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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 1999 or
[_] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
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, 95051
Building B, (Zip Code)
Santa Clara, California
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 562-0250
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
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None N/A
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 20,
2000, as reported on the NASDAQ National Market, was approximately $69,285,002.
The number of shares of Common Stock outstanding as of March 20, 2000:
13,356,145.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year.
This report, including all exhibits and attachments, contains 48 pages. The
exhibit index is on pages 45 & 46.
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PART I
Item 1. BUSINESS
This Report on Form 10-K contains certain forward looking statements
regarding future events with respect to Applied Imaging Corp. Actual events or
results may differ materially as a result of the factors described herein and in
the documents incorporated herein by reference, including, in particular, those
factors described under "Additional Risk Factors."
The Company
Applied Imaging Corp ("Applied Imaging" or the "Company") was
incorporated in California in July 1986, and reincorporated in Delaware in
October 1996. Applied Imaging develops, manufactures and markets automated
genetic testing systems for use in cancer testing, prenatal testing and other
genetic testing applications along with automated imaging systems used in cancer
pathology and cancer research. The Company's cytogenetic instrumentation
business, which has sold approximately 1600 systems to over 800 sites in more
than 35 countries since the Company's inception, markets microscopic image
analysis systems that enable laboratories to automate the analysis of
chromosomal abnormalities associated with conditions ranging from Down Syndrome
to breast cancer. The Company also markets imaging systems designed for use in
plant and animal genetic research programs. The Company has recently introduced
a research system to detect micrometastatic cancer cells in bone marrow, lymph
node and blood samples from cancer patients. This technology allows physicians
to better determine the initial staging of cancer cases and to then detect
disease recurrence earlier than is currently possible. It is also used for other
cancer research applications.
According to the Company's own analysis of its primary competitors'
publicly available financial data, Applied Imaging is the leading provider of
automated chromosomal image analysis systems to clinical and research
laboratories worldwide. The Company's CytoVision(TM) and Quips(R) systems are
widely utilized because of their ability to analyze human chromosome
preparations using powerful software classification algorithms and a specialized
user interface. These systems also incorporate the capability to analyze and
record images produced by advanced genetic research assays that employ
fluorescent in situ hybridization ("FISH") or comparative genomic hybridization
("CGH") methods. The Company is also developing specialized reagent products
that can be optimized for use on the Company's installed base of imaging systems
as one aspect of its business strategy.
The Company's Micrometastasis Detection System (MDS /TM/) couples the
ability to find rare cellular events with the capability to genetically
characterize these cells using FISH technology and specific DNA probes. It is
currently being sold to cancer researchers to detect and genetically
characterize cancer cells found in bone marrow, lymph nodes and stem cell
transplant samples. The Company has established a commercial relationship with
Nexell Therapeutics, Inc. to distribute their Cytonex staining kit for the
detection of cytokeratin-positive cells including carcinoma cells in blood and
bone marrow specimens worldwide. This stain is utilized in conjunction with the
MDS. Further basic research is being conducted by the Company into the use of
its micrometastasis detection platform as a method of detecting circulating
cancer cells in peripheral blood.
The Company previously pursued a prenatal genetic screening development
program focused on the isolation of specific fetal cells from a blood sample
taken from the expectant mother. While substantial research progress was made
towards the development of a reliable method for non-invasive prenatal
diagnosis, the Company has concluded that its methods do not currently
constitute a commercially viable system for this purpose. Accordingly, the
Company has shifted its research efforts and resources to its cancer imaging
programs, with a focus on the detection of rare micrometastatic cancer cells in
a variety of sample types. The Company believes that certain of its cell
enrichment and image analysis research conducted and products developed for
fetal cell analysis are directly applicable to these cancer testing
applications.
Genetic Disorders and Testing Applications
All genetic information in an organism is contained in its 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 the enzymes needed for the basic biochemical and physiological functions
of the cells. Chromosomal studies allow clinicians to examine genetic
rearrangements at both a macro level, while studying all chromosomes of a
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patient simultaneously, or at a micro level, while examining specific DNA probes
for individual genes or chromosomes.
Cancer Genomics
Chromosomal analysis is often performed for clinical and research purposes
for the precise characterization of many different types of cancers. Cancer
cells frequently demonstrate complex chromosomal abnormalities. The specific
patterns of these chromosomal abnormalities may be associated with certain well-
defined cancers. The chromosomal analysis of leukemias and lymphomas, for
example, provides researchers with supplementary information useful in the
staging or precise classification of the disease and may also provide useful
prognostic indicators. Similarly, advanced chromosomal analyses may allow a
researcher to assess new disease in a patient to determine if it may be a
recurrence of a previous cancer or an entirely different neoplasm.
Other Chromosomal Disorders
As in cancer, prenatal 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. Chromosomes can be seen with the aid of a
microscope and, when stained with certain dyes, reveal light and dark bands
reflecting regional variations in the DNA of the cell. Differences in size and
banding pattern allow the chromosomes to be distinguished from each other or may
identify a chromosomal disorder. The most common prenatal chromosomal disorder,
Down Syndrome, also known as trisomy 21, occurs when there are three copies of
chromosome 21 in the human genome. Other clinical syndromes caused by the most
common chromosomal abnormalities may result in mental retardation, impaired
physical development and abnormal sexual development.
Micrometastasis Detection
Micrometastasis is the spread of cancer away from the primary tumor that is not
detectable with routine testing methods. Typically, these metastases are too
limited in size to be observed using routine examination techniques. The
majority of cancers with micrometastases are attributable to a subset of cancer
known as carcinomas, a malignant growth that arises from epithelial cells found
in the skin or the lining of body organs. Carcinomas tend to infiltrate into
adjacent tissue and then spread (metastasize) to distant organs such as bone,
liver, lung or the brain. The initial application for micrometastases testing is
found among patients at the time of initial diagnosis for breast, prostate,
colorectal and gastric carcinomas. When micrometastatic cells are identified in
distant locations, the staging of the patient's disease will typically change to
reflect the presence of distant metastases, an indication of much more advanced
disease. This testing is expected to be performed in addition to normal staging
parameters and will aid in the most appropriate diagnosis and treatment of these
patients.
The Company has developed a micrometastasis detection system designed to
provide researchers and clinicians with the ability to identify micrometastatic
cancer cells in bone marrow, lymph nodes or blood specimens. The Company is
currently involved in a collaborative study with a leading European cancer
center to determine the prognostic significance of micrometastatic staging in a
population of over nine hundred breast cancer patients. The micrometastasis
detection system incorporates (i) an automated scanning microscope and image
analysis system, (ii) monoclonal primary antibodies specific to micrometastatic
cells and (iii) a colorimetric detection reagent.
Prenatal Testing
Prenatal testing is the process of detecting certain types of chromosomal
disorders in a fetus at an early stage of pregnancy. Definitive prenatal testing
is currently performed invasively, by extracting fetal cells and inspecting the
chromosomes within such cells to diagnose specific genetic disorders. Prenatal
testing is one of the most common uses of the Company's existing genetic testing
systems.
Fetal cells are obtained by one of two common procedures, amniocentesis or
chorionic villus sampling. Once the sample is extracted it is forwarded to a
cytogenetic laboratory, where the cells are cultured and deposited on a
microscope slide. The slide is then examined under a microscope in order to
locate and analyze a number of cells undergoing active cell division. At this
point, the chromosome complement of an individual cell is visible under the
microscope.
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Chromosome analysis without the advantage of an automated imaging system is
both tedious and time consuming. Typically, a laboratory technologist scans the
slide manually to locate cells undergoing active division. Once these metaphase
cells are found, they are photographed using a camera attached to the
microscope. This photograph is then printed and each 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 visual presentation of the
chromosomes is called a karyotype. Laboratories may eliminate many of these
steps and substantially improve their efficiency by using an automated image
analysis system to scan the slides for cells in metaphase, to automatically
classify the chromosomes, to present them on a video display for review and
acceptance and to print final karyotype records.
Current Cytogenetic Products
In the United States, approximately 500,000 total cytogenetic test
procedures are performed annually. Cytogenetic testing includes prenatal
screening for genetic disorders using amniotic fluid or chorionic villus
sampling. The most rapidly growing segment of cytogenetic testing includes those
tests for the diagnosis and prognosis of cancerous conditions using bone marrow,
blood and tissue samples. The Company currently manufactures, markets and sells
its CytoVision and Quips automated instruments for a wide range of these
cytogenetic applications. The Company's primary cytogenetic products are
described below. The Company has sold systems to over 800 sites worldwide in
more than 35 countries. The Company's primary cytogenetic products currently
sell for prices ranging from $20,000 to $200,000, depending upon the
instrument's capabilities and final system configurations.
CV ChromoScan(TM) System
The CytoVision ChromoScan is the Company's most comprehensive system for
automated chromosome analysis. The ChromoScan integrates many of the key
features of the Company's earlier products into one system capable of automated
microscope slide scanning, advanced chromosome analysis and fluorescent image
processing. The ChromoScan allows laboratories to automatically scan slides to
locate specific cells for chromosome analysis. This eliminates one of the most
tedious and time-consuming aspects of cytogenetic analysis: that of manual slide
scanning. The system accomplishes this in the background while simultaneously
allowing the technologist to process and analyze images previously identified.
The Company believes that no other commercially available system for cytogenetic
analysis incorporates this same range of features in one integrated and
automated package.
CytoVision(TM) System
The CytoVision system is a comprehensive chromosome analysis system that
integrates standard karyotyping capability with advanced FISH imaging
technologies, including color chromosome analysis techniques (in the CV
ChromoFluor(TM)). The system's computerized image capture and analysis
capabilities incorporate pattern recognition and automated chromosome
classification algorithms. The system provides automated karyotyping
capabilities, automatic separation of touching or overlapping chromosomes (a
common occurrence), a variety of user-defined image enhancement features, report
annotation capabilities and full screen display options. The DNA probe imaging
capability of the CytoVision detects and analyzes signals from DNA probes that
have been applied to cell nuclei. CytoVision systems enhance images of often-
faint fluorescent DNA probes and provide the operator with a range of optimized
analytical tools. The systems may also be upgraded to detect genetic
amplifications and deletions in tumor cells utilizing a research technique known
as comparative genomic hybridization ("CGH").
Quips(R) Systems
The Applied Imaging Quips systems offer advanced FISH imaging tools to
researchers worldwide. These systems were among the first to incorporate high
sensitivity digital imaging capabilities along with the ability to analyze new
DNA probe techniques such as M-FISH and interphase cytogenetics. Based on the
Apple(R) PowerMac platform, Quips systems allow researchers who have developed
techniques on Apple systems to continue their research with the most current
hardware and software solutions for the Macintosh. The Quips product line was
acquired by the Company as one part of a 1999 strategic alliance with Vysis,
Inc., the leading provider of DNA probe reagents for cancer and prenatal
testing.
Genus(TM)
The newest system introduced for cytogenetic research markets is the Company's
Genus system. Genus has been designed for the advanced analysis of plant and
animal genomes, a highly active area of basic research and commercial product
development. Adapting technology pioneered on the Company's CytoVision systems,
Genus allows researchers to apply well-established chromosome analysis
techniques to animals and plants that have wide variations in the makeup of
their chromosome complements. Initial market response to the introduction of
Genus has been very strong.
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All of the products in the CytoVision family are compatible with one
another and can be integrated into a network with common data management
protocols. In addition to its analysis systems, the Company also sells a number
of peripherals including a range of high quality printers. A typical
installation will include a number of interconnected CytoVision systems and
components.
Current Cancer Pathology Products
Micrometastasis Detection System (MDS(TM))
The MDS consists of a custom scanning microscopy system that has been optimized
for the analysis of bone marrow, lymph node and stem cell preparations to detect
rare cancer cells that have been stained by a variety of laboratory techniques.
Designed with fluorescent microscope capabilities fully integrated, the MDS
allows researchers to apply an extraordinarily wide range of DNA probes to
individual cells in order to characterize them at a molecular level.
Cytonex(TM) ImmunoCytoChemistry Staining Kit
The Cytonex kit is an FDA-cleared reagent product intended to detect
cytokeratin-positive metastases in cancer patients with common epithelial tumors
(such as breast, prostate and colon cancer). The Company is actively pursuing
partners such as Nexell Therapeutics (the manufacturers of Cytonex) who offer
novel diagnostic reagents that are suited for use in conjunction with our
existing and planned cancer pathology systems.
Sales, Distribution and Marketing
The Company currently sells its image analysis products to government and
private clinical laboratories, hospital laboratories, research institutions,
universities and pharmaceutical companies. These customers utilize the Company's
genetic imaging products for prenatal genetic screening and cancer research
studies.
In North America, the Company sells its products directly to its customers.
The North American sales team is comprised of nine sales and application support
specialists. 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 15 sales and application support
professionals, based in the United Kingdom, France and Germany. The Company's
primary distributors are located in Australia, China, Italy, Japan, South Korea
and Spain. In addition, the Company has established a sales agency agreement
with Vysis, S.A. where Vysis' European affiliates sell the Company's products in
France, Germany, the United Kingdom and selected other markets through their
direct sales channels.
Because the Company's products are technically sophisticated,
scientifically qualified and highly trained product specialists support the
Company's sales staff in all major markets. The Company offers an annual
instrument maintenance program to its customers through its dedicated 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 automated filter
wheels, (iii) proprietary hardware for scanning microscopy, and (iv) operating
systems and proprietary applications 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
that 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. The Company has
experienced no material difficulties in obtaining export licenses to date.
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Under current law, if the Company manufactures finished devices in the
United States, it will be required to comply with the FDA's Quality System
Regulation and the State of California's current Good Manufacturing Practice
("GMP") regulations. In addition, the FDA and/or the California authorities may
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 or criminal
prosecutions.
Research and Development
The Company's research and development efforts include various research,
product development, clinical evaluation and testing, quality assurance,
regulatory and process development activities. The current focus of the
Company's research and development efforts is the continued enhancement of the
Company's micrometastasis detection system. In addition, the Company is
collaborating with outside investigators and other companies to develop new
cancer testing applications for the micrometastasis platform. 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 for the micrometastasis detection system. Development of
these applications may require 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 further develop
its micrometastasis testing system or any other future applications of such
technology.
Research and development expenses were approximately $4.3 million, $6.7
million and $7.4 million in 1999, 1998 and 1997 respectively. Overall research
and development expenses have declined as the Company's development resources
have been shifted to concentrate on cancer imaging applications.
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 System and has corresponding issued patents in certain European
countries. The Company also has one United States patent relating to Multicolor
Fluorescent in situ Hybridization ("M-FISH") imaging techniques. In addition,
the Company has three United States patents concerning its technology for
enriching the concentration of fetal nucleated red blood cells from maternal
blood samples. Corresponding applications were filed through the Patent
Cooperation Treaty and preserve for the Company the right to file applications
in various countries. The Company relies upon trade secrets, know-how and
contractual arrangements to protect certain of its proprietary information and
products.
The fields of life science instrumentation and genetic screening processes
are covered by many issued patents and patent applications. The Company was
previously notified that it may be infringing on certain patents pertaining to
highly specialized cytogenetic applications. Upon review, the Company does not
believe there is any merit to such a claim. The Company is not aware of any
other 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 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.
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In October 1997, the Company entered into an exclusive worldwide licensing
agreement with the University of Cambridge for the commercialization of DNA-
probe technology developed by Cambridge researchers. The technology, known as
Cross Species Color Banding, has been utilized by the Company in an effort to
develop research test reagents to detect and analyze chromosomal aberrations.
The Company has developed an initial test kit for color banding analysis of
human chromosomes that has been made available for research use. The agreement
requires minimum annual royalty payments of $30,000 and the payment for specific
research related projects. The Company and the University of Cambridge are
currently in discussions regarding modifications to the terms of this agreement.
In January 1998, the Company entered into a non-exclusive worldwide
agreement with Vysis, Inc. for the right to use certain CGH software products.
The agreement requires an initial payment of $5,000 and a royalty payment of
$500 for each CGH software product sold.
The Company also relies upon trademarks to protect certain of its products,
and holds a United States trademark registration for the marks "CYTOSCAN" and
"RxFISH." Registrations for these marks and the mark "CYTOVISION" are held by
the Company in certain foreign jurisdictions.
The Company also has certain other 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 Instruments, Inc. (a subsidiary of International
Remote Imaging Systems, Inc.), Metasystems, Gmbh and Leica. The principal
competitive factors in this market are product features offered, ease of use,
clarity of output, customer service capabilities, price and installed base. The
Company believes it competes favorably with regard to these factors.
The market for micrometastasis detection imaging systems is a new and under
development. The Company's primary competitors in this market are Chromavision,
Inc. and Metasystems.
Certain 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, some 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 testing, manufacturing, labeling, distribution, sales, and marketing of
the Company's products are subject to government regulation in the United States
and in other countries. The Company believes that its future success will be
significantly dependent upon commercial sales of its micrometastasis detection
system. The Company currently markets this system for research purposes
globally. The Company is currently conducting clinical trials of its
micrometastasis system in the United States and Europe and plans to seek
regulatory clearance for specific clinical applications in the United States. 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 require
registration with the state and compliance with state GMP regulations.
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
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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 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.
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. The FDA is required to review 510(k) submissions within 90 days, but
it generally takes from five to twelve months from the date of submission to
obtain 510(k) clearance from the FDA; 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. Based on initial discussions with FDA officials, the Company plans to
submit a 510(k) application covering specific applications for its
micrometastasis detection system.
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. 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. Upon the
adoption of the "In Vitro Diagnostic Medial Device Directive of October 27,
1998, the European Community and its member countries currently are imposing
more substantial regulation on in vitro diagnostic devices and equipment-like
medical devices, and such regulation may affect the Company's current products
and products under development.
Delays in receipt of clearances or approvals to market its products,
failure to receive these clearances or approvals, the loss of previously
received clearances or approvals or the determination that 510(k) clearance,
pre-market approval or other approval is required for a product being marketed
without such clearance or approval could have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition, laboratories who purchase the Company's current products could
be subject to the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"),
which are intended to ensure the quality and reliability of medical testing
conducted in laboratories in the United States. The Company's products should
comply with CLIA regulations or the Company's ability to market its products
could be negatively affected.
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. The Federal Food, Drug and
Cosmetic Act and certain state laws require that medical devices be manufactured
in accordance with the Quality System Regulations ("QSregs"). Manufacturing
facilities are subject to periodic inspection by the FDA and certain state
agencies on a periodic basis to monitor compliance with GMP, QSregs and other
requirements. If violations of the applicable regulations are noted during such
inspections of manufacturing facilities, the Company can be prohibited from
conducting further manufacturing, distribution and sale of the devices until the
violations are cured.
The Company is also subject to other federal, state, local and foreign
laws, regulations and recommendations relating to safe working conditions and
good laboratory practices. 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
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In the United States, the Company's products are purchased primarily by
medical institutions which then bill various third-party payors, such as private
insurance plans, Medicare, Medicaid, and other government programs ("Third-Party
Payors") 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 new clinical benefits of genetic
screening procedures justify the 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. 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 micrometastasis detection system.
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. 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 December 31, 1999, the Company had 85 employees, of whom 24 were
involved in research and development, 9 in manufacturing , 39 in sales,
marketing and customer service and 13 in finance and administration. As of
December 31, 1999, 38 of the employees were based in the United Kingdom, 43 in
the United States, 1 in Israel, 2 in France and 1 in Germany. A total of 5
employees hold Ph.Ds, and 1 employee is an M.D. The Company's employees include
a number of professional cytogeneticists who support and sell its product range.
The Company believes its relationship with its employees to be good.
Accumulated Deficit; Future Losses
The Company expects its operating losses to continue in future periods as
it continues its efforts to market the micrometastasis detection system.
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
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include (i) demand for the Company's products, new product introductions by the
Company or its competitors or transitions to new products; (ii) the timing of
orders and shipments for capital equipment sales; (iii) 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
believes the pattern of fluctuating revenues is influenced by the budgetary
spending practices of the Company's customer base which consists primarily of
public and private clinical laboratories, research organizations and hospitals
operating on annual budgets. Due to the foregoing factors, it is likely that in
some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
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 would 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.
Uncertainty of FDA or Other Regulatory Clearances or Approvals
The testing, manufacturing, labeling, distribution, sale, and marketing, of
the Company's products are subject to government regulation in the United States
and other countries. 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 PMA. The Company's CytoVision product is the current model of the
Cytoscan product, marketed pursuant to the original 510(k) filing. The Company's
Quips products are marketed in the US pursuant to an original 510(k) clearance
obtained by Vysis, Inc. and its predecessor company.
The Company is conducting clinical trials of its micrometastasis detection
system in the US and Europe in preparation for the anticipated submission of a
510(k) pre-market notification in the United States. There can be no assurance
that the results of these clinical trials will be sufficient to complete such an
notification within a specific time frame or, that once submitted, the FDA will
accept such notification.
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.
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
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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 regulatory requirements in those
countries where the Company intends to use distributors. Any enforcement action
by regulatory authorities with respect to regulatory noncompliance may have a
material adverse effect on the Company's business, financial condition and
results of operations.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA clearance and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
approval for sale. Certain countries and customers may require evidence of the
company's compliance with international quality standards promulgated by the
International Standards Organization ("ISO"). In February 2000, the Company
received preliminary notification that it had successfully completed a third-
party audit of its international operations in Newcastle, England and that,
subject to certain conditions, it would be recommended for certification under
ISO 9001 guidelines for manufacturing and distribution operations as well as ISO
9000-3 guidelines for software development practices.
The Company has brought its currently sold instruments, as required, into
compliance with the European Parliament's Electromagnetic Compatibility
Directive (89/336/EEC) (the "ECD") and is entitled to apply the CE mark, with
respect to the ECD, to such instruments. The European Parliament has made a
distinction between Medical Devices ("MDs") and IVDs. The Company's instruments
are subject to the requirements or advantages of the In Vitro Diagnostic Medical
Device Directive (98/79/ec). There can be no assurance, however, that some or
all of the Company's products will not be redefined as MD's and made subject to
this Directive by the EU or its member states, which may have a material adverse
effect on the Company's business, financial condition, and 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 could
require approval to sale the Company products, or that will otherwise have a
material adverse effect on the Company's business, financial condition, or
results of operations.
As required by the In Vitro Diagnostics medical Device Directive, the
Company's medical device products have the right to affix the CE mark approved,
and the Company is entitled to apply the CE mark. Depending on the complexity of
the electromagnetic compatibility of each product, the testing and certification
process may take a day to months and cost from the several hundred to several
thousand dollars.
Dependence upon Patents and Proprietary Technology; Risk of Infringement
The Company relies primarily upon 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 that 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 patents in which it has licensed rights will be held valid if
subsequently challenged or that others will not claim rights in or ownership of
the patents and other proprietary rights held or licensed by the Company.
Furthermore, no assurance can be given that others have not developed or will
not develop similar products, duplicate any of the Company's products or design
around any patents issued to or licensed by the Company or that may be issued in
the future to the Company. Since patent applications in the United States are
maintained in secrecy until patents issue, the Company also cannot be certain
that others did not first file applications for inventions covered by the
Company's pending patent applications, nor can the Company be certain that it
will not infringe any patents that may issue to others on such applications.
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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. 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.
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.
Dependence on Distributors
Outside of North America and the United Kingdom, the Company relies
substantially on independent distributors and sales agents to market and sell
its products. There can be no assurance that distributors and agents will devote
adequate resources to support sales of the Company's products. Moreover,
agreements with a number of its distributors require that the Company indemnify
such distributors against costs, expenses and liabilities relating to litigation
regarding the Company's products and, despite these obligations of the Company,
distributors may decide to reduce or end their selling efforts until an
infringement dispute is resolved or settled.
Reliance on International Sales and Operations
The Company has significant international operations based in the United
Kingdom, employing at December 31, 1999, approximately 39 employees. In 1999,
1998 and 1997, approximately 60%, 63% and 59% respectively, of the Company's
total revenues were derived from customers and distributors outside of the
United States and Canada. 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
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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, 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 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, U.K. pounds sterling or European Currency Units (ECUs). 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.
For 1999, net sales to customers located in European countries accounted
for 60% of the Company's total sales. The unification of the European countries,
including the standardization of European currencies, as well as other factors,
could contribute to certain countries in the region experiencing banking,
currency and other difficulties that could, ultimately, impact the Company's
sales in Europe.
International 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, and other
sources of reimbursement for health care costs 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 technology 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 technology. 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 operations.
Third-Party Payors that do not use prospectively fixed payments
increasingly use other cost-containment processes that may pose administrative
hurdles to the use of the Company's products and products currently under
development. In addition, Third-Party Payors may deny reimbursement if they
determine that the device used in a treatment is unnecessary, inappropriate,
experimental, used for a non-approved indication or is not cost-effective.
Potential purchasers must determine that the clinical benefits of the Company's
products justify the additional cost or the additional effort required to obtain
prior authorization or coverage and the uncertainty of actually obtaining such
authorization or coverage.
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
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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.
Risk of Removal From the NASDAQ National Market
The shares of the Company's Common Stock are quoted on the NASDAQ National
Market. If the Company should continue to experience losses from operations, it
may be unable to maintain the standards for continued quotation on the NASDAQ
National Market, and the shares of Common Stock could be subject to removal from
the NASDAQ National Market. Trading, if any, in the Common Stock would therefore
be conducted on the NASDAQ SmallCap Market, which is a significantly less liquid
market than the NASDAQ National Market. As a result, an investor could find it
more difficult to dispose of the Company's Common Stock. NASDAQ has recently
promulgated new rules which make continued listing of companies on both the
NASDAQ National Market and the NASDAQ SmallCap Market more difficult and has
significantly increased its enforcement efforts with regard to the standards for
such listing. In addition, if the Company's Common Stock were removed from the
NASDAQ National Market and not qualify for listing on the NASDAQ SmallCap
Market, the Company's Common Stock could be subject to the so-called "penny
stock" rules that impose additional sales practice and market making
requirements on broker-dealers who sell and/or make a market in such securities.
Consequently, failure to qualify for listing on, or removal from, the NASDAQ
SmallCap Market, if it were to occur, could affect the ability or willingness of
broker-dealers to sell and/or make a market on the Company's Common Stock and
the ability of purchasers of the Company's Common Stock to sell their securities
in the secondary market. In addition, if the market price of the Company's
Common Stock is less than $5.00 per share, the Company may become subject to
certain penny stock rules even if still quoted on the NASDAQ SmallCap Market.
Such rules may further limit the market liquidity of the Common Stock and the
ability of investors to sell such Common Stock in the secondary market.
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 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. Key
employees of the Company include Jack Goldstein, Ph.D., its Chairman and Chief
Executive Officer, Carl Hull, President and Chief Operating Officer, Padraig
O'Kelly, Vice President-Operations, Dan Bowman, Vice President-Americas and
Guido Guidetti- Vice President-International. The Company has no key man
insurance. The Company has taken steps to retain its key employees, including
the granting of stock options that vest over time. Additionally, the Company has
entered into employment agreements with Dr. Goldstein, Mssrs.. Hull, Bowman and
Guidetti. 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 and micrometastasis detection products 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 products, 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
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The manufacture and sale of the Company's products involves the risk of
product liability claims. There can be no assurance that the coverage limits of
the Company's insurance policies will be adequate. The Company intends to
evaluate its coverage on a regular basis and in connection with the introduction
of products currently under development. Such insurance is expensive and may not
be available on acceptable terms, in sufficient amount of coverage, or at all. A
successful claim brought against the Company in excess of its insurance coverage
would have a material adverse effect on the Company's business, results of
operations and financial condition.
Control by Certain Stockholders
Certain stockholders, including certain executive officers and directors of
the Company and their affiliates, own approximately 71% 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.
Possible Volatility of Stock
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.
Potential Adverse Effect of Shares Eligible for Future Sale
According to Forms 13D and 13G filed by the Company's stockholders,
approximately 3,133,567 shares of the Company's Common Stock (representing
approximately 24% of the total shares outstanding) are held by affiliates and
are therefore subject to volume limitations pursuant to Rule 144. In the event
any of such stockholders cease to be affiliates (for example, by resigning from
the Board of Directors and holding less than 10% of the shares outstanding), (i)
certain of the shares held by such stockholders will be eligible for immediate
resale in the public market and (ii) pursuant to Rule 144(k), certain of such
shares will no longer be subject to the manner of sale and volume limitations of
Rule 144 and will be eligible for resale in the public market after 90 days from
the date such stockholder ceases to be an affiliate. Any sale of a substantial
number of shares may have the effect of depressing the trading price of the
Company's publicly traded stock, which would lower the Company's value and make
it more difficult for the Company to raise capital.
Significant Restrictions on Change in Control
Certain provisions of the Company's current 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 has adopted a
Preferred Shares Rights Agreement, sometimes referred to as a poison pill,
designed to prevent hostile takeovers not approved by the Board of Directors.
Also, the Company is authorized to issue 6,000,000 shares of undesignated
Preferred Stock. Such shares of Preferred Stock may be issued by the Company
without stockholder approval upon such terms as the Company's Board of Directors
may determine. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change of control of the Company, 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 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. 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. Certain provisions of Delaware law applicable to the
Company could also delay or make more difficult a
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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.
Item 2. PROPERTIES
In the United States, Applied Imaging leases an approximately 14,000 square
foot facility in Santa Clara, California, under a lease, which terminates in
November 30, 2000. In the United Kingdom, Applied Imaging International Ltd.
("AII") leases an approximately 12,500 square foot facility in Newcastle, which
lease terminates in July 2008. The Company believes that its facilities are
adequate to meet its requirements through 2000.
Item 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market under
the symbol "AICX." The following table sets forth the range of the high and low
sale prices by quarter as reported on the NASDAQ National Market for the periods
indicated.
High Low
------- -------
1999
First Quarter 2 1/4 3/8
Second Quarter 3 3/4
Third Quarter 1 5/8 3/4
Fourth Quarter 1 13/16 11/16
1998
First Quarter 4 1/4 1 7/8
Second Quarter 3 9/16 1 7/8
Third Quarter 3 2
Fourth Quarter 3 1/8 1 1/4
As of March 8, 2000, the number of common stockholders of record was 154.
The Company currently intends to retain any earnings for use in its business and
has not in the past, nor does it anticipate paying in the foreseeable future any
cash dividends.
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Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's audited consolidated financial statements and
related notes thereto and with Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are included elsewhere in this Form
10-K. The consolidated statement of operations data for the year ended
December 31, 1999 and the consolidated balance sheet data at December 31, 1999
are derived from, and are qualified by reference to, the consolidated
financial statements which have been audited by PricewaterhouseCoopers LLP and
the consolidated statement of operations data for the years ended December 31,
1998 and 1997 and the consolidated balance sheet data at December 31, 1998,
are derived from, and are qualified by reference to, the consolidated
financial statements which have been audited by KPMG LLP and are included in
this Form 10-K. The consolidated statement of operations data for the years
ended December 31, 1996 and 1995 and the consolidated balance sheet data
December 31, 1997, 1996 and 1995 are derived from audited consolidated
financial statements which have also been audited by KPMG LLP.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Product sales....................................... $ 11,475 $ 9,034 $ 10,457 $ 9,259 $ 8,106
Software maintenance and service.................... 2,655 2,650 2,677 2,663 2,692
------------ ------------ ------------ ------------ ------------
Total revenues................................. 14,130 11,684 13,134 11,922 10,798
Cost of revenues.................................... 6,686 6,010 6,284 5,974 5,484
------------ ------------ ------------ ------------ ------------
Gross profit................................... 7,444 5,674 6,850 5,948 5,314
------------ ------------ ------------ ------------ ------------
Operating Expenses:
Research and development............................ 4,299 6,662 7,381 3,667 2,919
Sales and marketing................................. 5,232 4,950 3,740 3,088 2,918
General and administrative.......................... 2,876 2,722 3,639 2,088 2,094
Amortization of Intangibles......................... 124 - - - -
Restructuring costs................................. 818 353 - - -
------------ ------------ ------------ ------------ ------------
Total operating expenses............................ 13,349 14,687 14,760 8,843 7,931
------------ ------------ ------------ ------------ ------------
Operating loss...................................... (5,905) (9,013) (7,910) (2,895) (2,617)
Other (expense) income.............................. (104) 541 398 14 71
------------ ------------ ------------ ------------ ------------
Net loss................................................. $ (6,009) $ (8,472) $ (7,512) $ (2,881) $ (2,546)
============ ============ ============ ============ ============
Net loss per share basic and diluted..................... $ (0.50) $ (0.86) $ (1.03) $ (1.43) $ (2.46)
============ ============ ============ ============ ============
Consolidated shares used to calculate Basic and
diluted net loss per share............................... 11,930 9,850 7,324 2,020 1,033
Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments... $ 8,406 $ 11,728 $ 8,378 $ 12,318 $ 5,156
Working capital..................................... 7,132 10,753 7,171 10,700 3,249
Total assets........................................ 19,744 18,808 14,714 16,473 9,373
Non-current portion of bank debt.................... 1,167 - - - -
Non-current of deferred revenues.................... 518 - - - -
Non-current of notes payable........................ 250 - - - -
Lease obligation.................................... 37 64 89 229 231
Accumulated deficit................................. (34,013) (28,004) (19,533) (12,021) (9,140)
Total stockholders' equity.......................... 8,612 12,343 8,943 12,005 4,714
</TABLE>
17
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth in this Item 7 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 below under "Factors That
May Affect Future Results," and those set forth under Item One on this document,
including "Additional Risk Factors".
Overview
Since its inception in 1986, the Company has principally been engaged in
the design, development, manufacture and marketing of automated genetic testing
systems for use in cancer testing, prenatal testing and other genetic testing
applications. The Company's genetic imaging instrumentation products include
systems that enable laboratories to automate many aspects of the detection of
chromosomal abnormalities associated with conditions such as cancer and Down
Syndrome. The Company also markets imaging systems used to detect the presence
of rare cancer cells in various tissues and to then genetically characterize
these cells. The Company sells its systems to government and private clinical
laboratories, research institutions, universities and pharmaceutical companies,
and has sold such systems to approximately 800 sites in over 35 countries.
The Company previously pursued a prenatal genetic screening development
program focused on the isolation of specific fetal cells from a blood sample
taken from the expectant mother. While substantial research progress was made
towards the development of a reliable method for non-invasive prenatal
diagnosis, the Company has concluded that its methods do not currently
constitute a commercially viable system for this purpose. Accordingly, the
Company has shifted its research efforts and resources to its cancer imaging
programs, with a focus on the detection of rare micrometastatic cancer cells in
a variety of sample types. The Company believes that certain of its cell
enrichment and image analysis products developed for fetal cell analysis are
directly applicable to these cancer testing applications.
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 cytogenetic products. These factors include, but
are not limited to, demand for the Company's products, timing of capital
equipment orders and shipments, competition and its related pricing pressures,
and seasonal factors, many of which are outside the Company's control.
The Company markets its products worldwide from its operations in the
United States and the United Kingdom and performs research and development in
both the United States and the United Kingdom. Sales from the United States are
primarily to customers within the United States and Canada. Revenues in the
United Kingdom are generated by both shipments of products from the United
States directly to international customers and direct shipments to international
customers from the United Kingdom.
Results of Operations
Fiscal 1999 Compared With Fiscal 1998
Revenues. Revenues increased to $14.1 million in 1999 from $11.7 million in
1998. This 21% increase in revenues is principally due to the acquisition of the
Vysis Quips(R) product line and the launch of two new products - Genus(TM) and
MDS(TM). Service contract and software maintenance revenues at $2.7 million was
the same as in 1998. In 1999, the Company recorded $99,000 of grant proceeds as
revenues compared to $287,000 in the prior year. Grant revenues fluctuate based
on the completion of milestones for existing programs and the receipt of any new
grant awards. For 1999 and 1998 revenues derived outside of North America were
approximately 60% and 63% of total revenues, respectively, reflecting increased
North American instrument sales during 1999.
Cost of Revenues. Cost of revenues as a percent of total sales decreased to
47% in 1999 from 51% in 1998. The decrease in cost of revenues as a percentage
of total revenues is attributable to lower costs for raw materials and lower
licensing fees achieved by converting the CytoVision product line from Unix to
Windows NT(R) and, to a lesser extent, by increased average instrument selling
prices.
Research and Development Expenses. Research and development expenses of
$4.3 million decreased approximately $2.4 million from 1998 levels. The decrease
is primarily due to reduced direct expenditures on the fetal
18
<PAGE>
cell isolation project. Reflecting this change, research and development costs
were 30% and 57% of total revenues for 1999 and 1998, respectively.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$5.2 million in 1999 from $5.0 million in 1998. In 1999 and 1998 sales and
marketing expenses as a percentage of total revenues were 37% and 42%,
respectively. The increase in spending in 1999 is primarily attributable to
investment in additional marketing and sales personnel to support the products
acquired from Vysis and to launch the Company's new instrumentation systems.
General and Administrative Expense. General and administrative expenses in
1999 amounted to $3.1 million, increasing $400,000 over 1998. This increase was
primarily due to higher spending on quality assurance costs for ISO
certification and regulatory preparation for a 510(k) submission for the
Company's micrometastasis detection system and to fees associated with a
distributor shutdown.
Amortization of Intangibles. The Company began amortizing in 1999 the
intangible assets which included goodwill and intellectual and software property
in connection with its acquisition in 1999 of the cytogenetic imaging business
of Vysis Inc. Total amortization in 1999 amounted to $124,000 representing a
partial year of amortization expense.
Restructuring. To focus the Company on the execution of its sales and
marketing strategy and to transition from working in fetal cell research to work
in cancer metastasis, and to reduce operating costs, the Company eliminated 15
mostly R&D positions in 1999 at both its United States and United Kingdom
facilities. The reductions were made at both the United States and United
Kingdom facilities. The consolidated statement of operations for 1999 includes
an $818,000 charge relating to the severance costs of these terminated employees
and certain costs associated with discontinued products. As of December 31,
1999, $225,000 of these costs have been paid and the balance is expected to be
paid sometime in 2000. The estimated future annual cost savings as a result of
the restructuring is $1.1 million.
Other Income. In 1999 Other Income amounted to $158,000 compared to
$541,000 of Other Income in 1998. The Other Expense total for 1999 represented a
decrease in interest income of $97,000, increase in interest expense of $47,000,
an increase in foreign exchange loss of $211,000, and provision for taxes of
$31,000.
Fiscal 1998 Compared With Fiscal 1997
Revenues. Revenues decreased to $11.7 million in 1998 from $13.1 million in
1997. The decrease in revenues was principally due to the economic crisis in
Asia, particularly Japan, as well as lower sales in North America. In 1998, the
Company recorded $287,000 of grant proceeds as revenues. For 1998 and 1997
revenues derived outside of North America were approximately 63% and 59% of
total revenues, respectively.
Cost of Revenues. Cost of revenues as a percent to total sales increased to
51% in 1998 from 48% in 1997. The increase in cost of revenues as a percentage
of total revenues was attributable to lower instrument selling prices, as a
result of increased price competition for cytogenetic instrumentation products,
along with lower service revenues and increases to inventory reserves for
certain discontinued products.
Research and Development Expenses. Research and development expenses of
$6.7 million decreased $719,000 from 1997 levels. The decrease was primarily due
to cost saving programs implemented throughout the year. Research and
development costs were 57% and 56% of total revenues for 1998 and 1997,
respectively.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$5.0 million in 1998 from $3.7 million in 1997. In 1998 and 1997 sales and
marketing expenses as a percentage of total revenues were 42% and 28%,
respectively. The increase in 1998 is primarily attributable to investment
spending for additional marketing and sales personnel to support the launch of
new products.
General and Administrative Expense. General and administrative expenses in
1998 amounted to $2.7 million, decreasing $918,000 over 1997. The decrease is
primarily due to lower corporate staffing levels and lower costs for recruiting
and relocation.
Restructuring. During the quarter ended June 30, 1998, plans were developed
to reduce operating costs by eliminating selected positions in both the United
States and United Kingdom facilities. The consolidated statement of operations
for 1998 includes a $353,000 charge relating to the severance costs of these
terminated employees. Substantially all of these costs have been paid.
Other Income. In 1998, Other Income amounted to $541,000 which represented
an increase of $143,000 over 1997 which is primarily due to the interest income
derived from the increase in liquid assets of the Company as a result
19
<PAGE>
of the private placements of its common stock. The Other Income total for 1998
consisted of $579,00 of interest income, $92,000 of interest expense, foreign
exchange gain of $58,000 and other miscellaneous costs.
Factors That May Affect Future Results
The Company's operating results may vary significantly depending on certain
factors, including adverse results in its clinical studies, delay 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.
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
As of December 31, 1999, the Company had cash, cash equivalents and short-
term investments of $8.4 million and working capital of $7.1 million, compared
to $11.7 million and $10.8 million, respectively, at December 31, 1998 and $8.4
million and $7.2 million, respectively, at December 31, 1997. For the year ended
December 31, 1999, cash used by operations totaled $5.0 million, compared to
$8.2 million and $7.1 million in 1998 and 1997 respectively. The decrease in
cash used by operations from 1998 to 1999 was primarily attributable to
reduced losses, increases in accounts payables and accruals. These were
partially offset by higher balances of accounts receivables which increased
$2.5 million in 1999 and inventories which increased to $1.4 million in 1999
from $1.2 million in 1998. In addition, the Company consumed $515,000 in 1999
for purchases of capital equipment compared to $744,000 for the comparable
prior year.
In November 1999, the Company raised $2.0 million of additional equity via
a private placement of one million shares of its Common Stock at a price of
$2.00 per share. The investors also entered into a distribution agreement for
the Company's products. The price exceeded the closing price of the Company's
Common Stock as reported on the Nasdaq National Market System. As part of the
private placement, the Company recognized a deferred revenue of $720,000 to be
amortized over 50 months. As of December 31, 1999, the balance of the deferred
revenue as a result of this private placement is $691,000.
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 a quarter
percent and carries certain restrictive convenants that require the Company to
maintain certain levels of liquidity and minimum and maximum total liabilities
to tangible net worth ratios.
In July 1999, the Company acquired certain cytogenetic instrumentation
assets of Vysis. Total consideration paid was $2,350,000 consisting of a cash
payment 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.
Since its inception in July 1986 through December 1998, the Company has
generated an accumulated deficit of approximately $34 million. The Company
expects negative cash flow from operations to continue into at least 2000, as it
continues the development of its micrometastasis detection systems, conducts
clinical trials required for FDA clearance of new products, expands its
marketing, sales and customer support capabilities, and adds administrative
infrastructure.* The Company currently estimates that its capital resources will
enable it to meet its short-term capital needs and sustain it into 2001.* Long-
term capital needs of the Company may require it to raise additional debt or
equity financing. If adequate funds are not available, the Company could be
required to delay development or commercialization of certain 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
products.* 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 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
20
<PAGE>
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 December 1998, AcSEC released Statement of Position 98-9 or SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition. SOP 98-9 amends SOP 97-2
to require that an entity recognize revenue for multiple element arrangements by
means of the residual method when (1) there is no vendor-specific objective
evidence (VSOE) of the fair values of all the undelivered elements that are not
accounted for by means of long-term contract accounting, and (2) all revenue
recognition criteria of SOP 97-2 (other than the requirement for VSOE of the
fair value of each delivered element) are satisfied. The provisions of SOP 98-9
that extend the deferral of certain paragraphs of SOP 97-2 became effective
December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9 will be effective
for transactions that are entered into in fiscal years beginning after March 15,
1999. Retroactive application is prohibited. The Company is currently evaluating
the impact of the requirements of SOP 98-9 and the effects, if any, on its
current revenue recognition policies and does not expect any material impact
from its application.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. The Company is currently evaluating the impact of SAB 101 on its
financial statements and related disclosures. The accounting and disclosures
prescribed by SAB 101 will be effective for the fiscal year ended December 31,
2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains and losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exits. SFAS 133 will be
effective for fiscal quarters beginning after June 15, 2000. The Company is
currently evaluating the impact of the requirements of SFAS 133 and the effects
if any on its financial statements and does not expect any material impact from
its application. The Company does not currently hold derivative instruments or
engage in hedging activities.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVES AND FINANCIAL INSTRUMENTS
Foreign currency hedging instruments
The Company transacts business in various foreign currencies. Accordingly,
the Company is subject to exposure from adverse movements in foreign currency
exchange rates. This exposure is primarily related to revenues and operating
expenses in the U.K. denominated in the respective local currency.
The Company currently does not use financial instruments to hedge operating
expenses in the U. K. denominated in the respective local currency. Instead, the
Company believes that a natural partial hedge exits, because local currency
revenues will substantially offset the operating expenses denominated in the
respective local currency. The company assesses the need to utilize financial
instruments to hedge currency exposure on a ongoing basis. As of December 31,
1999 the Company had no hedging contracts outstanding.
21
<PAGE>
The Company does not use derivative financial instruments for speculative
trading purposes, nor does the Company hedge its foreign currency exposure in a
manner that entirely offsets the effects of changes in foreign exchange rates.
The Company regularly reviews its hedging program and may as a part of this
review determine at any time to change its hedging program. See "Risk Factors--
Reliance on International Sales and Operations
Fixed income investments
The Company's exposure to market risks for changes in interest rates
relates primarily to investments in debt securities issued by U.S. government
agencies and corporate debt securities. The Company places its investments with
high credit quality issuers and, by policy, limits the amount of the credit
exposure to any one issuer.
The Company's general policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. All
highly liquid investments with a maturity of three months or less at the date of
purchase are considered to be cash equivalents; investments with maturities over
three months are considered to be short-term investments. The weighted average
pre-tax interest rate on the investment portfolio is approximately 5.6%.
22
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
The Board of Directors
Applied Imaging Corp.:
In our opinion, the accompanying consolidated balance sheet as of December
31, 1999 and the related consolidated statements of operations and comprehensive
loss, of stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Applied Imaging Corp. and its subsidiaries
at December 31, 1999, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule of valuation and qualifying accounts listed in the index
appearing under Item 14(a)(2) on page 45 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which 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 assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. The financial statements of
the Company as of December 31, 1998 and for each of the two years in the period
ended December 31, 1998 were audited by other independent accountants whose
report dated February 5, 1999 expressed an unqualified opinion of those
statements.
PricewaterhouseCoopers LLP
San Jose, CA
January 28, 2000
23
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
Applied Imaging Corp.:
We have audited the accompanying consolidated balance sheet of Applied
Imaging Corp. and its subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1998 and 1997. In connection with our audits of the
consolidated financial statements for the periods indicated above, we have also
audited the consolidated financial statement schedule of valuation and
qualifying accounts. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the related consolidated financial statement schedule 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, 1998, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997,
in conformity with generally accepted accounting principles. Also in our
opinion, the related consolidated financial statement schedule of valuation and
qualifying accounts, 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.
KPMG LLP
Mountain View, California
February 5, 1999
24
<PAGE>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,832 $ 5,480
Short-term investments 5,574 6,248
Trade accounts receivable (less allowance for doubtful accounts
of $251,000 and $162,000 at December 31, 1999 and 1998 respectively) 6,187 3,821
Related party receivables 143 -
Inventories 1,369 1,169
Prepaid expenses and other current assets 187 436
-------- --------
Total current assets 16,292 17,154
Property and equipment, net 1,014 1,569
Intangibles, net 2,358 -
Other assets 80 85
-------- --------
Total assets $ 19,744 $ 18,808
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of bank debt $ 1,709 $ 1,045
Current portion of capital lease obligation 34 34
Current portion of related party notes payable 500 -
Accounts payable 2,226 1,572
Accrued expenses 3,166 2,519
Deferred revenue, current 1,525 1,231
-------- --------
Total current liabilities 9,160 6,401
Long term liabilities:
Bank debt, less current portion 1,167 -
Related party notes payable, less current portion 250 -
Deferred revenues, non-current 518 -
Capital lease obligation, less current portion 37 64
-------- --------
Total liabilities 11,132 6,465
-------- --------
Commitments (Note 10)
Stockholders' equity:
Preferred stock, $0.01 par value; 6,000,000 shares authorized; none
issued and outstanding at December 31, 1999 and 1998 - -
Common stock; $0.001 par value; 20,000,000 shares authorized;
13,054,512 and 11,529,537 issued and outstanding December 31, 1999
and 1998 respectively 13 12
Additional paid-in capital 43,034 41,121
Accumulated deficit (34,013) (28,004)
Deferred stock compensation (43) (419)
Accumulated other comprehensive loss (379) (367)
-------- --------
Total stockholders' equity 8,612 12,343
-------- --------
Total liabilities and stockholders' equity $ 19,744 $ 18,808
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
25
<PAGE>
<TABLE>
<CAPTION>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
Year Ended December 31,
---------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Product sales............................... $ 11,475 $ 9,034 $ 10,457
Software maintenance and service............ 2,655 2,650 2,677
---------------- ---------------- ----------------
Total revenues......................... 14,130 11,684 13,134
---------------- ---------------- ----------------
Cost of revenues
Product sales............................... 5,582 4,953 5,188
Software maintenance and service............ 1,104 1,057 1,096
---------------- ---------------- ----------------
Total cost of revenues................. 6,686 6,010 6,284
---------------- ---------------- ----------------
Gross Profit........................... 7,444 5,674 6,850
---------------- ---------------- ----------------
Operating expenses:
Research and development.................... 4,299 6,662 7,381
Sales and marketing......................... 5,232 4,950 3,740
General and administrative.................. 3,138 2,722 3,639
Amortization of intangibles................. 124 - -
Restructuring costs......................... 818 353 -
---------------- ---------------- ----------------
Total operating expenses............... 13,611 14,687 14,760
---------------- ---------------- ----------------
Operating loss......................... (6,167) (9,013) (7,910)
Other income (loss).............................. 158 541 398
---------------- ---------------- ----------------
Net loss............................... (6,009) (8,472) (7,512)
Other comprehensive loss, net of tax:
Change in unrealized loss on short-term
investments.............................. (12) - -
---------------- ---------------- ----------------
Comprehensive loss......................... $ (6,021) $ (8,472) $ (7,512)
================ ================ ================
Net loss per share - basic and diluted........... $ (0.50) $ (0.86) $ (1.03)
================ ================ ================
Shares used to calculate basic and diluted net
loss per share 11,930 9,850 7,324
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
<TABLE>
<CAPTION>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1999, 1998 and 1997
(in thousands)
Accumulated
Additional Deferred other Total
Common Stock paid-in Accumulated stock comprehensive stockholders'
-----------------
Shares Amount capital deficit compensation loss equity
------ ------ ---------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1996 6,824 $ 7 $ 25,569 $ (12,021) $ (1,183) $ (367) $ 12,005
Exercise of common stock options 34 - 72 - - - 72
Private placement 796 1 3,940 - - - 3,941
Employee stock purchase 14 - 55 - - - 55
Amortization of deferred stock
compensation - - - - 382 - 382
Net loss - - - (7,512) - - (7,512)
------- ------ -------- ----------- --------- -------- ---------
Balances as of December 31,
1997 7,668 8 29,636 (19,533) (801) (367) 8,943
Exercise of common stock options 8 - 17 - - - 17
Private placement 3,833 4 11,396 - - - 11,400
Employee stock purchase 20 - 48 - - - 48
Warrants extended - - 24 - - - 24
Amortization of deferred stock
compensation - - - - 382 - 382
Net loss - - - (8,471) - - (8,471)
------- ------ -------- ----------- --------- -------- ---------
Balances as of December 31,
1998 11,530 12 41,121 (28,004) (419) (367) 12,343
Exercise of common stock options 6 - 10 - - - 10
Private placement 1,000 1 1,280 - - - 1,281
Employee stock purchase 22 - 23 - - - 23
Vysis acquisition 497 - 600 - - - 600
Amortization of deferred stock
compensation - - - - 376 - 376
Change in unrealized loss from
short-term investments - - - - - (12) (12)
Net loss - - - (6,009) - - (6,009)
------- ------ -------- ----------- --------- -------- ---------
Balances as of December 31,
1999 13,055 $ 13 $ 43,034 $ (34,013) $ (43) $ (379) $ 8,612
======= ====== ======== =========== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
<TABLE>
<CAPTION>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
For the year ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,009) $ (8,471) $ (7,512)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation & Amortization 1,092 826 695
Provision for doubtful accounts 89 - -
Amortization related to employee deferred
stock compensation 376 382 382
Loss on sale of other assets 41 5 29
Changes in operating assets and liabilities:
Trade accounts and related party receivable (2,598) (463) (1,904)
Inventories (200) (320) (18)
Prepaid expenses and other assets 249 (167) 68
Accounts payable 654 (183) 75
Accrued expenses 515 85 1,130
Deferred revenue 813 70 (62)
--------- --------- ---------
Net cash used in operating activities: (4,978) (8,236) (7,117)
--------- --------- ---------
Cash flows from investing activities:
Purchase of short-term investments (3,685) (4,997) (7,456)
Proceeds from sale and maturities of investments 4,347 4,209 1,996
Proceeds from sale of fixed assets 60 24 -
Acquisition of assets (1,000) - -
Purchases of equipment (515) (631) (1,119)
Other assets 5 (17) 203
--------- --------- ---------
Net cash used in investing activities: (788) (1,412) (6,376)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,314 11,489 4,068
Bank loan proceeds/(payments) - net 1,831 721 38
Capital lease payments, principal portion (27) - (13)
--------- --------- ---------
Net cash provided by financing activities: 3,118 12,210 4,093
========= ========= =========
Net increase (decrease) in cash and cash equivalents (2,648) 2,562 (9,400)
Cash and cash equivalents at beginning of year 5,480 2,918 12,318
--------- --------- ---------
Cash and cash equivalents at end of year $ 2,832 $ 5,480 $ 2,918
========= ========= =========
Supplemental disclosure of cash paid for interest: $ 114 $ 92 $ 39
========= ========= =========
Supplemental disclosure of non-cash investing and financing activities:
Equipment acquired through capital leases - - $ 135
========= ========= =========
Accrual recorded for business acquired $ 132 - -
========= ========= =========
Stock issued in connection with acquisition $ 600 - -
========= ========= =========
Debt assumed for acquisition of intangible assets related to business
acquired $ 750 - -
========= ========= =========
Unrealized loss from short-term investments $ (12) - -
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
APPLIED IMAGING CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 also markets imaging
systems designed for use in plant and animal genetic research programs. In
addition, the Company has recently introduced a research system to detect
micrometastatic cancer cells in bone marrow, lymph node and blood samples from
cancer patients. This technology allows physicians to better determine the
initial staging of cancer cases and to then detect disease recurrence earlier
than is currently possible.
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 to the U.S. dollar at year-end
exchange rates while nonmonetary items are remeasured at historical rates.
Revenue and expense accounts related to monetary assets and liabilities are
remeasured at the average rates in effect during the year. Revenue and expenses
related to non-monetary assets and liabilities are translated at historical
rates. Foreign currency gains and losses resulting from the conversion of the
subsidiary's financial statements into U.S. dollars are currently recognized in
the consolidated statement of operations. 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.
Comprehensive Income
In accordance with Statement of Financial Accounting Standards (SFAS)
No.130 Reporting Comprehensive Income, the Company is required to classify items
of other comprehensive income, by their nature (e.g. unrealized gains or losses
on securities) in a financial statement. For the year ended December 31, 1999
the component of comprehensive loss includes an unrealized loss on short-term
investments. The components of other comprehensive income in prior years include
foreign currency adjustment. The accumulated balance of other comprehensive
income from prior periods are reported as 'Accumulated other comprehensive
income' and displayed separately from accumulated deficit and additional paid-in
capital in the equity section of the balance sheet.
29
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The company recognizes revenue on product sales upon shipment and
concurrently accrues for expected hardware warranty expenses and establishes
reserves for product returns. Revenue attributable to software maintenance and
support, is deferred and recognized ratably over the term of the maintenance
agreement, generally one year.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition. SOP 97-2 applies to the sales of products that contain software
elements that are more than incidental to the product as a whole. The Company
adopted SOP 97-2 effective January 1, 1998. SOP 97-2 generally requires revenue
attributable to software elements to be allocated to the elements based on their
fair values. The fair value of an element must be based on the evidence which is
specific to the vendor. The revenue allocated to software products is recognized
upon shipment of the product. The revenue attributable to maintenance and
support is recognized ratably over the term of the maintenance agreement. There
was no change to the Company's accounting for revenues as a result of the
adoption of SOP 97-2.
In February 1998, the AICPA issued SOP 98-4, Deferral of the Effective Date
of SOP 97-2. The SOP defers the effective date for applying the provisions
regarding vendor-specific objective evidence of fair value ("VSOE") until the
AICPA can reconsider what constitutes such VSOE. There was no change to the
Company's accounting for revenues as a result of the adoption of SOP 98-4.
In December 1998, the AICPA issued SOP 98-9, Software Revenue Recognition,
with Respect to Certain Arrangements, which requires recognition of revenue
using the "residual method" in a multiple-element arrangement when fair value
does not exist for one of more of the delivered elements in the arrangement.
Under the residual method, the total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. The Company
does not expect a change to its accounting for revenues as a result of the
provisions of SOP 98-9.
Research and Development Expenditures
Research and development expenditures are charged to expense as incurred.
Loss per Share
Basic and diluted net loss per share are computed using the weighted
average number of outstanding shares of common stock. There were no reconciling
items of the numerators and denominators of the basic and diluted EPS
computation. Shares 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>
1999 1998 1997
------------------------------- ------------------------------- -------------------------------
Weighted Weighted Weighted
average average average
Shares exercise price Shares exercise price Shares exercise price
------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options.............. 1,988,568 $ 2.10 1,787,405 $ 2.32 1,199,272 $ 4.04
Warrants............. 313,010 5.10 577,909 5.17 681,744 5.18
------------ ------------ ------------
Total............. 2,301,578 2,365,314 1,881,016
============ ============ ============
</TABLE>
30
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash Equivalents and Short-Term Investments
All investments with original maturities at date of purchase of three
months or less are considered by the Company to be cash equivalents.
Short-Term Investments
Short-term investments consist of investments acquired with maturities
exceeding three months. While the Company's intent is to hold debt securities to
maturity, consistent with SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, the Company has classified all securities as
available-for-sale, as the sale of such securities may be required prior to
maturity to implement management strategies. Such securities are reported at
fair value with unrealized gains or losses excluded from earnings and reported
as a separate component of stockholders' equity, net of applicable taxes. As of
December 31, 1999, the difference between the fair value and the amortized cost
of available-for-sale securities was recorded as unrealized gains or losses in
stockholders' equity.
As of December 31, 1999 and 1998, the Company's short-term investments
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ --------
Amortized Unrealized Fair Fair
Cost Loss Value Value
------------------------------------------ --------
<S> <C> <C> <C> <C>
Corporate bonds............... $ 5,586 $ (12) $ 5,574 $ 6,248
========= ======== ========= ========
</TABLE>
As of December 31, 1999, the maturities of the short-term investments are
as follows: $3,596,000 within one year and $1,978,000 more than one year. There
were no realized gains or losses in 1999 or 1998.
Inventories
Inventories are stated at the lower of cost (first in, first out) or
market.
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.
Recoverability of property and equipment is measured by comparison of its
carrying amount to future net cash flows the property and equipment are expected
to generate. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
property and equipment exceeds its fair market value. To date, the Company has
made no adjustments to the carrying values of its long-lived assets. When assets
are disposed of, the cost and related accumulated depreciation are removed from
the accounts and the resulting gains or losses are included in other income or
loss.
Intangibles
Intangible assets, which include goodwill and intellectual and software
property in connection with the acquisition of the cytogenetic imaging
instrumentation business of Vysis Inc., was $2.5 million at December 31, 1999.
Intangible
31
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets are being amortized on a straight line basis over 10 years. Accumulated
amortization was $124,000 as of December 31, 1999. The Company periodically
assesses the recoverability of intangible assets by determining whether the
amortization of the asset balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of impairment, if any, is measured based on projected discounted future
operating cash flows and is recognized as a write down of the asset.
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, 1999, 1998 and 1997, 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 in the consolidated balance sheets.
Stock Based Compensation
The Company uses the intrinsic-value method to account for its stock-based
compensation arrangements. The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of SFAS 123 and Emerging Issues
Task Force Issue No. 96-18, "Accounting for equity instruments that are issued
to other than employees, or in conjunction with selling goods and services."
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided to reduce the deferred tax assets when it is more likely than not that
all or a portion of the deferred tax assets will not be realized.
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 these financial instruments approximate fair
value.
Financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable, 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. The Company performs on-
going credit evaluations of its customer's financial condition and, generally
requires no collateral from its customers. The Company maintains an allowance
for doubtful accounts to cover potential credit losses.
32
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In December 1998, AcSEC released Statement of Position 98-9 or SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition. SOP 98-9 amends SOP 97-2
to require that an entity recognize revenue for multiple element arrangements by
means of the residual method when (1) there is no vendor-specific objective
evidence (VSOE) of the fair values of all the undelivered elements that are not
accounted for by means of long-term contract accounting, and (2) all revenue
recognition criteria of SOP 97-2 (other than the requirement for VSOE of the
fair value of each delivered element) are satisfied. The provisions of SOP 98-9
that extend the deferral of certain paragraphs of SOP 97-2 became effective
December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9 will be effective
for transactions that are entered into in fiscal years beginning after March 15,
1999. Retroactive application is prohibited. The Company is currently evaluating
the impact of the requirements of SOP 98-9 and the effects, if any, on its
current revenue recognition policies and does not expect any material impact
from its application.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. The Company is currently evaluating the impact of SAB 101 on its
financial statements and related disclosures. The accounting and disclosures
prescribed by SAB 101 will be effective for the fiscal year ended December 31,
2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains and losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exits. SFAS 133 will be
effective for fiscal quarters beginning after June 15, 2000. The Company is
currently evaluating the impact of the requirements of SFAS 133 and the effects
if any on its financial statements and does not expect any material impact from
its application. The Company does not currently hold derivative instruments or
engage in hedging activities.
(2) Related Party Receivable
As a results of the acquisition by the Company of the intellectual and
software property related to the cytogenic imaging instrumentation business of
Vysis Inc., the Company had Vysis maintain the billings for certain customers
for a period of time subsequent to the transaction. These receivables represent
sales made by the Company.
(3) Inventories
A summary of inventories follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Raw materials................... $ 1,300 $ 999
Work in process................. 13 96
Finished goods.................. 56 74
------------ ------------
$ 1,369 $ 1,169
============ ============
</TABLE>
33
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Property and Equipment
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Equipment........................ $ 2,708 $ 2,726
Demonstration equipment.......... 1,323 1,173
Furnitures and fixtures.......... 621 626
---------- ----------
4,652 4,525
Less accumulated depreciation 3,638 2,956
---------- ----------
$ 1,014 $ 1,569
========== ==========
</TABLE>
In 1998, the Company reduced the carrying amount of property and equipment
and the related accumulated depreciation by $569,000 related to fully
depreciated property and equipment that is no longer in use. As of December 31,
1999 and 1998, $85,000 and $117,000, respectively, of equipment is under capital
lease with an accumulated amortization $70,000 and $43,000, respectively.
Depreciation expense was $968,000, $192,000 and $590,000 for 1999, 1998 and 1997
respectively.
(5) Accrued Expenses
A summary of accrued expenses follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Compensation and related costs..................... $ 766 $ 523
Warranty related costs............................. 347 197
Royalties.......................................... 306 367
Restructuring costs................................ 261 226
Product discontinuance costs....................... 240 -
Audit, tax, legal and external reporting costs..... 234 279
Consulting related expenses........................ 192 35
Other.............................................. 820 892
--------- ---------
$ 3,166 $ 2,519
========= =========
</TABLE>
(6) Debt Obligations
Applied Imaging International, Limited has a (Pounds)750,000 gross and
(Pounds)500,000 net unsecured revolving line of credit with an international
bank which is guaranteed by the Company. Under the line of credit the Company
also has the ability to borrow additional amounts based on cash deposits held by
the bank up to a maximum additional amount of (Pounds)250,000. The line of
credit is available until March 31, 2000 and, while the Company expects an
extension, any outstanding balance is due on demand after that date if no
extension is granted. The line of credit bears interest at 3% above the bank's
base rate, for borrowings up to (Pounds)500,000 and 6% for borrowings over
(Pounds)500,000. The base rate was 5.5% as of December 31, 1999. As of December
31, 1999 amounts outstanding under this facility amounted to $1,042,000. The
weighted average interest rate on short-term borrowings by the Company as of
December 31, 1999 was 8.49%.
34
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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% (9.75% at December 31, 1999) and carries
certain covenants pertaining to minimum liquidity, minimum and maximum total
liabilities and tangible net worth ratio and maximum loss. At December 31, 1999,
the Company is in compliance with all these covenants. In conjunction with the
loan, the Company paid a facility fee of $10,000.
As part of the payment terms to Vysis Inc., for the acquisition by the
Company of the intellectual and software property related to the former's
cytogenetic imaging instrumentation business, the Company agreed to a note
obligation of $750,000 payable in two installments each at 7% interest rate: the
first for $500,000 payable one year from the anniversary date of the acquisition
agreement and is included in current liabilities as a current portion of note
payable, related party and the second for $250,000 payable eighteen months from
the anniversary date and is included in long term liabilities as long term
portion of note payable, related party.
Below is the future maturities of the Company's debt obligations (in
thousands):
<TABLE>
<CAPTION>
Maturities
--------------------------------
2000 2001 2002
-------- -------- --------
<S> <C> <C> <C>
International bank in UK..... $ 1,042 $ - $ -
Silicon Valley Bank.......... 667 667 500
Vysis Inc.................... 500 250 -
-------- -------- --------
$ 2,209 $ 917 $ 500
======== ======== ========
</TABLE>
(7) Acquisition of Assets
On July On July 16, 1999, (the "anniversary date") the Company acquired the
intellectual and software property related 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,
$250,000 in cash to be paid eighteen months from the anniversary date 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. In addition, the Company incurred approximately
$32,000 in legal expenses directly related to this acquisition. The Company has
recorded goodwill of $2,482,000 and will amortize such goodwill over ten years.
(8) Stockholders' Equity
Common Stock
The Company is authorized to issue 20,000,000 shares of common stock. As of
December 31, 1999, there were warrants outstanding to purchase 173,010 shares of
common stock at $5.78 per share and 140,000 shares at $4.25 per share. These
warrants both expire in 2000.
As of December 31, 1999, 950,000 shares of common stock were reserved for
issuance under the Company's 1998 Stock Plan which is the maximum aggregate
number of shares which may be optioned and sold under the Plan. Under the 1998
Stock 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 10
years from the date of grant, and typically vest ratably over 4 years. In
October 1998, the Company's 1988
35
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amended and Restated Incentive Stock Option Plan expired. In 1994, the Company
enacted a Directors Option Plan designed to encourage participation on the
Company's Board. Under this plan, 5,000 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 December 31, 1999 there were 25,000 shares reserved for
issuance under this plan and a total of 95,000 options have been granted.
On June 19, 1996, the Board adopted, effective upon the closing of the IPO,
the Company's Employee Stock Purchase Plan (the Plan) which has a term of 10
years 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 six months later, whichever is lower. As of December 31, 1999
there were 144,395 shares reserved for issuance under the Plan.
Accounting for Stock-Based Compensation
As of December 31, 1999, there were 61,500 options available for grant
under the 1998 Stock Plan. In 1996, the Company recorded 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. The
deferred stock compensation is being amortized to compensation expense over the
period during which the options become exercisable, generally four years.
The Company has adopted the pro forma disclosure provisions of SFAS No. 123
for the 1998 Stock Plan and Employee Stock Purchase Plan. Had compensation cost
for the Company's stock-based compensation plans been determined in a manner
consistent with the fair value approach described in SFAS No. 123 'Accounting
for Stock-Based Compensation', the Company's net loss and pro forma net loss per
share as reported would have been increased to the pro forma amounts indicated
below (in thousands, except per share data):
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss:
As reported:........................... $ (6,009) $ (8,472) $ (7,512)
Pro forma.............................. (6,886) $ (9,206) $ (8,218)
Net loss per share:
As reported:
Basic and diluted ............. (0.50) $ (0.86) $ (1.03)
Pro forma
Basic and diluted.............. (0.58) $ (0.93) $ (1.12)
</TABLE>
On February 2, 1998, the Company's board of directors approved an amendment
to reprice options outstanding under the Company's 1988 Stock Option Plan with
exercise prices over $3.00 per share. On February 2, 1998, holders of such
options were offered the choice of retaining their existing options without
amendment or accepting the amendment of their stock options. The exercise price
of the amended options is $2.44 per share, which equals the fair market value of
the Company's common stock on February 2, 1998. Vesting of the amended options
occurs over four years and begins on February 2, 1998. Holders of the options
had until March 30, 1998 to make an irrevocable decision to either retain their
existing options without amendment or accept the amendment to their options. The
36
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amendment of the options is treated for accounting purposes as if the Company
cancelled the existing options and issued new options with the lower exercise
price and new vesting schedule. The compensation expense measured for the
difference between the fair value of the Company's common stock on the date
employees elected to accept new repriced options and the exercise price of the
repriced options ($2.44 per share) was not significant.
The fair value of each option is estimated on the date of grant using the
fair value method with the following weighted-average assumptions: volatility of
60%, no dividends, an expected life of three years, and risk-free interest rates
of 6%, 4.66 %, and 6.16% for the years ended December 31, 1999, 1998 and 1997
respectively. All of the above assumptions were used for the Employee Stock
Purchase Plan except the expected life is six months. A summary of the status of
the Company's stock option activity for the years ended December 31, 1999, 1998
and 1997, is as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
average average fair
Shares exercise price value
------------ -------------- ------------
<S> <C> <C> <C>
Outstanding at December 31, 1996.............................. 481,250 $ 2.48
Granted--Exercise price equals market value................... 443,750 5.67 $ 2.93
Granted--Exercise price greater than market value............. 269,400 3.87 1.88
Granted--Exercise price less than market value................ 60,250 4.05 2.15
Cancelled..................................................... (21,375) 3.90
Exercised..................................................... (34,003) 2.15
------------
Outstanding at December 31, 1997.............................. 1,199,272 $ 4.04
Granted--Exercise price equals market value................... 714,750 2.43 $ 1.05
Granted--Exercise price greater than market value............. 520,250 1.91 0.83
Granted--Exercise price less than market value................ 16,000 3.19 1.44
Cancelled..................................................... (654,016) 5.30
Exercised..................................................... (8,851) 1.82
------------
Outstanding at December 31, 1998.............................. 1,787,405 $ 2.32
Granted--Exercise price equals market value................... 377,500 0.99 $ 0.48
Cancelled..................................................... (170,837) 2.34
Exercised..................................................... (5,500) 1.80
------------
Outstanding at December 31, 1999.............................. 1,988,568
</TABLE>
Approximately 604 shares that were exercised in 1998 were issued in 1999.
37
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
as of December 31, 1999
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------
Weighted Weighted
average Weighted average
Number remaining average exercise
Range of exercise prices outstanding contractual life exercise price Number price
- ------------------------ ----------- ---------------- -------------- ------- --------
<S> <C> <C> <C> <C> <C>
From $0.72 to $1.19 247,500 9.69 years $ 1.07 19,737 $ 0.97
From $1.25 to $1.44 130,000 9.65 years 1.35 - -
From $1.80 to $1.88 817,000 7.72 years 1.85 489,750 1.84
From $2.06 to $2.38 25,541 8.23 years 1.90 9,436 2.25
From $2.44 to $3.00 684,819 7.86 years 2.55 337,763 2.56
From $3.13 to $5.00 38,708 8.08 years 3.58 19,515 3.58
From $5.13 to $6.30 45,000 6.94 years 6.17 42,500 6.23
----------- -------
1,988,568 918,701
=========== =======
</TABLE>
(9) Income Taxes
The Company has not recorded an income tax benefit in 1999, 1998, and 1997
due to the recording of a valuation allowance as an offset to net deferred tax
assets. A valuation allowance is provided due to uncertainties surrounding the
realization of deferred tax assets due to the history of operating losses
incurred by the Company. The tax effects of temporary differences that give rise
to significant portions of deferred tax assets are presented below.
Deferred tax assets (liabilities) consist of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Bad debt reserve $ 51 $ 31 $ 43
Inventory reserve 182 162 146
Depreciation & amortization 115 100 -
Deferred compensation (227) 122 122
Accrued expenses 241 237 415
Net operating loss carryforwards 10,467 8,740 6,109
Business credit carryforwards 1,301 1,186 540
----------- ----------- -----------
Total Gross Deferred Assets 12,130 10,578 7,375
Less: Valuation Allowance (12,130) (10,578) (7,368)
----------- ----------- -----------
Net Deferred Tax Assets $ - $ - $ 7
=========== =========== ===========
</TABLE>
As of December 31, 1999, the Company had net operating loss carryforwards
for U.S. federal, U.K., and California state tax return purposes of
approximately $26,645,000, $8,342,000 and $2,803,000 respectively. The federal
and California net operating loss carryforwards expire in the years between 2005
and 2019 and between 1999 and 2005, respectively.
(10) Commitments
The Company has various noncancelable operating leases for equipment,
vehicles, and facilities expiring through 2008. The facility leases generally
contain renewal options for periods ranging from two to five years and require
the Company to pay all executory costs such as maintenance, property taxes, and
insurance. Rent expense under operating
38
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
leases aggregated $455,183, $481,000 and $351,000 during 1999, 1998 and 1997,
respectively. The Company's primary lease commitments are for its facilities in
the United Kingdom, which aggregate approximately (Pounds)119,000 per year
through 2003, with a five-year renewal option held by the Company, and for its
facilities in the United States, which aggregate approximately $303,000 for
2000. The lease on US facilities expires in November 2000 and converts to a
month-to-month lease thereafter. The Company intends to negotiate an extension
of the present lease on the US facilities.
The Company has a capital lease commitment of $85,000, including interest
of $9,000 at 10%, which calls for annual payments of $34,000 through the year
2001 and a payment of $15,000 in 2002.
In March 1998, the Company entered into a non-exclusive world-wide
agreement with Amersham Pharmacia Biotech Inc. for the right to use certain
technologies in conjunction with its DNA probe technology. The agreement
requires minimum annual royalty payments of $10,000. The agreement will remain
in full force and effect until the expiration of all patents or eight years,
whichever is later.
(11) 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 the
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. The Company contributed $72,000, $90,000 and $85,000
in 1999, 1998 and 1997, 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 from 5.5% to 10.5% of such employee's
earnings. During 1999, 1998 and 1997, respectively, the Company made
contributions to the Internal Retirement Plans totaling $63,000, $66,000,
$60,000, respectively.
(12) Other Income, Net
The components of other income, net are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Interest income.......................................... $ 472 $ 579 $ 595
Interest expense......................................... (128) (92) (49)
Gain (loss) on foreign exchange.......................... (154) 58 (163)
Provision for income taxes............................... (31) - -
Miscellaneous income (expense)........................... (1) (4) 15
---------- ---------- ---------
$ 158 $ 541 $ 398
========== ========== =========
</TABLE>
39
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Segment and Foreign Operations
The Company has adopted the provision of SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. SFAS No 131 establishes
standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way management organizes the operating segments within the Company for making
operating decision and assessing financial performance. The following table
represents revenues by geographic area (in thousands):
<TABLE>
<CAPTION>
United States United Kingdom Israel Consolidated
------------- -------------- ------ ------------
<S> <C> <C> <C> <C>
Revenues
1999.............. $ 5,701 $ 8,429 - $ 14,130
1998.............. 4,304 7,380 - 11,684
1997.............. 5,328 7,806 - 13,134
Identifiable Assets
1999.............. $ 10,736 $ 8,978 $ 30 $ 19,744
1998.............. 11,779 6,981 48 18,808
</TABLE>
The Company's chief operating decision maker is considered to be the Company's
Chief Executive Officer ('CEO"). The CEO reviews financial information presented
on a consolidated basis for purposes of making operating decisions and assessing
financial performance. The consolidated financial information is identical to
the information presented in the accompanying consolidated statements of
operations. The Company has one segment.
No single customer accounted for greater than 10% of revenues in any period
reported.
(14) Restructuring
To focus the Company on the execution of its sales and marketing strategy
and to transition from working in fetal cell research to work in cancer
metastasis, and to reduce operating costs, the Company eliminated 15 positions
in 1999 at both its United States and United Kingdom facilities. The Company
recorded a net restructuring charge for the year of $818,000. The charge is
largely related to the severance costs of the terminated employees and certain
costs associated with discontinued products. As of December 31, 1999, $255,000
has been paid against the liability related to the termination benefits for the
terminated employees, and the balance is expected to be paid sometime in 2000.
In 1998, to reduce operating costs the Company recorded a restructuring
charge of $353,000 related to the elimination of thirteen positions at the
Company's facilities in the United States and United Kingdom. Substantially all
of the restructuring charge in 1998 were paid by the end of that year.
40
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the amounts that were charged and where they are
reflected in the accompanying statement of operations (in thousands):
<TABLE>
<CAPTION>
Description Year Ended December 31, Classification on Statement of Operations
---------------------------------------- ----------------------- ---------------------------------------------
1999 1998
---------- ----------
<S> <C> <C> <C>
Employee separation costs.................. $ 516 $ 353 All restructuring charges have been reflected
in the Statement of Operations as a separate
Costs associated with product close-down... 302 - line item under operating expenses.
---------- ----------
Total...................................... $ 818 $ 353
========== ==========
</TABLE>
The following table summarizes the Company's restructuring reserve balances
through December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Restructuring
Costs
-------------
<S> <C>
Restructuring charge taken in 1998 $ 353
Cash charges (353)
-------------
Restructuring reserve balances at
December 31, 1998 -
Restructuring charge 818
Cash charges (255)
Non cash charges (302)
-------------
Restructuring reserve balances at
December 31, 1999 $ 261
=============
</TABLE>
41
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Private Placement Transactions
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 investors also entered into a distribution agreement for
the Company's products. The price exceeded the closing price of the Company's
Common Stock as reported on the Nasdaq National Market System. As part of the
private placement, the Company recognized deferred revenue of $720,000 to be
amortized over 50 months. The total recognized to date is $29,000.
On June 3, 1998, the Company consummated a private sale of 3,333,331 shares
of its common stock to certain accredited investors at $3.00 per share. The
price exceeded the closing price of the Company's common stock as reported on
the NASDAQ National Market System. Included in the sale was 1,000,000 shares
sold to New Enterprise Associates, a principal owner of the Company. Thomas C.
McConnell, a director of the company, is an affiliate of New Enterprise
Associates.
On July 7, 1998 and July 15, 1998, the Company consummated private sales of
collectively 499,999 shares of its common stock to certain accredited investors
at $3.00 per share. The price exceeded the closing price of the Company's common
stock as reported on the NASDAQ National Market System.
On May 22, 1997, the Company consummated a private sale of 796,020 shares
of its common stock to certain partnerships affiliated with New Enterprise
Associates, at $5.025 per share. The price per share was calculated as the
average of the closing prices of the Company's common stock as reported on the
NASDAQ National Market System for the previous five trading days prior to the
day of the transaction closing date. In connection with this transaction, the
Company also issued warrants, which may be exercised within a three-year period
ending May 21, 2000 to acquire an aggregate of 173,010 shares of the Company's
common stock at a purchase price of $5.78 per share. The Company allocated a
portion of the proceeds to the warrants based on the fair value using the Black-
Scholes pricing model and such amount is included within common stock.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
42
<PAGE>
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file a definitive proxy statement within
120 days after the end of its fiscal year pursuant to Regulation 14A with
respect to the 2000 Annual Meeting of Stockholders (the "Proxy Statement") and
certain information included therein is incorporated herein by reference.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal No. 1--
Election of Directors" in the Proxy Statement.
The executive officers of the Registrant, who are elected by the board of
directors, are as follows:
Name Age Position
- ---- --- --------
Jack Goldstein, Ph.D.......... 52 Chief Executive Officer and Chairman
Carl Hull..................... 41 President and Chief Operating Officer
Jack Goldstein, Ph.D. joined the Company as Chief Executive Officer and
President in April 1997. Dr. Goldstein has 26 years of management experience at
leading healthcare companies. From 1986 to 1997, Dr. Goldstein worked for
Johnson & Johnson in various executive management positions including President
of Ortho Diagnostic Systems and Executive Vice President of Professional
Diagnostics at Johnson & Johnson World Headquarters. Prior to his tenure at
Johnson & Johnson, Dr. Goldstein served in management positions at Baxter
Healthcare Corporation and American Home Products Corporation. Dr. Goldstein
holds a B.A. degree in Biology from Rider University, an M.S. in Immunology and
a Ph.D. in Microbiology from St. John's University.
Carl Hull joined the Company as Vice President of Worldwide Marketing in
August 1997. In January 1999 he also became Vice President of Sales. In
September 1999, Mr. Hull was appointed President and Chief Operating Officer.
Prior to joining the Company, Mr. Hull served as Vice President of Marketing and
Business Development for Ventana Medical Systems. From 1982 to 1996, he served
in various marketing and sales management positions at Abbott Laboratories,
including Vice President and General Manager of Abbott Laboratories, Puerto
Rico. He also served as Marketing Manager Far-East, Marketing manager for
Hematology Products, District Sales Manager as well as Product Manager for
several diagnostic product lines. Mr. Hull received his MBA from University of
Chicago and a B.A. in Political Science and International Relations at Johns
Hopkins University.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" in the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Record Date and Stock Ownership" in the Proxy
Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.
43
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following Financial Statements of Applied Imaging Corp. and Report
of PricewaterhouseCoopers, LLP, have been provided as Item 8, above:
Report of PricewaterhouseCoopers, LLP
Consolidated Balance Sheet, 1999
Consolidated Statement of Operations, Year Ended December 31, 1999
Consolidated Statement of Stockholders' Equity, Year Ended December
31, 1999
Consolidated Statement of Cash Flows, Year Ended December 31, 1999
Notes to Consolidated Financial Statements
The following Financial Statements of Applied Imaging Corp. and Report
of KPMG LLP, have been provided as Item 8, above:
Report of KPMG LLP
Consolidated Balance Sheets, 1998 and 1997
Consolidated Statements of Operations, Years Ended December 31, 1998
and 1997
Consolidated Statements of Stockholders' Equity, Years Ended December
31, 1998 and 1997
Consolidated Statements of Cash Flows, Years Ended December 31, 1998
and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The financial statement schedule entitled "Valuation and Qualifying
Accounts" is included at page 48 of this Form 10-K.
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the notes
thereto.
3. Exhibits
Refer to (c) below.
(b) Reports on Form 8-K
The Company was not required to and did not file any reports on Form 8-K
during the three months ended December 31, 1999.
10 Exhibits
Exhibit No. Description
- ----------- -----------
3.1(1) Restated Certificate of Incorporation of the Registrant.
3.2(2) Bylaws of the Registrant as amended.
4.1(1) Specimen Common Stock Certificate.
4.3(3) Preferred Shares Rights Agreement dated as of May 29, 1998,
between the Registrant and Norwest Bank Minnesota, N.A. including
the form of Rights Certificate, the Certificate of Designation
and the summary of Rights attached thereto as Exhibits A, B, and
C, respectively.
10.1(1) Form of Indemnification Agreement for directors and officers.
10.2(b)(4) 1998 Incentive Stock Option Plan and form of Stock Option
Agreement thereunder.
10.4(1) Employee Stock Purchase Plan.
10.5(1) Amended and Restated Registration Rights Agreements.
10.6(1) License Agreement dated December 1, 1993 between the Registrant
and Chronomed, Inc.
10.7(1) Assignment dated December 1, 1993 by and between the Registrant
and Alex Saunders, M.D.
10.8(a)(1) Lease dated February 15, 1994 for the Registrant's headquarters
in Santa Clara, CA.
10.8(b)(2) Lease renewal dated December 8, 1998 for the Registrants
headquarters in Santa Clara, CA.
10.9(2) Lease dated July 1998 between Bio Science Center and Applied
Imaging International Ltd.
10.12(1) 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.
44
<PAGE>
Exhibit No. Description
- ----------- -----------
10.13(1) Cooperative Research and Development Agreement, dated June 10,
1995 between Registrant and the National Institute of Health.
10.14(1) Supply & Distribution Agreement dated March 3, 1994 between
Cytocell Ltd. and Registrant.
10.15(1) Research Purchase Agreement dated March 26, 1996 between
Pharmacia Biotech AB and Registrant.
10.16(1) Development Agreement dated February 5, 1996 between EM
Industries and Registrant.
10.17(1) Security and Loan Agreement dated September 5, 1995 between
Registrant and Imperial Bank.
10.18(1) Extension to Security and Loan Agreement dated September 16, 1996
between Registrant and Imperial Bank.
10.19(2) License Agreement dated October 24, 1997 between Cambridge
University and the Registrant.
10.20(2) Employment Letter Agreement dated July 21, 1997 between the
Company and Carl Hull.
10.21(2) Employment Letter Agreement dated April 2, 1997 between the
Company and Jack Goldstein, Ph.D. and amendment dated April 4,
1997.
10.23(7) Stock and Warrant Purchase Agreement dated May 22, 1997 between
the registrant and certain investors
10.24(8) Form of Stock Purchase Agreement between the Registrant and
certain investors used in connection with sales of Common Stock
on July 7 and July 15, 1998.
10.25(9) Asset Purchase, License and Distribution Agreement between the
Company and Vysis, Inc. dated July 16, 1999
21.1(1) List of Subsidiaries of the Registrant.
24.1 Power of Attorney (included at page 46 below).
24.2 Michael Braden left the Company on February 23, 2000.
27.1 Financial Data Schedule.
_____________
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 333-06703) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10-K for the year ending December
31, 1998 and 1997 and incorporated herein by reference.
(3) Filed as exhibit 3 to the Registrant's Report on Form 8-A with the
Commission on June 5, 1998 and incorporated herein by reference.
(4) Filed as exhibit 4.1 to the Registrant's Report on Form S-8 filed with the
Commission on June 26,1998 and incorporated herein by reference.
(5) Filed as exhibit 10.1 to the Registrant's Report on form 8-K filed with the
Commission on June 4, 1997 and incorporated herein by reference.
(6) Filed as exhibit 10.1 to the Registrant's Report on form 8-K filed with the
Commission on June 16, 1998 and incorporated herein by reference.
(7) Files as exhibit 10.1 to the Registrant's Report on Form 8-K filed with the
Commission on July 28, 1998 and incorporated herein by reference.
(8) Filed as exhibit 2.1 to the Registrant's Report on Form 8-K filed with the
Commission on July 30, 1999 and incorporated herein by reference.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Applied Imaging Corp.
By: /s/ Jack Goldstein
-------------------------------
Jack Goldstein
Chief Executive Officer
Date: March 29, 2000
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jack Goldstein and Carl Hull his or her
attorney-in-fact, with the power of substitution, for him or her in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/s/ Jack Goldstein
- ----------------------------- Chief Executive Officer and March 29, 2000
(Jack Goldstein) Director (Principal
Executive Officer)
/s/ Michael J. Braden
- ----------------------------- Corporate Controller March 29, 2000
(Michael J. Braden) (Principal
Accounting Officer)
/s/ John F. Blakemore, Jr.
- -----------------------------
(John F. Blakemore, Jr.) Director March 29, 2000
/s/ Gilbert J.R. McCabe
- ----------------------------- Director March 29, 2000
(Gilbert J.R. McCabe)
/s/ Thomas C. McConnell
- -----------------------------
(Thomas C. McConnell) Director March 29, 2000
/s/ Andre F. Marion
- -----------------------------
(Andre F. Marion) Director March 29, 2000
/s/ Robert C. Miller
- -----------------------------
(Robert C. Miller) Director March 29, 2000
/s/ G. Kirk Raab
- -----------------------------
(G. Kirk Raab) Director March 29, 2000
/s/ Pablo Valenzuela
- -----------------------------
Pablo Valenzuela Director March 29, 2000
46
<PAGE>
APPLIED IMAGING CORP.
- --------------------------------------------------------------------------------
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance of Charged to Deductions/ Balance at
Beginning of Costs and Recoveries End of
Allowance for doubtful accounts Year Expenses Other Year
<S> <C> <C> <C> <C>
Year ended December 31, 1999 $ 162 $ 89 $ - $ 251
=======================================================
Year ended December 31, 1998 $ 191 $ - $ (29) $ 162
=======================================================
Year ended December 31, 1997 $ 228 $ 10 $ (47) $ 191
=======================================================
</TABLE>
47
<PAGE>
[LOGO OF APPLIED IMAGING]
Exhibit 24.2
March 28, 2000
This is to confirm that Michael J. Braden has left Applied Imaging Corporation
on February 23, 2000.
/s/ John Sipin
John Sipin
Acting Chief Financial Officer
2380 Walsh Avenue, Bldg. B, Santa Clara, California 95051
Telephone (408) 562-0250, Fax (408) 562-0264
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 5,480 2,832
<SECURITIES> 6,248 5,574
<RECEIVABLES> 3,983 6,438
<ALLOWANCES> 162 251
<INVENTORY> 1,169 1,369
<CURRENT-ASSETS> 17,154 16,292
<PP&E> 4,525 4,652
<DEPRECIATION> 2,956 3,638
<TOTAL-ASSETS> 18,808 19,744
<CURRENT-LIABILITIES> 6,401 9,160
<BONDS> 0 0
0 0
0 0
<COMMON> 12 13
<OTHER-SE> 12,343 8,612
<TOTAL-LIABILITY-AND-EQUITY> 18,808 19,744
<SALES> 9,034 11,475
<TOTAL-REVENUES> 11,684 14,130
<CGS> 4,953 5,582
<TOTAL-COSTS> 6,010 6,686
<OTHER-EXPENSES> 14,687 13,611
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 92 128
<INCOME-PRETAX> (8,472) (6,009)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (8,472) (6,009)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,472) (6,009)
<EPS-BASIC> (.86) (.50)
<EPS-DILUTED> 0 0
</TABLE>
