<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the Quarterly Period ended September 30, 2000
OR
[_] Quarterly 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 October 31, 2000, 13,842,037 shares of the Registrant's Common Stock were
outstanding.
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APPLIED IMAGING CORP.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999.......................... 3
Condensed Consolidated Statements of Operations and Comprehensive
Loss Three and Nine months ended September 30, 2000 and 1999...... 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999..................... 5
Notes to Condensed Consolidated Financial Statement............... 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 4. Submission of matters to a vote of security holders............... 13
Item 6. Exhibits and Reports on Form 8-K.................................. 13
Signatures........................................................ 14
2
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PART 1-FINANCIAL INFORMATION
----------------------------
Item 1. Financial Statements
APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,795 $ 2,832
Short term investments 1,990 5,574
Trade accounts receivable, net 5,855 6,187
Related party receivables - 143
Inventories 2,003 1,369
Prepaid expenses and other assets 588 187
-------- --------
Total current assets 13,231 16,292
Property and equipment, net 1,154 1,014
Intangibles 2,737 2,358
Other assets, net 55 80
-------- --------
Total assets $ 17,177 $ 19,744
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of bank debt $ 1,963 $ 1,743
Current portion of related party
notes payable 250 500
Current portion of capital lease
obligation 34 -
Accounts payable 1,434 2,226
Accrued expenses 2,715 3,166
Deferred revenue 2,054 1,525
-------- --------
Total current liabilities 8,450 9,160
Bank debt, less current portion 666 1,167
Related party notes payable, less current portion - 250
Deferred revenue 388 518
Capital lease obligations, less current portion 18 37
-------- --------
Total liabilities 9,522 11,132
-------- --------
Stockholders' equity:
Common stock 13 13
Additional paid-in capital 44,799 43,034
Deferred compensation - (43)
Accumulated other comprehensive income (373) (379)
Accumulated deficit (36,784) (34,013)
-------- --------
Total stockholders' equity 7,655 8,612
-------- --------
Total liabilities and stockholders'
equity $ 17,177 $ 19,744
======== ========
</TABLE>
The accompanying notes are in integral part of these unaudited condensed
consolidated financial statements.
3
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APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2000 1999 2000 1999
------ ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $3,982 $ 3,098 $11,984 $ 8,904
Cost of revenues 1,756 1,506 5,172 4,209
------ ------- ------- -------
Gross profit 2,226 1,592 6,812 4,695
------ ------- ------- -------
Operating expenses:
Research and development 743 1,211 2,599 3,432
Sales and marketing 1,568 1,500 4,556 3,695
General and administrative 777 706 2,145 2,123
Amortization of intangibles 77 61 203 61
Restructuring costs - - - 224
------ ------- ------- -------
Total operating expenses 3,165 3,478 9,503 9,535
------ ------- ------- -------
Operating loss (939) (1,886) (2,691) (4,840)
Other income/(expense), net (7) (93) (80) (36)
------ ------- ------- -------
Net loss (946) (1,979) (2,771) (4,876)
Other comprehensive loss, net of tax
Change in unrealized loss on
short-term investments 5 - 6 -
Other Unrealized Gain/(Loss) 2 - - -
------ ------- ------- -------
Comprehensive loss $ (939) $(1,979) $(2,765) $(4,876)
====== ======= ======= =======
Net loss per share-basic and diluted $(0.07) $ (0.17) $ (0.21) $ (0.42)
====== ======= ======= =======
Weighted average shares outstanding 13,762 11,952 13,428 11,673
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
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APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,771) $(4,876)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and Amortization 652 835
Amortization related to employee deferred
stock compensation 43 287
Loss on sale of fixed and other assets - 41
Changes in operating assets and liabilities:
Trade accounts and related party receivable 684 (199)
Inventories (440) (334)
Prepaid expenses and other assets (391) 59
Accounts payable (869) (363)
Accrued expenses (509) 459
Deferred revenue 399 (59)
------- -------
Net cash used in operating activities: (3,202) (4,150)
------- -------
Cash flows from investing activities:
Proceeds from sale and maturities of investments 3,590 683
Purchases of equipment (354) (385)
Acquisition of Assets (180) (1,000)
Proceeds from sale of fixed assets - 61
Other assets 25 5
------- -------
Net cash provided by/(used in)investing activities: 3,081 (636)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock 850 621
Bank and other loan proceeds 1,296 -
Bank and other loan payments (2,062) 2,325
------- -------
Net cash provided by financing activities: 84 2,946
------- -------
Net decrease in cash and cash equivalents (37) (1,840)
Cash and cash equivalents at beginning of period 2,832 5,480
------- -------
Cash and cash equivalents at end of period $ 2,795 $ 3,640
======= =======
Supplemental disclosure of cash flow information:
Interest paid during the period $ 227 $ 56
======= =======
Cash paid for taxes during the year $ - $ -
======= =======
Common stock issued for businesses acquired $ 915 $ 600
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited 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, 2000 and 1999. 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, 2000 are not necessarily indicative of
results to be expected for the fiscal year ending December 31, 2000. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, for the year ended
December 31, 1999, contained in the Company's 1999 annual report on Form 10-K.
NOTE 2 - Inventories (in thousands)
-----------------------------------
<TABLE>
<CAPTION>
NOTE 2 - Inventories (in thousands)
Balance as of September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Raw materials $1,889 $1,300
Work in process 79 13
Finished goods 35 56
------------------ -----------------
Total $2,003 $1,369
================== =================
</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:
<TABLE>
<CAPTION>
Balance as of September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Options 1,929,272 1,820,494
Warrants - 313,010
------------------ ------------------
Total 1,929,272 2,133,504
================== ==================
</TABLE>
6
<PAGE>
NOTE 4 - Recent Accounting Pronouncements
-------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137"). SFAS 137 deferred the effective date until fiscal year beginning
after June 15, 2000. The Company will adopt SFAS No. 133 in 2001. The Company
believes that there will be no impact upon adoption of FAS 133 on the financial
position and results of operations of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. In June 2000, the SEC issued SAB 101B, "Second Amendment:
Revenue Recognition in Financial Statements" ("SAB 101B"). SAB 101B deferred
the implementation date of SAB 101 until no later than the fourth fiscal quarter
of fiscal years beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on the Company's financial
position and results of operations
NOTE 5 - Acquisition of Assets
-------------------------------
On July 6, 2000 the Company acquired the United States-based genetic imaging
business of Perceptive Scientific Instruments, LLC (PSI) from International
Remote Imaging Systems, Inc. The purchase did not include the personnel and
assets of PSI's research group, including its federally funded research grants.
The acquisition was accounted for as a purchase. The consideration paid was
385,371 shares of common stock valued at $915,000, the assumption of certain
liabilities, and potential future cash payments to a maximum of $0.9 million
based on the future performance of the business. The excess of the purchase
price over the net identifiable assets was allocated to goodwill. The company
estimates the goodwill at approximately $588,000 that will be amortized over ten
years. The purchase price was allocated as follows:
<TABLE>
<S> <C>
($000)
----------
Accounts receivable $ 209
Inventories 194
Prepaid expenses 10
Property and equipment 138
Capitalized software 90
Assumed liabilities (134)
Goodwill 588
----------
Total purchase consideration $ 1,095
==========
</TABLE>
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, 1999.
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, 1999.
Results of Operations
Revenues. The Company's revenues are derived primarily from the sale of
products, instrument service contracts and grant revenues. Revenues for the
three and nine months ended September 30, 2000 were $4.0 million and $12.0
million respectively, compared to $3.1 million and $8.9 million for the
corresponding periods in the prior year. This 29% increase in revenues in the
quarter and 35% increase in the nine-months was due to sales of two new
products, the MDS(TM) and Genus(TM) systems, increases in sales of existing
products and services and sales of PowerGene products acquired from PSI (see
footnote 5).
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,
2000 were 44% and 43% respectively, compared to 49% and 47% for the
corresponding prior year periods. The decrease is primarily due to the impact
of the reversal of manufacturing-related accruals, in the second and third
quarter of 2000, which were no longer deemed necessary. In addition, the
Company benefited from increased average instrument selling prices and lower
costs for raw materials.
Research and development expenses. Research and development expenses for the
three and nine months ended September 30, 2000 were $0.7 million and $2.6
million respectively, compared to $1.2 million and $3.4 million for the
comparative prior year periods. The decrease over the prior year periods is
primarily due to the decreased expenditures for salaries and consulting costs
associated with the fetal cell isolation program.
Sales and marketing expenses. Sales and marketing expenses for the three and
nine months ended September 30, 2000 were $1.6 million and $4.6 million
respectively, compared to $1.5 million and $3.7 million for the comparative
prior year periods. The increase is primarily related to higher commission and
travel expenses as a result of increased sales and increased sales personnel.
There was an increase in marketing expenses in the nine-month period that was
related primarily to the development of promotional materials for the new
Genus(TM) and MDS(TM) products. As a percentage of revenues, sales and
marketing expenses were 39% and 38% of total revenues for the three and nine
months ended September 30, 2000, compared to 48% and 41% for the corresponding
prior year periods.
8
<PAGE>
General and administrative expenses. General and administrative expenses for
the three and nine months ended September 30, 2000 were $0.8 million and $2.1
million respectively, essentially the same amounts as last year. As a
percentage of revenue, general and administrative costs were 20% and 18% of
total revenues for the three and nine months ended September 30, 2000 compared
to 23% and 24% for the corresponding prior year periods. The reduction in the
percentage of sales ratio is due to the favorable effects of the restructuring
put in place last year.
Amortization of Intangibles. Amortization of intangibles amounted to $77,000
and $203,000 for the three and nine months ended September 30, 2000
respectively. This represents the amortization of the intangible assets
(goodwill and intellectual/software property) resulting from the acquisition in
July 1999 of the cytogenetic imaging business of Vysis, Inc. and the purchase on
July 6, 2000 of the United States-based genetic imaging business of Perceptive
Scientific Instruments, LLC (PSI) from International Remote Imaging Systems,
Inc.
Restructuring Costs. A restructuring charge of $224,000 was accrued for
during the quarter ended March 31, 1999. The charge reflected the severance
costs for fifteen employees in both the United States and United Kingdom
facilities. There were no restructuring charges during the nine months ended
September 30, 2000.
Other income (expense) net. Other expenses for the first nine months of the
year at $80,000 were primarily related to the interest expense associated with
bank debt and higher exchange losses due to the strengthening of the dollar
against the pound. Other expenses for the quarter ended September 30, 1999 of
$93,000 included costs associated with a discontinued product.
Factors That May Affect Future Results
The Company's operating results may vary significantly depending on certain
factors, including the effect of delays in its research and development program,
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, and the factors set forth in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1999.
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.
Liquidity and Capital Resources
At September 30, 2000, the Company had cash, cash equivalents and
securities available for sale of $4.8 million and working capital of $4.8
million. Cash used by operations for the nine months ended September 30, 2000
was $3.2 million compared to $4.2 million for
9
<PAGE>
the corresponding prior year period. The decrease in cash used in operations is
primarily due to lower losses as explained above and reduced balances of
accounts receivables offset in part by reductions in accounts payable and
accruals. In addition, the Company used $0.5 million for purchases of capital
equipment and the PSI assets, discussed in Footnote 5 above, in the first nine
months of 2000. The Company also received $1.9 million from the issuance of
common stock for the purchase of the PSI assets and from the exercise of
employee stock options.
The Company expects negative cash flow from operations to continue through
at least 2000, as it continues the research and development of its MDS(TM)
System, 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 into 2001.*
There can be no assurance, however, that the Company will not be required to
seek capital at an earlier date. 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 investigation, the timing of regulatory
approvals or clearances, competing technologies or potential acquisitions.* 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. * The Company may seek to obtain additional funds through equity
or debt financing, collaborative or other arrangements with other companies, and
from other sources.* No assurance can be given that additional financing will be
available when needed or on terms acceptable to the Company.
Year 2000 Compliance
The Company is knowledgeable of the issues associated with programming code
in existing computer systems that may have created potential incompatibilities
in computer systems beginning in the Year 2000. The Company began a Year 2000
problem assessment in 1997, establishing its Year 2000 Company Policy and
initiating product upgrade plans. The Company completed an assessment of its
internal Year 2000 risks and developed a series of upgrade and contingency
plans. No significant problems were encountered with the Company's products or
its internal business systems with the advent of Year 2000.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137"). SFAS 137 deferred the effective date until fiscal year beginning
after June 15, 2000. The Company will adopt SFAS No. 133 in 2001. The Company
believes that there will be no impact upon adoption of FAS 133 on the financial
position and results of operations of the Company.
10
<PAGE>
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. In June 2000, the SEC issued SAB 101B, "Second Amendment:
Revenue Recognition in Financial Statements" ("SAB 101B"). SAB 101B deferred the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on the Company's financial
position and results of operations.
11
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Derivatives and Financial Instruments.
For the nine months ended September 30, 2000, there were no material
changes from the disclosures made in the Company's form 10-K for the year ended
December 31, 1999.
12
<PAGE>
PART II - OTHER INFORMATION
-----------------------------
Item 4: Submission of matters to a vote of security holders
The Company solicited proxies for an annual meeting of stockholders on May
10, 2000 to all of the Company's stockholders.
The election of directors was conducted and the following nominees were
elected: Jack Goldstein, Ph.D. and Thomas C. McConnell. The vote with respect
to each nominee was as follows:
Votes
_____________________
Name For Against
------------------- --------- --------
Jack Goldstein 9,209,084 0
Thomas C. McConnell 9,209,084 0
PricewaterhouseCoopers LLP was ratified as the independent auditors of the
company for the fiscal year ending December 31, 2000 with 9,266,207 votes in
favor and 29,258 votes against.
An amendment of the Company's 1998 Incentive Stock Option Plan (the Plan)
was approved to increase the total number of shares reserved for issuance under
the Plan from 950,000 shares to 1,900,000 shares. The amendment was approved
with 4,642,021 votes in favor and 330,647 votes against.
Item 6. Exhibits and Reports on Form 8-K.
(a)
Exhibit
-------
Exhibit 27.1 - Financial Data Schedule
There were no reports on Form 8-K during the quarter ended September
30, 2000
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 14, 2000 By: /S/ JACK GOLDSTEIN
-------------------------
Jack Goldstein
Chief Executive Officer
Chairman of the Board
By: /S/ BARRY HOTCHKIES
--------------------------
Barry Hotchkies
Vice President, Chief Financial Officer
14
