<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the Quarterly Period ended June 30, 2000
OR
[ ] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Transition Period From _________ To _________.
Commission File Number: 0-21371
APPLIED IMAGING CORP.
(Exact name of registrant as specified in its charter)
Delaware 77-0120490
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2380 Walsh Avenue, Building B,
Santa Clara, California 95051
(Address of principal executive offices including zip code)
(408) 562-0250
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the 90 days. Yes [X] No [ ]
As of July 24, 2000, 13,771,440 shares of the Registrant's Common Stock were
outstanding.
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APPLIED IMAGING CORP.
INDEX
Page
------
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 . . . . . . . . . 3
Condensed Consolidated Statements of Operations
and Comprehensive Loss. Three and six months
ended June 30, 2000 and 1999 . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . 8-10
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Derivatives and Financial Instruments . . . . . . . . 11
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 12
Signatures . . . . . . . . . . . . . . . . . 13
2
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------ ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,526 $ 2,832
Short term investments 3,426 5,574
Trade accounts receivable, net 5,933 6,187
Related party receivables - 143
Inventories 1,529 1,369
Prepaid expenses and other assets 515 187
------------------ ---------------
Total current assets 13,929 16,292
Property and equipment, net 986 1,014
Intangibles 2,235 2,358
Other assets, net 54 80
------------------ ---------------
Total assets $ 17,204 $ 19,744
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank debt $ 1,167 $ 1,743
Current portion of related party notes payable 500 500
Current portion of capital lease obligation 34 -
Accounts payable 1,859 2,226
Accrued expenses 2,620 3,166
Deferred revenue 1,952 1,525
------------------ ---------------
Total current liabilities 8,132 9,160
Bank debt, less current portion 833 1,167
Related party notes payable, less current portion 250 250
Deferred revenue 431 518
Capital lease obligations, less current portion 24 37
------------------ ---------------
Total liabilities 9,670 11,132
------------------ ---------------
Stockholders' equity:
Common stock 13 13
Additional paid-in capital 43,737 43,034
Deferred compensation - (43)
Accumulated other comprehensive income (380) (379)
Accumulated deficit (35,836) (34,013)
------------------ ---------------
Total stockholders' equity 7,534 8,612
------------------ ---------------
Total liabilities and stockholders' equity $ 17,204 $ 19,744
================== ===============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
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APPLIED IMAGING CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
( in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 4,321 $ 3,141 $ 8,002 $ 5,806
Cost of revenues 1,642 1,389 3,416 2,703
-------------- -------------- ------------ ------------
Gross profit 2,679 1,752 4,586 3,103
-------------- -------------- ------------ ------------
Operating expenses:
Research and development 976 1,090 1,856 2,221
Sales and marketing 1,519 1,134 2,988 2,195
General and administrative 689 697 1,368 1,417
Amortization of intangibles 63 - 126 -
Restructuring costs - - - 224
-------------- -------------- ------------ ------------
Total operating expenses 3,247 2,921 6,338 6,057
-------------- -------------- ------------ ------------
Operating loss (568) (1,169) (1,752) (2,954)
Other income/(expense), net 24 78 (73) 57
-------------- -------------- ------------ ------------
Net loss (544) (1,091) (1,025) (2,097)
Other comprehensive loss, net of tax
Change in unrealized loss on short-term
investments 4 - 1 -
Other Unrealized Gain/(Loss) - - (2) -
-------------- -------------- ------------ ------------
Comprehensive loss $ (540) $(1,091) $(1,826) $(2,897)
============== ============== ============ ============
Net loss per share - basic and diluted $(0.04) $(0.09) $(0.14) $(0.25)
============== ============== ============ ============
Weighted average shares outstanding 13,379 11,539 13,261 11,534
============== ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
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APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months
ended June 30,
-------------------------------------------
2000 1999
----------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,825) $(2,897)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and Amortization 451 437
Amortization related to employee deferred
stock compensation 43 193
Loss on sale of fixed and other assets - 41
Changes in operating assets and liabilities:
Trade accounts and related party receivable 397 579
Inventories (160) 51
Prepaid expenses and other assets (328) (75)
Accounts payable (367) (520)
Accrued expenses (546) (193)
Deferred revenue 340 (35)
----------------- -------------------
Net cash used in operating activities: (1,995) (2,419)
----------------- -------------------
Cash flows from investing activities:
Proceeds from sale and maturities of investments 2,149 1,002
Purchases of equipment (300) (270)
Proceeds from sale of fixed assets - 50
Other assets 26 (21)
----------------- -------------------
Net cash provided by investing activities: 1,875 761
----------------- -------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 703 22
Bank and other loan proceeds 500 -
Bank and other loan payments (1,389) (582)
----------------- -------------------
Net cash used in financing activities: (186) (560)
----------------- -------------------
Net increase (decrease) in cash and cash equivalents (306) (2,218)
Cash and cash equivalents at beginning of period 2,832 5,480
----------------- -------------------
Cash and cash equivalents at end of period $ 2,526 $ 3,262
================= ===================
Supplemental disclosure of cash flow information:
Interest paid during the period $ 161 $ 41
================= ===================
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
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APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE I - Basis of Presentation
------------------------------
The accompanying condensed consolidated financial statements include the
accounts of Applied Imaging Corp. and subsidiaries (the "Company") for the three
and six months ended June 30, 2000 and 1999. These financial statements are
unaudited and reflect all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation of the Company's financial position, operating results and cash
flows for those interim periods presented. The results of operations for the
three and six months ended June 30, 2000 are not necessarily indicative of
results to be expected for the fiscal year ending December 31, 2000. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, for the year ended
December 31, 1999, contained in the Company's 1999 annual report on Form 10-K.
NOTE 2 - Inventories (in thousands)
-----------------------------------
NOTE 2 - Inventories (in thousands)
Balance as of June 30, 2000 December 31, 1999
------------- -----------------
Raw materials $ 1,456 $ 1,300
Work in process 73 13
Finished goods - 56
------------- -----------------
Total $ 1,529 $ 1,369
============= =================
NOTE 3 - Loss per share
------------------------
The Company has reported losses per share in accordance with the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards,
(SFAS) No. 128 ''Earnings Per Share.'' SFAS No. 128 requires the presentation
of basic earnings per share (''EPS'') and, for companies with complex capital
structures (or potentially dilutive securities, such as convertible debt,
options and warrants), diluted EPS.
There were no reconciling items of the numerators and denominators of the
basic and diluted EPS computation. Securities excluded from the computation of
EPS because their effect on EPS was antidilutive, but could dilute basic EPS in
future periods are as follows:
Balance as of June 30, 2000 June 30, 1999
------------- -------------
Options 1,764,573 1,793,400
Warrants 140,000 681,747
------------- -------------
Total 1,904,573 2,475,147
============= =============
6
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NOTE 4 - Recent Accounting Pronouncements
------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137"). SFAS 137 deferred the effective date until fiscal years beginning
after June 15, 2000. The Company will adopt SFAS No. 133 in 2001. The Company is
assessing the effect of FAS 133 on the financial position and results of
operations of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. In June 2000, the SEC issued SAB 101B, "Second Amendment;
Revenue Recognition in Financial Statements" ("SAB 101B"). SAB 101B deferred the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on the Company's financial
position and results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
establishes guidance for the accounting for stock option grants made after June
30, 2000. FIN 44 also establishes guidance for the repricing of stock options
and determining whether a grantee is an employee, for which guidance was
effective after December 15, 1998 and modifying a fixed option to add a reload
feature, for which guidance was effective after January 12, 2000. The adoption
of certain of the provisions of FIN 44 prior to March 31, 2000 did not have a
material effect on the financial statements. The Company does not expect that
the adoption of the remaining provisions will have a material effect on the
financial statements.
NOTE 5 - Subsequent Event
--------------------------
On July 6, 2000 the Company acquired the United States-based genetic imaging
business of Perceptive Scientific Instruments, LLC (PSI) from International
Remote Imaging Systems, Inc. The consideration paid was 385,371 shares of
common stock valued at $915,000, the assumption of certain liabilities, and
potential future cash payments to a maximum of $0.9 million based on the future
performance of the business. The purchase did not include the personnel and
assets of PSI's research group, including its federally funded research grants.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the fiscal year
ended December 31, 1999.
The information set forth below contains forward-looking statements,
(designated by an *), and the Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Item one" in the Company's
annual report on form 10-K for the fiscal year ended December 31, 1999.
Results of Operations
Revenues. The Company's revenues are derived primarily from the sale of
products, instrument service contracts and grant revenues. Revenues for the
three and six months ended June 30, 2000 were $4.3 million and $8.0 million
respectively, compared to $3.1 million and $5.8 million for the corresponding
periods in the prior year. This 38% increase in revenues in the quarter and
six-months was due to sales of two new products, the MDS(TM) and Genus(TM)
systems, as well as increases in sales of existing products and services.
Cost of revenues. Cost of revenues includes direct material and labor costs,
manufacturing overhead, installation costs, warranty-related expenses and post-
warranty service and application support expenses. Costs of revenues, as a
percentage of total revenues, for the three and six months ended June 30, 2000
were 38% and 43% respectively, compared to 44% and 47% for the corresponding
prior year periods. The decrease is primarily due to the impact of the reversal
of a manufacturing-related accrual, in the second quarter of 2000, which was no
longer deemed necessary. In addition, the Company benefited from increased
average instrument selling prices and lower costs for raw materials.
Research and development expenses. Research and development expenses for the
three and six months ended June 30, 2000 were $1.0 million and $1.9 million
respectively, compared to $1.1 million and $2.2 million for the comparative
prior year periods. The decrease over the prior year periods is primarily due
to the decreased expenditures for salaries and consulting costs associated with
the fetal cell isolation program.
Sales and marketing expenses. Sales and marketing expenses for the three and
six months ended June 30, 2000 were $1.5 million and $3.0 million respectively,
compared to $1.1 million and $2.2 million for the comparative prior year
periods. The increase is primarily related to higher commission and travel
expenses as a result of increased sales and increased sales personnel. The
increase in marketing expenses was related primarily to the development of
promotional materials for the new Genus(TM) and MDS(TM) products. As a
percentage of revenues, sales and marketing expenses were 35% and 37% of total
revenues for the three and six months ended June 30, 2000, compared to 36% and
38% for the corresponding prior year periods.
General and administrative expenses. General and administrative expenses for
the three and six months ended June 30, 2000 were $0.7 million and $1.4 million
respectively, the same amounts as last year. As a percentage of revenue,
general and administrative costs were 16% and 17% of total revenues for the
three and six months ended June 30, 2000 compared to 22% and 24% for the
corresponding prior year periods. The reduction in the percentage of sales ratio
is due to the favorable effects of the restructuring put in place last year.
8
<PAGE>
Amortization of Intangibles. Amortization of intangibles amounted to $63,000
and $126,000 for the three and six months ended June 30, 2000 respectively.
This represents the amortization of the intangible assets (goodwill and
intellectual/software property) resulting from the acquisition in July 1999 of
the cytogenetic imaging business of Vysis, Inc.
Restructuring Costs. A restructuring charge of $224,000 was accrued for during
the quarter ended March 31, 1999. The charge reflected the severance costs for
fifteen employees in both the United States and United Kingdom facilities.
There were no restructuring charges during the six months ended June 30, 2000.
Other income (expense) net. Other expenses for the first six months of the year
at $73,000 were primarily related to the interest expense associated with bank
debt and higher exchange losses due to the strengthening of the dollar against
the pound.
Factors That May Affect Future Results
The Company's operating results may vary significantly depending on certain
factors, including the effect of delays in its research and development program,
adverse results in its clinical studies, delays in the introduction or shipment
of new products, increased competition, adverse changes in the economic
conditions in any of the several countries in which the Company does business, a
slower growth rate in the Company's target markets, order deferrals in
anticipation of new product releases, lack of market acceptance of new products,
the uncertainty of FDA or other domestic and international regulatory clearances
or approvals, and the factors set forth in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1999.
Due to the factors noted above, the Company's future earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis.
Any shortfall in revenues or earnings from levels expected by security analysts
could have an immediate and significant adverse effect on the trading price of
the Company's common stock.
Liquidity and Capital Resources
At June 30, 2000, the Company had cash, cash equivalents and securities
available for sale of $6.0 million and working capital of $5.8 million. Cash
used by operations for the six months ended June 30, 2000 was $2.0 million
compared to $2.4 million for the corresponding prior year period. The decrease
in cash used in operations is primarily due to lower losses as explained above
and reduced balances of accounts payable and accruals. In addition, the Company
consumed $300,000 for purchases of capital equipment in the first half of 2000.
The Company also used approximately $0.9 million to pay down its bank debt in
the U.S. and U.K, partially offset by the receipt of $0.7 million from the
exercise of employee stock options.
The Company expects negative cash flow from operations to continue through at
least 2000, as it continues the research and development of its MDS(TM) System,
expands its marketing, sales and customer support capabilities and adds
administrative infrastructure.* The Company currently estimates that its
existing capital resources will enable it to sustain operations into 2001.*
There can be no assurance, however, that the Company will not be required to
seek capital at an earlier date. The timing and amount of spending of such
capital resources cannot be accurately determined at this time and will depend
on several factors, including but not limited to, the progress of its research
and development efforts and clinical investigation, the timing of regulatory
approvals or clearances, competing technologies or
9
<PAGE>
potential acquisitions.* No assurance can be given that additional financing
will be available when needed or on terms acceptable to the Company. If adequate
funds are not available, the Company could be required to delay development or
commercialization of certain of its products, to license to third parties the
rights to commercialize certain products or technologies that the Company would
otherwise seek to commercialize itself, or to reduce the marketing, customer
support or other resources devoted to certain of its products. In addition, as
opportunities arise, funds may also be used to acquire businesses, technologies
or products that complement any such acquisitions. * The Company may seek to
obtain additional funds through equity or debt financing, collaborative or other
arrangements with other companies, and from other sources.* No assurance can be
given that additional financing will be available when needed or on terms
acceptable to the Company.
Year 2000 Compliance
The Company is knowledgeable of the issues associated with programming code in
existing computer systems that may have created potential incompatibilities in
computer systems beginning in the Year 2000. The Company began a Year 2000
problem assessment in 1997, establishing its Year 2000 Company Policy and
initiating product upgrade plans. The Company completed an assessment of its
internal Year 2000 risks and developed a series of upgrade and contingency
plans. No significant problems were encountered with the Company's products or
its internal business systems with the advent of Year 2000.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137"). SFAS 137 deferred the effective date until fiscal years beginning
after June 15, 2000. The Company will adopt SFAS No. 133 in 2001. The Company is
assessing the effect the FAS 133 on the financial position and results of
operations of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies: In June 2000, the SEC issued SAB 101B, "Second Amendment:
Revenue Recognition in Financial Statements" ("SAB 101B"). SAB 101B deferred the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on the Company's financial
position and results of operations.
In March 2000, the Financial Accounting Standards Board issued
interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
establishes guidance for the accounting for stock option grants made after June
30, 2000. FIN 44 also establishes guidance for the repricing of stock options
and determining whether a grantee is an employee, for which guidance was
effective after December 15, 1998 and modifying a fixed option to add a reload
feature, for which guidance was effective after January 12, 2000. The adoption
of certain of the provisions of FIN 44 prior to March 31, 2000 did not have a
material effect on the financial statements. The Company does not expect that
the adoption of the remaining provisions will have a material effect on the
financial statements.
10
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Derivatives and Financial Instruments.
For the six months ended June 30, 2000, there were no material changes from
the disclosures made in the Company's form 10-K for the year ended December 31,
1999.
11
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PART II - OTHER INFORMATION
-----------------------------
Item 4: Submission of matters to a vote of security holders
The Company solicited proxies for an annual meeting of stockholders on May 10,
2000 to all of the Company's stockholders.
The election of directors was conducted and the following nominees were
elected: Jack Goldstein, Ph.D. and Thomas C. McConnell. The vote with respect
to each nominee was as follows:
Votes
------------------------
Name For Against
-------------------------- ------------------------ --------------------
Jack Goldstein 9,209,084 0
Thomas C. McConnell 9,209,084 0
PricewaterhouseCoopers LLP was ratified as the independent auditors of the
company for the fiscal year ending December 31, 2000 with 9,266,207 votes in
favor and 29,258 votes against.
An amendment of the Company's 1998 Incentive Stock Option Plan (the Plan) was
approved to increase the total number of shares reserved for issuance under the
Plan from 950,000 shares to 1,900,000 shares. The amendment was approved with
4,642,021 votes in favor and 330,647 votes against.
Item 6. Exhibits and Reports on Form 8-K.
(a)
Exhibit
-------
Exhibit 27.1 - Financial Data Schedule
There were no reports on Form 8-K during the quarter ended June 30, 2000
12
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APPLIED IMAGING CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPLIED IMAGING CORP.
(Registrant)
Date: August 9, 2000 By: /S/ JACK GOLDSTEIN
-----------------------------
Jack Goldstein
Chief Executive Officer
Chairman of the Board
By: /S/ BARRY HOTCHKIES
-----------------------------
Barry Hotchkies
Vice President
Chief Financial Officer
13
