions of this Sec. H., it is understood
and agreed that, so long as any software that comprises part or all of
the Innovation is marketed by Proposer, by either Participant, or by
others with the rights to market such software, neither the Government
of Israel nor the Government of the United States shall have the right
to obtain a license to use such software unless the license fee
normally imposed in the ordinary course of business by either the
Participants or by others with the rights to market such software is
paid, and the standard license agreement is executed.
H.5. The rights of the governments of Israel and the United States shall
not extend to intellectual property and work performed prior to the
initiation of this grant and/or to intellectual property and work
performed outside the scope of this grant.
I. REVOCATION OF AGREEMENT
I.1. The Foundation may revoke any award, in whole or in part, for cause as
defined in the laws of the State of California.
I.2. Upon receipt of notice of revocation for cause, the Proposer may cure
the default in and within thirty calendar days after the date of
receipt of the notice.
I.3. Notwithstanding any other provision in this Agreement to the contrary,
the Foundation shall not be obliged to provide any further funding
after notice until and unless the said default is cured and so
demonstrated to the reasonable satisfaction of the Foundation.
I.4. Should the Agreement terminate for reason of cause, in addition to the
Foundation's rights under Sub.Sec.1.5., the Foundation and the
Governments of Israel and the United States shall be entitled to all
its rights pursuant to Sec.H. as may have vested on the date when all
sums due the Foundation under Sub.Sec.1.5. are fully paid.
I.5. If the Foundation shall revoke as aforesaid, all funds given Proposer
per Sub.Sec.B.1. above shall become due immediately without need for
demand. Such funds which do not, by terms of this Agreement, bear
interest, shall be repaid with interest at 1 % more
6
<PAGE>
than the average prime rate prevailing at Chase Manhattan Bank,
N.Y.C., from date of notice of revocation.
I.6. The Proposer may not terminate this Agreement or abandon the project
without the prior written consent of the Foundation, which consent
shall not be unreasonably withheld.
I.7. If upon termination of this Agreement for any reason, the entire
budgeted sum has not been expended, the Proposer shall forthwith
return to the Foundation its pro rata share of such unexpended
portion. If not repaid forthwith, such sum shall bear interest as per
Sec. 1.5.
J. SURVIVAL OF PROVISIONS
Notwithstanding revocation or other termination of this Agreement, the
following provisions shall survive termination of this Agreement:
Sections B., D., E., F., G., H., 1.4., 1.5., 1.7., K., L., N., Annex
C, Annex E and Annex F.
K. FINANCIAL RECORDS
K. 1. The Proposer shall maintain business and financial records and books
of account for the work hereunder separate and apart from other
business records of the Proposer. Such books and records shall be in
usual and accepted form.
K.2. Books and records of the work hereunder shall show Proposer's
contribution. Upon request by the Foundation, the Proposer shall
provide evidence of his compliance hereunder.
K.3. The Foundation may examine, or cause to be examined, the financial
books, vouchers, records and any other documents of the Proposer
relating to this Agreement at reasonable times and intervals during
the term of this Agreement and for a period of one (1) year following
termination, or for so long as payments per Sub.Sec.B.3.,
Sub.Sec.B.5., or Annex F, or of patent royalties are due, or may
become due the Foundation, whichever shall be the later.
L. SUITS AGAINST THE FOUNDATION
L. 1. The Proposer shall defend all suits brought against the Foundation,
its officers or personnel, indemnify them for all liabilities and
costs and otherwise hold them harmless on account of any and all
claims, actions, suits, proceedings and the like arising out of, or
connected with or resulting from the performance of this Agreement by
the Proposer, or from the manufacture, sales, distribution or use by
the Proposer of the Innovation, whether brought by Proposer or its
personnel or by third parties.
L.2. The Proposer agrees that persons employed by it in connection with the
research project shall be deemed to be solely its own employees and
that no relationship of master and servant shall be created between
such employees and the Foundation, either for purposes of tort
liability, social benefits, or for any other purpose. The Proposer
shall indemnify the Foundation and hold it harmless from court costs
and legal fees, and for any payment which the Foundation may be
obliged to make on a cause of action based upon an employee-employer
relationship as aforesaid.
M. MISCELLANEOUS CONDITIONS
M.1. The Foundation makes no representation, by virtue of its funding the
work hereunder, or receiving any payments or royalties as a result of
this Agreement, as to the safety, value or utility of the Innovation
or the work undertaken, nor shall the fact of participation of the
Foundation, its funding or exercise of its rights hereunder be
7
<PAGE>
deemed an endorsement of the Innovation or of the Proposer, nor shall
the name of the Foundation be used for any commercial purpose or be
publicized in any way by the Proposer except within the strict limits
of this Agreement.
M.2. The Proposer may not assign this Agreement or any of the work
undertaken pursuant to it without the prior written consent of the
Foundation, which consent shall not be unreasonably withheld.
M.3. This Agreement shall be construed under the laws of the State of
California. The forum for the resolution of any dispute arising from
this Agreement shall be the State of Israel or Washington, D.C. in the
U.S., as the moving party may elect. Execution of this Agreement shall
be taken as submission to the forum selected pursuant to this Section.
M.4. Unless the parties to a dispute shall agree otherwise, the dispute
shall be referred to arbitration under rules of the Israel Arbitration
Law if the forum is Israel, and under the rules of the American
Arbitration Association if the forum is the U.S.
M.5. Proposer undertakes to comply with all applicable laws, rules and
regulations of the State of Israel and the United States of America,
and will apply for and obtain all necessary licenses and permits for
the carrying out of its obligations hereunder.
M.6. Under Israeli law, no stamp duty is required on BIRD Foundation
Cooperation and Project Funding Agreements.
M.7. Notices, communications and reports shall be hand-delivered or mailed
by prepaid first-class mail (airmail if transmitted internationally)
addressed to:
a. The Israel-U.S. Binational Industrial Research and Development
Foundation
P.O. Box 39104
Tel Aviv 61390
Israel
b. Applied Imaging Ltd.
22 Maskit Street
Beit Lumir
Herzliya Pituach
Israel
C. Applied Imaging Corporation
2380 Walsh Avenue
Santa Clara, CA 95051
U.S.A.
N. LIMITATION ON PAYMENTS
Notwithstanding any other interpretation of this Agreement or the
Annexes hereto to the contrary, Proposer's total obligation hereunder
for payments to the Foundation shall not exceed the percentages
indicated in Sub.Sec.B.3.b) hereto of the total funds actually
provided by the Foundation hereunder, in equivalent dollars valued at
time of repayment (Annex C).
8
<PAGE>
0. EFFECTIVE DATE
The effective date of this Agreement shall be the 1st day of August, 1995.
Unless sooner terminated by the Foundation per Sec.l., this Agreement
shall terminate fifteen (1 5) months following the effective date.
/s/ Dan Vilenski
(for the BIRD Foundation)
/s/ Mitchell S. Golbus, M.D.
(for Applied Imaging Ltd.)
/s/ /Abraham I. Coriat, CEO
(for Applied Imaging Corporation)
9
<PAGE>
ANNEX A
APPROVED PROJECT BUDGET
Applied Imaging Ltd.
(15 months duration)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Cost to Totals
Project
I. DIRECT LABOR
Gross Annual Salary % on
(inc. Social Benefits) Project
Project Leader $ 80,000 100 100,000
Research Scientist 60,000 93.3 70,000
Technician 35,000 93.3 40,833
Technician 35,000 93.3 40,833
-------- ------ -------
Total, Direct Labor 251,666
Overhead (0/H) @ 25% 62,917
-------
Total, Direct Labor + O/H 314,583
II. EQUIPMENT
Acquisition No. Yrs. % on Cost to
Cost Deprec. Project Project
2 Microscope 32,000 3 100 12,444
Slidescan 40,000 3 100 15,556
Thermocycler 27,000 3 100 10,500
FISH Chamber 18,000 5 85.7 3,600
PCR Equipment 30,000 3 85.7 10,000
Centrifuge 15,000 5 85.7 3,000
Other 15,000 5 85.7 3,000
--------
177,000 58,100 58,100
III. EXPENDABLE MATERIALS & SUPPLIES
Reagent Supplies & Probe Kits 45,000
IV. TRAVEL
8 trips to A.I.C. @ $3,000 24,000
V. SUBCONTRACTS
Bichur Holim Hospital - collaborator 10,000
Tel Hashomer - collaborator 10,000
Herzliya Medical Center - collaborator 10,000 30,000
-------- --------
SUBTOTAL $471,183
General & Administrative Expense (G&A) @ 5% 23,584
--------
APPLIED IMAGING TOTAL PROJECT BUDGET $495,267
Projected expenditure, first 8 months $286,200
Projected expenditure, second 7 months $209,067
</TABLE>
10
<PAGE>
ANNEX A
APPROVED PROJECT BUDGET
Applied Imaging Corporation
15 months duration)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cost to Totals
Project
I. DIRECT LABOR
Gross Annual Salary % on
(inc. Social Benefits) Project
Manager $100,000 50 62,500
Research Scientist 110,000 54.5 75,000
Marketing 80,000 70 70,000
Mfg. Process Development 81,000 75 75,938
Quality & Regulatory Affairs 89,000 50 55,625
Technologist 62,000 30 23,250
-------- -------- --------
Total, Direct Labor 362,313
Overhead (0/H) @ 25% 90,578
--------
Total, Direct Labor + O/H 452,891
II. EXPENDABLE MATERIALS & SUPPLIES
Miscellaneous 15,000
III. TRAVEL
8 trips to A.I. Israel @ $3,000 24,000
IV. CONSULTANTS
Statistician (140 hrs. @ $150) 21,000
Regulatory Activities Consultant 50,000 71,000
-------- --------
SUBTOTAL $562,891
General & Administrative Expense (G&A) @ 5% 28,145
--------
APPLIED IMAGING CORP, TOTAL PROJECT BUDGET $591,036
Projected expenditure, first 8 months $296,500
Projected expenditure, second 7 months $294,536
</TABLE>
11
<PAGE>
ANNEX B
PAYMENT OF CONDITIONAL GRANT
1 First Payment - On signing - $181,050
2. Second Payment - After receipt and approval of the interim technical
and fiscal reports for the first eight-month period, or after actual
expenditures on the project have equalled or exceeded $582,700,
whichever is later - $181,051.
However, if at the required time of submission of the interim
technical and fiscal reports, work on the project or expenditures
thereon prove to be materially behind plan, per Annex D and Annex A,
respectively, the Foundation will review the project with Proposer and
determine a suitable course of action with respect to further payments
against the Conditional Grant, if any.
3. Final Payment - After receipt and approval of the final technical and
fiscal reports - the balance due Proposer up to the total sum of the
Conditional Grant per Sub.Sec.B.1.
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<PAGE>
ANNEX C
LINKAGE OF CONDITIONAL GRANT REPAYMENTS
The monies given as a Conditional Grant shall be linked in value until repayment
to the U.S. Consumer Price Index, CPl-U, hereinafter "index".
As each increment of the grant is given, it shall thereafter be linked to the
base index last published prior to the date of payment. Upon payment of the last
increment of the Conditional Grant due, all prior payments shall be brought to
the same base index as the last payment.
Just prior to each occasion of payment of a portion of Proposer's obligations
under Sub.Sec.B.3., B.5., B.6., G.2., Annex E and F, the unpaid balance due the
Foundation shall be brought from the prior base to the index last published
before such payment, which index shall then be the base. This procedure shall be
repeated on the occasion of each payment until Proposer's obligations for
payments shall have been discharged.
13
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[ANNEX D APPROVED PROGRAM PLAN GRAPHIC]
14
<PAGE>
[ANNEX D APPROVED PROGRAM PLAN GRAPHIC]
15
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ANNEX E
ROYALTY PAYMENTS ON PATENTS
1. ROYALTY RATE: The Royalty Rate in accordance with Sub.Sec.G.2. shall
be 1 1/2%
2. ROYALTY BASE:
a) Where the product sold consists of the Innovation and such
Innovation consists essentially of, or depends primarily on,
a patented invention or inventions made in whole or in part
during the performance of Foundation-supported work on the
project, the Royalty Base shall be the selling price of the
product as defined in Sub.Sec.B.3.2.
b) Where the product sold consists of an assemblage of
subsystems or entities, the Royalty Base shall be the
selling price of the product multiplied by a fraction the
numerator of which shall be the manufacturing cost of those
subsystems or entities which incorporate a patented
invention or inventions made in whole or in part under this
Project, and the denominator of which shall be the
manufacturing cost of the product sold.
c) If, however, a market price shall have been established for
any subsystem or entity which incorporates a patented
invention or inventions made in whole or in part under this
project and which is sold separately, sold as part of the
Innovation, or sold as part of any other product, such
market price shall be the Royalty Base.
3. ROYALTY: The Royalty due shall be the Royalty Rate multiplied by the
appropriate Royalty Base.
4. ROYALTY PAYMENTS:
a) No royalty payments shall be made on sales between
Participants.
b) Royalty payments shall commence only when 1 1/2% of
royalties received by Proposer as computed according to
paragraphs 1., 2. and 3. of this Annex E, shall equal or
exceed the outstanding amount of Proposer's obligation with
respect to payments indicated in Sub.Sec.B.3. of this
Agreement. However, in no event shall Proposer's obligation
with respect to payments be greater than the amounts
indicated in Sub.Sec.B.3.b) of this Agreement. Should
Proposer's obligations for payment to the Foundation per
Sub.Sec.B.3. not be fully discharged, any such deficiency
shall be made up from royalty payments on products other
than the Innovation, if any, which were forgiven in
accordance with the first sentence of this paragraph 4.b).
5. TERMS OF ROYALTY PAYMENTS:
The obligation to make royalty payments in the full amount under this
Agreement shall continue for the life of the last-to-expire patent
issued on any invention made in whole or in part under this
Foundation-supported project.
6. Royalty payments shall be made on a semiannual calendar basis,
commencing at the end of the semiannual period during which any
royalty first becomes due.
16
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ANNEX F
LICENSE AGREEMENTS
1. If any patented invention or inventions made in whole or in part
during this Foundation supported project becomes the subject of any
license agreement between Proposer, or either Participant, and a third
party, the licensor shall pay to the Foundation 30% of all payments
received by him under such license agreement.
2. If any technology developed, but not including any patented invention or
inventions made in whole or in part during this Foundation-supported
project, becomes the subject of any license agreement between Proposer, or
either Participant, and a third party, the licensor shall pay to the
Foundation 30% of all payments received by him under such license
agreement, as and when received. Payments under Annex F. 1. and this Annex
W. shall be deemed payments against Proposer's obligations under
Sub.Sec.B.3. In no event shall this Annex F be construed as requiring
payments of any amount greater than those indicated in Sub.Sec.B.3.b) of
this Agreement.
3. "License Agreement" as defined in paragraphs 1. and 2. of this Annex F
shall comprise only license agreements under which Proposer, or either
Participant, cedes to third parties the rights to use any patents or
technology arising from this Foundationsupported project for purposes of
using said patents or technology for engendering sales of products
developed hereunder. "License Agreements" shall not include any license
agreements which Proposer, or either Participant, enters into as a
necessary, common or convenient means by which said products are sold to
end-users in the ordinary course of business.
17
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BIRD FOUNDATION
GRANT APPLICATION
APRIL 17,1995
<PAGE>
To: ISRAEL - U.S BINATIONAL INDUSTRIAL RESEARCH AND DEVELOPMENT
FOUNDATION
From: APPLIED IMAGING, 238O WALSH AVENUE, SANTA CLARA, CA 95051.
TELEPHONE NUMBER: (408) 562-0250, FAX NUMBER: (408) 562-0264
APPLIED IMAGING, ISRAEL, 22 MASKIT STREET, BEIT LUMIR, 2ND FLOOR,
HERZELIA, PITUACH. TELEPHONE NUMBER: 972-9-565 411 FAX NUMBER:
972-572 750
PROJECT TITLE: Fetal Cell in Maternal Blood (FCMB) Program
PROJECT BUDGET: First
Project
Period
Project Duration: l5 months
Project Cost $1.2 million
Submitted by: Israeli Company Officer U.S. Company Officer
Signature:
Printed Name Mitchell S. Golbus, M.D. Abraham I Coriat
Date Submitted April 17,1995
Preferred date for project funding: July 1, 1995
<PAGE>
TABLE OF CONTENTS
A. EXECUTIVE SUMMARY...................................................... 1
B. THE INNOVATION......................................................... 3
1. PROBLEM/OPPORTUNITY.................................................... 3
2. APPLIED IMAGING'S SOLUTION............................................. 4
3. TECHNOLOGY............................................................. 5
C. PROPOSED PROGRAM....................................................... 7
1. ANALYSIS OF THE PROBLEM................................................ 7
2. PROPOSED APPROACH...................................................... 10
3. NON BIRD GRANT DEVELOPMENT WORK........................................ 14
D. PROGRAM PLAN........................................................... 16
E. THE MARKET............................................................. 17
1. MARKET OVERVIEW........................................................ 17
2. COMPETITION............................................................ 18
3. GOVERNMENT REGULATION.................................................. 18
F. COMMERCIALIZATION - PLANS AND PROSPECTS................................ 20
G. COOPERATION AND BENEFITS............................................... 22
H. ORGANIZATION AND MANAGEMENT PLAN....................................... 24
I. THE COMPANIES AND THE PROJECT PERSONNEL................................ 26
J. PROJECT BUDGET......................................................... 27
<PAGE>
A. EXECUTIVE SUMMARY
The objective of the project is continuous development and to conduct clinical
studies leading to the commercialization of a new prenatal test developed by
Applied Imaging Corporation. This new genetic screening test is designed to
enable the detection of prenatal genetic disorders through the analysis of fetal
cells obtained from a routine maternal blood sample. The test may significantly
reduce the risk of harm to the fetus and the pregnant woman and provide results
faster and less expensively than those provided by current invasive procedures
such as amniocentesis and chorionic villus sampling ("cvs"). The company
believes that the benefits of this new genetic screening progress should lead to
a greater proportion of pregnant women being screened for prenatal genetic
disorders, including women under the age of 35 who are not typically screened at
present with accurate procedures.
Applied Imaging has established a fully owned subsidiary in Israel that will
conduct development work to optimize and verify the current process and clinical
studies on this test, and, which has been developed by the Company in the US.
The Company intends to invest a total of $6M in the development of this product
(of which $3 million has already been invested) so that the $600,000 of the BIRD
foundation grant will represent 10% of the entire project. In the future it is
the intent of the company to further develop the infrastructure and size of
Applied Imaging Israel to license local technologies, conduct continuous
research and set up manufacturing facilities for products sold in Eastern and
Western Europe and, in the longer term, potentially in the Middle East.
The fetal cell screening test is expected to be introduced in 1996 in Europe and
subsequently in the United States, subject to receipt of required FDA regulatory
approvals. The Company projects sales of its new prenatal test kits and
instrumentation to be $2.3 million in the second year from the starting date of
this development project. $21 million in year three, $64 million in year four
and $104 million in year five.
Applied Imaging, incorporated in California in July, 1986, currently develops,
manufactures and markets automated clinical analysis systems used by cytogenetic
laboratories for prenatal genetic screening. Prenatal genetic screening detects
the presence of chromosomal abnormalities associated with conditions such as
mental retardation, sexual abnormality and physical deformation. The Company
currently produces and sells eight different products addressing various needs
of these laboratories. The Company's cytogenetic instrumentation includes
karyotyping, metaphase finding and DNA probe imaging products. These instruments
are used to increase laboratory productivity by automating certain time
consuming functions done in cytogenetic laboratories. Applied Imaging's
significant position in the cytogenetic screening market is demonstrated by its
installed base of over 900 clinical workstations at approximately 350 customer
sites in more than 30 countries. The Company has worldwide distribution channels
in 35 countries. Its headquarters are in Santa Clara, California. Sales outside
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North America are managed by its fully owned subsidiary based in Newcastle,
England. 1994 sales were $9.6 million. The Company employs 75 people worldwide.
Applied Imaging, Israel is newly established and has no corporate history. The
key to its success are Drs. Mitchell S. Golbus and Yaron Lapidot, who have been
chosen to lead the project in Israel.
The Company believes that it is well-positioned to develop and commercialize an
integrated prenatal genetic screening system by virtue of its proprietary
technology for enriching the concentration of nucleated fetal red blood cells in
maternal blood samples, its proprietary automation technology and its current
position as a leader in the cytogenetic screening market, in which the Company
plans to initially offer this fetal cell screening system. Applied Imaging's
core cytogenetic business will be used as a stepping stone to introduce the new
fetal cell test. The Company's fetal cell screening system is being designed to
be compatible with its existing cytogenetic products so that customers could
potentially update or upgrade their new or existing instrumentation to
accommodate such a fetal cell screening system.
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B. THE INNOVATION
1. PROBLEM /OPPORTUNITY
Birth defects afflict about 7% of all births, and of these 2% are genetic birth
defects. Structural chromosome abnormalities are the most common type of genetic
defect, and account for about 25% of genetic birth defects. The most common the
these chromosomal abnormalities are expressed by the presence of an abnormal
number of chromosomes in the cell nucleus. They represent 95% of all chromosomal
disorders accompanying birth defects that are detectable via current procedures
such as amniocentesis or Chorionic Villus Sampling (cvs). Of these abnormalities
Down syndrome, which is expressed as an extra chromosome 21, is the most common
and is present in one of every 800 births (1:800).
Currently, women with a previous family history of genetic disease, multiple
unexplained miscarriages, or those 35 years of age and older at the expected
delivery date, are considered "at high risk," and offered prenatal diagnosis.
Accurate prenatal diagnosis of genetic abnormalities require an INVASIVE sample
collection procedure which has inherent RISK to the fetus. The risk for
chromosomal abnormalities increases significantly with maternal age, from
approximately 1:500 at age 21, to 1:20 at age 45. The age of 35 is currently
selected as the cut-off for amniocentesis or cvs because the risk for having a
child with a chromosomal abnormality (1:200) is about equal to the risk of fetal
loss or injury due to the invasive sample collection procedure. However,
chromosomal birth disorders often occur to women of any age, and without any
previous family history. As a result, every pregnancy is at some risk. Since the
majority (70%) of births occur to women age 21 - 32, the majority of births with
chromosomal disorders occur in this population as well. With the current
practice of offering prenatal diagnosis only to women age 35 and older, ONLY 20-
30% of the chromosomal abnormalities could ever be detected. Furthermore, even
if the amniocentesis or cvs cell analysis procedures didn't cause any harm to
the fetus, they still would not be cost-effective to apply to all women, due to
the complexity of the test (2-3 weeks turnaround time) and the prohibitive costs
associated them ($1200 per test in the USA).
A need exists for a way to efficiently test the population of pregnant women of
ALL AGES with a low risk, non-invasive, cost effective procedure. This need has
led to the use of ultrasound and serum screening, to identify some chromosomal
abnormalities. Currently, at least one ultrasound study is done on the majority
of pregnancies occurring in the U.S., and Western European countries. However,
ultrasound can only pick up GROSS structural abnormalities, and isn't very
efficient at detecting Down syndrome, the most common chromosomal disorder. It
is also operator skill dependent and is most effective when done fairly late in
the pregnancy. Serum screening on the other hand is a relatively simple antibody
test that was recently modified to include the ability to detect chromosomal
abnormalities. This test is called AFP test because it measures maternal serum
levels of alpha-feto protein (AFP). A more recent test, called the Triple Test,
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combine the AFP test with additional blood chemistry tests to increase its
accuracy. While these tests are inexpensive and easy to perform, they suffer
from a very high false positive rate (7-11%), and only detect 60% of cases
tested for Down syndrome. The high false positive rate means that maternal
anxiety levels are needlessly heightened, and many women are needlessly faced
with the decision to undergo the costly and risky amniocentesis procedure, which
is used for definitive diagnosis. An increased number of unnecessary
amniocentesis procedures means an increased number of procedural induced losses
of normal, unaffected fetuses. A third drawback of these serum screening tests
is that they can only be done around the 16th week of pregnancy. This may not
leave enough time for delicate pregnancy management decisions if amniocentesis
is needed.
2. APPLIED IMAGING'S SOLUTION
The medical risks and costs of amniocentesis and cvs and the relative
unreliability of serum based procedures for diagnosing Down syndrome and other
chromosomal disorders have stimulated an interest in the development of a
reliable, less risky and less costly genetic screening procedure that could be
used to screen a greater proportion of pregnant women. New genetic screening
techniques currently being developed involve the enrichment of the concentration
of nucleated fetal red blood cells in maternal blood samples obtained during the
early stages of pregnancy and analyzing genetic material (DNA) from such fetal
cells to determine the presence of chromosomal abnormalities.
Recent medical research indicates that a small number of nucleated fetal red
blood cells enter the maternal blood stream during pregnancy. However, given the
rarity of nucleated fetal red blood cells in the maternal blood stream
(estimated at one per 100 million maternal blood cells), existing technologies
cannot easily and inexpensively enrich the concentration of such fetal cells in
maternal blood samples to a level which is sufficient for genetic screening
purposes. Applied Imaging has developed a methodology able to identify nucleated
fetal red cells from the maternal blood stream.
The initial step in the process developed involves taking a standard venous
sample of maternal blood. The blood sample is then subjected to various
enrichment processes designed to remove as many of the maternal blood cells as
possible in order to increase the concentration of nucleated fetal red blood
cells for easier detection of such fetal cells. However, because the nucleated
fetal cells still represent a very small percentage of the total number of cells
in the processed maternal blood sample, this detection process requires highly
specialized procedures.
Once detected, the nucleated fetal red blood cells may be subjected to DNA probe
analysis techniques to detect chromosomal abnormalities. DNA probes can be
designed
4
<PAGE>
to locate and enumerate specific chromosomes. DNA probes are usually introduced
into the processed blood sample on a slide (in situ). The sample is then
"incubated" to allow the DNA probes to enter fetal cells and bond to targeted
chromosomes. This incubation procedure can take several hours. The subsequent
detection and analysis of DNA probes in fetal cells may indicate the existence
of chromosomal disorders.
3. TECHNOLOGY
Applied Imaging has developed technologies which it believes will enrich the
concentration of nucleated fetal cells in maternal blood samples and produce a
safer and faster genetic screening procedure. The Company's fetal cell screening
system has the following characteristics:
. SMALL MATERNAL BLOOD SAMPLE. Laboratory studies indicate that Applied
Imaging's fetal cell screening system may allow it to perform chromosomal
screening analysis with an amount of maternal blood equivalent to that drawn
for most clinical tests.
. INCREASING FETAL CELL CONCENTRATION. The Company believes that most
approaches to increase the concentration of nucleated fetal cells in maternal
blood samples include various combinations of density gradient techniques and
separation techniques that use monoclonal antibodies. The Company has
developed a unique, proprietary procedure to remove maternal blood cells
based on the physical and biochemical properties of such cells. The Company
believes that its procedure will be less labor intensive, less time consuming
and less costly. The Company has filed three patent applications related to
the process of increasing the fetal cell concentration and has additionally
obtained a license for certain complementary technologies for which a patent
application has also been filed. The Company has been notified by the Patent
Office that all major claims of its patent applications have been accepted.
(See Appendix 2. - Enrichment of Fetal Cells from Maternal Blood for Genetic
Analysis - A Product Design)
. DETECTION OF NUCLEATED FETAL CELLS. Once the maternal blood sample has been
processed to increase the concentration of the nucleated fetal cells and the
enriched sample has been placed on a slide, detection of the fetal cells is
usually done manually using a microscope. Applied Imaging's fetal cell
screening system has been designed to automate the nucleated fetal cell
detection process based on adaptions of unique technologies incorporated in
the Company's current cytogenetic products. A patent has been issued covering
certain aspects of these underlying technologies. The fetal cell screening
system will eliminate the need for manual fetal cell detection.
. APPLICATION AND DETECTION OF DNA PROBES. DNA probes which fluoresce on
exposure to ultraviolet light are used to identify the presence of genetic
disorders in
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the detected nucleated fetal cells. The Company has entered into a long term
exclusive distribution agreement for a novel DNA probe assay developed by a
United Kingdom based company that is simple and typically requires an
incubation period of approximately one hour. The assay uses a special
coverslip which is pre-coated with DNA probes and placed on the microscope
slide containing the prepared maternal blood sample. The Company's fetal cell
screening system has been designed to automatically locate and enhance the
fluorescent images produced by the DNA probes.
Applied Imaging's fetal cell screening system is currently expected to be
introduced in Europe in 1996 and subsequently in the United States, subject to
receipt of required approvals in such jurisdictions. The system is being
designed to initially screen for chromosomal abnormalities resulting in
conditions such as Down syndrome, Patau syndrome, Edward syndrome, Turner
syndrome, Klinefelter syndrome, Triple X syndrome and certain other conditions.
These abnormalities account for approximately 95% of the incidence of all birth
defects which result from chromosome-based genetic disorders. There are no
competing fetal cell in maternal blood screening systems currently on the
market.
The proprietary fetal cell screening system consists of (i) a prepackaged
reagent kit to enrich the concentration of nucleated fetal red blood cells in
the maternal blood sample, (ii) a DNA probe kit and (iii) instrumentation to
automate the identification of nucleated fetal cells and the detection and
analysis of DNA probes.
The fetal cell screening system developed by Applied Imaging for the new
prenatal genetic screening test is now being used successfully in the Company's
laboratory on early gestation samples. See Appendix 4 for two photographs of
current prototypes of both the kit and instrumentation. We are now repeatedly
identifying fetal cells in maternal blood at gestation periods between 12-16
weeks (the alternative amniocentesis procedure is typically done between 16-18
weeks). During the last three months we have found and successfully probed fetal
cells from early gestation samples with a 93% success rate. Working prototypes
of the full screening process can now be demonstrated in our laboratory. The
Company has spend approximately $5 million to date in this area including $3
million in development work. It projects to spend an additional $3 million in
development work to complete this R&D program so as to start commercialization
in 1996. $600,000 will be provided by the BIRD foundation under this 15 month,
$1.2 million program.
The Company's fetal cell screening test kit and instrumentation are subject to
regulatory approval by the FDA in the United States. Its image analysis
equipment must conform to UL standards.
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C. PROPOSED PROGRAM
The current status of the specifications for Applied Imaging's fetal cell
screening product is:
1. Enrichment procedure and chemistry kit to enrich maternal cells. Status -
developed by Applied Imaging, feasibility demonstrated, prototype
demonstrable at Applied Imaging Corp.
2. DNA probe kit to be used for diagnosis of chromosomal disorders. Status -
Applied Imaging has negotiated a 10 year exclusive distribution agreement
with a supplier of these kits. Methodologies and procedures to use these
kits with Applied Imaging enrichment chemistry have been developed,
feasibility demonstrated
3. Image automation equipment to automatically search for fetal cells and
identify genetic disorders. Status - Engineering prototype developed,
demonstrable in Applied Imaging Laboratories.
Under this BIRD Foundation grant the Company intends to:
. Perform continuous development on the fetal cell enrichment methodology
(chemistry and DNA parts only) to optimize and simplify its design.
. Clinically verify Applied Imaging's methodology over a large number of
samples. Establish and monitor clinical sites for FDA submission.
. Establish manufacturing specifications for the final product, including
label claims.
. Define a marketing strategy for commercialization of its test in 1996,
initially in Europe, and subsequently in the United States ( following FDA
clearance).
1. ANALYSIS OF THE PROBLEM
STATUS:
Applied Imaging Corp. has designed a system design encompassing the enrichment
of fetal cells from maternal blood and the genetic analysis of the fetal cells
for specific markers with DNA probes. Refer to Appendix 2 "Enrichment of Fetal
Cells from Maternal Blood for Genetic Analysis - a Product Design" for a
detailed technical discussion of the technology used by the Company in this
process.
The system has multiple steps and components which are outlined in the block
diagram of figure 1 (in Appendix 2). Although the steps in figure 1 have been
worked out with parametric studies, iterating toward optimum performance, there
has been no formal
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extensive analysis of components and process. For a product that is to be robust
in the field and have predictable performance the formal analysis will be
required and will be the task of Applied Imaging, Israel.
Also, within the 3 major steps of figure 1 (in Appendix 2) the most time
consuming is step 1. There already exists some evidence that step 1 could be
simplified or potentially eliminated. This would save about 100 minutes of a 190
minute (3 hours, 10 minutes) procedure, and would eliminate the requirement of
moderately expensive laboratory equipment, i.e. a high speed programmable
centrifuge.
The Company has repeatedly identified fetal cells from MALE fetuses by analyzing
maternal blood samples. The Company believes that it can also identify FEMALE
fetuses from the maternal blood sample. However, in the present status there is
some uncertainty if one has reached desired results with female fetuses. In the
case of a male fetus, the cells placed on a slide after enrichment may be
confirmed as coming from the fetus by use of a Y chromosome probe with
fluorescence in situ hybridization (FISH). In effect males have a Y chromosome.
Females do not have such a chromosome. No such secondary test is currently
available for females, or in case of male, female twins. As a result, although
the Company believes it is successful in identifying both male and female fetal
cells, there is, as yet, no FORMAL proof that the enrichment for female fetal
cells was successful.
GOAL:
Our goal is to provide a ROBUST process with enrichment performed in under 2
hours (single or in batches of 10 - 20), with satisfactory proof of enrichment
in all samples. We may consider these the additional specifications above the
existing product.
The marketing considerations influencing these additional steps stem from the
desire to enter a broader market place. Our prior target market was the
cytogenetics laboratory. Personnel in cytogenetics are accustomed to meticulous,
time consuming procedures. When we describe our current test steps to such
customers they find it acceptable. In addressing the high volume, commercial
laboratory market, and also the overseas market with less trained personnel, the
test requires less meticulous manipulations, less time and more batching or high
volume production features.
A cytogenetics laboratory will do 6 - 8 tests per day. We know of commercial
settings where multiple hundreds of tests per day would be the minimum
acceptable load. Thus one commercial laboratory is equivalent in volume to 50
cytogenetics placements on average.
CHALLENGE:
Problems in realizing the additional specifications may be divided into three
components:
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i) Optimization by physical and component analysis requires an understanding of
the basics of the three step enrichment. For example, in step 1, the bulk
separation, differential centrifugation is reasonably well defined by the
Stokes Sedimentation equation.
2ga2(d1-d2)
V = -----------
9n
where
v is velocity of sedimentation
g is gravitational force
a is radius of a model sphere
d1 & d2 are density of sphere & medium
n is the coefficient of viscosity
These terms are all applicable to our bulk separation process, although we must
further equate cell deformability to viscosity before the Stokes equation fits
our problems.
Similarly the degree of hypotonicity of medium in the bulk separation will
affect both the density of cells (d1) and the deformability which relates to the
viscosity (n). A formal analysis of these features is bound to provide us with
opportunity to both improve efficiency of separation and the robustness of the
procedure. It will indicate how close to the margin of failure we are with
present design, and indicate how to redesign away from such margins.
There are at least a dozen areas in the 3 major steps that deserve a formal
analysis. A partial list includes:
. Augmenting cell deformity by use of drugs (we currently use
chlorpromazine).
. Programmed RPM centrifugation.
. Osmolarity of the bulk separation.
. Stability of lysing solution influenced by pH, temperature, etc.
. Speed of penetration of inhibitor into cells (to prevent lysis of fetal
cells).
. Osmolarity of the density gradient.
. Differential sedimentation of nucleated cells in the density gradient.
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Each of these is amenable to formal analysis once the variables are defined.
Part of the project will be to define the variables.
ii) A more detailed approach will be required in attempting to simplify or
eliminate Step 1. A more efficient lysis must be defined because using the
same proportion of reagents would necessitate using an unwieldy volume.
Currently proportions are 1:14 blood to reagent. The goal would be 1:2.
iii) In the identification of female derived fetal cells the investigation will
be in which parameters of genetic signature will most consistently form a
contrast versus maternal cells. There must be both a consistent difference
and a strong signal. There is a broad range of choices from which to
prioritize.
2. PROPOSED APPROACH
GENERAL PLAN:
. Start with transfer of technology to the laboratory in Applied Imaging
Israel. This will include a performance evaluation on 150 samples,
containing at least 30 abnormals. The Company will submit its test for
regulatory FDA approval in the United States based on the clinical results
of this study combined with other parallel clinical studies done at other
sites.
. In parallel or soon after the evaluation starts, begin both analytical and
parametric research on the lysis first method. If this shows promise of
------------------
meeting specifications then all the analytical aspects of the first step
bulk separation can be skipped, or at least deferred.
. Begin an analytical research of step 3, and move towards step 1 as
indicated by the lysis first experiments.
. Independent of the above, begin genetic studies leading to verification of
female fetal cells on a slide. Applied Imaging does not currently have the
skill base for this experimental approach. New hires will be required, and
these personnel will no doubt modify this part of the program. It must
begin as library research followed by an experimental plan and a series of
pilot experiments leading to a more focused study.
. As each step is completed, it will be incorporated into the current
standard procedure for an overall evaluation. A final evaluation will
probably occupy the last 4-5 months. The results of this final evaluation
will be incorporated into an amended FDA Phase Two application (See Section
D. Program Plan).
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The laboratory in Israel will be staffed by new personnel. Two key individuals
have already been identified.
The one major constraint on this project is availability of the right samples.
No doubt some variability between samples makes for replicate studies at each
step. Tel Hashomer, Bichur Holim and Herzelia Hospitals have agreed to cooperate
with the company and supply samples in Israel.
Section H. "Organization and Management Plan" describes the program personnel.
Appendix 3 includes resumes of the key individuals assigned to the program.
DETAILED DESCRIPTION OF TASKS:
TASK 1 - PRELIMINARY EVALUATION/CLINICAL STUDIES. This task will be shared with
at least four other centers in Europe, Canada and the U.S. The goal of this task
is in part to progress from feasibility to clinical product through the
regulatory cycle for the first generation product.
This evaluation task will not only demonstrate diagnostic success, it will also
measure time and motion studies, throughput and rate of procedural failures, as
a record for future comparison. It will also permit the Company to submit for
FDA approval in the United States.
The first level of protocols for this study have already been written. Detailed
studies are now being written with help of medical and statistical consultants.
The output of the collaboration will be three U.S. regulatory submissions
dealing with enrichment, instrumentation and DNA probes.
Since the objectives here are to improve efficiency and robustness the
measurements will include throughput, number of breakdowns, hands on labor as
well as the rate of success in simultaneously enriching at least 20 fetal cells
from maternal samples, and the efficiency of hybridization of these cells.
TASK 2 - ANALYSIS AND PARAMETRIC TESTING. As much as possible the various steps
of the enrichment procedure will be described by a set of equations. The
equations will be from physics or chemistry or both, as the case requires.
Once the equations are in place the measurement of variables will occupy a large
part of the study. This will require performance of part of the test under
carefully controlled conditions in which the end point is a numeric range of
each variable. Modifications of the test may be required.
For example the Stokes equation contains viscosity as a variable. This will be
measured by observing migration of well defined particles through the
erythrocyte stack under different conditions of centrifugation.
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Since the initial task will be to define the parameters to be measured, the
details of each sub-task cannot be given here. The physical chemist to be hired
will establish these definitions.
The result of these analyses will lead to parametric studies. For example for
optimal, programmed g forces to enable nucleated erythrocytes to migrate to the
plasma, cell interface in the bulk separation.
Another example is the level of non polar solvent addition to optimize inhibitor
diffusion into fetal erythrocytes and yet prevent lysis of these same
erythrocytes. An explanation for why a certain volume ratio of lysis agent to
sample is required will lead to potential ways to circumvent this requirement.
Then parametric studies to reduce the volume of reagent to manageable levels,
e.g. 1:2 will be done.
Although the potency of carbonic anhydrase (CA) inhibitors on both CAI and CAII
is published and well known, when put into the context of the present task these
do not have the same relevance. The reasons are not yet understood. For example,
although Acetazolamide is reported to inhibit CAII specifically its action is
realized much slower when the enzyme is still inside the erythrocyte. Thus one
requires a pre incubation with acetazolamide to achieve inhibition of CAII in
fetal cells while lysing the adult (maternal) cells. This requires an extra step
and is time consuming and therefore undesirable. On the other hand,
ethoxazolamide penetrates erythrocytes rapidly, causing inhibition of both CAI
and CAII, but is about 8 times more powerful on fetal cells. Our present
solution is a blend of these two inhibitors with which to obtain rapid
penetration to slow the CAII activity and then completely inhibit CAII while
leaving enough activity in CAI to lyse adult cells. It is likely that with
further analysis a more appropriate blend will be possible, and will work also
with a blend of membrane modifying agents so that the total volume of reaction
is reduced. The measurements here will be counting of lysed and non lysed cells
with standard hematological counters, with varying conditions of lysing
solution, time, inhibitors and solvents. The techniques are well worked out, but
the conditions require further investigation.
Reduction in reagent volume of the CAII inhibited CAI hemolysis is a very
important aspect of the study. As indicated above successful reduction in the
volume of reagent makes it possible to perform lysis of 20 ml of blood in less
than 50 ml total volume. This makes it possible to handle the sample in a single
container and even provide for some automation.
However, if after a reasonable effort the reduced volume is not achieved a
similar effort will be mounted on automating the specific hemolysis as a first
step. Preliminary analysis suggests that a continuous flow technique of rapid
mixing, reaction time-delay coils and a self cleaning continuous flow centrifuge
to reconcentrate samples will substitute for the low volume because it still
eliminates hands on time. There are several
12
<PAGE>
designs of continuous flow centrifuge in long expired patents that are exactly
right for this application. It may be necessary to have one of these built under
contract.
With automation by continuous flow timing becomes less critical. One sample
follows another into the system and all samples are recollected for further
processing without human interaction. Critical times will be automated and the
rate of errors will be reduced.
As a result of these two alternative paths available for this critical
development there is a high level of confidence in achieving the goal of
streamlining the overall enrichment process. Optimizing Step 1 will not be
undertaken unless both of these alternatives fail.
TASK 3 IDENTIFICATION OF FEMALE FETUS CELLS AFTER ENRICHMENT WILL BE A TASK OF
GENETIC ANALYSIS.
The task will be designed by newly hired personnel. However, the following
approaches are offered as a starting point.
The length of teleomeres (arms) on each chromosomes is renewed in embryonic
formation. Over a lifetime, teleomeres become continuously shorter. Therefore,
the lengths of maternal teleomeres on each chromosome are less than they are on
the fetus. The differences in length are measurable biochemically. By confirming
the longer length of the teleomeres on each chromosome we therefore can confirm
the fetal nature of a cell. By verifying the absence of chromosome Y we
therefore can confirm that the cell is fetal and female. Research will be
devoted to this length measurement. Results will be expressed as fluorescence
intensity. The precise lengths will be less important than length in identified
nucleated erythrocytes vs. all other maternal cells on the slide.
The task, therefore, may be divided into making choice of one or more
chromosomes which are amenable to such measurements, to purchase or make the
fluorescent probes for the teleomeric site(s), to develop the FISH techniques on
model systems and on the specific cells of interest on enrichment slides, and to
measure the resulting fluorescence intensity in enriched fetal cells and
adjacent maternal cells. Applied Imaging already has the instrumentation with
which to make such measurements.
Feasibility can be established by combining this procedure with Y chromosome
studies on male fetuses and subsequently using the technique on all samples in
combination with probes of diagnostic interest, e.g. for chromosome 21.
An alternative approach is to measure a fluorescence intensity ratio of probes
of polymorphic regions. The ratio is of one chromosome to another within single
cells. Such a ratio is likely to hold an individual's signature and therefore
would be different in cells of mother and her fetus. This is so partly because
the chromosomes of a pair are derived from different parents, so in the fetus
one of the chromosomes is derived from the mother, the other from the father.
Demonstration of feasibility of this has been
13
<PAGE>
established in a series of papers by Nederlof et al, Cytometry vol. 13, page 831
---------
to 852, 1992. These papers show ratio differences in polymorphic regions but do
not address the general problem presented here.
Our task would be to find the appropriate polymorphic regions, provide the
probes, either in laboratory or by contract, perform the FISH and measure
ratios. If feasibility is shown, this would be combined with probes of
diagnostic interest for final product, and passed back to an evaluation group to
test together with the final version of the enrichment product.
TASK 4. FINAL EVALUATION OF THE COMPLETE SYSTEM. A final, formal evaluation of
the whole improved product will occupy the last months of the study. Emphasis
will be on showing the improvements in diagnostic efficiency, decrease of
failures and reduction of throughput time. Since there would be no change in
claims, the new method evaluation would be submitted as an addendum to previous
regulatory submissions.
The identification of female fetus may become a new claim. However, since the
analogy to identifying a male fetus with Y chromosome probes is very good, there
will be a simple FDA submission on substantial equivalence (510(k)) on this new
version of probe products.
MARKETING TASK:
The Company will perform continuous studies and interviews of its customers to
further define the market and the product specifications. Health Maintenance
Organizations (HMO's) will be interviewed and test pricing studies will be
conducted. Reimbursement strategies will be analyzed in the process of setting
final test price for the product. A marketing strategy will be defined and put
together to introduce Applied Imaging's products in Europe in 1996 and in North
America following FDA approval. A marketing plan will be prepared.
3. NON BIRD GRANT DEVELOPMENT WORK
In addition to the development work defined within the outline of the BIRD
grant, Applied Imaging projects to invest an additional $1.8 million in
development costs to bring the fetal cell screening product to the market. This
will bring the total R & D investment to $3 million over the next two years. The
following tasks will need to be achieved in addition to those defined under this
project:
. Complete the design of the fetal cell scanning instrument
Applied Imaging has designed a prototype of the fetal cell scanning
instrument, however this device scans for fetal cells in one hour rather
than the targeted 15 minutes. To achieve this speed, the Company will
have to transfer technology
14
<PAGE>
already developed in its core business product. This includes a patented
automatic focusing system. The current instrument is not compatible with
the Company's other products. Development work needs to be done to insure
compatibility. This will also insure that current customers are able to
upgrade their existing systems.
. Improve slide staining techniques and slide sample deposit methodologies.
This is necessary to minimize the scanning area so that the
instrumentation speed is optimized. Sample deposit methodologies need to
be improved to optimize DNA probe efficiency.
. Conduct clinical studies at three additional sites.
The Company intends to conduct clinical studies of its fetal cell
products at two sites in addition to the one in Israel. This is necessary
to comply with FDA guidelines. The Company will also conduct studies
internally at its facility in Santa Clara, California.
. Conduct continuous development to adapt field feedback to the final
product.
The Company projects that modifications will have to be made to its fetal
cell product based on the clinical results from all sites. Manufacturing
specifications will also change.
The combination of this development work and the work executed under the BIRD
grant should enable the Company to have a product available for
commercialization in 1996.
15
<PAGE>
D. PROGRAM PLAN
See the following two pages.
16
<PAGE>
[PROGRAM PLAN GRAPHIC]
<PAGE>
[PROGRAM PLAN GRAPHIC]
<PAGE>
E. THE MARKET
1. MARKET OVERVIEW
The Company believes that the introduction of its fetal cell test will broaden
the target market addressed by Applied Imaging products to include all pregnant
women receiving prenatal care. Of the four million live births per year in the
United States, 2.7 million are attributed to women under 35 who receive prenatal
care in the first trimester (Source: Summary of the Vital Statistics of the
USA). 2.1 million pregnant women in the United States are tested every year for
genetic disorders. Current methodologies for diagnosing these disorders are
either expensive ($1,200 in the United States) and risky (one in 200 result in
miscarriage) or highly inaccurate (50% - 60% accuracy). It is estimated that the
market for these fetal cell based tests could reach $400 million per year in the
United States alone (Source: Industry Analyst Report). The international markets
in developed countries for prenatal genetic testing are widely believed to be
triple the size of the United States market.
Appendix 1 details a market model for the products, projected sales and market
share for both the test kits and the instrumentation. The average selling price
of the test kits in high volume is projected to be $55. The average selling
price for the equipment able to automatically identify and analyze fetal cells
is projected to be $125,000. Consumables margins are projected to be 70% and
instrumentation margin 55%. Market share is projected to be 35% for both
instrumentation and the consumables. The BIRD project represents 10% of the
development expenses necessary to bring this product to the market.
Applied Imaging feels comfortable that it can achieve this market share for the
following reasons:
1. No other company is currently providing such a test in the market.
2. The Company believes that its product will be highly differentiated .
The Company's technology enables it to offer a test projected to be
lower cost and faster than any other test that is currently being
developed by both commercial and R & D organizations.
3. The Company is taking a fully integrated approach to provide a total
solution to the screening system and is using its unique imaging and
automation expertise to achieve this. To the Company's knowledge this
approach is unique to Applied Imaging.
4. The Company has world wide distribution channels in place which will
provide quick access to the market. The Company will take advantage of
its
17
<PAGE>
existing customer base, which it knows very well and will provide an
upgrade path to its customer base.
5. The Company will build from its current 70% market share in the genetic
screening market it addresses.
In the longer-term, a further opportunity is emerging to screen for major
cancers through detection of cancer cells in the peripheral blood. Applied
Imaging intends, with the involvement of the Israeli subsidiary, to develop
products for this market with the technologies used for the fetal cell testing.
The technological challenges for each opportunity are similar - isolation and
analysis of extremely rare cells.
2. COMPETITION
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 nucleated fetal red blood cells in maternal blood
samples. The Company knows of four companies that have publicly announced their
intent to offer prenatal genetic screening products based on detection and
analysis of nucleated fetal red blood cells in maternal blood samples. These
companies are Integrated Genetics, Inc., based in Boston, MA; CellPro,
Incorporated, based in Seattle, WA; and Aprogenex, Inc., based in Houston, TX.
Integrated Genetics specializes in providing genetic testing services. Cell Pro
specializes in cell separation and gene therapy, and Aprogenex specializes in
providing DNA probes.
The Company believes that its methodology for identifying fetal cells and
diagnosing genetic disorders is lower cost, faster and simpler than other
methodologies being developed by other organizations. The Company is also taking
a unique, fully integrated approach to the process by not only developing the
chemistry to isolate fetal cells but by also automating the identification of
these cells and the diagnosis process. The Company is not aware of any company
that is currently offering this product commercially.
3. GOVERNMENT REGULATION
The manufacturing, distribution, advertising and marketing of the Company's
clinical diagnostic products are subject to rigorous government regulations in
the United States. Applied Imaging expects to seek 510(k) clearance for its
fetal cell screening product. A 510(k) premarket notification must be supported
by appropriate data establishing, to the satisfaction of the FDA, that a newly
developed device is "substantially equivalent" to a device legally marketed in
the United States. Clearance under 510(k) normally takes at least 180 to 360
days and may require submission of clinical safety and effectiveness data to the
FDA, which are typically obtained from clinical studies. Preliminary discussions
with the FDA have led us to believe that a 510(k) submission could be acceptable
to the
18
<PAGE>
FDA. However if substantial equivalence cannot be established for its products,
the FDA might require that the manufacturer submit a PMA application. The PMA
process is significantly more complex and time consuming than the 510(k)
clearance process.
It is the Company's plan to start selling its products in Europe while its
products are cleared by the FDA in the United States. Under these conditions
these products will need to be manufactured outside the United States.
19
<PAGE>
F. COMMERCIALIZATION -PLANS AND PROSPECTS
1. PROJECTIONS
The Company sales projections are: $2.3 million for the second year from the
starting date of this project, $21 million for the third year, $64 million for
the fourth year and $104 million for the fifth year. The fetal cell screening
system is expected to be introduced in Europe in 1996 and subsequently in the
United States, subject to receipt of required FDA regulatory approvals. See a
fetal cell screening five year market model in Appendix 1 and cash flow
projections in Section J. "Project Budget".
2. MANUFACTURING
The U.S. division of Applied Imaging will manufacture all kits sold in North
America. It is Applied Imagings current intention to manufacture the kits sold
to Europe in Israel. This will enable the company to sell its products until the
Company receives FDA clearance in the United States. This would also enable the
Company to start commercialization of its products in 1996, before FDA approval.
Applied Imaging will seek financing from Israeli Venture Capital Organizations
to achieve this objective.
3. SALES AND DISTRIBUTION
Applied Imaging intends to use its core cytogenetic business as a stepping stone
to introduce the new fetal cell test. The Company will take advantage of its
significant position in this screening market as demonstrated by its installed
base of over 900 clinical workstations at approximately 350 customer sites in
more than 30 countries. The Company has worldwide distribution channels in 35
countries. The Company's fetal cell screening system is being designed to be
compatible with its existing cytogenetic products so that customers could
potentially update or upgrade their new or existing instrumentation to
accommodate such fetal cell screening system.
4. FINANCING
One half of the $1.2M BIRD project, or $600,000 will be provided by Applied
Imaging from its own working capital. To achieve its immediate goals in the
fetal cell area, the Company is raising $4 million from its current investors to
complete the work required on the fetal cell in maternal circulation. Applied
Imaging's total investment in the development of the fetal cell screening test
is projected to be $6 million, out of which $3 million has already been spent.
Thus the BIRD grant will represent 10% ($600,000 over $6 million) of the total
product development project.
The Company's current investors have already committed to provide the required
fundings. The Company also intends to file for an Initial Public Offering in
1996 subject
20
<PAGE>
to market conditions. $20 million is projected to be raised during this public
offering. The Company has teamed up with Allen and Co., an investment banker, to
underwrite an Initial Public Offering in the United States when market
conditions allow. Allen and Co. has already conducted substantial due diligence
on the Company and has invested $4 million in Applied Imaging in a previous
round of financing.
21
<PAGE>
G. COOPERATION AND BENEFITS
The BIRD Foundation grant will enable the Company to accomplish the following
objectives:
1. Conduct optimization studies of the chemical procedures used in the
identification of fetal cells, developed by Applied Imaging. Location
- Israel.
2. Conduct alpha site clinical studies on the methodology for fetal cell
isolation and genetic screening. Arrangements with Israeli
laboratories, at Tel Hashomer and Herzelia Medical Center (the largest
private and non private cytogenetic laboratories in Israel), and at
Bichur Holim Hospital are being discussed. It is projected that at
least one of these sites may be used for clinical studies leading
toward FDA submission. Location - Israel.
3. Improve current fetal cell separation methodology to increase speed and
ease of use while reducing costs. Design changes will be made based on
the studies conducted as per (1) and (2). Location - Israel.
4. Adapt design to optimize manufacturing efficiency and to productize the
chemistry kit. Location - Israel. Develop manufacturing specifications
and kit labeling. Location - U.S.
5. Conduct market survey and prepare a marketing strategy to introduce its
fetal cell screening product in Europe and Israel. Location - U.S.
6. Submit test for FDA approval. Location - U.S.
In addition to accomplishing the development objectives mentioned above, it is
the intent of Applied Imaging to fully develop the infrastructure and size of
Applied Imaging Israel with the following objectives in mind:
1. Licensing of Israeli based technologies in other areas of prenatal
diagnostics and joint venture with current Israeli developers of synergetic
technologies taking advantage of Applied Imaging's strong presence in the
United States and world-wide distribution channels in over 35 countries in
Europe and the Far East. These technologies will be identified in the first
12 months of this project's start-up.
2. Conduct research that will lead to the adaptation of the Company's existing
fetal cell methodology so that its fetal cell isolation kit can be used to
screen for single gene disorders in addition to the chromosomal disorders
that are currently being targeted. Successful implementation of these
methodologies will substantially enlarge the market potential of the
company. Feasibility of the process will be demonstrated.
22
<PAGE>
3. Conducting continuous research and development to adapt Applied Imaging's
current technology to the area of pre-emptive diagnosis of various cancers.
4. Manufacturing of chemistry kits for the European market. Overseas
manufacturing will enable the company to ship test kits commercially
outside the United States without the necessary regulatory approval from
the United States. based Food and Drug Administration (FDA).
To achieve these goals the Company intends to start an aggressive effort to
raise additional funds from Israeli Venture Capital Companies and grant sources
and will use the BIRD Foundation investment as a reference.
Applied Imaging Corp. sees the following benefits of establishing a fully owned
subsidiary in Israel:
1. Access to highly skilled scientific resources.
2. Low cost scientific personnel (believed to be half the current U.S.
cost).
3. Good strategic position to access Eastern Europe markets and
potentially the Middle East markets.
Mr. Abe Coriat, Applied Imaging's founder, CEO and Chairman, lived in Israel for
nine years and speaks Hebrew.
23
<PAGE>
H. ORGANIZATION AND MANAGEMENT PLAN
ORGANIZATION
Applied Imaging Corporation has opened a subsidiary company in Israel
(incorporated in May, 1995). The Israeli company is managed by Dr. Mitchell
Golbus. Dr. Golbus reports to Abe Coriat, CEO. The Israeli Company has already
identified a project leader, Dr. Yaron Lapidot, to be responsible for all
scientific aspects of the program in Israel. For the purposes of this program
all personnel assigned to this project will report to him. The U.S. company has
assigned Dr. Alex Saunders (M.D.) responsibility for the overall program and for
the coordination of the tasks between the U.S. and the Israeli subsidiary. See
Appendix 3 for resumes of these key individuals.
COMMUNICATION AND MANAGEMENT CONTROLS
Both companies will maintain timely and close communication through daily
telephone conversations or E-mail. The heads of the program and other assigned
individuals will meet twice per quarter to conduct management reviews. The
Company will establish strict bookkeeping procedures to keep track of the
project expenditures.
PERSONNEL PLAN
Most positions in the U.S. company have already been identified and filled. They
include Dr. Alex Saunders, M.D., Program Manager; Chris Marks, Product Manager,
Marketing; Julia Miyaoka, Process Development Manager, manufacturing; Paul
Hardiman, Regulatory Affairs, and a technologist (to be recruited). Two Ph.D.'s
will be recruited by the Israeli company and will be joining Applied Imaging
Israel upon receipt of the funding. Dr. Yaron Lapidot, M.D., Ph.D., has agreed
to join the company. Dr. Lapidot will be the project leader in the Israeli
Company. Dr. Mitchell Golbus has already signed an agreement with Applied
Imaging Corporation. One additional Ph.D. and two technologists will be
recruited by the Israeli company.
Appendix 3 includes resumes of the key personnel assigned to this project by
both the U.S. and Israeli companies.
SUB CONTRACTORS
The Company foresees working with three sub-contractors in Israel. They will
provide maternal samples for the clinical studies and will collaborate with the
Israeli company in providing scientific support and advice. Applied Imaging
will also have access to their extensive capital equipment that might be
necessary for the research in this project. Tel Hashomer, the largest hospital
in Israel, Herzelia Medical Center, which has the largest private cytogenetic
laboratory in Israel, and Bichur Holim Hospital have been approached to that
effect, and have agreed in principle to cooperate with the Company. $30,000 of
24
<PAGE>
this grant has been assigned for sub-contracting purposes. The U.S. company will
use the services of a professional statistician and a regulatory activities
consultant. $71,000 has been assigned to this effect.
25
<PAGE>
I. THE COMPANIES AND THE PROJECT PERSONNEL
APPLIED IMAGING CORPORATION (U.S. AND ISRAEL)
Applied Imaging Corporation develops, manufactures and markets automated
clinical analysis systems used by cytogenetic laboratories for prenatal genetic
screening. The Company currently produces and sells eight different products
addressing various needs of these laboratories. The Company's cytogenetic
instrumentation includes karyotyping, metaphases finding and DNA probe imaging
products. These instruments are used to increase laboratory productivity by
automating the time consuming functions done in cytogenetic laboratories.
Applied Imaging has an installed base of over 900 clinical workstations at
approximately 350 customer sites in more than 30 countries. The Company has
worldwide distribution channels in 35 countries. Its headquarters are in Santa
Clara, California (14,000 square foot facility). Sales outside North America are
managed by its fully owned subsidiary based in Newcastle, England (10,000 square
foot facility). 1993 sales were $8.6 million. 1994 sales were $9.6 million and
the company projects $10.5 million in sales out of its core business in 1995.
The Company employs 75 people worldwide.
The Company has opened a subsidiary in Israel for the purposes of this project
and for the purposes of growing its Israeli subsidiary into a fully blown
research and manufacturing center in the near future. The Israeli subsidiary is
new and has no corporate record to date. The Company is currently searching for
appropriate facilities.
The proposed project can be absorbed into the existing structure by Applied
Imaging however, it would require the addition of staff to the Israeli
subsidiary. The $600,000 contribution by Applied Imaging to this project will be
funded from its working capital.
In addition to the BIRD foundation grant, the company has also applied for an
SBIR grant in the United States and an additional grant in Europe under the
European community BIOMED program. These grants are all related to the cell
isolation technology developed by Applied Imaging.
Appendix 5 includes brochures and relevant company information on Applied
Imaging Corporation.
26
<PAGE>
J. PROJECT BUDGET
See Following Pages
27
<PAGE>
ANNEX A
APPROVED PROJECT BUDGET
Applied Imaging Corporation
(15 months duration)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cost to Totals
Project
I. DIRECT LABOR
Gross Annual Salary % on
(inc. Social Benefits) Project
Manager $100,000 50 62,500
Research Scientist 110,000 54.5 75,000
Marketing 80,000 70 70,000
Mfg. Process Development 81,000 75 75,938
Quality & Regulatory Affairs 89,000 50 55,625
Technologist 62,000 30 23,250
--------
Total, Direct Labor 362,313
Overhead (O/H) @ 25% 90,578
--------
Total, Direct Labor + O/H 452,891
II. EXPENDABLE MATERIALS & SUPPLIES
Miscellaneous 15,000
III .TRAVEL
8 trips to A.I Israel @ $3,000 24,000
IV. CONSULTANTS
Statistician (140 hrs. @ $150) 21,000
Regulatory Activities Consultant 50,000 71,000
-------- --------
SUBTOTAL $562,891
General & Administrative Expense (G&A) @ 5% 28,145
--------
APPLIED IMAGING CORP. TOTAL PROJECT BUDGET $591,036
Projected expenditure, first 8 months $296,500
Projected expenditure, second 7 months $294,536
</TABLE>
Applied/Applied Contract
28
<PAGE>
ANNEX A
APPROVED PROJECT BUDGET
Applied Imaging, Israel
(15 months duration)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Cost to Totals
Project
I. DIRECT LABOR
Gross Annual Salary % on
(inc. Social Benefits) Project
Project Leader $80,000 100 100,000
Research Scientist 60,000 93.3 70,000
Technician 35,000 93.3 40,833
Technician 35,000 93.3 40,833
-------
Total, Direct Labor 251,666
Overhead (O/H) @ 25% 62,917
-------
Total, Direct Labor + O/H 314,583
II. EQUIPMENT
Acquisition No. Yrs. % on Cost to
Cost Deprec. Project Project
2 Microscope 32,000 3 100 12,444
Slidescan 40,000 3 100 15,556
Thermocycler 27,000 3 100 10,500
FISH Chamber 18,000 5 85.7 3,600
PCR Equipment 30,000 3 85.7 10,000
Centrifuge 15,000 5 85.7 3,000
Other 15,000 5 85.7 3,000
------- -------
177,000 58,100 58,100
III. EXPENDABLE MATERIALS & SUPPLIES
Reagent Supplies & Probe Kits 45,000
IV. TRAVEL
8 trips to A.I.C. @ $3,000 24,000
V. SUBCONTRACTS
Bichur Holim Hospital - collaborator 10,000
Tel Hashomer - collaborator 10,000
Herzliya Medical Center - collaborator 10,000
------- 30,000
SUBTOTAL $471,683
General & Administrative Expense (G&A) @ 5% 23,584
--------
APPLIED IMAGING TOTAL PROJECT BUDGET $495,267
Projected expenditure, first 8 months $286,200
Projected expenditure, second 7 months $209,067
</TABLE>
29
<PAGE>
APPLIED IMAGING `BIRD FOUNDATION' PROJECT FINANCIAL PROJECTIONS
<TABLE>
<CAPTION>
YEARS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 7 8
Product Sales 2.30 21.00 64.00 104.00 87.00 80.00 60.00
Manuf. Cost 1.00 7.98 23.00 37.00 31.00 28.00 21.00
Devel. Exp. 2.00 1.00
Operating Exp. 0.80 2.30 7.00 22.00 36.00 30.00 28.00 21.00
Capital Exp. 0.40 2.00 3.00 5.00 6.00 2.00 2.00 0.00
Deprec. 0.10 0.60 1.35 2.60 4.00 4.00 3.75 2.50
Gross Profit 1.30 13.02 41.00 67.00 56.00 52.00 39.00
Before Tax Income -2.90 -2.60 4.67 16.40 27.00 22.00 20.25 15.50
Income Tax 6.23 10.80 8.80 8.10 6.20
Net Income -2.90 -2.60 4.67 10.17 16.20 13.20 12.15 9.30
Oper. Cash Flow -2.80 -2.00 6.02 12.77 20.20 17.20 15.90 11.80
Work. Cap. Inc. 0.69 5.61 12.90 12.00 -5.10 -2.10 -6.00
Total Cash Flow -3.20 -4.69 -2.59 -5.13 2.20 20.30 16.00 35.80
Cum. Cash Flow -3.20 -7.89 -10.48 -15.61 -13.41 6.89 22.89 58.69
</TABLE>
4/8/95 BRDX-A.XLS
30
<PAGE>
Applied Imaging 'Bird Foundation' Payback Worksheet
Discount %
10 1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.51
-3.20 -4.27 -2.15 -3.85 1.50 12.59 8.96 18.26 27.8
15 1.00 0.87 0.76 0.66 0.57 0.50 0.43 0.38
-3.20 -4.08 -1.97 -3.38 1.25 10.15 6.88 13.60 19.2
20 1.00 0.83 0.69 0.58 0.48 0.40 0.33 0.28
-3.20 -3.89 -1.79 -2.97 1.06 8.12 5.28 10.02 12.6
25 1.00 0.80 0.64 0.51 0.41 0.33 0.26 0.21
-3.20 -3.75 -1.66 -2.62 0.90 6.70 4.16 7.52 8.0
30 1.00 0.77 0.59 0.46 0.35 0.27 0.21 0.16
-3.20 -3.61 -1.53 -2.36 0.77 5.48 3.36 5.73 4.6
35 1.00 0.74 0.55 0.41 0.30 0.22 0.17 0.12
-3.20 -3.47 -1.42 -2.10 0.66 4.47 2.72 4.30 1.9
40 1.00 0.71 0.51 0.36 0.26 0.19 0.13 0.09
-3.20 -3.33 -1.32 -1.85 0.57 3.86 2.08 3.22 0.0
45 1.00 0.69 0.48 0.33 0.23 0.16 0.11 0.07
-3.20 -3.24 -1.24 -1.69 0.51 3.25 1.76 2.51 -1.3
50 1.00 0.67 0.44 0.30 0.20 0.13 0.09 0.06
-3.20 -3.14 -1.14 -1.54 0.44 2.64 1.44 2.15 -2.3
55 1.00 0.65 0.42 0.27 0.17 0.11 0.07 0.05
-3.20 -3.05 -1.09 -1.38 0.37 2.23 1.12 1.79 -3.2
60 1.00 0.63 0.39 0.24 0.15 0.10 0.06 0.04
-3.20 -2.95 -1.01 -1.23 0.33 2.03 0.96 1.43 -3.6
65 1.00 0.61 0.37 0.22 0.13 0.08 0.05 0.03
-3.20 -2.86 -0.96 -1.13 0.29 1.62 0.80 1.07 -4.3
70 1.00 0.59 0.35 0.20 0.12 0.07 0.04 0.02
-3.20 -2.77 -0.91 -1.03 0.26 1.42 0.64 0.72 -4.8
75 1.00 0.57 0.33 0.19 0.11 0.06 0.03 0.02
-3.20 -2.67 -0.85 -0.97 0.24 1.22 0.48 0.72 -5.0
INTERNAL RATE OF RETURN CHART OMITTED
4/8/95 BRDX-A.XLS
31
<PAGE>
APPENDIX
APPENDIX 1 MARKET MODEL
APPENDIX 2 TECHNICAL DISCUSSION OF THE TECHNOLOGY USED FOR FETAL CELL
ENRICHMENT
APPENDIX 3 RESUMES OF KEY PERSONNEL PARTICIPATING IN THE PROGRAM
APPENDIX 4 PHOTOGRAPHS OF THE FETAL CELL SCREENING SYSTEM-KIT AND
INSTRUMENTATION
APPENDIX 5 COMPANY BROCHURES AND RELEVANT INFORMATION ABOUT APPLIED IMAGING
32
<PAGE>
APPENDIX 1
MARKET MODEL
33
<PAGE>
FETAL CELL SCREENING MARKET MODEL
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5
<S> <C> <C> <C> <C> <C>
Total Worldwide Test Market 25,000 36,000 2,000,000 4,500,000
SYSTEMS:
Annual Test Capacity Per System 2,000 4,000 5,000 5,000
Systems Required (Units) 12 90 400 900
Prior Years installed Base (Cum'l Units) 0 12 102 502
- -----------------------------------------------------------------------------------------------
Available System Market (Units) 12 78 298 398
- -----------------------------------------------------------------------------------------------
AIC System Selling Price $K $ 150 $ 150 $ 130 $ 125
AIC System Market Share 75% 75% 40% 35%
AIC Systems Sold 9 59 119 139
- -----------------------------------------------------------------------------------------------
AIC System Revenues $M $ 1.35 $ 8.78 $ 15.50 $ 17.41
- -----------------------------------------------------------------------------------------------
TEST KITS:
AIC Kit Selling Price $ 75 $ 70 $ 60 $ 55
AIC Kit Market Share 50% 50% 40% 35%
AIC Kits Sold 12,500 180,000 800,000 1,575,000
- -----------------------------------------------------------------------------------------------
AIC Kit Revenues $M $ 0.94 $ 12.60 $ 48.00 $ 86.63
- -----------------------------------------------------------------------------------------------
Total Fetal Cell Revenues $M 0.00 $ 2.29 $ 21.38 $ 63.50 $ 104.04
</TABLE>
34
<PAGE>
APPENDIX 2
TECHNICAL DISCUSSION OF THE TECHNOLOGY
USED FOR FETAL CELL ENRICHMENT
35
<PAGE>
APPENDIX 2
ENRICHMENT OF FETAL CELLS FROM MATERNAL BLOOD FOR GENETIC ANALYSIS. A PRODUCT
DESIGN.
Alex M. Saunders, M.D., Applied Imaging Corp., Santa Clara, California
The diagnostic challenge is to enrich fetal nucleated Red Blood Cells (nRBC) by
four orders of magnitude, thus obtaining 20 or more of these cells onto a
microscope slide, when starting with 20 ml of anticoagulated whole blood. The
first product will be a screening test for aneuploidy of chromosomes 21, X and Y
at 12 to 16 weeks gestation.
Our product requirements include a test that is simple to use, has simple
reagents, is based on sound scientific principles, and a procedure that fits
into both cytogenetic laboratories and broad based commercial laboratories. We
designed a four stage enrichment, in which the last stage is an automated
microscope search of the slide.
The three other enrichment steps are:
Bulk separation from unwanted RBC
Specific hemolysis of adult RBC
Density fractionation of nucleated cells.
Each step sounds simple, but requires chemical optimization to maintain ease of
use, and provide a robust system.
Bulk separation is a type of density gradient, utilizing RBC as their own
comparative density medium. (1) When done under hypotonic conditions, the least
mature RBC, including nRBC, swell most and become least dense. The least dense
5% of cells is harvested, thus eliminating more than 95% of bulk RBC. This part
of the system was optimized using the H. 1 (Technicon Instruments Corp.), a
complete hematology system which reports cell parameters such as RBC volume and
hemoglobin concentration. (2) A special tube was designed to make harvesting of
cells of interest more convenient.
Specific hemolysis of maternal RBC depends on the presence of carbonic anhydrase
(CA isoenzymes in RBC. Fetal RBC contain only CAII whereas maternal RBC contain
both CAI and CAdL By providing ammonium chloride and sodium bicarbonate as a
reaction mixture and inhibiting CAII fetal cells are preserved while maternal
RBC undergo accumulation of anunonium bicarbonate within each cell, draw in
water and burst. Optimizing this system required careful attention to solubility
of the inhibitor, penetration of inhibitor into RBC, dilution, timing, as all as
stopping the reaction. However, monitoring the results was relatively straight
forward and depended only on cell count as an end point.
36
<PAGE>
The density gradient step is meant to separate all white blood cells (WBC) from
the remaining RBC, so that nuclei found on the slide would more likely belong to
fetal nRBC. A four layer gradient is used to separate WBC into small fractions
which do not entrap the nRBC that migrate to the bottom layer. From the top
down, the layers provide relatively pure platelets, lymphocytes, granulocytes,
and RBC. Therefore the gradient would also have value in assays involving these
other cell types. We ensure good separation of RBC by making the entire medium
hypertonic. This strategy shrinks the RBC differentially, making them more
dense, but does not alter WBC. We intend to supply density gradients preformed,
locked in place in a gelatin matrix.
Finally 2 to 4 (MU)l of whole blood equivalent is harvested from the density
gradient and 2 (MU)l is put on a single microscope slide. Even though this
faction represents a 10,000 times enrichment there are many contaminating cells
remaining. For example, if one performs a Kleihour - Betke (K-B) (4) adult
hemoglobin extraction on such a slide when the starting point is 20 mL of whole
blood with 4 ml of fetal umbilical cord blood added, the proportions of
hemoglobin containing fetal and adult RBC are about equal on the slide.
As a result of the lack of purity, an automated cell finder is required as part
of the system. This is designed to find cells containing both hemoglobin and a
nucleus. By performing a K-B extraction on the slide we are more assured that
this combination provides fetal nRBC. The coordinates of each nRBC are stored by
computer. The slide is then removed from the microscope and processed by
Fluorescence In Situ Hybridization (FISH). Each cell is then relocated in the
microscope where chromosomes 2 1, X, and Y are enumerated.
Before the instrument was available, we visually searched for nRBC and found
them in 76% of 50 maternal samples in the 12 - 16 week gestation period. Out of
11 samples examined to date with the automated search feature, we have failed to
locate nRBC in only one.
37
<PAGE>
[Enrichment of Fetal Cells from Maternal Blood for Genetic Analysis Graphic]
38
<PAGE>
APPENDIX 3
RESUMES OF KEY PERSONNEL
PARTICIPATING IN THE PROGRAM
39
<PAGE>
MITCHELL S. GOLBUS, M.D.
CURRICULUM VITAE
Date and Place of Birth:
- ------------------------
April 6, 1939; Chicago, Illinois
Marital Status:
- ------------------
Married 1967, Antoinette Buiano Golbus
Children:
- -----------
Amon - born March 18,1970
Matthew - born December 23, 1971
Aliyah - born June 8, 1974
Education:
- -----------
Sept. 1956 - Aug. 1959 Illinois Institute of Technology, B.S. in Psychology
Sept. 1959 - June 1963 University of Illinois School of Medicine, M.D.
Brief Chronology of Employment and Academic Appointments:
- ---------------------------------------------------------
July 1963 - June 1964: Rotating Intern,
Los Angeles County General Hospital
July 1964 - June 1968: Resident,
Dept. Obstetrics, Gynecology and Reproductive Sciences,
University California Medical (Center San Francisco
July 1968 - Aug. 1971: Major, United States Medical Corps,
stationed in Germany
Sept. 1971 - June 1973: Assistant Research Geneticist and Research Fellow
in Medical Genetics, Dept. Pediatrics, University
California Medical Center, San Francisco
Jan 1972 - June 1973: Clinical Instructor,
Dept. Obstetrics, Gynecology and Reproductive Sciences.
University California Medical Center, San Francisco
July 1973 - June 1977: Assistant Professor
Dept. Obstetrics, Gynecology and Reproductive Sciences
and Dept. Pediatrics, University California Medical Center,
San Francisco
July 1977 -June 198 1: Associate Professor,
Dept. Obstetrics, Gynecology and Reproductive Sciences
and Dept. Pediatrics, University California Medical Center,
San Francisco
July 1981 - Present: Professor,
Dept. Obstetrics, Gynecology and Reproductive Sciences
and Dept. Pediatrics, University California Medical Center,
San Francisco
Professional Organizations:
- ----------------------------------
Diplomate, American Board of Obstetrics and Gynecology - 1970
Fellow, American College of Obstetricians and Gynecologists - 1972
40
<PAGE>
American Society of Human Genetics - 1974
San Francisco Gynecological Society - 1975
Society for Gynecologic Investigation - 1975
American Association for the Advancement of Science - 1975
Diplomate, American Board of Medical Genetics - 1982
Institute of Medicine, National Academy of Sciences - 1992
American Medical Association - 1992
Founding Fellow AMA, MD; American College of Medical Genetics - 1993
National Committees:
- ----------------------
American College of Obstetricians & Gynecologists,
Subcommittee on Genetics - 1980-1983; Chairman 1984-1987
Maternal-Fetal Medicine Committee - 1984-1987
Liaison to AAP Committee on Genetics - 1984-1987
American Society of Human Genetics,
Clinical Service Committee - 1980-1981
Program Committee - 1980-1982
Board of Directors - 1982-1984
Finance Committee - 1984
Social Issues Committee - 1989-1991
March of Dimes Birth Defects Foundation,
Clinical Research Grant Review Committee - 1977-1991
Basil O'Connor Grant Review Committee - 1984-1991
National Genetics Foundation
Medical Advisory Committee - 1982-1987
National Institutes of Health Task Force on Predictors of Hereditory
Disease and Congenital Defects - 1975
National Society for Prevention of Blindness,
Advisory committee on Defects of Vision of Congenital and Neonatal
Origin-1975
National Tay-Sachs & Allied Disease Association,
Scientific Advisory Committee - 1979-
Public Service:
- ----------------
California Birth Defects Monitoring Program,
Advisory Committee - 1982-
California State Department of Health Services,
Advisory Committee on Genetics - 1973-
Northern California Tay-Sachs Disease Prevention Program,
Director - 1973-
Editorial Boards:
- ------------------
Prenatal Diagnosis - 1981-
Israel Journal of Obstetrics and Gynecology - 1990-
Obstetrical and Gynecologic Survey - 1990-
Journal of Maternal-Fetal Medicine - 1991 -
Dr. Golbus is the author of 23 1 Refereed Publications, 60 Chapters
and Books, 35 Other Publications and 123 abstracts
41
<PAGE>
YARON LAPIDOT, MD, Ph.D.
CURRICULUM VITAE
Address
- -------
4 Sheshet Ha'yarnim St.
Nes-Tsiona 74063
Israel
Tel, 9728-403534
Fax 972-8-405540
Personal
- ---------
Born - May 5, 1953, Rehovot, Israel
Married, 3 children.
Education & Diplomas
- -----------------------
1979-86 M.D. Ben Gurion University, Beer-Sheva - Medicine
1988-91 Ph.D. Hebrew Univ. Of Jerusalem - Biological Chemistry.
Professional Experience:
- ------------------------
1994- Rafael, Haifa - Project Initiation and Marketing
DiaGenetics, Kiryat Weizmann, Rehovot - Research and Clinical
Development.
1991-93 Clinical/Scientific Postdoctoral in Molecular Genetics,
UCSF, San Francisco, California.
OB/GYN residency, Golda medical center, Petah tikvah, and Edith
Wolfson medical center, Holon.
1986-87 Internship - Lady David Carmel Hospital, Haifa.
1980-84 Tutorial, Medical School, Ben Burion University. Beer Sheva.
1973-77 Pilot, Israeli Air Force.
Languages
- ----------
Proficient in Hebrew, English. Basic knowledge in French.
42
<PAGE>
ALEX M. SAUNDERS, M.D.
CURRICULUM VITAE
Education and Academic Background
- -----------------------------------------------------------------
1953 AB Biology Stanford University, Stanford CA
1957 MD Pathology University of British Columbia,
British Columbia, Canada
1957-62 Fellowship La Rabida Institute, Chicago IL
1962-69 Stanford Faculty Stanford University, Stanford, CA
Dept. Of Pathology -
NIH Grant #AMO6992
Employment History
1962-69 Stanford University, Department of Pathology
1969-75 Technicon Corp., Tarrytown NY, Technical Director and Medical
Director
1976-82 Smith Kline Geometric Data, King of Prussia, PA
VP R&D and Regulatory Affairs.
1980-91 Industry Representative to Hematology Advisory
Group of FDA. Collaborated in writing FDA
Standard for Differential White Cell Counters.
1982-85 Becton Dickinson Immunocytometry Systems,
Mountain View, CA, Director Clinical Cytometry Systems
1985-93 Chronomed, Inc. President and Chief Scientist San Carlos, CA
1993 - Applied Imaging Corp. Santa Clara, CA, Chief Scientist &
Medical Director
43
<PAGE>
Chief Scientist and Medical Director of Applied Imaging Corp. Dr. Saunders has
26 years of experience in Research and in management of commercial R & D as well
as 8 years of academic teaching research and service at Stanford University.
His major commercial products include the first automated differential White
Blood Cell Counter designed for Technicon (now part of Miles) and the Immune
Monitor Kit for lymphocyte sub-types designed for Becton Dickinson
Immunocytometry Systems. In his own company, Chronomed, Inc., Dr. Saunders
invented Retrospective Time Resolved Testing, and successfully applied the
invention in the field of diabetes. A set of products has been licensed and is
being engineered for product by a third party. A 510(k) clearance has been
obtained.
Dr. Saunders designed the FCMB procedure described above. He has over 40 peer
review publications and 21 patents allowed or in the works.
44
<PAGE>
APPENDIX 4
PHOTOGRAPHS OF THE FETAL CELL SCREENING SYSTEM
KIT AND INSTRUMENTATION
45
<PAGE>
CHROMOPROBE-I IMAGE OMITTED
COMPUTER WORKSTATION IMAGE OMITTED
46
<PAGE>
EXHIBIT 10.20
IMPERIAL BANK
Member FDIC
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE)
This Agreement is entered into between Applied Imaging Corporation, a
Corporation (hereby called "Borrower") and Imperial Bank (herein called "Bank").
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as may be
determined by Bank up to, but not exceeding in the aggregate unpaid principal
balance, the following Borrowing Base:
80.000 % of Eligible Accounts and in no event more than $1,000,000.00
2. The amount of each loan made by Bank to Borrower hereunder shall be debited
to the loan ledger account of Borrower maintained by Bank (herein called "Loan
Account") and Bank shall credit the Loan Account with all loan repayments made
by Borrower. Borrower promises to pay Bank (a) the unpaid balance of Borrower's
Loan Account on demand and (b) on or before the tenth day of each month,
interest on the average daily unpaid balance of the Loan Accounts during the
Immediately preceding month at the rate of One & 500/1000ths percent (1.500%)
per annum in excess of the rate of interest which Bank has announced as its
prime lending rate ("Prime Rate") which shall vary concurrently with any change
in such Prime Rate. Interest shall be computed at the above rate on the basis
of the actual number of days during which the principal balance of the loan
account is outstanding divided by 360, which shall for interest computation
purposes be considered one year. Bank at its option may demand payment of any
or all of the amount due under the Loan Account including accrued but unpaid
interest at any time. Such notice may be given verbally or in writing and
should be effective upon receipt by Borrower. The amount of interest payable
each month by Borrower shall not be less than a minimum monthly charge of
$250.00. Bank is hereby authorized to charge Borrower's deposit account(s) with
Bank for all sums due Bank under this Agreement.
3. Requests for loans hereunder shall be in writing duly executed by Borrower
in a form satisfactory to Bank and shall contain a certification setting forth
the matters referred to in Section 1, which shall disclose that Borrower is
entitled to the amount of loan being requested.
4. As used in this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or leased, or to
be sold or to be leased, or for services rendered or to be rendered no matter
how evidenced, including accounts receivable, contract rights, chattel paper,
instruments, purchase orders, notes, drafts, acceptances, general intangibles
and other forms of obligations and receivables.
<PAGE>
B. "Collateral" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank now has
or hereafter acquires a security interest.
C. "Eligible Accounts" means all of Borrower's Accounts excluding,
however, (1) all Accounts under which payment is not received within 90 days
from any invoice date, (2) all Accounts against which the account debtor or any
other person obligated to make payment thereon asserts any defense, offset,
counterclaim or other right to avoid or reduce the liability represented by the
Account and (3) any Accounts if the account debtor or any other person liable in
connection therewith is insolvent, subject to bankruptcy or receivership
proceedings or has made an assignment for the benefit of creditors or whose
credit standing is unacceptable to Bank and Bank has so notified Borrower.
Eligible Accounts shall only include such accounts as Bank in its sole
discretion shall determine are eligible from time to time.
5. Borrower hereby assigns to Bank all Borrower's present and future Accounts,
including all proceeds due thereunder, all guaranties and security therefor, and
hereby grants to Bank a continuing security interest in all moneys in the
Collateral Account referred to in Section 6 hereof, as security for any and all
obligations of Borrower to Bank, whether now owing or hereafter incurred and
whether direct, indirect, absolute or contingent. So long as Borrower is
indebted to Bank or Bank is committed to extent credit to Borrower, Borrower
will execute and deliver to Bank such assignments, including Bank's standard
forms of Specific General Assignment covering individual Accounts, notices,
financing statements, and other documents and papers as Bank may require in
order to affirm, effectuate or further assure the assignment to Bank of the
Collateral or to give any third party, including the account debtors obligated
on the Accounts, notice of Bank's interest in the Collateral.
6. Until Bank exercises its rights to collect the Accounts pursuant to
paragraph 10, Borrower will collect with diligence all Borrower's Accounts,
provided that no legal action shall be maintained thereon or in connection
therewith without Bank's prior written consent. Any collection of Accounts by
Borrower, whether in the form of cash, checks, notes, or other instruments for
the payment of money (properly endorsed or assigned where required to enable
Bank to collect same), shall be in trust for Bank, and Borrower shall keep all
such collections separate and apart from all other funds and property so as to
be capable of identification as the property of Bank and deliver said
collections daily to Bank in the identical form received. The proceeds of such
collection when received by Bank may be applied by Bank directly to the payment
of Borrower's Loan Account or any other obligation secured thereby. Any credit
given by Bank upon receipt of said proceeds shall be conditional credit subject
to collection. Returned items at Bank's option may be charged to Borrower's
general account. All collections of the Accounts shall be set forth on an
itemized schedule, showing the name of the account debtor, the amount of each
payment and such other information as Bank may request.
7. Until Bank exercises its rights to collect the Accounts pursuant to
paragraph 10, Borrower may continue its present policies with respect to
returned merchandise and adjustments. However, Borrower shall immediately
notify Bank of all cases involving returns, repossessions, and loss or damage of
or to merchandise represented by the Accounts and of any credits, adjustments or
disputes
-2-
<PAGE>
arising in connection with the goods or services represented by the Account and,
in any of such events, Borrower will immediately pay to Bank from its own funds
(and not from the proceeds of Accounts or Inventory) for application to
Borrower's Loan Account or any other obligation secured hereby the amount of any
credit for such returned Accounts or Inventory) for application to Borrower's
Loan Account or any other obligation secured hereby the amount of any credit for
such returned or repossessed merchandise and adjustments made to any of the
Accounts.
8. Borrower represents and warrants to Bank: (i) If Borrower is a corporation,
that Borrower is duly organized and existing in the State of its incorporation
and the execution, delivery and performance hereof are within Borrower's
corporate powers, have been duly authorized and are not in conflict with law or
the terms of any charter, by-law or other incorporation papers, or of any
indenture, agreement or undertaking to which Borrower is a party or by which
Borrower is found or affected; (ii) Borrower is, or at the time the collateral
becomes subject to Bank's security interest will be, the true and lawful owner
of and has, or at the time the Collateral becomes subject to Bank's security
interest will have, good and clear title to the Collateral, subject only to
Bank's rights therein; (iii) Each Account is, or at the time the Account comes
into existence will be, a true and correct statement of a bona fide indebtedness
incurred by the debtor named therein in the amount of the Account for either
merchandise sold or delivered (or being held subject to Borrower's delivery
instructions) to, or services rendered, performed and accepted by, the account
debtor; (iv) That there are or will be no defenses, counterclaims, or setoffs
which may be asserted against the Accounts; and (v) any and all financial
information, including information relating to the Collateral, submitted by
Borrower to Bank, whether previously or in the future, is or will be true and
correct.
9. Borrower will: (i) Furnish Bank from time to time such financial statements
and information as Bank may reasonably request and inform Bank immediately upon
the occurrence of a material adverse change therein; (ii) Furnish Bank
periodically, in such form and detail and at such times as Bank may require,
statements showing aging and reconciliation of the Accounts and collections
thereon; (iii) Permit representatives of Bank to inspect the Borrower's books
and records relating to the Collateral and make extracts therefrom at any
reasonable time and to arrange for verification of the Accounts, under
reasonable procedures, acceptable to Bank, directly with the account debtors or
otherwise at Borrower's expense; (iv) Promptly notify Bank of any attachment or
other legal process levied against any of the Collateral and any information
received by Borrower relative to the Collateral, including the Accounts, the
account debtors or other persons obligated in connection therewith, which may in
any way affect the value of the Collateral or the rights and remedies of Bank in
respect thereto; (v) Reimburse Bank upon demand for any and all legal costs,
including reasonable attorneys' fees, and other expenses incurred in collecting
any sums payable by Borrower under Borrower's Loan Account or any other
obligation secured hereby, enforcing any term or provision of this Security
Agreement or otherwise or in the checking, handling and collection of the
Collateral and the preparation and enforcement of any agreement relating
thereto; (vi) Notify Bank of each location and of each office of Borrower at
which records of Borrower relating to the Accounts are kept; (vii) Provide,
maintain and deliver to Bank policies insuring the Collateral against loss or
damage by such risks and in such amounts, forms and companies as Bank may
require and with loss payable solely to Bank, and, in the event Bank takes
possession of the Collateral, the insurance policy or policies and any unearned
or returned premium thereon shall at the option of Bank become the sole
-3-
<PAGE>
property of Bank, such policies and the proceeds of any other insurance covering
or in any way relating to the Collateral, whether now in existence or hereafter
obtained, being hereby assigned to bank; and (viii) In the event the unpaid
balance of Borrower's Loan Account shall exceed the maximum amount of
outstanding loans to which Borrower is entitled under Section 1 hereof, Borrower
shall immediately pay to Bank, from its own funds and not from the proceeds of
Collateral, for credit to Borrower's Loan Account the amount of such excess.
10. Bank may at any time, without prior notice to Borrower, collect the
Accounts and may give notice of assignment to any and all account debtors, and
Borrower does hereby make, constitute and appoint Bank its irrevocable, true and
lawful attorney with power to receive, open and dispose of all mail addressed to
Borrower, to endorse the name of Borrower upon any checks or other evidence of
payment that may come into the possession of Bank upon the Accounts to endorse
the name of the undersigned upon any document or instrument relating to the
Collateral; in its name or otherwise, to demand, sue for, collect and give
acquittance for any and all moneys due or to become due upon the Accounts; to
compromise, prosecute or defend any action, claim or proceeding with respect
thereto; and to do any and all things necessary and proper to carry out the
purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell, dispose of or grant a
security interest in any of the Collateral other than to Bank, or execute any
financing statements covering the Collateral in favor of any secured party or
person other than Bank.
12. Should: (i) Default be made in the payment of any obligation, or breach be
made in any warranty, statement, promise, term or condition, contained herein or
hereby secured; (ii) Any statement or representation made for the purpose of
obtaining credit hereunder prove false; (iii) Bank deem the Collateral
inadequate or unsafe or in danger of misuse; (iv) Borrower become insolvent or
make an assignment for the benefit of creditors; or (v) Any proceedings to be
commended by and against Borrower under any bankruptcy, reorganization,
arrangement, readjustment or debt or moratorium law or statute; then in any such
event, Bank may, at its option and without demand first made and without notice
to Borrower, do any one or more of the following: (a) Terminate its obligation
to make loans to Borrower as provided in Section 1 hereof; (b) Declare all sums
secured hereby immediately due and payable; (c) immediately take possession of
the Collateral wherever it may be found, using all necessary force so to do, or
require Borrower to assemble the Collateral and make it available to Bank at a
place designated by Bank which is reasonable convenient to Borrower and Bank,
and Borrower waives all claims for damages due to or arising from or connected
with any such taking; (d) Proceed in the foreclosure of Bank's security interest
and sale of the Collateral in any manner permitted by law, or provided for
herein; (e) Sell, lease, or otherwise dispose of the Collateral at public or
private sale, with or without having the Collateral at the place of sale, and
upon terms and in such manner as Bank may determine, and Bank may purchase same
at any such sale; (f) Retain the Collateral in full satisfaction of the
obligations secured thereby; (g) Exercise any remedies of a secured party under
the Uniform Commercial Code. Prior to any such disposition, Bank may, at its
option, cause any of the Collateral to be repaired or reconditioned in such
manner and to such extent as Bank may deem advisable, and any sums expended
therefor by Bank shall be repaid by Borrower and secured hereby. Bank shall
have the right to enforce one or more remedies hereunder
-4-
<PAGE>
successively or concurrently, and any such action shall not stop or prevent Bank
from pursuing any further remedy which it may have hereunder or by law. If a
sufficient sum is not realized from any such disposition of Collateral to pay
all obligations secured by this Security Agreement, Borrower hereby promises and
agrees to pay Bank any deficiency,
13. If any writ of attachment, garnishment, execution or other legal process be
issued against any property of Borrower, or if any assessment for taxes against
Borrower, other than real property, is made by the Federal or State government
or any department thereof, the obligation of Bank to make loans to Borrower as
provided in Section 1 hereof shall immediately terminate and the unpaid balance
of the Loan Account, all other obligations secured hereby and all other sums due
hereunder shall immediately become due and payable without demand, presentment
or notice.
14. Borrower authorizes Bank to destroy all invoices, deliver receipts, reports
and other types of documents and records submitted to Bank in connection with
the transactions contemplated herein at any time subsequent to four months from
the time such items are delivered to Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower, but each
and every condition hereof shall be in addition thereto.
16. Additional Provisions: Subject to conditions and limitations contained in
the Credit Terms and Conditions dated September 5, 1995.
Executed this 5th day of September, 1995.
IMPERIAL BANK APPLIED IMAGING CORP.
----------------------------------------
(Name of Borrower)
By: /s/ Neil E. Woodruff, CFO
- ----------------------------- -------------------------------------
(Authorized Signature and Title)
By: [ILLEGIBLE SIGNATURE APPEARS HERE],
AVP By:
-------------------------- -------------------------------------
Title (Authorized Signature and Title)
-5-
<PAGE>
IMPERIAL BANK September 5, 1995
Member FDIC
2460 Sand Hill Road
Menlo Park, California
Subject: Credit Terms and Conditions ("Agreement")
Gentlemen:
To induce you to make loans to the undersigned (herein called "Borrower"), and
in consideration of any loan or loans you, in your sole discretion, may make to
Borrower, Borrower warrants and agrees as follows:
A. Borrower represents and warrants that:
1. EXISTENCE AND RIGHTS. Company is a corporation. Borrower is duly
organized and existing and in good standing under the laws of the State of
California and is authorized and in good standing to do business in the State of
California. Borrower has powers and adequate authority, rights and franchises
to own its property and to carry on its business as now conducted, and is duly
qualified an din good standing in each State in which the character of the
properties owned by it therein or the conduct of its business makes such
qualification necessary, and Borrower has the power and adequate authority to
make and carry out this Agreement. Borrower has no investment in any other
business entity, except as previously disclosed to Bank.
2. AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, or Articles of Association, as the case may
be, and this Agreement is the valid, binding and legally enforceable obligation
of Borrower in accordance with its terms.
3. NO CONFLICT. The execution, delivery and performance of this
Agreement are not in contravention of or in conflict with any agreement,
indenture or undertaking to which Borrower is a party or by which it or any of
its property may be bound or affected, and do not cause any lien, charge or
other encumbrance to be created or imposed upon any such property by reason
thereof.
4. LITIGATION. There is no litigation or other proceeding pending or
threatened against or affecting Borrower, and Borrower is not in default with
respect to any order, writ, injunction, decree or demand of any court or other
governmental or regulatory authority.
5. FINANCIAL CONDITION. The balance sheet of Borrower as of 8/31/95, and
the related profit and loss statement for the month ended on that date, a copy
of which has heretofore been delivered to you by Borrower, and all other
statements and data submitted in writing by Borrower to
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you in connection with this request for credit are true and correct, and said
balance sheet and profit and loss statement truly present the financial
condition of Borrower as of the date thereof and the results of the operations
of Borrower for the period covered thereby, and have been prepared in accordance
with generally accepted accounting principles on a basis consistently
maintained. Since such date there have been no materially adverse changes in
the financial condition or business of Borrower. Borrower has no knowledge of
any liabilities, contingent or otherwise, at such date not reflected in said
balance sheet, and Borrower has not entered into any special commitments or
substantial contracts which are not reflected in said balance sheet, other than
in the ordinary and normal course of its business, which may have a materially
adverse effect upon its financial condition, operations or business as now
conducted.
6. TITLE TO ASSETS. Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those permitted by
Section C.3 hereof.
7. TAX STATUS. Borrower has no liability for any delinquent state, local
or federal taxes, and if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
8. TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
9. REGULATION U. The proceeds of this loan shall not be used to purchase
or carry margin stock (as defined with Regulation U of the Board of Governors of
the Federal Reserve system).
B. Borrower agrees that so long as it is indebted to you, it will, unless you
shall otherwise consent in writing:
1. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
2. INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses.
3. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same
become delinquent and before penalties accrue thereon, all taxes, assessments
and governmental charges upon or against it or any of its properties, and all
its other liabilities at any time existing, except to the extent and so long as:
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a. The same are being contested in good faith and by appropriate
proceedings in such manners as not to cause any materially adverse effect upon
its financial condition or the loss of any right of redemption from any sale
thereunder, and
b. it shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed by it adequate
with respect thereto.
4. RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit your representatives to have access to,
and to examine its properties, books and records at all reasonable times; and
furnish you:
a. As soon as available, and in any event within 25 days after the
close of each month of each fiscal year of Borrower, commencing with the month
next ending, a balance sheet, profit and loss statement and reconciliation of
Borrower's capital accounts as of the close of such period and covering
operations for the portion of Borrower's fiscal year ending on the last day of
such period, all in reasonable detail and stating in comparative form the
figures for the corresponding date and period in the previous fiscal year,
prepared in accordance with generally accepted accounting principles on a basis
consistently maintained by Borrower and certified by an appropriate officer of
Borrower, subject, however, to year-end audit adjustments;
b. As soon as available, and in any event within 90 days after the
close of each fiscal year of Borrower, a report of audit of Company as of the
close of and for such fiscal year, all in reasonable detail and stating in
comparative form the figures as of the close of and for the previous fiscal
year, with the unqualified opinion of accountants satisfactory to you.
c. Within 25 days after the close of each month of each fiscal year
of Borrower, a certificate by chief financial officer or partner of Borrower,
stating that Borrower has performed and observed each and every covenant
contained in this Letter of Inducement to be performed by it and that no event
has occurred and no condition then exists which constitutes an event of default
hereunder or would constitute such an event of default upon the lapse of time or
upon the giving of notice and the lapse of time specified herein, or, if any
such event has occurred or any such condition exists, specifying the nature
thereof;
d. Promptly after the receipt thereof by Borrower, copies of any
detailed audit reports submitted to Borrower by independent accountants in
connection with each annual or interim audit of the accounts of Borrower made by
such accountants;
e. Promptly after the same are available, copies of all such proxy
statements, financial statements and reports as Borrower shall send to its
stockholders, if any, and copies of all reports which Borrower may file with the
Securities and Exchange Commission or any governmental authority at any time
substituted therefore; and
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f. Such other information relating to the affairs of Borrower as you
reasonably may request from time to time.
g. Notice of Default. Promptly notify the Bank in writing of the
occurrence of any event of default hereunder or any event which upon notice and
lapse of time would be an event of default.
C. Borrower agrees that so long as it is indebted to you, it will not, without
your written consent:
1. TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in the
character of its business; or make any change in its executive management.
2. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than loans from you except obligations
now existing as shown in financial statement dated 8/31/95, excluding those
being refinanced by your bank; or sell or transfer, either with or without
recourse, any accounts or notes receivable or any moneys due to become due.
3. LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage, pledge
incumbrance, lien or charge of any kind (including the charge upon property at
any time purchased or acquired under conditional sale or other title retention
agreement) upon any asset now owned or hereafter acquired by it, other than
liens for taxes not delinquent and liens in your favor.
4. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances
to any person or other entity other than in the ordinary and normal course of
its business as now conducted or make any investment in the securities of any
person or other entity other than the United States Government; or guarantee or
otherwise become liable upon the obligation of any person or other entity,
except by endorsement of negotiable instruments for deposit or collection in the
ordinary and normal course of its business.
5. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merger or consolidate, or commence any proceedings
therefor; or sell any assets except in the ordinary and normal course of its
business as now conducted; or sell, lease, assign, or transfer any substantial
part of its business or fixed assets, or any property or other assets necessary
for the continuance of its business as now conducted including without
limitation the selling of any property or other asset accompanied by the leasing
ack of the same.
6. DIVIDENDS, STOCK PAYMENTS. If a corporation, declare or pay any
dividend (other than dividends payable in common stock of Borrower) or make any
other distribution on any of its capital stock now outstanding or hereafter
issued or purchase, redeem or retire any of such stock.
D. The occurrence of any one of the following events of default shall, at your
option, terminate your commitment to lend and make all sums of principal and
interest then remaining unpaid on all
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Borrower's indebtedness to you immediately due and payable, all without demand,
presentment or notice, all of which are hereby expressly waived;
1. FAILURE TO PAY NOTE. Failure to pay any installment of principal or of
interest on any indebtedness of Borrower to you.
2. BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Agreement binding upon Borrower.
3. BREACH OF WARRANTY. Any of Borrower's representations or warranties
made herein or any statement or certificate at any time given in writing
pursuant hereto or in connection herewith shall be false or misleading in any
material respect.
4. INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or
admits its inability to pay its debts as they mature; or make an assignment for
the benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.
5. JUDGMENTS, ATTACHMENTS. Any money judgment, writ or warrant of
attachment, or similar process shall be entered or filed against Borrower or any
of its assets and shall remain unvacated unbonded or unstayed for a period of 10
days or in any event later than five days prior to the date of any proposed sale
thereunder.
6. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted.
E. MISCELLANEOUS PROVISIONS.
1. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
your Bank or any holder of Notes issued hereunder, in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege precluded other
or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this agreement or any note issued in
connection with a loan that your Bank may make hereunder, are cumulative to, and
not exclusive of, any rights or remedies otherwise available.
See Addendum dated September 5, 1995 attached hereto and incorporated herein by
this reference for additional items. In the event of a conflict between this
Agreement and the Addendum, the terms in the Addendum prevail.
APPLIED IMAGING CORP.
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/s/ Neil E. Woodruff, CFO
----------------------------------------
(Authorized Signature and Title)
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APPLIED IMAGING CORP.
ADDENDUM TO CREDIT TERMS & CONDITIONS
DATED SEPTEMBER 5, 1995
1. CREDIT FACILITY
---------------
A $1,000,000 Revolving Line of Credit for seasonal cash requirements.
2. MATURITY
--------
September 5, 1996.
3. TERMS
-----
Interest payable monthly, principal at maturity.
4. COLLATERAL
----------
Bank to have a blanket first priority security interest perfected by a UCC
filing on all assets of Borrower including all present and future
inventory, chattel paper, accounts, contract rights, unencumbered
equipment, general intangibles, and fixtures and the product thereof.
Borrower to continue to pledge to Bank 660,000.66 shares of Applied Imaging
International Limited stock.
5. BORROWING FORMULA
-----------------
Advances will be limited to the lesser of: (i) 80% of Eligible Accounts (as
hereinafter defined) plus the outstanding balance on the term loan
evidenced by that certain note dated January 5, 1995 in the original sum of
$172,500 executed by Neil Woodruff in favor of Bank); or (ii) $1,000,000.
As used herein, "Eligible Accounts" will include those domestic accounts
receivable of Borrower which are outstanding less than 90 days from invoice
date subject to certain exclusions for contra, US government, and
intercompany accounts. Any account which alone exceeds 25% of total
accounts will have the amount in excess of 25% excluded unless approved in
writing by Bank.
6. PRICING
-------
Interest Rate: Imperial Bank's Prime Rate + 1.5% per annum.
Facility Fee: $5,000, due and payable concurrently with execution hereof
by Borrower.
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7. COVENANTS
---------
A. Borrower to maintain on a monthly basis unless stated otherwise:
1. Minimum Quick Ratio/1/ of 1.00 to 1.00.
2. Minimum Tangible Net Worth/2/ of $2,000,000.
3. Maximum Total Liabilities/3/ to Tangible Net Worth/2/ of 2.00 to
1.00.
4. Losses not to exceed $900,000 in the quarter ending 12/31/95,
$1,000,000 in the quarter ending 3/31/96, $1,000,000 in the
quarter ending 6/30/96, and $1,050,000 in the quarter ending
9/30/96.
B. Borrower to provide to Bank:
1. Unqualified audited financial statements within 90 days after
each fiscal year end.
2. Company prepared monthly financial statements and Compliance
Certificate within 25 days after the end of each month.
3. Monthly agings of accounts receivable and accounts payable with
Borrowing Base Certificate within 25 days after the end of each
month.
4. Budgets, sales projections, operating plan, or other financial
exhibits which Bank may reasonably request.
C. Other Covenants:
1. Borrower's primary banking and investment accounts to be
maintained at Bank.
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/1/ Quick Ratio is cash plus accounts receivable divided by current
liabilities.
/2/ Tangible Net Worth is the financial statement net worth of the
Borrower prepared according to generally accepted accounting
principles less intangible assets, plus indebtedness fully
subordinated to the debt due to the Bank.
/3/ Total Liabilities are all the Borrower's liabilities except for
indebtedness fully subordinated to the debt due to the Bank.
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2. Without Bank's prior approval, Borrower shall not:
(a) Enter into any mergers or acquisitions or major debt
agreements, except for equipment leases.
(b) Pay cash dividends or repurchase stock.
(c) Hypothecate existing assets.
(d) Loan money or guarantee loans of others.
3. Borrower shall notify Bank in writing of any legal action
commenced against it which may result in damages over $50,000.
Borrower shall provide Bank with such notice immediately upon
Borrower's receipt of notice of such legal action.
4. Borrower shall provide Bank proof of insurance on all tangible
corporate assets and a Lender's Loss Payable Clause with Bank as
loss payee.
8. OTHER CONDITIONS
----------------
1. Bank shall conduct annual collateral audits by Bank's designated agent
at Borrower's expense, with results satisfactory to Bank.
2. Prior to loan closing, Borrower shall execute and deliver to Bank any
and all documents required by Bank.
APPLIED IMAGING CORP.
By: /s/ Neil E. Woodruff
--------------------------
Title: Chief Financial Officer
-------------------------
Date: 10/27/95
-------------------------
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EXHIBIT 10.21
-------------
[LETTERHEAD OF IMPERIAL BANK APPEARS HERE]
September 16, 1996
Neil Woodruff
Applied Imaging Corp.
2340 A Walsh Avenue, Building F
Santa Clara, California 95051
Re: Loan #00721000311/Note Number 4
Dear Neil:
Imperial Bank has approved an extension of your credit facility shown above as
evidenced by that certain Security and Loan Agreement dated September 5, 1995,
from its current maturity of September 5, 1996 to November 5, 1996.
Except as modified and extended hereby, the existing documentation as amended
concerning your obligations remains in full force and effect.
Sincerely,
/s/ Edgerton Scott II
Edgerton Scott II
Senior Vice President & Manager
Special Markets Group
<PAGE>
EXHIBIT 23.1
CONSENT AND FORM OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Applied Imaging Corp.:
When the reincorporation referred to in Note 14 of Notes to Consolidated
Financial Statements has been consummated, we will be in a position to render
the following report:
The audits referred to in our report dated February 26, 1996, except
as to Note 14, which is as of July 15, 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 forms of 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
September 16, 1996
