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SWDocIDUNITED 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, 2002
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
____ to ____.
Commission File No. 000-30109
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LUMINEX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-2747608
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12212 TECHNOLOGY BLVD., AUSTIN, TEXAS 78727
(Address of principal executive offices) (Zip Code)
(512) 219-8020
(Registrant's telephone number, including area code)
-----------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, PAR VALUE $0.001
RIGHTS TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK,
PAR VALUE $0.001
(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 past 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 the 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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined by Exchange Act Rule 12b-2). Yes [X] No [ ]
Based on the closing sale price of common stock on The Nasdaq Stock
Market on March 24, 2003, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $122,584,587. Excludes an aggregate of
4,402,652 shares of common stock held by officers and directors.
There were 29,625,818 shares of the Company's Common Stock, par value
$.001 per share, outstanding on March 24, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Listed below are documents parts of which are incorporated herein by
reference and the part of this report into which the document is incorporated:
Proxy Statement for the 2003 Annual Meeting of Stockholders - Part III (which
definitive proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days subsequent to December 31, 2002).
LUMINEX CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business....................................................................................... 1
Item 2. Properties .................................................................................... 16
Item 3. Legal Proceedings.............................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 16
Executive and Other Officers and Related Information........................................... 17
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 19
Item 6. Selected Consolidated Financial Data........................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..................................... 27
Item 8. Financial Statements and Supplementary Data.................................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......... 46
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 47
Item 11. Executive Compensation......................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.................................................................... 47
Item 13. Certain Relationships and Related Transactions................................................. 48
Item 14. Controls and Procedures........................................................................ 48
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 49
Signatures and Certifications............................................................................. S-I
SAFE HARBOR CAUTIONARY STATEMENT
All statements in this report that do not discuss past results are
forward-looking statements. Generally, the words "believe," "expect," "intend,"
"estimate," "anticipate," "will" and similar expressions identify
forward-looking statements. All statements which address our outlook for our
businesses and their respective markets, such as projections of future
performance, statements of management's plans and objectives, forecasts of
market trends and other matters are forward-looking statements. It is important
to note that our actual results or performance could differ materially from
those projected in such forward-looking statements. Forward-looking statements
are based on management's current expectations and are therefore subject to
certain risks and uncertainties, including those discussed under the section
titled "Factors That May Affect Future Results" included in this Annual Report
on Form 10-K. Specific uncertainties which could cause our actual results to
differ materially from those projected include risks and uncertainties relating
to market demand and acceptance, the dependence on strategic partners for
development, commercialization and distribution of products, fluctuations in
quarterly results due to a lengthy and unpredictable sales cycle, our ability to
scale-up manufacturing operations, potential shortages of components,
competition, the timing of regulatory approvals and any modification of the
Company's operating plan in response to its ongoing evaluation of its business
and search for a new chief executive officer. We expressly disclaim any intent,
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained in this Annual Report on Form 10-K to
reflect any change in our expectations with regard to such statements or any
change in events, conditions or circumstances on which any such statements are
based.
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Luminex(R) and xMAP(TM) are trademarks of Luminex Corporation. This
report also refers to trademarks, service marks and trade names of other
organizations.
ii
PART I.
ITEM 1. BUSINESS
OVERVIEW
Luminex Corporation manufactures and markets products incorporating a
proprietary technology that advances and simplifies biological testing for the
life sciences industry. This industry depends on a broad range of tests, called
bioassays, to perform diagnostic tests, discover new drugs and identify new
genes. Our xMAP technology allows our Luminex 100 System to simultaneously
perform up to 100 bioassays on a single drop of fluid by reading biological
tests taking place on the surface of microscopic polystyrene beads called
microspheres. xMAP technology combines this miniaturized liquid array bioassay
capability with small lasers, digital signal processors and proprietary software
to create a system offering advantages in speed, precision, flexibility and
cost. Our xMAP technology is currently being used within the various segments of
the life sciences industry in the fields of drug discovery, clinical
diagnostics, genetic analysis, protein analysis and biomedical research.
Luminex was incorporated in May 1995 and began commercial production of
our first generation system in 1997. Our shares of common stock are traded on
The Nasdaq Stock Market under the symbol "LMNX."
Luminex is incorporated in the State of Delaware, our principal
executive offices are located at 12212 Technology Blvd., Austin, Texas 78727,
and our telephone number is (512) 219-8020.
INDUSTRY BACKGROUND
The life sciences industry uses bioassays to detect the presence of
certain biochemicals, proteins or genes in a sample. Drug discovery, genetic
analysis, pharmacogenomics, clinical diagnostics and general biomedical research
all use bioassays. For example, bioassays can be used to:
- - measure the attraction, or affinity, between a chemical compound and a
disease target for drug discovery and development;
- - assist physicians in prescribing the appropriate drug therapy to match
the patient's unique genetic makeup, a process known as
pharmacogenomics;
- - detect genetic variations, such as single nucleotide polymorphisms
(SNPs); or
- - measure the presence and quantity of biochemicals in blood to assist
physicians in diagnosing, treating or monitoring disease conditions.
Laboratories either develop bioassays internally to meet their specific
needs or purchase them in the form of off-the-shelf test kits or customized
services. Although it is important to note that our xMAP technology is relevant
to only a subset of the total life sciences market, industry reports estimated
the total global market for tools and consumables used in drug discovery and
development, clinical diagnostics and biomedical research to have been
approximately $33 billion as of 2001 and expected to grow at an annual rate of
approximately 7%.
1
The table below briefly describes the key bioassay technologies in the
life sciences industry:
KEY TECHNOLOGIES DESCRIPTION MARKETS SERVED
BioChips...................... High-density arrays of DNA fragments Biomedical research
attached to a flat glass or silicon surface
Clinical immuno-analyzers..... Automated test-tube based platform Clinical.diagnostics
Gels and blots................ Physical separation of analyses for Clinical diagnostics and biomedical
visualization research
Microarrays................... Low-density arrays of DNA fragments Biomedical research
attached to a flat glass or silicon surface
Microfluidics chips........... Miniaturized liquid handling system on a Biomedical research
chip
Microtiter-based assays....... Plastic trays with discrete wells in which Drug discovery, clinical diagnostics and
assays are fixed biomedical research
XMAP TECHNOLOGY
Our xMAP technology has been designed to provide a testing platform
that can perform a wide range of bioassays in a cost-effective manner. The key
features of xMAP technology include the following:
- - Multi-analyte/multi-format
xMAP technology has been designed to simultaneously perform up to 100
distinct bioassays in a single tube or well of a microtiter plate using
only a small amount of sample. Moreover, unlike most existing
technologies that are capable of performing only one type of bioassay,
xMAP can perform enzymatic, genetic and immunologic tests on the same
instrumentation platform.
- - Flexibility/scalability
xMAP technology allows flexibility in customizing test panels. Panels
can be modified to include new bioassays in the same tube by adding
additional microsphere sets. It is also scalable, meaning that there is
no change in the manufacturing process or the required labor, whether
producing a small or large number of microsphere-based tests.
- - Throughput
Our technology's current ability to perform up to 100 tests in a single
tube with only a small amount of sample permits efficient use for
high-throughput applications.
- - Ease of use
Most xMAP bioassays are simple to perform. A test sample is added to a
solution containing microspheres that have been coated with reagents.
The solution is then processed through our xMAP system which
incorporates proprietary software to automate data acquisition and
analysis in real-time.
- - Low cost
We have designed our xMAP systems to be relatively inexpensive to
manufacture and utilize. In addition, microsphere-based bioassays are
inexpensive compared to other technologies such as biochips.
Our xMAP technology combines existing biological testing techniques
with advanced digital signal processing and proprietary software. With our
technology, discrete bioassays are performed on the surface of color-coded
microspheres. These microspheres are read in a compact analyzer that utilizes
lasers and high-speed digital signal processing to simultaneously identify the
bioassay and measure its result.
Polystyrene microspheres, approximately 5.6 microns in diameter, are a
fundamental component of the xMAP technology. We purchase undyed microspheres
and, in a proprietary process, dye them with varying intensities of a red and a
near infrared dye to achieve up to 100 distinct colors. The specific dye
proportions permit
2
each color-coded microsphere to be readily identified based on its distinctive
fluorescent signature. Our customers create bioassays by attaching different
biochemical reactants to each distinctly colored microsphere set. The
microsphere sets can then be combined in test panels as required by the user,
with a current maximum of 100 tests per panel.
To perform a bioassay using xMAP technology, a researcher attaches
biochemicals, or reagents, to one or more sets of color-coded microspheres,
which are then mixed with a test sample. This mixture is injected into the xMAP
analyzer, where the microspheres pass single-file in a fluid stream through two
laser beams. The first laser excites the internal dyes that are used to identify
the color of the microsphere and the test being performed on the surface of the
microsphere. The second laser excites a third fluorescent dye that is used to
quantify the result of the bioassay taking place. Our proprietary optics,
digital signal processors and software record the fluorescent signature of each
microsphere and compare the results to the known identity of that color-coded
microsphere set. The results are analyzed and displayed in real-time with data
stored on the computer database for reference, evaluation and analysis.
BUSINESS STRATEGY
Our primary goal continues to be to establish our xMAP technology as
the industry standard for performing bioassays. To achieve this goal, we have
implemented the following strategies:
- - Focus on large sectors
We will continue to focus our commercialization efforts through
strategic partners on large sectors of the life sciences industry. We
have targeted major pharmaceutical companies, large clinical
laboratories, in vitro diagnostic manufacturers and major medical
institutions for our principal marketing efforts. We believe these
customers provide the greatest opportunity for maximizing the use of
xMAP technology and that continued adoption by these industry leaders
will promote wider market acceptance.
- - Continue to develop strategic partnerships
We intend to broaden and accelerate market acceptance of xMAP
technology by continuing to enter into development, marketing and
distribution strategic partnerships with the leaders in the life
sciences industry that we believe can convert core product lines to,
and develop new applications on, Luminex platforms. By leveraging our
strategic partners' market positions and utilizing their distribution
channels and marketing infrastructure, we believe we can continue to
expand our installed base. Currently, we have 14 strategic partners who
have released commercialized products utilizing the Luminex platform
and are submitting royalties. These 14 strategic partners accounted for
approximately 44% of our total revenue in 2002, of which three
strategic partners constituted 30% of total revenue.
- - Develop next generation products
Our research and development group is pursuing projects intended to
advance our xMAP technology. We are also collaborating with industry
participants and biomedical research institutions to develop additional
xMAP products.
In November 2002, we engaged a strategic consulting firm with extensive
experience in the life sciences industry to assist management in evaluating and
refining the core focus and operating plans for the Company. Based on the
results of this study, the consulting firm will make recommendations to
management which, if adopted, may impact the Company's strategy and operations
on a go-forward basis.
PRODUCTS
Instruments
Luminex 100. The Luminex 100 is a compact analyzer that integrates
fluidics, optics and digital signal processing to perform up to 100 bioassays
simultaneously in a single tube or well of a microtiter plate using only a small
amount of sample. By combining small diode lasers with digital signal processors
and microcontrollers, the Luminex 100 performs rapid, multi-analyte profiles
under the control of a Windows(R)-based personal computer and our proprietary
software.
We also offer two peripheral components for the Luminex 100 - the XY
Platform and the Luminex Sheath Delivery System ("Luminex SD"). The XY Platform
complements the Luminex 100 by automating the sequential
3
positioning of each well of a microtiter plate, permitting up to 9,600
unattended tests per plate to be performed in less than an hour. The XY Platform
can also be connected to robotic systems that deliver these plates to the
Luminex 100, allowing integration into automated test centers. The Luminex SD is
a pressurized, external pump delivery system that enhances the delivery of
sheath fluid to the Luminex 100 by pumping sheath fluid from an external bulk
reservoir, enabling the Luminex 100 to operate for up to 24 hours without
switching to a new reservoir of sheath fluid.
Luminex HTSTM (High-Throughput System). The high-throughput version of
our xMAP analyzer, the Luminex HTS, is interfaced with an automated liquid
handler. The Luminex HTS utilizes a higher pressure flow system which produces a
flow rate approximately ten times greater than the flow rate of the Luminex 100.
Although a small number of HTS systems were sold in 2001 and 2002, full
commercial production of the Luminex HTS currently is expected to begin in the
second quarter of 2003.
Consumables
Microspheres. Our xMAP systems use polystyrene microspheres that are
approximately 5.6 microns in diameter. We dye the microspheres in sets with
varying intensities of a red and a near infrared dye to achieve up to 100
distinct color sets. Each microsphere can carry the reagents of an enzymatic,
genetic or immunologic bioassay. In addition to microspheres, consumables also
include sheath fluid and spare parts.
Universal array microspheres. In January 2003, the Company introduced a
universal array microsphere. This microsphere-based product is designed for
conducting genotyping and other DNA-based experiments in the life sciences and
diagnostic markets using our xMAP technology. When used in conjunction with our
multiplexing technology, the universal array microspheres are designed to
simplify the genotyping assay development process and increase assay
flexibility. The universal array microspheres may be used in customized end-user
identified single nucleotide polymorphisms (SNPs) or in pre-defined kits
developed by our strategic partners.
SALES AND MARKETING
Our sales and marketing strategy is intended to expand the installed
base of xMAP systems and generate recurring revenues from royalties on bioassay
kits and testing services developed or performed by others that use our
technology, as well as from the sale of microspheres and other consumables. The
key element of our sales and marketing strategy is a strategic partner program
with life sciences companies that will develop applications or perform testing
using our technology platforms and distribute our systems to their customers.
During 2002, we effected a reduction in force designed to reduce overhead costs
and align staffing and personnel costs with the Company's current business. In
connection with the reduction in force, we eliminated our direct sales function
and are now focusing our sales and marketing efforts primarily through our
strategic partners.
We continue to use strategic partners as our primary distribution
channel. Strategic partners develop application-specific bioassay kits for use
on our systems that they sell to their customers generating royalties for us.
Certain strategic partners also perform services for third parties using our
technology that also result in royalties for us. Some strategic partners also
buy our products, including xMAP systems and consumables, and then resell those
products to their customers. As of December 31, 2002, we had 14 strategic
partners who had released commercialized products utilizing the Luminex platform
and were submitting royalties. Of such 14 strategic partners, 8 companies
principally serve the clinical diagnostics market and 6 companies serve the
research market. These strategic partners constituted 44% of the Company's
revenues for 2002. We also believe our strategic partners provide us with
complementary capabilities in product development, regulatory expertise and
sales and marketing. By leveraging our strategic partners' bioassay testing
competencies, customer relationships and distribution channels, we believe that
we can achieve rapid market penetration without a direct sales force.
We also serve as the original equipment manufacturer (OEM) for certain
strategic partners that choose to sell our xMAP systems under their own branding
and marketing efforts.
4
CUSTOMERS
At December 31, 2002, we had sold a total of 1,273 xMAP system since
inception in the biomedical research, clinical diagnostics and pharmaceutical
markets. For the three years ended December 31, 2002, 2001 and 2000, we had
sales to foreign customers of $2.7 million, $2.3 million and $2.2 million,
respectively, representing 20.7%, 11.3% and 26.6%, respectively, of our total
product revenues for such periods. In 2002, only one customer accounted for more
than 10% of total revenues. Bio-Rad Laboratories, Inc. accounted for 16%, 13%
and 13% of our total revenues in 2002, 2001 and 2000, respectively. In addition,
in 2001 another customer accounted for 16% of total revenues. Although no other
customer accounted for more than 10% of our total revenues in 2002, 2001 or
2000, a total of three customers constituted approximately 30% of total revenues
in 2002. The loss of any of these customers could have a material adverse effect
on our business, financial condition and results of operation.
TECHNICAL OPERATIONS
Our Technical Operations Group provides technical support to customers,
strategic partners and their customers. Most of the Company's technical
operations personnel are either biologists or biochemists and have extensive
experience in academic, industrial and commercial settings. Cross training is a
major focus, empowering group members to solve problems outside their primary
assignment.
Customer Support
Our in-house customer support department assists users through a
toll-free customer support hotline, facsimile and e-mail. Personnel assist our
strategic partners and customers with product orders, software, hardware, system
implementation and development of their bioassays. A comprehensive software and
database system is utilized to track customer interactions, follow trends and
utilization. The information is categorized and presented to management for
weekly and monthly review.
In addition to resolving customer problems, our customer service group
also attends trade shows and visits customers to solicit feedback.
Training
Through our training group, we offer comprehensive programs in basic
system training, advanced assay development, instrument field service and
technical support functions. For larger customers who have many users, such as
our strategic partners, training may be performed on-site at their locations.
Field Service
We have five field service personnel: three based in Austin, Texas, one
in Chicago, Illinois and one in San Jose, California. To support the increasing
number of installed systems, we have entered into agreements with third party
service providers at both the domestic and international levels. Furthermore, we
intend to base additional field service personnel on both the east and west
coasts of the U.S. and pursue additional third-party service provider agreements
for quicker, more cost-effective support of our customers worldwide.
Additionally, certain of our strategic partners provide their own field service
support.
Technical Applications
In order to allow customers to expedite the production of bioassays for
use on our systems, we have formed a technical applications group, based in
Austin, Texas, that includes experienced biological scientists. This group works
closely with our customers and strategic partners in their development of
bioassays with the ultimate goal of faster adoption and commercialization.
5
RESEARCH AND DEVELOPMENT
Our research and development program is devoted to advancing the
capabilities of our xMAP technology to further penetrate the life sciences
industry. As of March 24, 2003, we employed approximately 25 engineers,
scientists and technicians dedicated to research and development. In addition,
we are collaborating with other companies and academic institutions to increase
the breadth of xMAP applications. Our current research and development projects
include:
- - Mixed sample measurement of cells and beads
We have initiated a project on behalf of a strategic partner to examine
the utility of xMAP technology for blending bead-based assays for
soluble analytes with simultaneous cellular analysis of a complex
biological sample.
- - Expanding our multiple testing capabilities
Our current bead utilizes two common chemistries for the immobilization
of assays on its surface. While these chemistries are well accepted in
the industry, it is desirable to expand our bead chemistry capability
to enhance market penetration and adoption.
- - Automation
We are collaborating with our strategic partners to integrate our
various xMAP instruments with sample handling equipment and laboratory
information systems to increase bioassay throughput.
- - Enhancing biassay performance and operational efficiencies
Our scientists and hardware and software engineers continually dedicate
efforts to further enhance xMAP in the areas of assay performance, such
as sensitivity, precision and ruggedness, and operational efficiencies.
MANUFACTURING
The Company has approximately 18,000 square feet of manufacturing
facilities located at the Company's principal executive offices in Austin,
Texas. In 2002, we successfully completed the registration of our quality
management system to the ISO 9001:2000 standard, which is an internationally
recognized standard for quality management systems. Subsequent audits by the
registrar will be carried out at 6-month intervals to ensure we are maintaining
our system in compliance with ISO standards.
Instruments
Certain components of our xMAP instruments are assembled by contract
manufacturers. The remaining assembly and manufacturing of our instruments is
performed by our employees at our facility in Austin, Texas. The quality control
and quality assurance protocols are also performed at this facility. Parts and
component assemblies that comprise our xMAP instruments are obtained from a
number of sources; however, we currently purchase lasers for our xMAP
instruments from one supplier. We recently received notice that this supplier
will terminate the production of the model of lasers currently used in our xMAP
instruments during late 2003 or early 2004. While we believe our current supply
of lasers will be sufficient to meet our needs for 2003, the failure to find an
alternative supplier to supply quality lasers at a reasonable price for our xMAP
instruments, or enter into an arrangement with our current supplier to provide
us with a suitable replacement laser, would have a material adverse effect on
our business, financial condition and results of operations. There are, however,
available alternative suppliers of such lasers and we are currently evaluating
our options, including entering into arrangements with alternative suppliers to
provide lasers to us in the future.
Microspheres
We dye polystyrene microspheres using a proprietary method in our
Austin, Texas manufacturing facility in large lots with ten intensities of a red
and a near infrared dye to produce 100 distinctly colored microsphere sets. We
currently use one supplier for polystyrene microspheres, which we purchase
pursuant to purchase orders and not pursuant to a long-term contract. While we
believe the microspheres will continue to be available from our supplier in
quantities sufficient to meet our production needs, there are other suppliers
that could provide us microspheres, if given sufficient lead-time to manufacture
the microspheres to our specifications.
6
COMPETITION
We designed our xMAP technology for use by customers across the various
segments of the life sciences industry. For this reason, much of our competition
is from existing technologies that perform many of the same functions as our
xMAP technology. Our competition includes companies marketing conventional
testing products based on established technologies, as well as companies
developing their own advanced testing technologies. Most of our competitors are
larger than we are and can commit significantly greater resources to their
competitive efforts.
The pharmaceutical industry is the largest market for the genomic,
protein and high-throughput screening applications of the xMAP technology. In
each application area, Luminex faces a different set of competitors. Genomic and
protein testing can be performed by products available from Affymetrix Inc.,
Applied Biosystems, a business group of Applera Corporation, Aclara Biosciences,
Inc., Becton Dickinson Company, Illumina Perkin-Elmer Life Sciences, a business
unit of PerkinElmer, Inc., and Sequenom, Inc., among others. In high-throughput
screening, Molecular Devices, IGEN, Amersham and Aurora BioSciences Corporation
offer products competitive with ours.
The clinical laboratory market is dominated by several very large
competitors. These include Abbott Laboratories, Bayer Corporation, Beckman
Coulter, Inc., Johnson & Johnson and Roche Bioscience, a division of F.
Hoffmann-La Roche Ltd., among others. These companies have technologies that can
perform a variety of established assays. These companies also offer integrated
systems and laboratory automation that are designed to meet the need for
improved work efficiencies in the clinical laboratory.
Competition within the biomedical research market is even more
fragmented than that within the pharmaceutical industry. There are hundreds of
suppliers to this market including Amersham Pharmacia Biotech, Applied
Biosystems, Becton Dickinson, Perkin Elmer Life Sciences and Zeptosens. Any
company in this field is a potential competitor with us.
INTELLECTUAL PROPERTY
To establish and protect our proprietary technologies and products, we
rely on a combination of patent, copyright, trademark and trade secrets laws and
confidentiality agreements.
We have implemented a patent strategy designed to maximize our
intellectual property rights. For core intellectual property, we are pursuing
patent coverage in the United States and those foreign countries that correspond
to the majority of our anticipated customer base. We currently own 12 issued
patents in the United States. In addition, our patent portfolio includes 17
other pending patent applications in the United States and their corresponding
international and foreign counterparts in major industrial markets. Our patents
and pending claims provide, or will provide, protection for systems and
technologies that allow "real time" multiplexed analytical techniques for the
detection and quantification of many analytes from a single sample. We also hold
a patent covering the precision-dyeing process that we use to dye our
microspheres. We have been granted a patent on our "Zero Dead Time" sampling
architecture, which uses digital oversampling to measure the area of a
fluorescence pulse instead of "peak detection," giving increased sensitivity
with no lost events. Other issued patents and pending patent applications cover
specific aspects and applications of our xMAP technology and on-going molecular
research. However, as a result of a procedural omission by the Company's former
patent counsel, we are unable to pursue in Japan a patent application
corresponding to our U.S. patent for real-time multiplexing techniques.
The source code for our proprietary software is protected as a trade
secret and/or as a copyrighted work. Aspects of this software also are covered
by an issued patent.
We also rely on trade secret protection of our intellectual property.
We attempt to protect our trade secrets by entering into confidentiality
agreements with strategic partners, third parties, employees and consultants.
Our employees and third-party consultants also sign agreements requiring that
they assign to us their interests in inventions and original works of expression
and any corresponding patents and copyrights arising from their work for us.
7
GOVERNMENT REGULATION
Food and Drug Administration
The Food and Drug Administration regulates medical devices pursuant to
various statutes, including the Federal Food, Drug and Cosmetic Act as amended
and supplemented by the Medical Device Amendments of 1976, the Safe Medical
Devices Act of 1990, the Medical Device Amendments of 1992, the FDA Export
Reform and Enhancement Act of 1996, the FDA Modernization Act of 1997, the
Public Health, Security and Bioterrorism Preparedness and Response Act of 2002
and the Medical Device User Fee and Modernization Act of 2002. Medical devices,
as defined by statute, include instruments, machines, in vitro reagents or other
similar or related articles, including any component, part or accessory of such
articles that are intended for use in the diagnosis of disease or other
condition or in the cure, mitigation, treatment or prevention of disease, or are
intended to affect the structure or function of the human body. The FDA
classifies medical devices intended for human use into three classes. For Class
I devices, general controls (for example, labeling and good manufacturing
practices) are sufficient to provide reasonable assurance of safety and
effectiveness. Class II devices are products where general controls are not
sufficient to provide reasonable assurance of safety and effectiveness and for
which there is sufficient information to establish special controls (for
example, guidelines and patient registries). Class III devices are purported or
represented to be used to support or sustain human life, are for a use that is
of substantial importance in preventing impairment of human health, or where the
device presents a potential unreasonable risk of illness or injury.
We manufacture a version of the Luminex 100 - the Luminex 100
Integrated System ("IS") - for use with diagnostic assay kits that are expected
to become available through our strategic partners. For FDA purposes, the
Luminex 100 IS is considered a component of our partners' kit products.
Depending on the particular kit's regulatory classification into Class I, II or
III and its intended use, kits manufactured by our strategic partners that are
used in conjunction with our technology may be subject to FDA clearance or
approval before they can be marketed and sold. After incorporating the Luminex
100 IS into their products, our strategic partners are required to make various
premarket submissions such as premarket approval applications, premarket
notifications and/or investigational device exemption applications to the FDA
for their products and are required to comply with numerous requirements and
restrictions prior to clearance or approval of the applications. There can be no
assurance that the FDA will file, clear or approve our strategic partners'
submissions.
In 2000, we submitted a device master file ("DMF") with information
about the Luminex 100 IS to the FDA. Our strategic partners can reference the
DMF in their premarket submissions. In 2001, FDA reviewed our DMF while
reviewing one of our strategic partner's submissions, and asked questions of the
Company about the content of the DMF. It is possible that FDA may ask questions
about our DMF each time one of our strategic partners submits an application to
the FDA referencing our DMF. Although we intend to respond to the FDA's
questions in a timely fashion, there can be no assurance that our responses will
be acceptable to the FDA.
Our products use lasers to identify the bioassays and measure their
results. Therefore, we are required to ensure that our products comply with FDA
regulations pertaining to the performance of laser products. These regulations
are intended to ensure the safety of laser products by establishing standards to
prevent exposure to excess levels of laser radiation. There can be no assurance
that the FDA will agree with our interpretation and implementation of these
regulations.
We, and our strategic partners, may be subject to periodic inspection
by the FDA for, among other things, compliance with the FDA's current good
manufacturing practice regulations. These regulations, also known as the Quality
System Regulations, govern the methods used in, and the facilities and controls
used for, the design, manufacture, packaging and servicing of all finished
medical devices intended for human use. Additionally, our strategic partners may
be subject to other premarket and postmarket controls such as labeling,
complaint handling, medical device reporting and corrections and removals
reporting and record keeping requirements. If the FDA has evidence demonstrating
that a company is not in compliance with applicable regulations, it can detain
or seize products, request or, in certain circumstances, require a recall,
impose operating restrictions, enjoin future violations and assess civil and
criminal penalties against the company, its officers or its employees, and can
recommend criminal prosecution to the Department of Justice. Other regulatory
agencies may have similar powers.
Medical device laws and regulations are also in effect in many
countries outside of the United States. These range from comprehensive
preapproval requirements for medical products to simpler requests for product
data or certification. The number and scope of these requirements are
increasing. There can be no assurance that
8
we, and our strategic partners, will be able to obtain any approvals that may be
required to market xMAP products outside the United States.
Failure by us, or our strategic partners, to comply with applicable
federal, state and foreign medical product laws and regulations would likely
have a material adverse effect on our business. In addition, federal, state and
foreign regulations regarding the manufacture and sale of medical devices and
components of such devices are subject to future changes. We cannot predict what
impact, if any, such changes might have on our business, but any such change
could have a material impact.
Environmental
We are subject to stringent and complex federal, state and local laws
and regulations relating to the protection of human health and the environment.
In the course of our business, we are involved in the handling, storage and
disposal of certain chemicals and biohazards. The laws and regulations
applicable to our operations include provisions that regulate the discharge of
materials into the environment. Some of these environmental laws and regulations
impose "strict liability," rendering a party liable without regard to negligence
or fault on the part of such party. Such environmental laws and regulations may
expose us to liability for environmental contamination, including remediation
costs, natural resource damages and other damages as a result of the conduct of,
or conditions caused by, us or others, or for acts that were in compliance with
all applicable laws at the time such acts were performed. In addition, where
contamination may be present, it is not uncommon for neighboring landowners and
other third parties to file claims for personal injury, property damage and
recovery of response costs. Although it is our policy to use generally accepted
operating and disposal practices in accordance with applicable environmental
laws and regulations, hazardous substances or wastes may have been disposed or
released on, under or from properties owned, leased or operated by us or on,
under or from other locations where such substances or wastes have been taken
for disposal. These properties may be subject to investigation, remediation and
monitoring requirements under federal, state and local environmental laws and
regulations. We believe that our operations are in substantial compliance with
applicable environmental laws and regulations. However, failure to comply with
these environmental laws and regulations may result in the imposition of
administrative, civil and criminal penalties or other liabilities. We do not
believe that we have been required to expend material amounts in connection with
our efforts to comply with environmental requirements or that compliance with
such requirements will have a material adverse effect upon our capital
expenditures, results of operations or competitive position. Because the
requirements imposed by such laws and regulations may frequently change and new
environmental laws and regulations may be adopted, we are unable to predict the
cost of compliance with such requirements in the future, or the effect of such
laws on our capital expenditures, results of operations or competitive position.
Moreover, the modification or interpretation of existing environmental laws or
regulations, the more vigorous enforcement of existing environmental laws or
regulations, or the adoption of new environmental laws or regulations may also
negatively impact our strategic partners, which in turn could have a material
adverse effect on us and other similarly situated component companies.
EMPLOYEES
As of March 24, 2003, we had a total of 117 employees. This represents
a reduction in total work force from 193 at March 31, 2002. This reduction was
precipitated as management sought to align properly the Company's cost structure
and needs with the Company's current business following the decline in revenues
that occurred in 2002. None of our employees are represented by a collective
bargaining agreement, and we have not experienced any work stoppage. We believe
that relations with our employees are good.
AVAILABLE INFORMATION
Our website address is WWW.LUMINEXCORP.COM. Our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to these reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, are available free of charge
through our website as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission.
9
FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF APPROXIMATELY $76.1
MILLION AS OF DECEMBER 31, 2002.
We have incurred significant net losses since our inception, including
losses of $24.9 million in 2002, $15.7 million in 2001 and $12.5 million in
2000. At December 31, 2002, we had an accumulated deficit of approximately $76.1
million. To achieve profitability, we will need to generate and sustain
substantially higher revenue while achieving reasonable cost and expense levels.
If we fail to achieve profitability within the time frame expected by securities
analysts or investors, the market price of our common stock will likely decline.
Furthermore, as we continue to incur losses and utilize cash to support
operations, we further decrease the cash available to the Company. As of
December 31, 2002, cash and short-term investments totaled $40.5 million, a
decrease of $10.6 million, from $51.1 million at December 31, 2001. We do not
know when or if we will become profitable. If we do achieve profitability, we
may not be able to sustain or increase profitability on a quarterly or an annual
basis.
IF OUR TECHNOLOGY AND PRODUCTS DO NOT BECOME WIDELY USED IN THE LIFE SCIENCES
INDUSTRY, IT IS UNLIKELY THAT WE WILL EVER BECOME PROFITABLE.
Life sciences companies have historically conducted biological tests
using a variety of technologies, including bead-based analysis. However,
compared to certain other technologies, our xMAP technology is relatively new
and unproven, and the use of our technology by life sciences companies is
limited. The commercial success of our technology will depend upon its
widespread adoption as a method to perform bioassays. In order to be successful,
we must convince potential customers to utilize our system instead of competing
technologies. Market acceptance will depend on many factors, including our
ability to:
- - convince prospective strategic partners and customers that our
technology is an attractive alternative to other technologies for
pharmaceutical, research, clinical and biomedical testing and analysis;
- - manufacture products in sufficient quantities with acceptable quality
and at an acceptable cost; and
- - place and service sufficient quantities of our products.
Because of these and other factors, our products may not gain
sufficient market acceptance to achieve profitability.
OUR SUCCESS DEPENDS LARGELY ON THE ESTABLISHMENT OF MEANINGFUL AND SUCCESSFUL
RELATIONSHIPS WITH OUR STRATEGIC PARTNERS.
The development and commercialization of our xMAP technology is highly
dependent on our ability to establish successful strategic relationships with a
number of partners. As of December 31, 2002, we had 14 strategic partners who
had commercialized products using the Luminex platform and were submitting
royalties. Furthermore, three of our customers accounted for 30% of the
Company's revenues for the year ended December 31, 2002, one of which
constituted 16% of total revenues. The loss of any of our significant strategic
partners, or any of our three largest customers during 2002, would have a
material adverse effect on our growth and future results of operations. Delays
in implementation, changes in strategy or the financial difficulty of our
strategic partners for any reason could have a material adverse effect on our
business, financial condition and results of operations.
Our ability to enter into agreements with additional partners depends
in part on convincing them that our technology can help achieve and accelerate
their goals or efforts. We will expend substantial funds and management efforts
with no assurance that any additional strategic relationships will result. We
cannot assure you that we will be able to negotiate additional strategic
agreements in the future on acceptable terms, if at all, or that current or
future partners will not pursue or develop alternative technologies either on
their own or in collaboration with others. Some of the companies we are
targeting as strategic partners offer products competitive with our xMAP
technology, which may hinder or prevent strategic relationships. Termination of
strategic relationships, or the failure to enter into a sufficient number of
additional agreements on favorable terms, could reduce sales of our products,
lower margins on our products and limit the creation of market demand and
acceptance.
A significant portion of our future revenues will come from sales of
our systems and the development and sale of bioassay kits utilizing our
technology by our strategic partners and from use of our technology by our
strategic partners in performing services offered to third parties. We believe
that our strategic partners will have economic incentives to develop and market
these products, but we cannot predict future sales and royalty revenues because
our existing strategic partner agreements do not include minimum purchase
requirements. In addition, we do not have the right or ability to provide
incentives to our strategic partners' sales personnel to sell products based on
xMAP technology or to control the timing of the release of products by our
strategic partners. The amount of
10
these revenues will depend on a variety of factors that are outside our control,
including the amount and timing of resources that current and future strategic
partners devote to develop and market products incorporating our technology.
Further, the development and marketing of certain bioassay kits will require our
strategic partners to obtain governmental approvals, which could delay or
prevent their commercialization efforts. If our current or future strategic
partners do not successfully develop and market products based on our technology
and obtain necessary government approvals, our revenues from product sales and
royalties will be significantly reduced.
OUR LIMITED OPERATING HISTORY AND RELIANCE ON STRATEGIC PARTNERS TO MARKET OUR
PRODUCTS MAKES FORECASTING DIFFICULT.
Because of our limited operating history, it is difficult to accurately
forecast future operating results. Our operating expenses are largely based on
anticipated revenue trends and a high percentage of our expenses are, and will
continue to be, fixed in the short-term. As a result, if we do not achieve our
expected revenues, our operating results will be below our expectations. The
level of our revenues will depend upon the rate and timing of the adoption of
our technology as a method to perform bioassays. Due to our limited operating
history, predicting this timing and rate of adoption is difficult.
In addition, we anticipate that a large percentage of future sales of
our products and products incorporating our technology will be made by our
strategic partners. For the following reasons, estimating the timing and amount
of sales of these products that may be made by our strategic partners is
particularly difficult:
- - We have no control over the timing or extent of product development,
marketing or sale of our products by our strategic partners.
- - Our strategic partners are not committed to minimum purchase
commitments and we do not control the incentives provided by our
strategic partners to their sales personnel.
- - A significant number of our strategic partners intend to produce
clinical diagnostic applications that may need to be approved by the
FDA.
- - Certain strategic partners may have unique requirements for their
applications and systems. Assisting the various strategic partners may
strain our research and development and manufacturing resources. To the
extent that we are not able to timely assist our strategic partners,
the commercialization of their products will likely be delayed.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO ATTRACT AND TO RETAIN OUR MANAGEMENT
AND STAFF.
In March 2002, we created a Management Evaluation and Search Committee
to evaluate our existing management team and organizational structure and to
provide recommendations regarding changes and additions to our management team
and organizational structure, if deemed appropriate. From that process (which is
ongoing), we are actively seeking a new chief executive officer and have engaged
in significant staff reductions (including restructuring our management team and
organizational structure during 2002) to align our operating costs with the
Company's current business.
During 2002, there was a significant turnover of senior management, as
eight officers ceased to be employed by the Company, including those whose
employment was terminated in connection with the September 2002 sale of the
Rules Based Medicine research and development project ("RBM") to a newly formed
company headed by Dr. Mark Chandler, the Company's then chairman, chief
executive officer and co-founder. In connection with Dr. Chandler's departure
following the closing of the RBM transaction, Thomas W. Erickson was engaged in
September 2002 to serve as interim chief executive officer and president while
the Management Evaluation and Search Committee sought a new chief executive
officer. Mr. Erickson is currently under contract with us through August 2003.
Additionally, as a result of the management restructuring, certain of the
remaining members of management have taken on additional responsibilities and
the Company has employed interim personnel and third-party consultants to fill
the vacated positions.
In addition, we have reduced the overall work force from 193 at March
31, 2002 to 117 at March 24, 2003. The reduction in force was designed to reduce
overhead costs and align staffing and personnel costs with the Company's current
business. This reduction in force required remaining employees to assume
additional
11
responsibilities and, when combined with the changes in senior management, has
created challenges in maintaining continuity of customer relationships, research
and development and strategic planning for the Company.
We depend on the principal members of our management and scientific
staff, including our research and development, customer support, technical
service and sales staff. The loss of services of key members of management could
delay or reduce our product development, sales and customer support efforts. In
addition, recruiting and retaining qualified scientific and other personnel to
perform research and development, customer support, technical service and sales
work will be critical to our success. There is a shortage in our industry of
qualified management and scientific personnel, and competition for these
individuals is intense. There can be no assurance that we will be able to
attract additional and retain existing personnel necessary to achieve our
business objectives.
WE EXPECT OUR OPERATING RESULTS TO CONTINUE TO FLUCTUATE SIGNIFICANTLY FROM
QUARTER TO QUARTER.
The sale of bioassay testing devices typically involves a significant
technical evaluation and commitment of capital by customers. Accordingly, the
sales cycle associated with our products typically is lengthy and subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance reviews that are beyond our control. As a result of this
lengthy and unpredictable sales cycle, our operating results have historically
fluctuated significantly from quarter to quarter. We expect this trend to
continue for the foreseeable future.
The vast majority of our system sales are made to our strategic
partners. Our partners typically purchase instruments in three phases during
their commercialization cycle: first, instruments necessary to support internal
assay development; second, instruments for sales force demonstrations; and
finally, instruments for resale to their customers. As a result, most of our
system placements are highly dependent on the commercialization timetables of
our strategic partners and can fluctuate from quarter to quarter as our
strategic partners move from phase to phase. We expect this trend to continue
for the foreseeable future.
WE HAVE ONLY PRODUCED OUR PRODUCTS IN LIMITED QUANTITIES AND WE MAY EXPERIENCE
PROBLEMS IN SCALING UP OUR MANUFACTURING OPERATIONS OR DELAYS OR COMPONENT
SHORTAGES THAT COULD LIMIT THE GROWTH OF OUR REVENUE.
To date, we have produced our products in limited quantities compared
to the quantities necessary to achieve desired revenue growth. We may not be
able to produce sufficient quantities or maintain consistency between differing
lots of consumables. If we encounter difficulties in scaling up our
manufacturing operations due to, among other things, quality control and quality
assurance and component and raw material supplies, we will likely experience
reduced sales of our products, increased repair or re-engineering costs due to
product returns and defects and increased expenses due to switching to alternate
suppliers, any of which would reduce our revenues and gross margins.
We presently outsource certain aspects of the assembly of our systems
to contract manufacturers. We have non-cancellable purchase requirements with
certain of our components suppliers which requires us to take delivery of a
minimum number of component parts for our products or the cost per unit will
increase, which would adversely impact our gross margin. In addition, certain
key components of our product line are currently purchased from a limited number
of outside sources and may only be available through a limited number of
providers. We do not have agreements with all of our suppliers. Our reliance on
our suppliers and contract manufacturers exposes us to risks including:
- - the possibility that one or more of our suppliers or our assemblers
could terminate their services at any time without penalty;
- - the potential inability of our suppliers to obtain required components;
- - the potential delays and expenses of seeking alternate sources of
supply or manufacturing services;
- - reduced control over pricing, quality and timely delivery due to the
difficulties in switching to alternate suppliers or assemblers; and
- - increases in prices of raw materials and key components.
12
Consequently, in the event that supplies of components or work
performed by any of our assemblers are delayed or interrupted for any reason,
our ability to produce and supply our products could be impaired.
BECAUSE WE RECEIVE REVENUES PRINCIPALLY FROM LIFE SCIENCE COMPANIES, THE CAPITAL
SPENDING POLICIES OF THESE ENTITIES HAVE A SIGNIFICANT EFFECT ON THE DEMAND FOR
OUR PRODUCTS.
Our customers include clinical diagnostic, pharmaceutical,
biotechnological, chemical and industrial companies, and the capital spending
policies of these companies can have a significant effect on the demand for our
products. These policies are based on a wide variety of factors, including
governmental regulation or price controls, the resources available for
purchasing research equipment, the spending priorities among various types of
analytical equipment and the policies regarding capital expenditures during
recessionary periods. Any decrease in capital spending by life sciences
companies could cause our revenues to decline. As a result, we are subject to
significant volatility in revenue. Therefore, our operating results can be
materially affected (negatively and positively) by the spending policies and
priorities of our customers.
THE LIFE SCIENCES INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID
TECHNOLOGICAL CHANGE AND WE MAY NOT HAVE THE RESOURCES NECESSARY TO SUCCESSFULLY
COMPETE.
We compete with companies in the United States and abroad that are
engaged in the development and production of similar products. We will continue
to face intense competition from existing competitors, as well as other
companies seeking to develop new technologies. Many of our competitors have
access to greater financial, technical, scientific, research, marketing, sales,
distribution, service and other resources than we do. These companies may
develop technologies that are superior alternatives to our technologies or may
be more effective at commercializing their technologies in products.
The life sciences industry is characterized by rapid and continuous
technological innovation. We may need to develop new technologies for our
products to remain competitive. Our present or future products could be rendered
obsolete or uneconomical by technological advances by one or more of our current
or future competitors. In addition, the introduction or announcement of new
products by us or by others could result in a delay of or decrease in sales of
existing products, as customers evaluate these new products. Our future success
will depend on our ability to compete effectively against current technologies,
as well as to respond effectively to technological advances.
THE INTELLECTUAL PROPERTY RIGHTS WE RELY UPON TO PROTECT THE TECHNOLOGY
UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO MAINTAIN MARKET EXCLUSIVITY.
INADEQUATE INTELLECTUAL PROPERTY PROTECTION COULD ENABLE THIRD PARTIES TO
EXPLOIT OUR TECHNOLOGY OR USE VERY SIMILAR TECHNOLOGY AND COULD REDUCE OUR
ABILITY TO DISTINGUISH OUR PRODUCTS IN THE MARKET.
Our success will depend on our ability to obtain, protect and enforce
patents on our technology and to protect our trade secrets. Any patents we own
may not afford full protection for our technology and products. Others may
challenge our patents and, as a result, our patents could be narrowed or
invalidated. In addition, our current and future patent applications may not
result in the issuance of patents in the United States or foreign countries.
Competitors may develop products that are not covered by our patents. Further,
there is a substantial backlog of patent applications at the U.S. Patent and
Trademark Office, and the approval or rejection of patent applications may take
several years.
We have obtained 12 patents in the United States directed to various
aspects and applications of our technology. We have 17 pending applications in
the United States. Moreover, we have corresponding international and foreign
patent applications pending in certain foreign jurisdictions. In Japan, due to a
procedural omission by our previous patent counsel, we are unable to obtain
patent protection for our method of "real time" detection and quantification of
multiple analytes from a single sample similar to the protection we have
obtained in the United States. Although we are pursuing patent protection in
Japan for other aspects of our technology, we may not be able to prevent
competitors from developing and marketing technologies similar to our xMAP
technology in Japan.
We require our employees, consultants, strategic partners and other
third parties to execute confidentiality agreements. Our employees and
third-party consultants also sign agreements requiring that they assign to us
their interests in inventions and original expressions and any corresponding
patents and copyrights arising from their work for us. However, we cannot
guarantee that these agreements will provide us with adequate protection against
improper use of our intellectual property or disclosure of confidential
information. In addition, in some situations,
13
these agreements may conflict with, or be subject to, the rights of third
parties with whom our employees, consultants or advisors have prior employment
or consulting relationships. Further, others may independently develop
substantially equivalent proprietary technology and techniques, or otherwise
gain access to our trade secrets. Our failure to protect our proprietary
information and techniques may inhibit or limit our ability to exclude certain
competitors from the market.
In order to protect or enforce our patent rights, we may have to
initiate legal proceedings against third parties, such as infringement suits or
interference proceedings. These legal proceedings could be expensive, take
significant time and divert management's attention from other business concerns.
If we lose, we may lose the benefit of some of our intellectual property rights,
the loss of which may inhibit or preclude our ability to exclude certain
competitors from the market. We also may provoke these third parties to assert
claims against us. The patent position of companies like ours generally is
highly uncertain, involves complex legal and factual questions, and has recently
been the subject of much litigation. No consistent policy has emerged from the
U.S. Patent and Trademark Office or the courts regarding the breadth of claims
allowed or the degree of protection afforded under patents like ours.
OUR SUCCESS WILL DEPEND PARTLY ON OUR ABILITY TO OPERATE WITHOUT INFRINGING ON
OR MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
We may be sued for infringing on the intellectual property rights of
others. In addition, we may find it necessary, if threatened, to initiate a
lawsuit seeking a declaration from a court that we do not infringe the
proprietary rights of others or that their rights are invalid or unenforceable.
Intellectual property litigation is costly, and, even if we prevail, the cost of
such litigation could affect our profitability. In addition, litigation is time
consuming and could divert management attention and resources away from our
business. If we do not prevail in any litigation, in addition to any damages we
might have to pay, we could be required to stop the infringing activity or
obtain a license. Any required license may not be available to us on acceptable
terms, if at all. In addition, some licenses may be nonexclusive, and therefore,
our competitors may have access to the same technology licensed to us. If we
fail to obtain a required license or are unable to design around a patent, we
may be unable to sell some of our products, which could have a material adverse
affect on our business, financial condition and results of operations.
We are aware of a European patent granted to Dr. Ioannis Tripatzis,
which covers certain testing agents and certain methods of their use. Dr.
Tripatzis has publicly stated his belief that his European patent covers aspects
of our technology if practiced in Europe. This European patent expires in 2004.
We cannot assure you that a dispute with Dr. Tripatzis will not arise involving
our European activities or that any dispute with him will be resolved in our
favor.
IF WE FAIL TO COMPLY WITH THE EXTENSIVE GOVERNMENTAL REGULATIONS THAT AFFECT OUR
BUSINESS, WE COULD BE SUBJECT TO ENFORCEMENT ACTIONS, INJUNCTIONS AND CIVIL AND
CRIMINAL PENALTIES THAT COULD DELAY OR PREVENT MARKETING OF OUR PRODUCTS.
The testing, production, labeling, distribution and marketing of our
products for some purposes and products based on our technology expected to be
produced by our strategic partners are subject to governmental regulation by the
Food and Drug Administration in the United States and by similar agencies in
other countries. Some of our products and products based on our technology
expected to be produced by our strategic partners for in vitro diagnostic
purposes are subject to approval or clearance by the FDA prior to marketing for
commercial use. To date, only three strategic partners have obtained such
approvals or clearances. The process of obtaining necessary FDA clearances or
approvals can be time-consuming, expensive and uncertain. Further, clearance or
approval may place substantial restrictions on the indications for which the
product may be marketed or to whom it may be marketed. In addition, we are also
required to comply with FDA requirements relating to laser safety.
Approved or cleared products are subject to continuing FDA requirements
relating to, among others, quality control and quality assurance, maintenance of
records and documentation, adverse event and other reporting, and labeling and
promotion of medical devices. Our inability, or the inability of our strategic
partners, to obtain required regulatory approval or clearance on a timely or
acceptable basis could harm our business. In addition, failure to comply with
applicable regulatory requirements could subject us or our strategic partners to
enforcement action, including product seizures, recalls, withdrawal of
clearances or approvals, restrictions on or injunctions against marketing our
products or products based on our technology, and civil and criminal penalties.
14
Medical device laws and regulations are also in effect in many
countries outside the United States. These range from comprehensive device
approval requirements for some or all of our medical device products to requests
for product data or certifications. The number and scope of these requirements
are increasing. Failure to comply with applicable federal, state and foreign
medical device laws and regulations may harm our business, financial condition
and results of operations. We are also subject to a variety of other laws and
regulations relating to, among other things, environmental protection and work
place safety.
Our strategic partners and customers expect that our organization
operates to an established quality management system compliant with FDA quality
system regulations and industry standards, such as ISO 9000. We completed the
ISO 9001:2000 standard registration process in March 2002. Subsequent audit will
be carried out at six-month intervals to ensure we maintain our system in
substantial compliance with ISO standards. Failure to maintain compliance to FDA
regulations and ISO registration could reduce our competitive advantage in the
international market and also decrease satisfaction and confidence levels with
our partners.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, WE MAY BE REQUIRED TO PAY
DAMAGES THAT EXCEED OUR INSURANCE COVERAGE.
Our business exposes us to potential product liability claims that are
inherent in the testing, production, marketing and sale of human diagnostic and
therapeutic products. While we believe that we are reasonably insured against
these risks, there can be no assurance that we will be able to obtain insurance
in amounts or scope sufficient to provide us with adequate coverage against all
potential liabilities. A product liability claim in excess of our insurance
coverage or a recall of one of our products would have to be paid out of our
cash reserves.
IF THIRD-PARTY PAYORS INCREASINGLY RESTRICT PAYMENTS FOR HEALTHCARE EXPENSES OR
FAIL TO ADEQUATELY PAY FOR MULTI-ANALYTE TESTING, WE MAY EXPERIENCE REDUCED
SALES WHICH WOULD HURT OUR BUSINESS AND OUR BUSINESS PROSPECTS.
Third-party payors, such as government entities, health maintenance
organizations and private insurers, are restricting payments for healthcare.
These restrictions may decrease demand for our products and the price we can
charge. Increasingly, Medicaid and other third-party payors are challenging the
prices charged for medical services, including clinical diagnostic tests. They
are also attempting to contain costs by limiting coverage and the reimbursement
level of tests and other healthcare products. Without adequate coverage and
reimbursement, consumer demand for tests will decrease. Decreased demand could
cause sales of our products, and sales and services by our strategic partners,
to fall. In addition, decreased demand could place pressure on us, or our
strategic partners, to lower prices on these products or services, resulting in
lower margins. Reduced sales or margins by us, or our strategic partners, would
hurt our business, profitability and business prospects.
OUR OPERATING RESULTS MAY BE AFFECTED BY CURRENT ECONOMIC AND POLITICAL
CONDITIONS.
With the onset of war in the Middle East and continuing concern for
future terrorist attacks, there exist many economic and political uncertainties.
These uncertainties could adversely affect our business and revenues in the
short or long term in ways that cannot presently be predicted.
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE.
The trading price of our common stock has been and is likely to
continue to be highly volatile and subject to wide fluctuations in price. This
volatility is in response to various factors, many of which are beyond our
control, including:
- - general economic conditions and interest rates;
- - instability in the United States and other financial markets and the
possibility of war, other armed hostilities or further acts of
terrorism in the United States or elsewhere;
- - actual or anticipated variations in quarterly operating results from
historical results or estimates of results prepared by securities
analysts;
- - announcements of technological innovations or new products or services
by us or our competitors;
- - changes in financial estimates by securities analysts;
15
- - conditions or trends in the life science, biotechnology and
pharmaceutical industries;
- - announcements by us of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
- - additions or departures of key personnel; and
- - sales of our common stock.
In addition, the stock market in general, and The Nasdaq Stock Market
and the market for technology companies in particular, has experienced
significant price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. Further, there
has been particular volatility in the market prices of securities of life
sciences companies. These broad market and industry factors may seriously harm
the market price of our common stock, regardless of our operating performance.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted. A
securities class action suit against us could result in substantial costs,
potential liabilities and the diversion of management's attention and resources.
OUR DIRECTORS AND EXECUTIVE OFFICERS HAVE A SIGNIFICANT OWNERSHIP POSITION IN
THE COMPANY'S COMMON STOCK, WHICH COULD DELAY OR PREVENT A MERGER OR OTHER
CHANGE IN CONTROL TRANSACTION.
Our directors and executive officers beneficially owned approximately
15% of our outstanding common stock as of March 24, 2003. These persons will be
able to exercise significant influence over all matters requiring stockholder
approval, including the election of directors and the approval of significant
corporate transactions. This ownership position could also delay or prevent a
change in control of the Company even if beneficial to our stockholders.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION, BYLAWS AND
STOCKHOLDER RIGHTS PLAN AND DELAWARE LAW AND OUR STOCKHOLDER RIGHTS PLAN COULD
MAKE A THIRD-PARTY ACQUISITION OF US DIFFICULT.
Our certificate of incorporation, bylaws and stockholder rights plan
contain provisions that could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. These
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock. We are also subject to certain provisions
of Delaware law that could delay, deter or prevent a change in control of us.
ITEM 2. PROPERTIES
Our principal research and development, manufacturing and
administrative facilities are currently located in approximately 75,000 square
feet of leased space in Austin, Texas pursuant to a lease agreement which
expires July 31, 2010. We recently reduced our aggregate space in our Austin
facilities from approximately 98,000 square feet. We believe that these
facilities are adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
As a result of a procedural omission, we are unable to pursue a patent in Japan
which corresponds to some of our issued U.S. patents related to our method of
"real time" detection and quantification of multiple analytes from a single
sample. On January 31, 2000, we filed a lawsuit in Travis County, Texas state
district court alleging negligence and breach of contract on the part of our
prior patent counsel in this matter. On March 7, 2003, we reached a settlement
with the defendants and executed and entered into a full, final and complete
release regarding such action, without an admission of liability or wrongdoing
on the part of the defendants. As consideration in connection with the
settlement and release, the Company received approximately $1.8 million, net of
legal and related costs and expenses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
EXECUTIVE OFFICERS AND RELATED INFORMATION
NAME AGE POSITION
---- --- --------
Thomas W. Erickson 52 Interim President and Chief Executive Officer
Randel S. Marfin 46 Vice President, Marketing/Sales and Business Development
Oliver H. Meek 51 Vice President, Manufacturing
James W. Jacobson, Ph.D. 48 Vice President, Research and Development
Harriss T. Currie 41 Acting Chief Financial Officer and Controller
Thomas W. Erickson. Mr. Erickson has served as the Company's Interim
President and Chief Executive Officer since September 2002. Prior to joining
Luminex, he was Interim President and Chief Executive Officer and a management
consultant to Omega Healthcare Investors, Inc. (NYSE:OHI), a real estate
investment trust, from 2000 to 2002. In addition, Mr. Erickson was Co-Founder,
President and Chief Executive Officer for CareSelect Group, Inc., a physician
practice management company, from 1994 to 2001 and has served as President and
Chief Executive Officer of ECG Ventures, Inc., a venture capital company, from
1994 to present. Earlier in his career, Mr. Erickson held several management
positions at American Hospital Supply Corporation. He currently is Chairman of
the Board of LifeCare Hospitals, Inc. and serves on the Board of Directors of
Omega Healthcare Investors, Inc. Mr. Erickson received a B.B.A. from the
University of Iowa and an M.B.A. from Southern Methodist University.
Randel S. Marfin. Mr. Marfin currently serves as Vice President,
Marketing/Sales and Business Development. From June 1998 until January 2003, Mr.
Marfin served as Luminex's Vice President, Business Development. Prior to
joining us, he worked for three years at SpectraCell Laboratories, Inc., most
recently as Vice President of Sales and Marketing where he was responsible for
business development, acquisitions, strategic planning and sales and marketing.
From 1990 to 1998, he served as General Manager of Texas for both Damon Clinical
Laboratories and Nichols Institute. In addition, Mr. Marfin held sales
management and business development positions for Damon Clinical Laboratories
and MPC Labs. Mr. Marfin graduated from the University of Houston in 1986 with a
B.S. in Biochemistry and Biophysics and served in the United States Air Force.
Oliver H. Meek. Mr. Meek has served as Vice President, Manufacturing
since February 2000 and served the Company as a consultant from 1999 to February
2000. From August 1985 to January 2000, he held management positions in the area
of Technical Product Development, Reagent and Instrument Manufacturing and
Quality with Abbott Laboratories. Mr. Meek graduated from The University of
Texas at Austin in 1979 with a B.A. degree in biology and is a Certified Quality
Engineer.
James W. Jacobson, Ph.D. Dr. Jacobson joined Luminex Corporation in May
1998, and he currently serves as Vice President, Research and Development. From
1994 to 1998, Dr. Jacobson was Laboratory Director at Cytastar Laboratories,
Virus Reference Laboratories and SpectraCell Laboratories in Houston. Following
post-doctoral work at North Carolina State University and Duke University, he
was a faculty member in the Department of Biology, University of Houston,
Houston, Texas. Dr. Jacobson received the Ph.D. degree in 1986 from Washington
University in Saint Louis, Missouri.
Harriss T. Currie. Mr. Currie, a Certified Public Accountant, has
served as the Controller of Luminex since joining the Company in November 1998.
In March 2002, Mr. Currie was elected to serve as Acting Chief Financial Officer
of the Company. Prior to joining us, he was employed as the Chief Financial
Officer, Secretary and Treasurer of SpectraCell Laboratories from 1993 to 1998
where he also served as Vice President of Finance for two subsidiary companies
of SpectraCell Laboratories from 1997 to 1998. Mr. Currie earned his B.B.A. from
Southwestern University in 1986 and his M.B.A. in Finance and Marketing from The
University of Texas at Austin in 1992. Prior to returning to school for his
M.B.A., Mr. Currie was a certified public accountant with Deloitte & Touche LLP.
G. Walter Loewenbaum II, Chairman of the Board of Directors and
beneficial owner of approximately 7.5% of the Company's outstanding common stock
(as of March 24, 2003), provides advice and assistance to the Company's senior
management team with respect to financial and strategic matters and general
business operations of the Company on a regular basis. Mr. Loewenbaum, although
not an executive officer, maintains an office at the Company's offices in
Austin, Texas and receives compensation for his services as Chairman of the
Board of Directors.
17
The Management Evaluation and Search Committee, with the assistance of
a third party management recruiting firm, continues its search for a chief
executive officer of the Company. In addition, the Management Evaluation and
Search Committee is evaluating the Company's organizational structure and need
for other changes and/or additions to the management team.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock is traded on The Nasdaq Stock Market under the symbol
"LMNX."
The following table sets forth the range of high and low sale prices on
The Nasdaq Stock Market for each quarter during 2001 and 2002.
2001 HIGH LOW
-------------------------------- ------ ------
First Quarter .................. $36.19 $15.88
Second Quarter ................. $24.00 $11.95
Third Quarter .................. $22.35 $13.42
Fourth Quarter ................. $18.98 $12.49
2002 HIGH LOW
-------------------------------- ------ ------
First Quarter .................. $18.35 $11.95
Second Quarter ................. $11.51 $ 5.38
Third Quarter .................. $ 8.10 $ 4.26
Fourth Quarter ................. $ 7.81 $ 3.50
HOLDERS
As of March 24, 2003, we had 231 holders of record of our common stock.
Because many of our shares are held by brokers and other institutions on behalf
of stockholders, we are unable to estimate the total number of beneficial
stockholders represented by these record holders.
DIVIDENDS
We have never declared or paid cash dividends on our common stock and,
while this policy is subject to periodic review by our board of directors, we
currently intend to retain any earnings for use in our business and do not
anticipate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the fourth quarter of 2002, we issued 13,000 shares of common
stock pursuant to the exercise of options granted to our directors, employees
and consultants pursuant to our 1996 Stock Option Plan for exercise prices
ranging from $1.96 to $3.92 per share. These shares were issued in reliance upon
the exemption from the registration requirements of the Securities Act of 1933
set forth in Section 4(2) or Rule 701 thereof.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operation" and other financial data included elsewhere in this Annual Report on
Form 10-K. The consolidated statement of operations data for the years ended
December 31, 2002, 2001 and 2000 and the consolidated balance sheet data at
December 31, 2002 and 2001 are derived from the audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of operations data for the years ended December 31, 1999
and 1998 and the consolidated balance sheet data at December 31, 2000, 1999 and
1998 are derived from audited consolidated financial statements not included in
this Annual Report on Form 10-K.
19
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Consolidated Results of Operations Data: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenue ......................... $ 13,008 $ 20,939 $ 8,570 $ 3,112 $ 386
Gross profit .......................... 2,683 6,323 3,230 1,940 298
Loss from operations .................. (24,117) (18,484) (16,372) (9,486) (5,879)
Net loss .............................. (24,934) (15,685) (12,474) (9,202) (5,596)
Accretion of discount on convertible
preferred stock .................. $ -- $ -- $ -- $ (3,406) $ --
-------- -------- -------- -------- --------
Net loss applicable to common
stockholders ..................... $(24,934) $(15,685) $(12,474) $(12,608) $ (5,596)
======== ======== ======== ======== ========
Net loss before per common share, basic
and diluted ...................... $ (0.85) $ (0.55) $ (0.52) $ (0.96) $ (0.43)
======== ======== ======== ======== ========
Shares used in computing net loss per
share, basic and diluted ......... 29,275 28,330 23,828 13,151 13,086
AT DECEMBER 31,
-------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Consolidated Balance Sheet Data: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash and cash equivalents............. $40,482 $34,930 $ 7,106 $ 4,083 $ 8,437
Short-term investments ............... -- 16,122 66,521 4,929 --
Working capital ...................... 45,321 63,018 76,779 10,426 8,391
Total assets ......................... 53,623 72,073 83,668 12,566 9,590
Total stockholders' equity............ 45,571 67,255 78,688 11,195 9,190
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes included below in
Item 8 and "Factors That May Affect Future Results" included above in Item 1 of
this Annual Report on Form 10-K.
OVERVIEW
2002 was a year of transition at the Company. We (i) experienced a
significant decline in revenue versus the prior year, (ii) sold RBM in September
2002 to a newly-formed company headed by the then chairman, chief executive
officer and co-founder of the Company, (iii) effected a significant reduction in
force and other cost cutting measures to more properly align our cost structure
and needs with the Company's current business and (iv) engaged a strategic
consulting firm, with extensive experience in the life sciences industry, to
assist management in evaluating and refining the core focus and operating plans
for the Company. All of these were major events, and we believe the actions
taken during 2002 will allow us to focus the Company's efforts and maximize our
market potential and business strategy to be the industry standard for
performing bioassays.
The operating results for 2002 (as compared with 2001) reflect a 38%
reduction in total revenue, a 58% decline in gross profit and an 8% increase in
total operating expenses, inclusive of a $2.3 million restructuring charge taken
in the fourth quarter of 2002. As a result, management has taken significant
measures to improve operating results. In 2002, we reduced overhead costs
through the reductions in force, which lowered total employment from 193 at
March 31, 2002 to 117 at March 24, 2003. Management believes these and other
cost reductions were prudent and necessary to stabilize the business and
position the Company for future growth. We also hired a strategic consulting
firm during the fourth quarter of 2002 to work with management to evaluate,
refine and focus the Company's strategic plan and operations. In addition, the
Management Evaluation and Search Committee, with the assistance of a nationally
known management recruiting firm, continues to evaluate candidates for the
Company's chief executive officer position.
20
The RBM sale in September 2002 involved the divestiture of a research
and development project in which Luminex xMAP technology was used to analyze a
large number of proteins, metabolites and other substances in the blood. The
transaction was an asset and liability transfer to a newly formed company headed
by Dr. Mark Chandler, the Company's then chairman, chief executive officer and
co-founder. We received both a preferred stock equity interest, containing a
$4.4 million liquidation preference, and a 10% nondilutable (prior to a public
offering) common stock interest in the newly formed company (Rules Based
Medicine, Inc.). We also entered into a Development and Supply Agreement in
which Rules Based Medicine, Inc. licensed our xMAP technology. At the time of
the acquisition, we recorded an investment carrying value of $1.6 million in
Rules-Based Medicine, Inc., which represented the historical basis of the cash
and equipment transferred to the acquirer in the transaction. Upon evaluation at
year end, we recorded an impairment write-down of the full carrying value of the
equity investment received in the asset sale of $1.6 million based on current
estimates of future cash flow, current market conditions and current
profitability of Rules-Based Medicine, Inc.
The business restructuring charges of $2.3 million for 2002 were
comprised of (i) approximately $1.4 million in personnel related costs
associated with the reductions in force and (ii) approximately $900,000
associated with the early termination of a real estate lease for expansion space
no longer needed for our operations. In connection with the lease termination,
we reduced our leased space in Austin, Texas from 98,000 to 75,000 square feet.
For the years ended December 31, 2002, 2001 and 2000, we had net losses
of $24.9 million, $15.7 million and $12.5 million, respectively. We anticipate
that our quarterly results of operations will continue to fluctuate for the
foreseeable future due to several factors, including the rate of market
acceptance of current and new products, the timing of the introduction by our
strategic partners of commercial products based on our technology, a lengthy and
unpredictable sales cycle for our product offerings, our ability to scale up
manufacturing operations and avoid component shortages, the timing of regulatory
approvals, the timing of significant orders and any modifications of the
Company's operating plan in response to the ongoing evaluation of the Company's
business and search for a new chief executive officer. Our limited operating
history makes accurate predictions of future operations difficult.
Our ability to achieve sustained profitability will depend upon our
ability to continue to enter into strategic partnerships with companies that
will develop and market products incorporating our technology and market and
distribute our systems and consumables. Strategic partners will develop
application-specific bioassay kits for use on our systems that they will sell to
their customers generating royalties for us. Strategic partners may also perform
testing services for third parties using our technology that will also result in
royalties for us. Some strategic partners will also buy our products and then
resell those products to their customers. Through December 31, 2002, we have 14
strategic partners who have released commercialized products based on the
Luminex platform and are submitting royalties. These strategic partners
constituted 44% of total revenues for 2002.
We believe actions taken in the third and fourth quarter of 2002 to
right size our infrastructure and reduce the cash burn rate will better allow
management to further develop our technology, more effectively deliver our
products and serve our customers' needs. During 2003, we anticipate, among other
things: (i) hiring a new chief executive officer, (ii) refining our strategic
and operating focus and (iii) improving our customer and strategic partner
relationships, all while maintaining controls on our costs and operating
expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Revenue on sales of our products is recognized when persuasive evidence
of an agreement exists, delivery has occurred, the fee is fixed and determinable
and collectibility is probable. Generally, these criteria are met at the time
our product is shipped. We expect that each system's sale will generate a
recurring revenue stream from the sale of consumable products. We recognized
royalty revenues for the first time from some of our strategic partners during
2001. Royalty revenue is generated when a partner sells products incorporating
our technology or provides testing services to third parties using our
technology. Royalty revenue is recognized as it is reported to us by our
partners, and payment is typically submitted concurrently with the report and is
included in product revenue. We also sell to our customers extended service
contracts for maintenance and support of our products. One customer accounted
for 16% and 13%, respectively, of total revenue in 2002 and 2001. In 2001,
another customer accounted for 16% of total revenue. No other customer accounted
for more than 10% of our revenues in 2002, 2001 and 2000. In 2002, three
customers together accounted for 30% of total revenue. We believe these customer
relationships continue to be good; however, the loss of a significant customer,
a significant reduction in product purchases or
21
financial difficulty for a significant customer could have a material adverse
effect on our business, financial condition and results of operations. We
believe these customers will continue as significant customers in 2003.
Total deferred revenue as of December 31, 2002 was $3.9 million and
consisted of (i) payments received for sales to customers with rights of return
that had not yet expired, (ii) upfront payments from strategic partners to be
used for the purchase of products or to be applied towards future royalty
payments, (iii) unamortized revenue related to extended service contracts and
(iv) unamortized license fees. Upfront payments from our strategic partners are
nonrefundable and will be recognized as revenue as our strategic partners
purchase products or apply such amounts against royalty payments. Nonrefundable
license fees are amortized into revenue over the estimated life of the license
agreements.
Inventories are valued at the lower of cost or market value and have
been reduced by an allowance for excess and obsolete inventories. At December
31, 2002, there were two major components of the allowance for excess and
obsolete inventory. First, the Company has a specific reserve for inventory
components that we no longer use in the manufacture of our systems. Second, we
have a reserve against slow moving items for potential obsolescence. The total
estimated allowance is reviewed on a regular basis and adjusted based on
management's review of inventories on hand compared to estimated future usage
and sales. The Company believes that its inventory is properly valued based on
current market conditions.
We continuously monitor collections and payments from our customers and
maintain allowances for doubtful accounts based upon our historical experience
and any specific customer collection issues that we have identified. While such
credit losses historically have been within our expectations, there can be no
assurance that we will continue to experience the same level of credit losses
that we have in the past. A significant change in the liquidity or financial
position of any one of our significant customers, or a further deterioration in
the economic environment, in general, could have a material adverse impact on
the collectibility of our accounts receivable and our future operating results,
including a reduction in future revenues and additional allowances for doubtful
accounts.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of certain
items in the Statements of Operations. The financial information and the
discussion below should be read in conjunction with the consolidated financial
statements and notes thereto.
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
---- ---- ----
Revenue:
Product revenue ............................. 100% 98% 95%
Grant revenue ............................. -- 2% 5%
---- ---- ----
Total revenue ............................... 100% 100% 100%
Cost of product revenue ......................... 79% 70% 62%
---- ---- ----
Gross profit ............................... 21% 30% 38%
Operating expenses:
Research and development ................... 48% 40% 104%
Selling, general and administrative expenses 141% 79% 124%
Business restructuring charges ............. 18% -- --
---- ---- ----
Total operating expenses ................... 206% 118% 228%
Loss from operations ............................ (185)% (88)% (191)%
Other income, net ............................... 6% 13% 45%
Impairment of asset ............................. (12)% -- --
---- ---- ----
Net loss ........................................ (192)% (75)% (146)%
==== ==== ====
22
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenue. Revenue decreased to $13.0 million in 2002 from $20.9 million
in 2001 primarily as a result of decreases in instrumentation revenue.
Instrumentation revenue decreased from $15.4 million in 2001 to $6.5 million in
2002, a decrease of $8.9 million or 58%. The decrease in instrumentation revenue
was primarily attributable to slower than anticipated commercial rollouts by our
partners that became commercial in the last half of 2001. Because of the
unanticipated slowness of the commercialization process, our partners were not
required to replenish inventory as quickly resulting in reduced system sales.
The following table summarizes the number of system sales for 2002 compared with
2001:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
------ -------
Luminex 100 Systems.................. 254 621
Luminex HTS Systems.................. 1 6
Consumable sales increased to $4.3 million in 2002 from $4.0 million in 2001, an
increase of $300,000 or 8%. Consumable sales, exclusive of large purchases by a
strategic partner during 2001 that did not recur at the same rate in 2002,
increased to $3.9 million in 2002 from $3.3 million in 2001, an increase of 17%
The increase in consumable sales largely was attributable to the increase in the
installed base of instruments.
Service contract revenue increased during 2002 to $795,000 from $176,000 during
2001. The increase is attributable to an increased number of systems under
contract in 2002 as compared to the prior year period. We began to sell extended
service contracts in 2001. The increase is attributable to increased sales of
royalty bearing products by our partners and an increase in the commercial base
of Luminex systems as compared to the prior year. During the year ended December
31, 2002, we sold approximately 170 extended service contracts as compared with
approximately 125 in 2001.
We recognized royalty revenue of $631,000 during 2002 as compared with $128,000
during 2001. Total royalty bearing sales comprised approximately $10.5 million
during 2002 as compared with royalty bearing sales of approximately $2.1 million
during 2001. The increase is attributable to increased sales of royalty bearing
products by our partners and an increase in the commercial base of Luminex
systems as compared to the prior year. For the year ended December 31, 2002 we
had 14 commercial partners submit royalties as compared with eight for the year
ended December 31, 2001.
Other revenue decreased to $760,000 in 2002 from $814,000 in 2001. Included in
other revenue are shipping charges, training revenue and other miscellaneous
sales. The decrease was primarily a result of a decrease in shipping revenue as
a result of the lower number of system shipments during 2002.
Grant revenue was $0 in 2002 as compared to $492,000 in 2001. On July 1, 2001 we
permanently withdrew from our grant arrangement, and no further grant revenue is
anticipated.
A breakdown of total revenue for the years ended December 31, 2002 and 2001 is
as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
------- -------
Instrument sales ....... $ 6,525 $15,354
Consumable sales ....... 4,297 3,975
Service contract revenue 795 176
Royalty revenue ........ 631 128
Other revenue .......... 760 814
Grant revenue .......... -- 492
------- -------
$13,008 $20,939
======= =======
Gross Profit. Gross profit decreased by 58% to $2.7 million in 2002
from $6.3 million in 2001. Gross margin (gross profit as a percentage of total
revenue) decreased to 21% for the year ended December 31, 2002 from 30% for the
year ended December 31, 2001. The decrease in gross margin was primarily
attributable to: (i) an increase in raw material and component costs, (ii)
overcapacity in our manufacturing facility in 2002 as a result of the lower than
expected demand and (iii) an inventory obsolescence reserve taken in 2002 of
approximately $600,000.
23
Research and Development Expense. Research and development expenses
decreased 25% to $6.2 million in 2002 from $8.3 million in 2001. During 2002,
RBM research and development expenses increased to $1.8 million from $1.0
million in 2001. Exclusive of RBM, research and development expenses for 2002
were $4.4 million compared with $7.3 million in 2001. The decrease in 2002 was
primarily attributable to: (i) the completion of several initiatives related to
new product developments during the latter half of 2001 and (ii) the elimination
of expenditures related to the grant from the National Institute of Standards
and Technology at June 30, 2001. Specific components contributing to this net
decrease during 2002 were reductions of direct materials and consumable supplies
of $1.2 million and a reduction in research and development personnel costs of
$850,000 resulting primarily from the September 2002 sale of RBM. Exclusive of
non-recurring items, we currently expect research and development expenses to be
in the range of $4.0 to $6.0 million for 2003.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased by $1.8 million to $18.3 million in 2002 from
$16.5 million in 2001, an increase of 11%. The following table provides a
breakdown of the major components of selling, general and administrative
expenses for the years ended December 31, 2002 and 2001:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
------- -------
Personnel costs ............. $ 7,416 $ 6,666
Legal and professional fees . 2,012 2,707
Stock compensation expense .. 2,364 861
Corporate insurance and taxes 1,605 1,119
Other ....................... 4,893 5,174
------- -------
Total ....................... $18,290 $16,527
======= =======
The increase was attributable to: (i) an increase in personnel costs of
approximately $750,000 primarily due to an overall headcount increase over 2001,
(ii) a net increase in stock compensation expense of approximately $1.5 million
and (iii) an increase in corporate insurance and taxes of approximately
$500,000. In 2002, stock compensation expense included approximately $1.6
million associated with the restructuring of stock options for employees leaving
the Company in connection with the sale of RBM and approximately $630,000 for
options issued to non-employees performing services for the Company. The overall
increase was offset by a decrease in legal and professional fees of
approximately $700,000 and a decrease in other operating expenses of
approximately $280,000. Other selling, general and administrative expenses
include travel costs, depreciation and amortization, facilities costs, marketing
costs and other miscellaneous expenditures. As a result of the actions taken
during 2002 to reduce costs, we currently expect total selling, general and
administrative expenses to be in the range of $12.0 to $15.0 million for 2003.
Business Restructuring Charges. The business restructuring charges
taken during the fourth quarter of 2002 totaled $2.3 million and were comprised
of: (i) approximately $1.4 million in personnel related costs associated with
the reduction in force and (ii) approximately $900,000 associated with the early
termination of a real estate lease for expansion space no longer needed for our
operations. In connection with the lease termination, we reduced our leased
space in Austin, Texas from 98,000 to 75,000 square feet. Future savings, as a
result of the business restructuring, are anticipated to be approximately $2.4
million per year in personnel related costs and approximately $230,000 per year
through 2010 in facility related expenditures. During 2002, we incurred cash
expenditures totaling approximately $364,000 and non-cash charges of
approximately $136,000 related to our business restructuring. We expect to incur
approximately $1,729,000 in cash expenditures and $100,000 of non-cash charges
related to the business restructuring in the first quarter of 2003.
Other Income, net. Other income decreased by $2.1 million to $735,000
in 2002 from $2.8 million in 2001. The decrease was primarily attributable to a
decrease in the average investment yields in 2002 compared with 2001 and a
reduction in the cash and short-term investment balances.
Income Taxes. As of December 31, 2002, we had federal net operating
loss carryforwards of approximately $87 million and federal research tax credit
carryforwards of approximately $1.5 million. The federal net operating loss and
credit carryforwards begin to expire in 2010, if not utilized. Utilization of
the federal net operating losses and credit carryforwards will be limited by the
change of ownership provisions contained in Section 382 of the Internal Revenue
Code.
24
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenue. Revenue increased to $20.9 million in 2001 from $8.6 million
in 2000 primarily as a result of increases in instrumentation and consumable
revenue. Instrumentation revenue increased from $6.8 million in 2000 to $15.4
million in 2001, an increase of $8.6 million or 126%. The increase in
instrumentation revenue was attributable to increased sales of Luminex systems
along with increased sales of the related peripheral components. The following
table summarizes system sales for 2001 compared with 2000:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---- ----
Luminex 100 Systems.............. 621 297
Luminex HTS Systems.............. 6 2
Consumables sales increased to $4.0 million in 2001 from $1.2 million in 2000,
an increase of $2.8 million or 233%. The increase in consumable sales was
attributable to the increase in the installed base of instrumentation.
We recognized royalty revenue for the first time during 2001 in the amount of
approximately $128,000, as eight of our strategic partners generated
royalty-bearing sales during the year.
Other revenue increased to $990,000 in 2001 from $130,000 in 2000, an increase
of $860,000. Included in other revenue are shipping charges, service contract
revenue, training revenue and other miscellaneous sales. The increase was
primarily a result of an increase in shipping revenue of approximately $200,000,
an increase in other miscellaneous sales (primarily parts sales) of
approximately $380,000 and extended service contract sales of $176,000, which we
began selling during 2001.
Grant revenue increased by 10% to $492,000 in 2001 from $446,000 in 2000. After
being temporarily suspended in September 1999 when our prior joint venture
partner withdrew as a result of a change in its business strategy, the grant was
reinstated on July 1, 2000 with a new joint venture partner. Subsequently, on
July 1, 2001 we permanently withdrew from our grant arrangement, and no further
grant revenue is anticipated.
A breakdown of total revenue for the years ended December 31, 2001 and 2000 is
as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
------- -------
Instrument sales...................... $15,354 $ 6,804
Consumable sales ..................... 3,975 1,190
Royalty revenue ...................... 128 --
Other revenue ........................ 990 130
Grant revenue ........................ 492 446
------- -------
$20,939 $ 8,570
======= =======
Gross Profit. Gross profit increased by 97% to $6.3 million in 2001
from $3.2 million in 2000. Gross margin (gross profit as a percentage of total
revenue) decreased to 30% for the year ended December 31, 2001 from 38% for the
year ended December 31, 2000. The decrease in gross margin was primarily
attributable to: (i) an increase in raw material and component costs and (ii) an
increase in manufacturing overhead related to the expansion of operations for
anticipated future demand.
Research and Development Expense. Research and development expenses
decreased 8% to $8.3 million in 2001 from $9.0 million in 2000. The decrease in
2001 was primarily attributable to the completion of several initiatives during
the year related to the development of new products. Also, contributing to this
net decrease were reductions in consumable supplies of $1.1 million and stock
compensation expenses of $500,000 related to the issuance of options to third
party research and development consultants in 2000, offset by increases in
research and development personnel costs of approximately $500,000.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased by $5.9 million to $16.5 million in 2001 from
$10.6 million in 2000, an increase of 56%. The increase was primarily
25
attributable to increased personnel costs of $2.8 million, increased consulting
and professional expenses of $1.0 million and increased corporate insurance and
taxes of $1.2 million.
Other Income, net. Other income decreased by $1.1 million to $2.8
million in 2001 from $3.9 million in 2000. The decrease was attributable to a
significant decrease in the average investment yields in 2001 compared with 2000
and a reduction in the average cash and short-term investment balances.
Income Taxes. As of December 31, 2001, we had federal net operating
loss carryforwards of approximately $63 million and federal research tax credit
carryforwards of approximately $1.4 million. The federal net operating loss and
credit carryforwards begin to expire in 2010, if not utilized. Utilization of
the federal net operating losses and credit carryforwards will be limited by the
change of ownership provisions contained in Section 382 of the Internal Revenue
Code.
QUARTERLY RESULTS
The following table sets forth certain quarterly financial data for the
periods indicated (in thousands, except per share data).
QUARTER ENDED(1)
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2002 2002 2002 2002
------- ------- ------- -------
Revenue ............ $ 2,287 $ 3,177 $ 3,582 $ 3,962
Gross profit ....... 292 529 613 1,249
Loss from operations (6,844) (6,424) (5,844) (5,005)
Net loss ........... (6,624) (6,242) (5,676) (6,392)
Basic loss per share (0.23) (0.21) (0.19) (0.22)
QUARTER ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001
------- ------- ------- -------
Revenue ............ $ 3,864 $ 4,712 $ 6,188 $ 6,175
Gross profit ....... 1,254 794 2,006 2,269
Loss from operations (5,028) (5,164) (4,206) (4,104)
Net loss ........... (3,949) (4,369) (3,621) (3,746)
Basic loss per share (0.14) (0.15) (0.13) (0.13)
- ----------
(1) Loss from operations, net loss and basic loss per share differ from
unaudited amounts previously reported in the Company's Form 10-Qs for the
quarters ended March 31, June 30 and September 30, 2002 due to recorded
stock compensation expense (non-cash) for options issued to non-employees
in the amount of approximately $180,000, $180,000 and $160,000 for the
quarters ended March 31, June 30 and September 30, 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we held cash, cash equivalents and short-term
investments of $40.5 million and had working capital of $45.3 million, as
compared with cash, cash equivalents and short-term investments of $51.1 million
and working capital of $63.0 million at December 31, 2001. We have funded our
operations to date primarily through the issuance of equity securities. Our cash
reserves are held directly or indirectly in a variety of short-term,
interest-bearing instruments, including obligations of the United States
government or agencies thereof and U.S. corporate debt securities.
Cash used in operations was $9.3 million in 2002, compared with $22.6
million in 2001. The reduction in net cash used in operations, in conjunction
with a $24.9 million net loss in 2002, primarily reflects a decrease in accounts
receivable of $4.8 million, an increase of deferred revenue of $3.2 million, a
net inventory reduction of $2.0 million, an increase in accrued liabilities of
$1.1 million, depreciation and amortization expense of $1.5 million and $1.6
million for the impairment of asset charge on the carrying value of our
strategic investment in Rules Based Medicine, Inc. Purchases of property and
equipment in 2002 totaled $1.1 million compared with $2.4 million in 2001.
We have non-cancellable purchase commitments with certain of our
component suppliers. Should our production requirements fall below the level of
our commitments, we could be required to take delivery of inventory for which we
have no immediate need or incur an increased cost per unit going forward. We are
not otherwise committed to scheduled purchase requirements. However, because of
a long lead-time to delivery, we are required to
26
place orders for a variety of items well in advance of scheduled production
runs. Should the Company's need for raw materials and components used in
production continue to fluctuate, we could incur additional costs associated
with either expediting or postponing delivery of those materials.
The following table summarizes our contractual obligations as of December 31,
2002 and the anticipated effect of these obligations on our liquidity in future
years (in thousands):
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Non-cancellable rental obligations . $ 783 $ 770 $ 794 $ 806 $ 824 $1,980 $5,957
Non-cancellable purchase obligations 2,999 0 0 0 0 0 2,999
------ ------ ------ ------ ------ ------ ------
Anticipated liquidity impact as of
December 31, 2002 ................. $3,782 $ 770 $ 794 $ 806 $ 824 $1,980 $8,956
====== ====== ====== ====== ====== ====== ======
Our research and development expenses in 2002 were $6.2 million, of
which the RBM project was approximately $1.8 million. In 2003, we currently
expect research and development expenses related to the ongoing development of
our xMAP technology and consumables to be approximately $4.0 to $6.0 million.
Selling, general and administrative expenses should decrease during
2003 as a result of the restructuring efforts taken in the fourth quarter of
2002. We currently expect total selling, general and administrative expenses to
be in the range of $12 to $15 million for 2003.
In the first quarter of 2003, we settled the pending lawsuit and
entered into a full, final and complete release with our prior patent counsel,
without an admission of liability or wrongdoing on the part of the defendants.
As consideration for the settlement and release, the Company received
approximately $1.8 million, net of legal and related costs and expenses. This
cash infusion will offset losses anticipated from operations during the first
quarter of 2003. Additionally, we currently expect to receive approximately $1.2
million in nonrefundable license fees from strategic partners during 2003. These
license fees are amortized into income over the life of the agreement.
Our future cash requirements will depend on a number of factors,
including our success in developing and expanding markets for our products,
payments under possible future strategic arrangements, continued progress of our
research and development of potential products, the timing and outcome of
regulatory approvals, the costs involved in preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims and other intellectual
property rights, the need to acquire licenses to new technology and the status
of competitive products. Additionally, any actions taken based on
recommendations of the consulting firm hired in November 2002 to evaluate and
refine the focus and operating plans for the Company could result in
expenditures not currently contemplated in our estimates for 2003. We believe,
however, that our existing cash, cash equivalents and short term-investments are
sufficient to fund our current operating expenses and capital equipment
requirements for 2003.
We have no credit facility or other committed sources of capital. To
the extent capital resources are insufficient to meet future capital
requirements, we will have to raise additional funds to continue the development
of our technologies. There can be no assurance that debt or equity funds will be
available on favorable terms, if at all. To the extent that additional capital
is raised through the sale of equity or convertible debt securities, the
issuance of those securities could result in dilution to our stockholders.
Moreover, incurring debt financing could result in a substantial portion of our
operating cash flow being dedicated to the payment of principal and interest on
such indebtedness, could render us more vulnerable to competitive pressures and
economic downturns and could impose restrictions on our operations. If adequate
funds are not available, we may be required to curtail operations significantly
or to obtain funds through entering into agreements on unattractive terms.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of
domestic interest rates, particularly since the majority of our investments are
in short-term instruments held to maturity. A 50 basis point fluctuation from
average investment returns at December 31, 2002 yields an approximate 25%
variance in overall investment return. Due to the nature of our short-term
investments, we have concluded that there is no material market risk exposure.
All payments for our products, including sales to foreign customers, are
required to be made in U.S. dollars; therefore, we do not engage in any foreign
currency hedging activities. Accordingly, our foreign currency market risk is
limited.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors......................................... 29
Consolidated Balance Sheets............................................ 30
Consolidated Statements of Operations.................................. 31
Consolidated Statements of Cash Flows.................................. 32
Consolidated Statements of Changes in Stockholders' Equity............. 33
Notes to Consolidated Financial Statements............................. 34
28
Report of Independent Auditors
The Board of Directors and Stockholders
of Luminex Corporation
We have audited the accompanying consolidated balance sheets of Luminex
Corporation ("the Company") as of December 31, 2002 and 2001, and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Luminex
Corporation at December 31, 2002 and 2001, and the consolidated results of
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Austin, Texas
January 24, 2003 except for Note 17,
as to which the date is March 7, 2003
29
LUMINEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
-------------------------
ASSETS 2002 2001
--------- ---------
Current assets:
Cash and cash equivalents .............................................. $ 40,482 $ 34,930
Short-term investments ................................................. -- 16,122
Accounts receivable, (net of allowance for doubtful accounts of
$400,000 and $500,000 at December 31, 2002 and 2001, respectively) 2,460 7,246
Inventories ............................................................ 6,764 8,748
Notes receivable - related parties ..................................... 43 --
Other .................................................................. 730 614
--------- ---------
Total current assets ............................................... 50,479 67,660
Property and equipment, net ................................................. 2,397 3,577
Notes receivable - related parties .......................................... 75 243
Other ....................................................................... 672 593
--------- ---------
Total assets ....................................................... $ 53,623 $ 72,073
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 1,080 $ 2,163
Accrued liabilities .................................................... 3,107 2,000
Deferred revenue ....................................................... 971 479
--------- ---------
Total current liabilities .......................................... 5,158 4,642
Deferred revenue ............................................................ 2,894 176
--------- ---------
Total liabilities ........................................................... 8,052 4,818
Stockholders' equity
Common stock, $.001 par value, 200,000,000 shares authorized; issued and
outstanding:
29,459,218 in 2002; 28,788,305 in 2001 ............................ 29 29
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; none issued and outstanding ......................... -- --
Additional paid-in capital ............................................. 121,702 118,995
Deferred stock compensation ............................................ -- (623)
Accumulated other comprehensive income ................................. (79) 1
Accumulated deficit .................................................... (76,081) (51,147)
--------- ---------
Total stockholders' equity ......................................... 45,571 67,255
--------- ---------
Total liabilities and stockholders' equity ......................... $ 53,623 $ 72,073
========= =========
See the accompanying notes.
30
LUMINEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
Revenue:
Product ................................................... $ 13,008 $ 20,447 $ 8,124
Grant ..................................................... -- 492 446
-------- -------- --------
Total revenue ........................................ 13,008 20,939 8,570
Cost of product revenue ........................................ 10,325 14,616 5,340
-------- -------- --------
Gross profit .............................................. 2,683 6,323 3,230
Operating expenses:
Research and development .................................. 6,181 8,280 8,953
Selling, general and administrative ....................... 18,290 16,527 10,649
Business restructuring charges ............................ 2,329 -- --
-------- -------- --------
Total operating expenses ............................. 26,800 24,807 19,602
-------- -------- --------
Loss from operations ........................................... (24,117) (18,484) (16,372)
Other income, net ......................................... 735 2,799 3,898
Impairment of investment .................................. (1,552) -- --
-------- -------- --------
Net loss ....................................................... $(24,934) $(15,685) $(12,474)
======== ======== ========
Net loss per share, basic and diluted .......................... $ (0.85) $ (0.55) $ (0.52)
======== ======== ========
Shares used in computing net loss per share, basic and diluted . 29,275 28,330 23,828
See the accompanying notes.
31
LUMINEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $(24,934) $(15,685) $(12,474)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense .................................... 1,532 1,544 1,087
Amortization of deferred stock and stock compensation expense and
restricted stock ...................................................... 2,362 886 2,440
Implied interest ......................................................... (20) 146 --
Forgiveness of note receivables - related parties ........................ 150 50 --
Loss on disposal of assets ............................................... 216 18 --
Impairment of Investment ................................................. 1,552 -- --
Other .................................................................... (12) -- --
Changes in operating assets and liabilities:
Accounts receivable .................................................... 4,786 (4,161) (1,744)
Inventories ............................................................ 1,984 (6,340) (1,745)
Other .................................................................. (159) 1,125 (1,523)
Accounts payable ....................................................... (1,082) (578) 2,368
Accrued liabilities .................................................... 1,106 1,327 395
Deferred revenue ....................................................... 3,210 (911) 846
-------- -------- --------
Net cash used in operating activities .......................................... (9,309) (22,579) (10,350)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net maturities (purchase) of short-term investments ........................ 16,122 50,399 (61,592)
Purchase of property and equipment ......................................... (1,099) (2,362) (2,488)
Investment ................................................................. (1,100) -- --
Proceeds from sale of asset ................................................ 125 -- --
Acquired technology rights ................................................. (75) (600) --
Notes receivable - related parties ......................................... -- (400) (74)
-------- -------- --------
Net cash provided by (used in) investing activities ............................ 13,973 47,037 (64,154)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock ..................................... 968 3,365 78,769
Stock issuance costs ....................................................... -- -- (1,242)
-------- -------- --------
Net cash provided by financing activities ...................................... 968 3,365 77,527
-------- -------- --------
Effect of exchange rates on cash ............................................... (80) 1 --
Increase in cash and cash equivalents .......................................... 5,552 27,824 3,023
Cash and cash equivalents, beginning of year ................................... 34,930 7,106 4,083
-------- -------- --------
Cash and cash equivalents, end of year ......................................... $ 40,482 $ 34,930 $ 7,106
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Compensation resulting from modification of Stock Options ...................... $ 1,597 $ -- $ --
Conversion of Preferred Stock .................................................. $ -- $ -- $ 28,946
Transfer of property and equipment to Investment ............................... $ 452 $ -- $ --
See the accompanying notes.
32
LUMINEX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock Common Stock
---------------------- ----------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
--------- -------- ---------- ------ -------
Balance at December 31, 1999 ............... 841,359 $ 28,946 13,167,754 $ 13 $ 5,691
Conversion of Preferred Stock to
Common Stock .......................... (841,359) (28,946) 8,768,582 9 28,937
Initial public offering, net of
offering cost ......................... -- -- 4,869,000 5 75,737
Exercise of stock options ................ -- -- 648,529 1 1,735
Exercise of warrants ..................... -- -- 117,185 -- 49
Deferred stock compensation
related to stock options .............. -- -- -- -- 2,801
Warrants granted ......................... -- -- -- -- 135
Restricted stock granted ................. -- -- 15,000 -- 566
Amortization of restricted stock ......... -- -- -- -- --
Amortization of deferred stock and
stock compensation expense ............ -- -- -- -- --
Net loss ................................. -- -- -- -- --
-------- -------- ----------- -------- ---------
Balance at December 31, 2000 ............... -- -- 27,586,050 28 115,651
Exercise of stock options ................ -- -- 1,123,487 1 3,364
Exercise of warrants ..................... -- -- 78,768 -- --
Deferred stock compensation related
to stock options ...................... -- -- -- -- (20)
Amortization of restricted stock ......... -- -- -- -- --
Amortization of deferred stock
and stock compensation expense......... -- -- -- -- --
Net loss ................................. -- -- -- -- --
Foreign currency translation adjustment .. -- -- -- -- --
-------- -------- ----------- -------- ---------
Balance at December 31, 2001 ............... -- -- 28,788,305 29 118,995
Exercise of stock options ................ -- -- 376,949 -- 950
Exercise of warrants ..................... -- -- 293,964 -- 17
Forfeiture of unvested stock options ..... -- -- (487)
Amortization of deferred stock and
stock compensation expense ............ -- -- 2,227
Amortization of restricted stock ......... -- --
Net loss ................................. -- --
Foreign currency translation adjustment
(cumulative effect of at December 31,
2002) ................................. -- --
-------- -------- ----------- -------- ---------
Balance at December 31, 2002 ............... -- $ -- 29,459,218 $ 29 $ 121,702
======== ======== =========== ======== =========
Accumulated
Other Deferred Total
Capitalized Stock Accumulated Stockholders'
Items Compensation Deficit Equity
------------- ------------- ------------ -------------
Balance at December 31, 1999 ............... -- $ (467) $(22,988) $ 11,195
Conversion of Preferred Stock to
Common Stock .......................... -- -- -- --
Initial public offering, net of
offering cost ......................... -- -- -- 75,742
Exercise of stock options ................ -- -- -- 1,736
Exercise of warrants ..................... -- -- -- 49
Deferred stock compensation
related to stock options .............. -- (2,801) -- --
Warrants granted ......................... -- -- -- 135
Restricted stock granted ................. -- (566) -- --
Amortization of restricted stock ......... -- 78 -- 78
Amortization of deferred stock and
stock compensation expense ............ -- 2,227 -- 2,227
Net loss ................................. -- -- (12,474) (12,474)
--------- ------- -------- --------
Balance at December 31, 2000 .......... -- (1,529) (35,462) 78,688
Exercise of stock options ................ -- -- -- 3,365
Exercise of warrants ..................... -- -- -- --
Deferred stock compensation related
to stock options ...................... -- 20 -- --
Amortization of restricted stock ......... -- 425 -- 425
Amortization of deferred stock
and stock compensation expense......... --
Net loss ................................. -- -- 461
Foreign currency translation adjustment .. -- -- (15,685) (15,685)
1 -- -- 1
Balance at December 31, 2001 ............... --------- ------- -------- --------
Exercise of stock options ................ 1 (623) (51,147) 67,255
Exercise of warrants ..................... -- 950
Forfeiture of unvested stock options ..... -- 17
Amortization of deferred stock and -- 487 --
stock compensation expense ............
Amortization of restricted stock ......... -- 73 2,300
Net loss ................................. -- 63 63
Foreign currency translation adjustment -- (24,934) (24,934)
(cumulative effect of at December 31,
2002) ................................. --
(80) -- -- (80)
Balance at December 31, 2002 ............... --------- ------- -------- --------
(79) $ -- $(76,081) $ 45,571
========= ======= ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Luminex Corporation (the "Company"), a Delaware corporation, designs,
develops, manufactures, markets, services and supplies proprietary molecular
measurement and analysis systems (the "xMAP System") capable of performing
multiple tests on a single patient sample.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated upon consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual amounts and results could differ from
those estimates, and such differences could be material to the financial
statements.
CASH EQUIVALENTS
Cash equivalents consist of cash deposits and investments with original
maturities of three months or less when purchased.
SHORT-TERM INVESTMENTS
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company's short-term investments are classified as held-to-maturity since the
Company has the intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at cost, adjusted for amortization of
premiums and discounts to maturity. The cost of these investments, adjusted for
amortization, approximates fair value. Such amortization is included in interest
income. Interest on securities classified as held-to-maturity is also included
in other income.
The Company had no short-term investments as of December 31, 2002.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of short-term investments and trade
receivables. The Company's short-term investments consist of investments in high
credit quality financial institutions and corporate issuers.
The Company provides credit, in the normal course of business, to a
number of its customers geographically dispersed primarily throughout the U.S.
The Company attempts to limit its credit risk by performing ongoing credit
evaluations of its customers and maintaining adequate allowances for potential
credit losses and does not require collateral.
One customer accounted for 16%, 13% and 13% of the Company's total
revenues in 2002, 2001 and 2000, respectively. An additional customer accounted
for 16% of the Company's total revenues in 2001. No other customer accounted for
more than 10% of total revenues in 2002, 2001 or 2000.
34
INVENTORIES
Inventories, consisting primarily of raw materials and purchased
components, are stated at the lower of cost (standard cost adjusted to actual at
period end) or market. The Company routinely assesses its on-hand inventory for
timely identification and measurement of obsolete, slow-moving or otherwise
impaired inventory.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated amounts for
amortization and depreciation. Property and equipment are generally amortized or
depreciated on a straight-line basis over the useful lives of the assets, which
range from three to seven years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the remaining term of the lease or the
estimated useful life of the improvements.
SOFTWARE COSTS
The Company capitalizes eligible software development costs incurred
subsequent to completion of the preliminary project stage, pursuant to the
American Institute of Certified Public Accountants' Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." After all substantial testing and deployment is
completed and software is ready for its intended use, development costs are
amortized over the shorter of the expected useful life of the software or five
years. The impact of adoption on the consolidated financial statements of the
Company was not material. Prior to adoption of SOP No. 98-1, the Company
expensed these costs as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets in accordance with SFAS No.
144, "Accounting for the Impairment of Long-Lived Assets." Long-lived assets
held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that their net book value may not be
recoverable. When such factors and circumstances exist, the Company compares the
projected undiscounted future cash flows associated with the related asset or
group of assets over their estimated useful lives against their respective
carrying amounts. Impairment, if any, is based on the excess of the carrying
amount over the fair value of those assets and is recorded in the period in
which the determination was made.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Revenue from sales of the Company's products are recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, the fee is fixed and determinable and collectibility is probable.
Generally, these criteria are met at the time the product is shipped. Revenues
from royalties related to agreements with strategic partners are recognized when
such amounts are either reported to the Company or accrued based on shipment
activity provided by the respective strategic partner. Revenue from extended
service agreements are deferred and recognized ratably over the term of the
agreement.
In accordance with the terms of a federal grant in which the Company
participated, grant revenue was recognized as research expenses relating to the
grant were incurred, provided that the amounts received were not refundable if
the research was not successful. On July 1, 2001, we permanently withdrew from
our grant arrangement and no further grant revenue is anticipated.
Amounts billed or collected in excess of revenue recognized are
recorded as deferred revenue.
We continuously monitor collections and payments from our customers and
maintain allowances for doubtful accounts based upon our historical experience
and any specific customer collection issues that have been identified. While
such credit losses have historically been within our expectations, there can be
no assurance that we will continue to experience the same level of credit losses
that we have in the past. A significant change in the liquidity or financial
position of any one of our customers, or a further deterioration in the economic
environment, in general, could have a material adverse impact on the
collectibility of our accounts receivable and our future operating results,
including a reduction in future revenues and additional allowances for doubtful
accounts.
35
WARRANTY PROGRAMS
We provide for the estimated cost of product warranties at the time
revenue is recognized. While we engage in product quality programs and
processes, our warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from our estimates, revisions to the estimated warranty liability
would be required.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed in the period incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising
expenses were not significant for any of the years presented.
INCENTIVE COMPENSATION
Management incentive plans are tied to various financial performance
metrics. Bonus accruals made throughout the year related to the various
incentive plans are based on management's best estimate of the achievement of
the specific financial metrics. Adjustments to the accruals are made on a
quarterly basis as forecasts of financial performance are updated. At year-end,
the accruals are adjusted to reflect the actual results achieved.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement prescribes the use of the
liability method whereby deferred tax assets and liabilities are determined
based on differences between the basis for financial reporting purposes and the
tax bases of such assets and liabilities, and are measured using enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
NET LOSS PER SHARE
SFAS No. 128, "Earnings Per Share" prescribes standards for computing
net income (loss) per share. Basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share
is computed by dividing the net income (loss) for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. Potentially dilutive securities composed of incremental common shares
issuable upon the exercise of stock options and warrants, and common shares
issuable on conversion of preferred stock, were excluded from historical diluted
loss per share because of their anti-dilutive effect.
STOCK-BASED COMPENSATION
SFAS No. 123 prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options. As allowed by
SFAS No. 123, the Company has elected to continue to account for its employee
stock-based compensation using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25").
36
SFAS No. 123 allows companies to estimate the pro forma fair value of
their stock-based compensation using a generally recognized option pricing model
and provide those results in the form of footnote disclosure. The fair value of
each option grant was estimated using the Black Scholes Option-Pricing model
based on the date of grant and the following weighted average assumptions at
December 31:
2002 2001 2000
-------- -------- --------
Dividend yield .................. 0.0% 0.0% 0.0%
Expected volatility ............. 1.0% 0.9% 0.6%
Risk-free rate of return ........ 5.0% 5.0% 5.0%
Expected life ................... 10 yrs 10 yrs. 5 yrs.
Weighted Average Fair
Value at Grant Date .......... $ 4.11 $ 16.44 $ 19.52
======== ======== ========
For purposes of pro forma disclosures, the estimated fair value of the
options is expensed over the options' vesting periods. Because, for pro forma
purposes, the estimated fair value of the Company's employee stock options is
treated as if amortized to expense over the options vesting period, the effects
of applying SFAS No. 123 for pro forma disclosure are not necessarily indicative
of future amounts.
YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
-------- -------- --------
Net loss, as reported .......................... $(24,934) $(15,685) $(12,474)
Add: Stock-based employee compensation expense
included in reported net loss .............. $ 1,732 $ 886 $ 2,440
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards ...................... $ (9,473) $(12,226) $ (5,604)
Pro Forma net loss ........................... $(32,675) $(27,025) $(15,638)
Earnings per share:
Based and Diluted - as reported ............ $ (0.85) $ (0.55) $ (0.52)
Based and Dilutes - pro forma .............. $ (1.12) $ (0.95) $ (0.66)
SEGMENT REPORTING
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires the use of a management approach in identifying the
business segments of an enterprise. Management has determined that the Company
operates in one business segment.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to current
year presentation.
37
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31 (in thousands):
2002 2001
------- -------
Accounts receivable .................. $ 2,860 $ 7,746
Less: allowance for doubtful accounts (400) (500)
------- -------
$ 2,460 $ 7,246
======= =======
The following table summarizes the changes in the allowance for doubtful
accounts (in thousands):
Balance at December 31, 1999 ................... $ 64
Additions charged to costs and expenses 94
Write-offs of uncollectible accounts .. (88)
-----
Balance at December 31, 2000 ................... 70
Additions charged to costs and expenses 616
Write-offs of uncollectible accounts .. (186)
-----
Balance at December 31, 2001 ................... 500
Additions charged to costs and expenses 218
Write-offs of uncollectible accounts .. (334)
Recoveries of uncollectible accounts .. 16
-----
Balance at December 31, 2002 ................... $ 400
=====
NOTE 3 - INVENTORIES
Inventories consisted of the following at December 31 (in thousands):
2002 2001
------- -------
Parts and supplies .................... $ 6,995 $ 7,225
Work-in-progress ...................... 304 735
Finished goods ........................ 965 1,288
------- -------
8,264 9,248
Less: Allowance for obsolete inventory (1,500) (500)
------- -------
$ 6,764 $ 8,748
======= =======
The Company has non-cancellable purchase commitments with certain of
its component suppliers in the amount of approximately $3.0 million for 2003.
Should production requirements fall below the level of the Company's
commitments, the Company could be required to take delivery of inventory for
which it has no immediate need or postpone delivery of inventory and incur an
increased per unit cost going forward.
38
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in
thousands):
2002 2001
------- -------
Laboratory equipment ........................... $ 2,676 $ 2,690
Leasehold improvements ......................... 875 850
Computer equipment ............................. 990 968
Purchased software and intangibles ............. 1,523 1,499
Furniture and fixtures ......................... 325 348
Construction in progress ....................... -- 44
------- -------
6,389 6,399
Less: Accumulated amortization and depreciation (3,992) (2,822)
------- -------
$ 2,397 $ 3,577
======= =======
NOTE 5 - NOTES RECEIVABLE - RELATED PARTIES
Notes Receivable - Related Parties consisted of the following at
December 31 (in thousands):
2002 2001
----- -----
Notes Receivable - Related Parties ........ $ 243 $ 389
Imputed Interest Discount on Notes
Receivable - Related Party ............. (125) (146)
----- -----
118 243
Less: current portion .................... (43) --
----- -----
$ 75 $ 243
===== =====
Notes Receivable - Related Parties at December 31, 2002 consisted of
notes from two officers of the Company.
During 2001, in connection with the relocation and employment of a
former officer, the Company received a promissory note in the amount of
$400,000, secured by mortgaged real property. On each of October 2, 2001 and
2002, according to the terms of the note, $50,000 of principal was forgiven.
Effective January 1, 2003, the officer left the employment of the Company and
consistent with the terms of the promissory note, an additional $100,000 was
forgiven on that date. The additional $100,000 charge was taken as part of the
fourth quarter 2002 business restructuring charge discussed in Note 7 below and
is reflected in the carrying value of the note at December 31, 2002. The
promissory note is non-interest bearing and is due on or before May 9, 2011.
During 2000, in connection with the relocation and employment of an
officer, the Company received a promissory note in the amount of $38,500. The
note is interest bearing and was due on or before February 25, 2003. Subsequent
to December 31, 2002, the note plus accrued interest was repaid in its entirety
by the officer.
Implied Interest Discount on Notes Receivable - Related Party is the
discount derived from imputing an interest rate of 10% on the outstanding
balance during the life of the note. This discount is amortized over the life of
the note and recognized as interest income. The current balance is the
unamortized portion remaining.
NOTE 6 - OTHER ASSETS
Other assets consisted of the following at December 31, (in thousands):
2002 2001
----- -----
Purchased Technology Rights (net) .... $ 615 $ 587
Other ................................ 112 6
----- -----
727 593
Less: current portion ............... $ (55) $ --
----- -----
$ 672 $ 593
===== =====
39
In March 2001, the Company entered into an agreement that provides the
Company with a license to commercialize products incorporating certain patented
technology. Under the terms of the agreement, the Company made $600,000 in
milestone payments through December 31, 2002 and has agreed to make additional
payments of $400,000 in the aggregate upon the achievement of additional
milestones. In addition, the Company will make royalty payments based on sales
of the developed products incorporating the licensed technology. The costs of
the technology rights acquired were capitalized and are being amortized on a
straight-line basis over their estimated useful life of approximately four
years. For the years ended December 31, 2002 and 2001, the Company recognized
amortization expense related to the amortization of these acquired technology
rights of approximately $40,000 and $13,000, respectively.
NOTE 7 - BUSINESS RESTRUCTURING COSTS
In November 2002, the Company's management approved a business
restructuring plan to reduce headcount and infrastructure. The Company recorded
approximately $2.3 million in business restructuring charges. Components of
business restructuring charges and the remaining accruals as of December 31,
2002 were as follows (in thousands):
CASH AND BALANCE AT
INITIAL CHARGE NON-CASH ACTIVITY DECEMBER 31, 2002
-------------- ----------------- -----------------
Employee separation costs $1,401 $ (364) $1,037
Facility restructuring costs 928 (136) 792
------ ------ ------
$2,329 $ (500) $1,829
====== ====== ======
Employee separation costs, which include severance, related payroll
taxes, outplacement and other benefits, owed to approximately 35 terminated
employees, totaled approximately $1.4 million during 2002, of which
approximately $364,000 has been paid. Employee groups impacted by the
restructuring include personnel in positions throughout the sales, marketing,
research and development and general and administrative functions. Remaining
cash expenditures resulting from the restructuring are estimated to be $1.7
million during 2003 and consist of approximately $937,000 in remaining severance
to employees and approximately $792,000 related to facility restructuring costs.
There can be no assurance that the estimated costs of the Company's
restructuring efforts will not change. During 2002, we incurred cash
expenditures totaling approximately $364,000 and non-cash charges of
approximately $136,000 related to our business restructuring. We expect to incur
all of the remaining cash expenditures related to the business restructuring in
the first quarter of 2003.
NOTE 8 - IMPAIRMENT OF INVESTMENT
On September 5, 2002, the Company transferred assets related to the
Company's Rules-Based Medicine research and development project ("RBM"),
consisting of cash, property and equipment with a fair market value of
approximately $1.6 million, to Rules Based Medicine, Inc., a newly formed
company headed by the Company's former chairman, chief executive officer and
co-founder. The Company periodically analyzed its strategic investment for
impairment considered other than temporary. In performing its analysis on this
strategic investment, the Company first evaluated whether general market
conditions which reflect prospects for the economy as a whole, or specific
information pertaining to the investment's industry or the individual entity,
indicated that a decline in value that is other than temporary had occurred.
Then, the Company considered specific factors, including the financial condition
and near-term prospects of the investment, any specific events that may affect
the investee company, and the intent and ability of the Company to retain the
investment for a period of time sufficient to allow for any anticipated recovery
in market value. At December 31, 2002, based upon current estimates of future
cash flow, current market conditions and current profitability, the Company made
the decision to permanently impair the strategic investment. As a result of this
decision, the Company recognized $1.6 million in impairment charges for the year
ended December 31, 2002, and such amount is recorded as "Impairment of
investment" in the Consolidated Statements of Operations.
NOTE 9 - INCOME TAXES
As of December 31, 2002, the Company had federal net operating loss
carryforwards of approximately $86.1 million and research and development credit
carryforwards of approximately $1.4 million that will begin to expire in 2010 if
not utilized prior to that time.
40
Current federal income tax laws impose substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change," as defined in such laws, of a corporation. The Company's
utilization of the net operating losses incurred prior to 2000 will be subject
to an annual limitation due to an "ownership change" resulting from the sales of
equity securities.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of December
31 are as follows (in thousands):
2002 2001
-------- --------
Deferred tax assets:
Deferred revenue .......................... $ 1,225 $ 175
Depreciable assets ........................ 271 453
Accrued expenses and other ................ 1,353 1,000
Net operating loss and credit carryforwards 33,275 24,680
Write-down of investment .................. 574 --
Stock compensation ........................ 1,128 681
-------- --------
Total deferred tax assets ...................... 37,826 25,989
Valuation allowance for deferred tax assets (37,621) (26,880)
-------- --------
Net deferred taxes ............................. 205 109
Deferred tax liabilities:
Prepaid expenses .......................... (205) (109)
-------- --------
Total deferred tax liabilities ................. (205) (109)
-------- --------
Net deferred taxes ............................. $ -- $ --
-------- --------
The Company has established a valuation allowance equal to the net
deferred tax assets due to uncertainties regarding the realization of deferred
tax assets based on the Company's lack of earnings history. The valuation
allowance increased by approximately $10.8 million during 2002. $8.7 million of
this increase was due to operating losses not benefited and $2.1 million was due
to stock option deductions. Approximately $10.1 million of the valuation
allowance relates to tax benefits for stock option deductions included in the
net operating loss carryforward, which when realized, will be allocated directly
to contributed capital to the extent the benefits exceed amounts attributable to
deferred compensation expense.
The Company's provision for income taxes differs from the expected tax
benefit amount computed by applying the statutory federal income tax rate of 34%
to income before income taxes as a result of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
---- ---- ----
Statutory tax rate ................... (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit .. (3.0) (3.0) (2.9)
Nondeductible expenses................ 0.2 0.3 0.7
Research credit generated............. (0.5) (3.4) (2.3)
Other................................. - .3 (0.4)
Operating losses not benefited........ 37.3 39.8 38.1
----- ----- -----
--% --% --%
===== ===== =====
NOTE 10 - NET LOSS PER SHARE
The Company has excluded all outstanding stock options, outstanding
warrants to purchase stock and shares subject to repurchase from the calculation
of diluted loss per common share because all such securities are anti-dilutive
for all applicable periods presented. The total number of shares excluded from
the calculations of diluted net loss per share, prior to application of the
treasury stock method for options, was 1,966,671, 3,967,020 and 5,428,763, for
the years ended December 31, 2002, 2001 and 2000, respectively. Such securities,
had they been dilutive, would have been included in the computations of diluted
net loss per share.
41
NOTE 11 - STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On March 30, 2000, trading of the Company's common stock on The Nasdaq
Stock Market commenced in conjunction with the Company's initial public offering
of 4,500,000 shares of common stock at $17 per share. Cash proceeds from the
offering, net of underwriting discounts and commissions, totaled approximately
$71.1 million and were received by the Company upon closing of the offering on
April 4, 2000. Concurrent with the initial public offering, a total of 841,359
shares of convertible preferred stock, representing all of the Company's issued
and outstanding preferred stock, were converted into 8,768,582 shares of common
stock.
On April 27, 2000, the underwriters of the initial public offering
exercised a portion of their over-allotment option and purchased an additional
369,000 shares of the common stock, generating additional proceeds to the
Company of approximately $5.8 million, net of underwriting discounts and
commissions.
STOCK SPLIT
On March 30, 2000, the number of authorized shares of common stock was
increased to 200,000,000. Additionally, on March 9, 2000, the Board of Directors
of the Company approved a 2.04-for-1 stock split of common stock in the form of
a stock dividend. All common stock and per share information has been adjusted
to reflect the stock dividend as if such stock dividend had taken place at the
inception of the Company.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to
5,000,000 shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the Company's stockholders.
The Company had previously issued Series A, Series B, Series C, Series
D and Series E Convertible Preferred Stock. Effective March 30, 2000, in
connection with the Company's initial public offering, all outstanding classes
of convertible preferred stock were converted to common stock. At December 31,
2002 and 2001, there was no preferred stock issued and outstanding.
STOCKHOLDER'S RIGHTS PLAN
On June 20, 2001, the Company's Board of Directors declared a dividend
of one right for each outstanding share of the Company's common stock to
stockholders of record at the close of business on July 2, 2001. Each right
entitles the registered holder to purchase from the Company a unit consisting of
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
par value $.001 per share, at a purchase price of $100 per fractional share,
subject to adjustment. The rights are not currently exercisable and will become
exercisable only in the event a person or group acquires beneficial ownership of
20 percent or more of common stock. The rights expire on June 20, 2011.
WARRANTS
At December 31, 2002, the Company had outstanding a warrant to purchase
13,000 shares of common stock at a price of $12.00 per share. In 2000, the
Company granted this warrant to a collaborative partner. The Company recorded,
in selling, general and administrative expense, stock compensation in the amount
of $135,000 in connection with the issuance of this warrant. At December 31,
2001, the Company had outstanding warrants to purchase 351,090 shares of common
stock at prices ranging from $1.96 to $12.00 per share.
42
NOTE 12 - EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
Under the Company's 1996 Stock Option Plan (the "1996 Plan"), the 2000
Long-Term Incentive Plan (the "2000 Plan") and the 2001 Broad-Based Stock Option
Plan (the "2001 Plan"), certain employees, non-employees and non-employee
directors have been granted options to purchase shares of common stock. The
stock options generally vest in installments over a multi-year period and expire
either five or ten years after the date of grant. Since approval of the 2000
Plan in February 2000, no further option shares are authorized for issuance
under the 1996 Plan. At December 31, 2002, there were options for approximately
1.3 million shares of common stock outstanding under the 1996 Plan.
The 2000 Plan allows the Company to grant a variety of incentive awards
to key employees, directors and consultants of the Company. A maximum of 3.6
million shares of common stock were authorized for issuance under the 2000 Plan
and can be awarded in the form of non-qualified stock options, stock
appreciation rights, restricted stock and other stock-based awards. A total of
approximately 1.7 million shares are authorized and available for future
issuance as of December 31, 2002. At December 31, 2002, there were options for
approximately 1.8 million shares of common stock outstanding under the 2000
Plan.
The 2001 Plan allows the Company to grant non-qualified stock options
to employees and consultants of the Company. Directors and officers of the
Company are not eligible to participate in the 2001 Plan or to receive grants
thereunder. A maximum number of shares of common stock equal to five percent
(5%) of the maximum number of fully diluted common shares outstanding from time
to time, subject to adjustment, are authorized for issuance under the 2001 Plan.
As of December 31, 2002, the maximum number of shares authorized for issuance
under the 2001 Plan was approximately 1.8 million. A total of approximately 1.0
million shares are authorized and available for future issuance as of December
31, 2002. At December 31, 2002, there were options for approximately 778,000
shares of common stock outstanding under the 2001 Plan.
The 1996 Plan, the 2000 Plan and 2001 Plan are administered by the
Compensation Committee of the Board of Directors which has the authority to
determine the terms and conditions under which options will be granted,
including the number of shares, option price, vesting schedule and term. Under
certain circumstances, the Company may repurchase previously granted options or
shares issued upon the exercise of a previously granted option.
During the years ended December 31, 2002, 2001 and 2000, the Company
recorded deferred stock compensation expense of $2.4 million, $886,000 and $2.4
million in connection with certain stock options and restricted stock granted.
The amounts represent the difference between the exercise price of stock option
grants and the deemed fair value of the common stock at the time of such grants
amortized over the vesting period of the grant or, for restricted stock, the
market value of the shares at the time of issuance amortized over the vesting
period. During 2000, the Company granted options to purchase 255,000 shares of
common stock with an exercise price of $11.76 per share and fair value of $17.00
per share. During 2002, the Company subsequently recaptured approximately
$488,000 of unrecognized deferred stock compensation related to this issuance
upon the departure as an employee of the option holder. During 2002, the Company
recorded approximately $630,000 of stock compensation expense related to option
issuances during the year to certain non-employees performing services for the
Company. At September 5, 2002, the Company recognized stock compensation expense
of approximately $1.6 million in connection with the modification of the terms
of stock options. In connection with the RBM transaction, the Company agreed to
extend the exercise period of fully vested options held by former employees who
resigned from the Company to join RBM for the lesser of two years or the stated
expiration date of such options. All deferred compensation amounts are being
amortized over the vesting periods of the applicable options resulting in
amortization of $135,000, $481,000 and $1.7 million in 2002, 2001 and 2000,
respectively. There was no unamortized deferred stock compensation at December
31, 2002.
43
A summary of the changes in stock options and warrants is as follows:
RANGE OF EXERCISE WEIGHTED AVERAGE
SHARES PRICES EXERCISE PRICE
--------- ----------------- ----------------
Options outstanding, December 31, 1999 3,437,359 $ 0.49 - $ 5.88 $ 3.06
Granted............................. 1,718,000 $ 5.88 - $44.61 $ 9.88
Exercised........................... (648,529) $ 0.49 - $18.63 $ 2.67
Surrendered......................... (64,184) $ 1.96 - $17.00 $ 5.86
---------- --------------- ------
Options outstanding, December 31, 2000 4,442,646 $ 0.49 - $44.61 $ 9.71
Granted............................. 1,064,097 $12.81 - $30.82 $18.24
Exercised........................... (1,123,487) $ 0.49 - $44.61 $ 2.99
Surrendered......................... (80,480) $ 5.88 - $28.00 $16.73
---------- --------------- ------
Options outstanding, December 31, 2001 4,302,776 $ 0.49 - $44.61 $13.48
Granted............................. 1,029,500 $ 4.11 - $18.00 $ 7.61
Exercised........................... (376,949) $ 0.49 - $13.05 $ 2.51
Surrendered......................... (1,109,661) $ 5.88 - $44.61 $16.96
---------- --------------- ------
Options outstanding, December 31, 2002 3,845,666 $ 1.96 - $41.75 $11.97
========== =============== ======
The following table summarizes outstanding and exercisable options and
warrants at December 31, 2002:
OPTIONS AND WARRANTS OUTSTANDING OPTIONS AND WARRANTS EXERCISABLE
------------------------------------ --------------------------------------
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE AND VESTED EXERCISE PRICE
-------------- ----------- ---------------- -------------- ------------------ ----------------
$1.96 - $3.92 1,152,500 1.21 years $ 3.74 1,152,500 $ 3.74
$4.11 - $6.50 186,252 4.97 years $ 5.83 186,242 $ 5.83
$6.51 - $8.00 737,175 9.41 years $ 6.59 279,061 $ 6.68
$12.56 - $17.94 1,025,027 7.20 years $15.99 726,873 $16.15
$18.00 - $41.75 744,722 7.00 years $26.05 588,213 $25.84
--------- ---------- ------ --------- ------
3,845,666 5.68 years $11.97 2,932,889 $11.66
========= ========== ====== ========= ======
Total exercisable options as of December 31, 2002, 2001 and 2000 were 2,932,889,
2,270,727 and 1,935,402, respectively.
RESERVED SHARES OF COMMON STOCK
At December 31, 2002 and 2001, the Company had reserved 3,845,666 and
4,653,866 shares of common stock, respectively, for the conversion of the
following:
DECEMBER 31,
-------------------------
2002 2001
--------- ---------
Warrants.................................... 13,000 351,090
Options..................................... 3,832,666 4,302,776
--------- ---------
3,845,666 4,653,866
========= =========
EMPLOYEE SAVINGS PLANS
Beginning in 1998, the Company utilized a Savings Incentive Match Plan
for Employees ("SIMPLE") under Section 408(p) of the Internal Revenue Code. Each
employee of the Company was eligible to contribute up to $6,000 annually. The
Company matched such contributions on a dollar-for-dollar basis up to the lesser
of 3% of the employee's gross salary compensation or $6,000. All employee and
employer contributions were immediately vested. The Company's contributions
totaled approximately $0, $0 and $128,000 in 2002, 2001 and 2000, respectively.
44
Effective January 1, 2001, the Company ceased its SIMPLE plan and began
sponsoring a retirement plan authorized by section 401(k) of the Internal
Revenue Code. In accordance with the 401(k) plan, all employees are eligible to
participate in the plan on the first day of the month following the commencement
of full time employment. For 2002 and 2001, each employee could contribute a
percentage of compensation up to a maximum of $11,000 and $10,500 per year,
respectively, with the Company matching 50% of each employee's contributions.
The Company's contributions for 2002 and 2001 were $292,000 and $294,000,
respectively.
RESTRICTED STOCK AWARDS
Restricted stock awards may be granted at the discretion of the Board
of Directors under the 2000 Plan in connection with the hiring or retention of
key employees and are subject to certain conditions. Restrictions expire at
certain dates after the grant date in accordance with specific provisions in the
employee's agreement. During the year ended December 31, 2000, the Company
awarded 15,000 shares of restricted common stock, which had a fair value at the
date of grant of $566,250. Compensation under this restricted stock award is
charged to expense over the restriction period and amounted to $63,000, $425,000
and $79,000 in 2002, 2001 and 2000, respectively. As of December 31, 2002, the
Company had no deferred stock compensation relating to this or any other
restricted stock award.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
LEASE ARRANGEMENTS
The Company has operating leases related primarily to its office
facilities. Rental expense for these operating leases for the years 2002, 2001
and 2000 totaled approximately $813,000, $736,000 and $548,000, respectively.
Minimum annual rental commitments as of December 31, 2002 under
non-cancellable leases (after taking into account the effects of the
restructuring charges taken in the fourth quarter of 2002) for each of the next
five years and in the aggregate were as follows:
2003 ......................... $ 783
2004 ......................... 770
2005 ......................... 794
2006 ......................... 806
2007 ......................... 824
Thereafter ................... 1,980
------
Total ................... $5,957
======
NON-CANCELLABLE PURCHASE COMMITMENTS
As of December 31, 2002 the Company had approximately $3.0 million in
purchase commitments with several of its inventory suppliers. These commitments
require delivery of minimum amounts of components throughout 2003. None of the
Company's current commitments extend past 2003.
NOTE 14 - RELATED PARTY TRANSACTIONS
On June 1, 1999, the Company entered into a consulting agreement with a
director of Luminex for consulting services. In consideration for those
services, the Company paid the director $5,833 per month. On November 1, 1999,
the Company amended that agreement to increase the amount of consulting services
provided to the Company and the consulting fee to $11,666 per month. In
addition, the Company issued stock options for the purchase of 51,000 shares of
the Company's common stock to this director. The Company recorded compensation
expense related to these options of approximately $1.0 million in 2000. The
consulting agreement terminated on October 31, 2000.
During 2001, in connection with the relocation and employment of a
former officer, the Company received a promissory note in the amount of
$400,000, secured by mortgaged real property. On each of October 2, 2001 and
2002, according to the terms of the note, $50,000 of principal was forgiven.
Effective January 1, 2003, the officer left the employment of the Company and
consistent with the terms of the promissory note, an additional $100,000 was
forgiven on that date. The additional $100,000 charge was taken as part of the
fourth quarter 2002 business
45
restructuring charge and is reflected in the carrying value of the note at
December 31, 2002. The promissory note is non-interest bearing and is due on or
before May 9, 2011.
During 2000, in connection with the relocation and employment of an
officer, the Company received a promissory note in the amount of $38,500. The
note is interest bearing and was due on or before February 25, 2003. Subsequent
to December 31, 2002, the note plus accrued interest was repaid in its entirety
by the officer.
NOTE 15 - JOINT VENTURE RESEARCH ARRANGEMENT
The Company, along with a joint venture partner, was granted a special
assistance award in October 1998, by the National Institute of Standards and
Technology to conduct liquid array technology development. The government grant
was reinstated July 1, 2000 with a new joint venture partner after being
temporarily suspended in September 1999 when the prior joint venture partner
withdrew due to a change in its business strategy. Effective July 1, 2001, the
Company permanently withdrew from the arrangement, and no future grant revenue
is expected. The Company incurred expenses related to liquid array development
activities totaling $0, $591,000 and $559,000 and recognized grant revenues of
$0, $492,000 and $466,000 during 2002, 2001 and 2000, respectively.
NOTE 16 - GEOGRAPHIC INFORMATION
We operate in one business segment, biological testing in the life
sciences industry. The table below provides information regarding product
revenues from our sales to customers within the United States and in foreign
countries for the years ended December 31 (in thousands):
2002 2001 2000
------- ------- -------
Domestic ........... $10,313 $18,142 $ 5,966
Foreign:
Europe ........ 2,383 1,590 1,392
Asia .......... 30 75 361
Other ......... 282 640 405
------- ------- -------
$13,008 $20,447 $ 8,124
======= ======= =======
NOTE 17 - SUBSEQUENT EVENT - SETTLEMENT OF LITIGATION
As a result of a procedural omission, the Company is unable to pursue a
patent in Japan, which corresponds to some of the Company's issued U.S. patents
related to the Company's method of "real time" detection and quantification of
multiple analytes from a single sample. On January 31, 2000, the Company filed a
lawsuit in Travis County, Texas state district court alleging negligence and
breach of contract on the part of the Company's prior patent counsel in this
matter. On March 7, 2003, the parties executed a full, final and complete
release regarding such action, without an admission of liability or wrongdoing
on the part of the defendants. As consideration in connection with the
settlement and release, the Company received approximately $1.8 million, net of
legal and related costs and expenses.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
information under the caption "Proposal 1 - Election of Directors" and to the
information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in our definitive proxy statement for our annual meeting of
stockholders to be held on or about May 22, 2003 (the "Proxy Statement"). Our
Proxy Statement will be filed with the Securities and Exchange Commission not
later than 120 days subsequent to December 31, 2002.
Certain information with respect to our executive officers is set forth
under the caption "Executive Officers and Related Information" in Item 4 of this
Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by
reference to the sections entitled "Executive Compensation and Related
Information" contained in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning the security ownership of certain beneficial
owners and management is incorporated by reference to the section entitled
"Security Ownership of Certain Beneficial Owners and Management" contained in
our Proxy Statement.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth, as of December 31, 2002, certain
information with respect to shares of the Company's common stock authorized for
issuance under the Company's equity compensation plans.
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))
------------- ----------------------- ------------------- ------------------------------
(A) (B) (C)
Equity compensation plans
approved by security
holders ................... 3,067,771 $12.40 1,723,511
Equity compensation plans
not approved by security
holders (1) ............... 777,895 $10.30 1,017,987
--------- ------ ---------
Total .............. 3,845,666 $11.97 2,741,498
========= ====== =========
(1) The number of shares of the Company's common stock authorized for
issuance under the 2001 Plan, is determined by calculating 5% of the
maximum number of all issued and outstanding shares of the common
stock plus all shares of the common stock which may be directly
issuable upon the exercise, exchange or conversion of any outstanding
rights, warrants, options or other derivative securities convertible
into shares of common stock.
2001 BROAD-BASED STOCK OPTION PLAN
In February 2001, our Board of Directors approved the 2001 Plan, a
non-stockholder approved plan, for grants of stock options to employees who are
not directors or officers of the Company. Options may be granted to such
employees at not less than 100% of the fair market value of the common stock on
the date of grant. The options become exercisable in whole or in such
installments as determined by the Board of Directors and generally expire 10
years after the grant date. For addition information regarding the Company's
2001 Plan, see Note 12 of Notes to Consolidated Financial Statements.
47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships is incorporated by
reference to the section entitled "Certain Relationships and Related Party
Transactions" contained in our Proxy Statement.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Within 90 days prior
to the date of this Annual Report on Form 10-K (the "Evaluation Date"), our
Interim Chief Executive Officer and Acting Chief Financial Officer have reviewed
and evaluated the effectiveness of our "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15(d)-14(c).
Based on that evaluation, these officers concluded that as of the Evaluation
Date, the Company's disclosure controls and procedures were adequate and
effective to ensure that material information required to be disclosed in this
Annual Report on Form 10-K regarding the Company and its consolidated
subsidiaries has been made known to them by others within Company.
Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's disclosure controls and procedures subsequent to the Evaluation
Date. There were no significant deficiencies or material weaknesses identified,
and therefore no corrective actions were taken.
48
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report on
Form 10-K:
(1) Financial Statements:
The Financial Statements required by this item are submitted
in Part II, Item 8 of this report.
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or
the required information is shown in the Financial Statements
or in the notes thereto.
(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
2.1 Asset Purchase Agreement, effective as of September 5, 2002, by and
among Rules-Based Medicine, Inc., Luminex Corporation and RBM
Acquisition, Inc. (Pursuant to Item 601(b)(2) of Regulation S-K, the
schedules to this agreement are omitted, but will be provided
supplementally to the Commission upon request) (Previously filed as an
Exhibit to the Company's Current Report on Form 8-K dated September 5,
2002).
3.1 Restated Certificate of Incorporation of the Company (Previously filed
as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 333-96317), filed February 7, 2000, as amended).
3.2 Amended and Restated Bylaws of the Company (Previously filed as an
Exhibit to the Company's Registration Statement on Form S-1 (File No.
333-96317), filed February 7, 2000, as amended).
4.1 Rights Agreement dated as of Jun 21, 2001 between Luminex Corporation
and Mellon Investor Services, LLC, as Rights Agent which includes as
Exhibit A the form of Certificate of Designations of Series A Junior
Participating Preferred Stock setting forth the terms of the Series A
Junior Participating Preferred Stock, as Exhibit B the form of Rights
Certificate and as Exhibit C the Summary of Rights (Previously filed
as Exhibit 4 to the Company's Current Report on Form 8-K dated June
20, 2001).
10.1# 1996 Stock Option Plan of the Company, as amended (Previously filed as
an Exhibit to the Company's Registration Statement on Form S-1 (File
No. 333-96317), filed February 7, 2000, as amended).
10.2# Form of Stock Option Agreement for the 1996 Stock Option Plan
(Previously filed as an Exhibit to the Company's Registration
Statement on Form S-1 (File No. 333-96317), filed February 7, 2000, as
amended).
10.3# Form of Incentive Stock Option Agreement for the 1996 Stock Option
Plan (Previously filed as an Exhibit to the Company's Registration
Statement on Form S-1 (File No. 333-96317), filed February 7, 2000, as
amended).
10.4# 2000 Long-Term Incentive Plan of the Company, as amended (Previously
filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2002).
10.5# Form of Stock Option Award Agreement for the 2000 Long-Term Incentive
Plan (Previously filed as an Exhibit to the Company's Registration
Statement on Form S-1 (File No. 333-96317), filed February 7, 2000, as
amended).
10.6# 2001 Broad-Based Stock Option Plan of the Company (Previously filed as
an Exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended December 30, 2001).
10.7# Form of Option Grant Certificate for the 2001 Broad-Based Stock Option
Plan (Previously filed as an Exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 30, 2001).
10.8+ Development and Supply Agreement dated as of March 19, 1999 by and
between the Company and Bio-Rad Laboratories, Inc. (Previously filed
as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 333-96317), filed February 7, 2000, as amended)
49
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
10.9+ Amendment to Development and Supply Agreement dated as of January 13,
2000 by and between the Company and Bio-Rad Laboratories, Inc.
(Previously filed as an Exhibit to the Company's Registration
Statement on Form S-1 (File No. 333-96317), filed February 7, 2000, as
amended)
10.10 Second Amendment to Development and Supply Agreement dated as of June
12, 2000 by and between the Company and Bio-Rad Laboratories, Inc.
(Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000).
10.11+ Distribution, Development and Supply Agreement dated as of August 6,
2001 by and between the Company and Miraibio, Inc (Previously filed as
an Exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended December 30, 2001).
10.12+ Agreement for Electronic Manufacturing Services dated as of January 1,
2000 by and between the Company and Sanmina Corporation (Previously
filed as an Exhibit to the Company's Registration Statement on Form
S-1 (File No. 333-96317), filed February 7, 2000, as amended).
10.13# Form of Amended and Restated Employment Agreement between the Company
and each of Randel S. Marfin, James W. Jacobson, Ph.D. and Oliver H.
Meek (Previously filed as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 2002).
10.14# Management Services Agreement, effective as of August 12, 2002, by and
between Luminex Corporation and Thomas W. Erickson (Previously filed as
an Exhibit to the Company's Current Report on Form 8-K dated September
5, 2002).
10.15 First Amendment to Management Services Agreement by and between
Luminex Corporation and Thomas W. Erickson, dated March 1, 2003.
10.16# Consultant Agreement, effective as of September 5, 2002, by and
between Mark B. Chandler, Ph.D. and Luminex Corporation (Previously
filed as an Exhibit to the Company's Current Report on Form 8-K dated
September 5, 2002).
10.17# Form of Indemnification Agreement dated May 22, 2002 between the
Company and each of the directors and officers of the Company
(Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2002)
10.18 Lease Agreement between Aetna Life Insurance Company, as Landlord, and
Luminex Corporation, as Tenant, dated October 19, 2001 (Previously
filed as an Exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 2001).
10.19 First Amendment to Lease Agreement between Aetna Life Insurance
Company, as Landlord, and Luminex Corporation as Tenant, dated July
25, 2002. (Previously filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2002)
10.20 Lease Amendment between McNeil 4 & 5 Investors, LP, as Landlord, and
Luminex Corporation, as Tenant, dated January 27, 2003
10.21 Sublease Agreement dated as of May 2, 2002 by and between the Company
and American Innovations, Ltd., for facilities situated at 12112
Technology Boulevard, Austin, Texas 78727 (Previously filed as an
Exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2002).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (incorporated in the signature page of this report).
99.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- -----------------
# Management contract or compensatory plan or arrangement
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act and Rule
24b-2 promulgated under the Securities Exchange Act, which portions
are omitted and filed separately with the Securities and Exchange
Commission.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2002.
(c) See Exhibits listed under Item 14(a)(3).
50
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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, on March
28, 2003.
LUMINEX CORPORATION
By: /s/ Thomas W. Erickson
---------------------------------------
Thomas W. Erickson
Interim President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Thomas W. Erickson and Harriss T. Currie,
each his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes or substitute, may lawfully
do or cause to be done by virtue hereof.
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 dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Thomas W. Erickson Interim President and March 28, 2003
- -------------------------------------------- Chief Executive Officer
Thomas W. Erickson (Principal Executive Officer)
/s/ Harriss T. Currie Acting Chief Financial Officer and March 28, 2003
- -------------------------------------------- Controller (Principal Financial
Harriss T. Currie and Accounting Officer)
/s/ C. Thomas Caskey, M.D. Director March 28, 2003
- --------------------------------------------
C. Thomas Caskey, M.D.
/s/ Robert J. Cresci Director March 28, 2003
- --------------------------------------------
Robert J. Cresci
/s/ Fred C. Goad, Jr. Director March 28, 2003
- --------------------------------------------
Fred C. Goad, Jr.
/s/ Laurence E. Hirsch Director March 28, 2003
- --------------------------------------------
Laurence E. Hirsch
/s/ Jim D. Kever Director March 28, 2003
- --------------------------------------------
Jim D. Kever
/s/ John E. Koerner, III Director March 28, 2003
- --------------------------------------------
John E. Koerner, III
S-I
/s/ G. Walter Loewenbaum II Chairman of the Board of Directors March 28, 2003
- -------------------------------------------- and Director
G. Walter Loewenbaum II
/s/ William L. Roper, M.D. Director March 28, 2003
- --------------------------------------------
William L. Roper, M.D.
S-II
CERTIFICATION
I, Thomas W. Erickson, certify that:
1. I have reviewed this annual report on Form 10-K of Luminex
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
By: /s/ Thomas W. Erickson
----------------------------------
Thomas W. Erickson
Interim President and Chief
Executive Officer
S-III
CERTIFICATION
I, Harriss T. Currie, certify that:
1. I have reviewed this annual report on Form 10-K of Luminex
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
By: /s/ Harriss T. Currie
----------------------------------
Harriss T. Currie
Acting Chief Financial Officer
and Controller
S-IV