<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quartery Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the Quarterly Period ended September 30, 1999
[_] Quartery Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the Transition
Period From ______________ To _______________.
Commission File Number: 0-21371
APPLIED IMAGING CORP.
(Exact name of registrant as specified in its charter)
Delaware 77-0120490
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2380 Walsh Avenue, Building B,
Santa Clara, California 95051
(Address of principal executive offices including zip code)
(408) 562-0250
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the 90 days.
Yes [X] No [_]
As of November 8, 1999, 12,054,512 shares of the Registant's Common Stock were
outstanding.
<PAGE>
APPLIED IMAGING CORP.
INDEX
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998.............................. 3
Condensed Consolidated Statements of Operations
Three and Nine months ended September 30, 1999 and 1998............... 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998......................... 5
Notes to Condensed Consolidated Financial Statements.................. 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 8-11
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Derivatives and Financial Instruments.............................. 12
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.................................. 13
Signatures............................................................ 14
</TABLE>
2
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PART I - FINANCIAL INFORMATION
- ------------------------------
1. Financial Statements
APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,640 $ 5,480
Short term investments 4,082 6,248
Trade accounts receivable, net 4,020 3,821
Inventories 1,503 1,169
Prepaid expenses and other assets 377 436
------------------- -------------------
Total current assets 13,622 17,154
Property and equipment, net 1,079 1,569
Intangibles 2,421 -
Other assets, net 80 85
------------------- -------------------
Total assets $ 17,202 $ 18,808
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank and other debt $ 1,840 $ 1,079
Accounts payable 1,209 1,572
Accrued expenses 2,978 2,519
Deferred revenue 1,172 1,231
------------------- -------------------
Total current liabilities 7,199 6,401
Long-term liabilities 1,628 64
------------------- -------------------
Total liabilities 8,827 6,465
------------------- -------------------
Stockholders' equity:
Common stock 12 12
Additional paid-in capital 41,742 41,121
Deferred compensation (132) (419)
Accumulated other comprehensive income (367) (367)
Accumulated deficit (32,880) (28,004)
------------------- -------------------
Total stockholders' equity 8,375 12,343
------------------- -------------------
Total liabilities and stockholders' equity $ 17,202 $ 18,808
=================== ===================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 3,098 $ 2,639 $ 8,904 $ 8,608
Cost of revenues 1,506 1,340 4,209 4,216
------------ ------------ ------------ ------------
Gross profit 1,592 1,299 4,695 4,392
------------ ------------ ------------ ------------
Operating expenses:
Research and development 1,211 1,707 3,432 5,158
Sales and marketing 1,500 1,171 3,695 3,767
General and administrative 706 736 2,123 2,191
Amortization of intangibles 61 - 61 -
Restructuring costs - - 224 353
------------ ------------ ------------ ------------
Total operating expenses 3,478 3,614 9,535 11,469
------------ ------------ ------------ ------------
Operating loss (1,886) (2,315) (4,840) (7,077)
Other income/(expense), net (93) 213 (36) 371
------------ ------------ ------------ ------------
Net loss $ (1,979) $ (2,102) $ (4,876) $ (6,706)
============ ============ ============ ============
Net loss per share - basic and diluted $ (0.17) $ (0.18) $ (0.42) $ (0.72)
============ ============ ============ ============
Weighted average shares outstanding 11,952 11,448 11,673 9,277
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------
1999 1998
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $(4,876) $(6,706)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation and Amortization 835 644
Compensation expense on stock options 287 287
Loss on sale of fixed assets 41 5
Changes in operating assets and liabilities:
Accounts receivable, net (199) 174
Inventories (334) (485)
Prepaid expenses and other assets 59 (156)
Accounts payable (363) (278)
Accrued expenses 459 177
Deferred revenue (59) (202)
------- -------
Net cash used by operating activities: (4,150) (6,540)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (385) (543)
Business acquired (2,482) -
Purchases of marketable securities (1,000) (6,181)
Proceeds from sales and maturities of short term investments 3,165 4,209
Proceeds from sale of fixed assets 61 24
Other assets 5 (13)
------- -------
Net cash used by investing activities: (636) (2,504)
------- -------
Cash flows from financing activities:
Bank loan proceeds/(payments), net 2,325 167
Proceeds from Issuance of Common Stock 621 11,567
------- -------
Net cash provided by financing activities: 2,946 11,734
------- -------
Net increase/(decrease) in cash and cash equivalents (1,840) 2,690
Cash and cash equivalents at beginning of period 5,480 2,918
------- -------
Cash and cash equivalents at end of period $ 3,640 $ 5,608
======= =======
Supplemental disclosure of cash flow information:
Interest paid during period $ 56 $ 72
======= =======
Stock issued and accruals recorded for business acquired $ 1,482 $ -
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE I - Basis of Presentation
- ------------------------------
The accompanying condensed consolidated financial statements include the
accounts of Applied Imaging Corp. and subsidiaries (the "Company") for the three
and nine months ended September 30, 1999 and 1998. These financial statements
are unaudited and reflect all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation of the Company's financial position, operating results and cash
flows for those interim periods presented. The results of operations for the
three and nine months ended September 30, 1999 are not necessarily indicative of
results to be expected for the fiscal year ending December 31, 1999. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, for the year ended
December 31, 1998, contained in the Company's 1998 annual report on Form 10K.
NOTE 2 - Inventories (in thousands)
- -----------------------------------
<TABLE>
<CAPTION>
Balances as of September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Raw materials $ 1,444 $ 999
Work in process 40 96
Finished goods 19 74
------------------ ------------------
Total $ 1,503 $1,169
================== ==================
</TABLE>
NOTE - 3 Loss per share
-----------------------
The company has reported losses per share in accordance with the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards,
(SFAS) No. 128 "Earnings Per Share." SFAS No. 128 requires the presentation
of basic earnings per share ("EPS") and, for companies with complex capital
structures (or potentially dilutive securities, such as convertible debt,
options and warrants), diluted EPS.
There were no reconciling items of the numerators and denominators of the
basic and diluted EPS computation. Securities excluded from the computation of
EPS because their effect on EPS was antidilutive, but could dilute basic EPS in
future periods are as follows:
Balance as of September 30, 1999 December 31, 1998
------------------ -----------------
Options 1,820,494 1,198,190
Warrants 313,010 577,909
------------------ -----------------
Total 2,133,504 1,776,099
================== =================
See footnote 7 for additional shares issued subsequent to September 30, 1999.
6
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NOTE - 4 Restructuring Costs
- -----------------------------
During the quarter ended March 31, 1999, plans were developed to reduce
costs by eliminating fifteen positions in the Company. The employee reductions
were made at both the United States and United Kingdom facilities. The
consolidated statement of operations includes $224,000 of pretax charges
relating to the severance costs of these employees. As of September 30, 1999,
substantially all of these costs have been paid.
During the quarter ended June 30, 1998 the company recorded a restructuring
charge of $353,000 relating to the severance costs of thirteen positions in the
Company. All of these costs have been paid.
NOTE -5 Acquisition of assets
- -------------------------------
On July 16, 1999 (the "anniversary date"). The company acquired
intellectual and software property relating to the cytogenetic imaging
instrumentation business of Vysis, Inc.
The acquisition was accounted for as a purchase. The consideration paid was
$2,350,000 consisting of a cash payment of $1.0 million, $500,000 in cash to be
paid one year from the anniversary date and is included in current liabilities,
$250,000 in cash to be paid eighteen months from the anniversary date and is
included in long-term liabilities and 497,368 shares of the Company's common
stock issued at $1.206 per share. The installment payments bear interest at the
annual rate of seven percent. The interest is due and payable at the time the
installment is due. In addition, the Company has recorded a liability of
approximately $100,000 for the estimated costs associated with certain
warranties and service contracts that the Company has taken responsibility for.
The Company incurred approximately $32,000 in legal expenses directly related to
this acquisition. The Company estimates it will record intangibles of
approximately 2,482,000 and will amortize such goodwill over ten years.
NOTE -6 Term loan
- -------------------
On September 9, 1999, the Company entered into a $2.0 million Loan and
Security Agreement with Silicon Valley Bank. The term of the loan is three
years and calls for monthly principal payments of $55,556 plus interest. The
loan bears interest at prime plus 1.25 %. In conjunction with the loan, the
Company paid a facility fee of $10,000.
NOTE -7 Subsequent Event
- --------------------------
On November 3, 1999, the Company consummated a private sale of one million
shares of its Common Stock to certain accredited investors at a purchase price
of $2.00 per share. The price exceeded the closing price of the Company's
Common Stock as reported on the Nasdaq National Market System.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the fiscal year
ended December 31, 1998.
The information set forth below contains forward-looking statements
(designated by an *), and 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 "Item one" in the Company's
annual report on form 10-K for the fiscal year ended December 31, 1998.
Results of Operations
Revenues. The Company's revenues are derived primarily from the sale of
products and from service contracts. Revenues for the three and nine months
ended September 30, 1999 were $3.1 million and $8.9 million respectively,
compared to $2.6 million and $8.6 million for the corresponding prior year
periods. The increase in revenues is attributed to cytogenetic imaging
products acquired in July, 1999 and new products developed internally. These
revenues were partially offset by lower grant revenues and certain products
discontinued in 1999.
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. Costs of revenues, as a
percentage of total revenues, for the three and nine months ended September 30,
1999 were 49% and 47% respectively, compared to 51% and 49% for the
corresponding prior year periods. The decreases are primarily due to lower raw
material costs and license fees for the cytogenetic instrumentation products.
Research and development expenses. Research and development expenses consist of
research and development relating to new products as well as software
development costs to upgrade existing products. Research and development
expenses for the three and nine months ended September 30, 1999 were $1.2
million and $3.4 million respectively, compared to $1.7 million and $5.2 million
over the corresponding prior year periods. The decreases over the prior year
periods are primarily due to decreased expenditures for salaries, lab supplies
and consulting costs associated with the development of the Company's prenatal
screening products and lower development costs for the Company's cytogenetic
instrument business.
Sales and marketing expenses. Sales and marketing expenses consist primarily of
salaries, commissions and travel expenses of the Company's direct sales force,
as well as commissions paid to independent international sales agents. Sales
and marketing expenses for the three and nine months ended September 30, 1999
were $1.5 million and $3.7 million respectively, compared to $1.2 million and
$3.8 million in the corresponding prior year periods. As a percentage of
revenues, sales and marketing expenses were 48% and 41% of total revenues for
the three and nine months ended September 30, 1999 compared to 44% for the
corresponding prior year periods. The increase for the three months ended
September 30, 1999 is primarily due to costs and personnel additions associated
with the cytogenetic imaging products acquired in July 1999 and new product
launches.
8
<PAGE>
General and administrative expenses. General and administrative expenses
consist primarily of payroll costs associated with the Company's management and
administrative personnel, travel expenses, and legal, accounting and regulatory
compliance costs. General and administrative expenses were $706,000 and $2.1
million for the three and nine months ended September 30, 1999, compared to
$736,000 and $2.2 over the prior year periods.
Amortization of intangibles. Reflects the amortization expense associated with
the July 16, 1999 acquisition of the cytogenetic imaging instrumentation
business of Vysis Inc.
Restructuring costs. A restructuring charge of $224,000 was accrued for during
the quarter ended March 31,1999. The charge reflects the severance costs for
fifteen employees. The employee reductions were made in both the United States
and United Kingdom facilities. As of September 30, 1999 substantially all of
the severance costs have been paid to former employees.
During the quarter ended June 30, 1998 the Company recorded a restructuring
charge of $353,000 relating to the severance costs of thirteen positions in both
the United States and United Kingdom facilities. All of these costs have been
paid.
Other income/(expense), net. Includes one time charges for costs to terminate
certain distributor agreements and costs associated with a discontinued product.
No such charges were recorded in the prior year.
Factors That May Affect Future Results
The Company's operating results may vary significantly depending on certain
factors, including the effect of delays in and terminations of its research and
development programs, adverse results in its clinical studies, delays in the
introduction or shipment of new products, increased competition, adverse changes
in the economic conditions in any of the several countries in which the Company
does business, a slower growth rate in the Company's target markets, order
deferrals in anticipation of new product releases, lack of market acceptance of
new products, the uncertainty of FDA or other domestic and international
regulatory clearances or approvals, the Company's inability to attract and
retain key employees, and the factors set forth in the Company's annual report
on form 10-K for the fiscal year ended December 31, 1998.
Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenues or earnings from levels expected by security
analysts could have an immediate and significant adverse effect on the trading
price of the Company's common stock.
9
<PAGE>
Liquidity and Capital Resources
At September 30, 1999, the Company had cash, cash equivalents and
securities available for sale of $7.7 million and working capital of $6.4
million. Cash used by operations for the nine months ended September 30, 1999
was $4.2 million compared to $6.5 million for the corresponding prior year
period. The decrease in cash used in operations is primarily due to lower losses
as explained above. In addition, the Company consumed $385,000 for purchases of
capital equipment compared to $543,000 for the prior year period.
In November 1999, the Company strengthened its financial position by
raising $2 million of additional equity via a private placement of one million
shares of its Common Stock.
In September 1999, the Company established a $2 million three year term
loan from Silicon Valley Bank. The loan calls for monthly principal payments of
$55,556 plus interest. The loan bears interest at prime plus one and quarter
percent.
On July 16, 1999, the Company acquired certain assets relating to the
cytogenetic imaging instrumentation business of Vysis, Inc. Total consideration
paid was $2,350,000 consisting of a cash payment at closing of one million
dollars, installment payments of $500,000 due July 16, 2000 and $250,000 due
January 16, 2001 and 497,368 shares of the Company's Common Stock. The
installment payments bear interest at 7%, which is due and payable at the time
the installments are due. In addition, the Company will record a liability of
approximately $100,000 for the estimated costs associated with certain
warranties and service agreements that the Company will be responsible for. The
Company will also purchase approximately $500,000 in existing inventory from
Vysis for use in the cytogenetic imaging instrumentation business
The Company expects negative cash flow from operations to continue into at
least 2000, as it continues the research and development of its micrometastases
technologies, expands its marketing, sales and customer support capabilities and
adds administrative infrastructure.* The Company currently estimates that its
existing capital resources will enable it to sustain operations through 2000*.
Because 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 technologies or products, the Company may consider obtaining
additional financing.* The Company may seek to obtain additional funds through
equity or debt financing, collaborative or other arrangements with other
companies, or from other sources.* 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. In addition, as opportunities arise, funds may also be used to
acquire businesses, technologies or products that complement any such
acquisitions.*
10
<PAGE>
Year 2000 Compliance
The Company is knowledgeable of the issues associated with the programming
code in existing computer systems as the year 2000 approaches. The Company began
in 1997 and 1998 with a Year 2000 problem assessment, establishing a Year 2000
Company Policy, and initiating product upgrades to remedy Year 2000 problems.
The Company is using a four-phase approach to achieve Year 2000 compliance. The
first phase consisted of the inventorying of all potential business interruption
problems, including those with products and systems, as well as potential
disruption from suppliers and other third parties. The second phase consists of
prioritization of potential problems and allocating the appropriate level of
resources to the most critical areas. The third phase addresses the remediation
programs to solve or mitigate any identified Year 2000 problems. The fourth
phase, if necessary, will be to develop and implement contingency plans if there
are significant Year 2000 problems from the Company or its key suppliers.
The Company has completed an assessment of its internal Year 2000 risks.
The assessment included a review of products the Company produces and sells to
third parties, its telecommunication systems and its internal computer and
management information systems. The Company has determined that its current
products are Year 2000 compliant. The Company has recently upgraded its
telecommunication equipment and accounting systems to be Year 2000 compliant. In
February 1999, the Company released Year 2000 Upgrades to bring Pentium-based
systems currently installed at customer sites into Year 2000 compliance. Should
unanticipated Year 2000 problems occur, the Company is prepared to develop and
execute contingency plans to satisfy customers on an as-needed basis.*
The Company is continuing its external assessment of Year 2000 risks. In
early 1998, the Company contacted its key third party manufacturing suppliers
to assess exposure to Year 2000 problems. The initial assessment was that the
key supplier products were Year 2000 complaint. Currently, the Company is
contacting its key suppliers, vendors, financial service organizations (third
party suppliers) to confirm their continuing Year 2000 compliance of their
products and business programs to ensure the Company will not incur any Year
2000 business disruptions. Additionally, new key suppliers are also being
contacted. The Company expects to complete its 1999 external assessment on or
before the end of November 1999.* At present, the Company is not aware of any
issues with any of its third party suppliers.* However, third party compliance
is outside of the Company's control, and consequently, uncertainty exists.
Significant Year 2000 compliance problems from its third party suppliers,
partners, or customers could have a material adverse affect on the Company's
business, results of operation, financial condition and prospects.
The Company has expended and will continue to expend resources to continue
to monitor and upgrade its products and services and for the upgrade to its
telecommunication and management information systems. * To date the Company
estimates that its has expended approximately $155,000 for costs associated with
its year 2000 compliance and estimates it will spend an additional $25,000 to
$45,000 inclusive of non-incremental costs that will be incurred by reallocation
of existing resources in bringing the Company into Year 2000 compliance.*
However, there may be unforeseeable issues with unseen costs that are outside of
the Company's control that could have a negative impact on the Company.*
11
<PAGE>
Item. 3. Quantitative and Qualitative Disclosures about Market Risk
Derivatives and Financial Instruments.
For the quarter ended September 30, 1999, there were no material
changes from the disclosures made in the Company's form 10-K for the year ended
December 31, 1998.
12
<PAGE>
PART II - OTHER INFORMATION
- -----------------------------
Item 6: Exhibits and Reports on Form 8-K
(a)
Exhibit
-------
Exhibit 27.1 - Financial Data Schedule
The following report on Form 8-K was filed during the period for which this
report is filed:
(b) Reports on Form 8-K
-------------------
The Company filed a Form 8-K on July 16, 1999, announcing the acquisition
of assets from Vysis, Inc. relating to Vysis' cytogenetic imaging
instrumentation business.
13
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APPLIED IMAGING CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPLIED IMAGING CORP.
(Registrant)
Date: November 10, 1999 By: /S/ JACK GOLDSTEIN
-------------------------
Jack Goldstein
President, Chief Executive Officer
Chairman of the Board
By: /S/ MICHAEL J. BRADEN
-----------------------------
Michael J. Braden
Chief Accounting Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-31-1999
<PERIOD-END> SEP-30-1998 SEP-30-1999
<CASH> 5,608 3,640
<SECURITIES> 7,432 4,082
<RECEIVABLES> 3,335 4,238
<ALLOWANCES> 151 218
<INVENTORY> 1,334 1,503
<CURRENT-ASSETS> 17,982 13,622
<PP&E> 5,000 4,520
<DEPRECIATION> 3,343 3,441
<TOTAL-ASSETS> 19,726 17,202
<CURRENT-LIABILITIES> 5,664 7,199
<BONDS> 0 0
0 0
0 0
<COMMON> 12 12
<OTHER-SE> 13,979 8,375
<TOTAL-LIABILITY-AND-EQUITY> 19,726 17,202
<SALES> 6,538 6,969
<TOTAL-REVENUES> 8,608 8,904
<CGS> 3,417 3,384
<TOTAL-COSTS> 4,216 4,695
<OTHER-EXPENSES> 11,469 9,535
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 70 81
<INCOME-PRETAX> (6,706) (4,876)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,706) (4,876)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,706) (4,876)
<EPS-BASIC> (.72) (.42)
<EPS-DILUTED> 0 0
</TABLE>
