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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended December 31, 2001 or
[_] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 0-21371
APPLIED IMAGING CORP.
(Exact name of registrant as specified in its charter)
Delaware 77-0120490
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
2380 Walsh Avenue, 95051
Building B, (Zip Code)
Santa Clara, California
(Address of principal
executive offices)
Registrant's telephone number, including area code: (408) 562-0250
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 11,
2002, as reported on the Nasdaq National Market, was approximately $26,700,573.
The number of shares of Common Stock outstanding as of March 11, 2002:
15,826,677.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year.
This report, including all exhibits and attachments, contains 102 pages. The
exhibit index is on pages 51 & 52.
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PART I
ITEM 1. BUSINESS
This Report on Form 10-K contains certain forward-looking statements
regarding future events with respect to Applied Imaging Corp. Actual events or
results may differ materially from the results discussed in the forward-looking
statements. Factors that might cause or contribute to such differences include,
but are not limited to, those factors discussed in this Form 10-K, in
particular, in the section entitled "Additional Factors That Might Affect
Future Results" and in the documents incorporated herein by reference.
The Company
Applied Imaging Corp ("Applied Imaging", the "Company", "we" or "our") was
incorporated in California in July 1986, and reincorporated in Delaware in
October 1996. In November 1996, we completed an initial public offering of
common stock that is listed on the Nasdaq National Market under the symbol
AICX. We are headquartered in Santa Clara, California, and have facilities in
League City, Texas and the United Kingdom. We are the world's leading provider
of automated cytogenetic instrument systems. Our products are sold worldwide
through a direct sales force, third-party distributors and independent sales
representatives. We employ 92 people worldwide.
The Company was founded to develop, manufacture, and market automated
genetic imaging systems for use in cytogenetic laboratories for cancer testing,
prenatal testing and other genetic testing applications. We sell our products
to government and private clinical laboratories, research institutions,
universities, and pharmaceutical companies located in the United States,
Canada, Europe, Japan and other countries. We also market imaging systems
designed for use in plant and animal genetic research programs. In addition, in
2000, we introduced and received clearance from the United States ("U.S.") Food
and Drug Administration ("FDA") for a clinical system to detect micrometastatic
cancer cells in bone marrow from cancer patients. This system and its research
capabilities assists physicians in determining the initial staging of cancer
cases, in detecting disease recurrence and in genetically characterizing cancer
cells.
We have an installed base of over 2,500 instruments in over 1,000
laboratories and clinics in more than 60 countries. Our CytoVision(R),
PowerGene(R) and QUIPS(R) systems are widely utilized because of their ability
to analyze human chromosome preparations using powerful software classification
algorithms and a specialized user interface. These systems also incorporate the
capability to analyze and record images produced by advanced genetic research
assays that employ fluorescent in situ hybridization ("FISH") or comparative
genomic hybridization ("CGH") methods.
Our MDS(TM) system combines the ability to find targeted cancer cells using
brightfield microscopy techniques with our decade-long experience in
fluorescence microscopy imaging and analysis. Taken together, these
technologies allow us to analyze the proteins on or within a cell while
simultaneously assessing which genes within that cell have been activated or
expressed. Both protein and gene expression data are emerging as required
parameters when assessing the precise nature of a given tumor or cancer cell.
Gene and protein expression data are increasingly being used to select the most
effective cancer therapies for individual patients.
We previously pursued a prenatal genetic screening development program
focused on the isolation of specific fetal cells from a blood sample taken from
the expectant mother. While substantial research progress was made towards the
development of a reliable method for non-invasive prenatal diagnosis, we
concluded that our methods did not constitute a commercially viable system for
this purpose. Accordingly, we shifted our research efforts and resources to
cancer imaging programs, with a focus on the detection of rare micrometastatic
cancer cells in a variety of sample types. However, we believe that certain of
the cell enrichment and image analysis products we developed for fetal cell
analysis may be directly applicable to these cancer testing applications, such
as the use of our imaging platform to detect circulating cancer cells in
peripheral blood.
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Cancer and Prenatal Cytogenetics
All genetic information in an organism is contained in its chromosomes, made
up of strands of DNA and associated protein molecules. DNA is comprised of
paired nucleotide bases and genetic information is encoded by the specific
order of the nucleotide bases within units called genes. Genes are organized
linearly along the chromosomes and carry the required information for the
synthesis of the proteins that provide the structural components of cells and
tissues, as well as the enzymes needed for the basic biochemical and
physiological functions of the cells. Chromosomal studies allow clinicians to
examine genetic rearrangements at both a macro level, while studying all
chromosomes of a patient simultaneously, or at a micro level, while examining
specific DNA probes for individual genes or chromosomes.
In the United States, approximately 600,000 cytogenetic test procedures are
performed annually. Cytogenetic testing includes prenatal screening for genetic
disorders using amniotic fluid or chorionic villus sampling. The most rapidly
growing segment of the cytogenetic testing market includes those tests for the
diagnosis and prognosis of cancerous conditions using bone marrow, blood and
tissue samples.
Chromosomal analyses are often performed for clinical and research purposes
for the precise characterization of many different types of cancers. Cancer
cells frequently demonstrate complex chromosomal abnormalities. The specific
patterns of these chromosomal abnormalities may be associated with certain
well-defined cancers. The chromosomal analysis of leukemias and lymphomas, for
example, provides researchers with supplementary information useful in the
staging or precise classification of the disease and may also provide useful
indicators of patient prognosis. Similarly, advanced chromosomal analyses may
allow a researcher to assess new disease in a patient to determine if it may be
a recurrence of a previous cancer or an entirely different neoplasm.
As in cancer, prenatal chromosomal disorders may occur when genes or
portions of genes move between chromosomes, when portions of chromosomes or the
genes they contain are missing or when an abnormal number of chromosomes are
present in the cell. Chromosomes can be seen with the aid of a microscope and,
when stained with certain dyes, reveal light and dark bands reflecting regional
variations in the DNA of the cell. Differences in size and banding pattern
allow the chromosomes to be distinguished from each other or may help identify
a chromosomal disorder. The most common prenatal chromosomal disorder, Down
Syndrome, also known as trisomy 21, occurs when there are three copies of
chromosome 21 in the human genome. Other prenatal clinical syndromes caused by
the most common chromosomal abnormalities may result in mental retardation,
impaired physical development and abnormal sexual development.
Prenatal testing is the process of detecting certain types of chromosomal
disorders in a fetus at an early stage of pregnancy. Definitive prenatal
testing is currently performed invasively, by extracting fetal cells and
inspecting the chromosomes within such cells to diagnose specific genetic
disorders. Fetal cells are obtained by one of two common procedures,
amniocentesis or chorionic villus sampling. Once the sample is extracted it is
forwarded to a cytogenetic laboratory, where the cells are cultured and
deposited on a microscope slide. The slide is then examined under a microscope
in order to locate and analyze a number of cells undergoing active cell
division. At this point, the chromosome complement of an individual cell is
visible under the microscope.
Our current products sold into this market are:
CV ChromoScan(TM) System
The CytoVision(R) ChromoScan(TM) is our most comprehensive system for
automated chromosome analysis. The ChromoScan(TM) integrates many of the key
features of our earlier products into one system capable of automated
microscope slide scanning, advanced chromosome analysis and fluorescent image
processing. The ChromoScan(TM) allows laboratories to automatically scan slides
to locate specific cells for chromosome analysis or other genetic studies
utilizing fluorescent DNA probes, thereby eliminating one of the most tedious
and time-consuming aspects of cytogenetic analysis: that of manual slide
scanning. The system accomplishes this in the
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background while simultaneously allowing the technologist to process and
analyze images previously identified. We believe that no other commercially
available system for cytogenetic analysis incorporates this same range of
features in one integrated and automated package.
CytoVision(R) System
The CytoVision(R) system is a comprehensive chromosome analysis system that
integrates standard karyotyping capability with advanced FISH imaging
technologies, including color chromosome analysis techniques. The system's
computerized image capture and analysis capabilities incorporate pattern
recognition and automated chromosome classification algorithms. The system
provides automated karyotyping capabilities, a variety of user-defined image
enhancement features, and report annotation capabilities and full screen
display options. The DNA imaging capability of the CytoVision(R) detects and
analyzes signals from DNA probes that have been applied to cell nuclei.
CytoVision(R) systems enhance images of often-faint fluorescent DNA probes and
provide the operator with a range of optimized analytical tools. The systems
may also be upgraded to detect genetic amplifications and deletions in tumor
cells utilizing a research technique known as CGH.
All of the product modules in the CytoVision(R) family are compatible with
one another and can be easily integrated into a comprehensive network based
system with common data management protocols.
PowerGene(R) Systems
Our PowerGene(R) products are the integrated chromosome analysis systems
most often used by the largest commercial clinical laboratories worldwide. With
a powerful intuitive user interface that facilitates the training of
cytogenetic technologists in a variety of settings, PowerGene(R) systems take
full advantage of the ease of use features associated with Apple(R) Macintosh
platforms. We acquired the PowerGene(R) product line in July 2000 from
International Remote Imaging Systems, Inc.
QUIPS(R) System
Our QUIPS(R) systems offer advanced FISH imaging tools to researchers
worldwide. These systems were among the first to incorporate high sensitivity
digital imaging capabilities along with the ability to analyze new DNA probe
techniques such as M-FISH and pre-implantation cytogenetics. Based on the
Apple(R) Macintosh platform, QUIPS(R) systems allow researchers who have
developed techniques on Apple systems to continue their research with the most
current hardware and software solutions for the Macintosh. We acquired the
QUIPS(R) product line as one part of a 1999 strategic alliance with Vysis,
Inc., the leading provider of DNA probe reagents for cancer and prenatal
testing.
Cancer Pathology: Testing
There are an increasing number of therapeutic products either being marketed
or under development by the pharmaceutical industry that target specific
abnormalities in genes or proteins found in cancer patients. Generally, these
therapeutics require sophisticated diagnostic tests to determine which patients
have a specific abnormality and would therefore be candidates for the therapy
under consideration. This advance selection of patients is often required by
the FDA before approval of a highly-specific therapy. The necessary diagnostic
tests are typically conducted on a tissue sample of the tumor and can utilize
various staining techniques to detect a protein or gene expression of interest.
These tests may require brightfield microscopy in order to interpret the
protein expression or fluorescent microscopy to interpret DNA probe results.
Interpretation and analysis of the tests can be conducted either manually
through a microscope or with an instrument such as our MDS(TM) system that
automates the imaging and interpretation of tissue-based pathology assays. We
believe that the MDS(TM) system is currently the only clinical imaging system
capable of analyzing both protein and gene expression levels using both
brightfield and fluorescence illumination on a single platform. The MDS(TM)
system provides the pathologist with the capability to automatically detect
cells of interest in a tissue specimen and to precisely qualify the results of
a wide range of tests.
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We offer several applications on the MDS(TM) platform to assist pathologists
in their review of key breast cancer tests. These include:
. HER-2/neu immunohistochemistry (IHC)
. Ki-67--cell proliferation marker
. estrogen receptor (ER)--tumor hormone receptor marker
. progesterone receptor (PR)--tumor hormone receptor marker
. p53--tumor suppressor oncogene
. AE1/AE3--pan-cytokeratin antibody
. nuclear IHC markers
. cytoplasmic IHC markers.
The MDS(TM) system offers a broad range of multiparametric analyses to aid
pathologists in the interpretation of complex test results.
In 2001, we introduced our PathVysion(TM) Digital Scoring Application that
provides the first automated imaging capability to assist in detecting
amplification of the HER-2/neu gene in tissue. This application utilizes the
MDS(TM) system to automate the analysis of a complex fluorescent assay that is
an important factor in the selection of certain breast cancer patients to
receive Genentech's Herceptin(R) therapy. The PathVysion(TM) Digital Scoring
Application analyzes results of the PathVysion HER-2 DNA Probe Kit developed by
Vysis, Inc. to detect amplification of the HER-2/neu gene in breast cancer
tissue using FISH techniques. (PathVysion is a trademark of Vysis, Inc. used
under license by Applied Imaging. Herceptin is a registered trademark of
Genentech, Inc.)
The IHC applications and the PathVysion(TM) application are released to
clinical and research sites for research use, pending application to the Food
and Drug Administration for full clearance of the applications for routine
clinical use.
In August 2001, we entered into a strategic alliance with DAKO Corporation,
a fully integrated, global provider of cancer diagnostic and research products
for pathology and oncology, for the development and marketing of image analysis
applications for IHC and genetic probe assays. These applications will optimize
the MDS(TM) system to read and interpret the results of a specific menu of
assays available from DAKO, including HercepTest(TM) and ImmunoCyt(TM). The
DAKO HercepTest assay has been approved by the FDA for use as an aid in the
assessment of patients who are being considered for Herceptin(R) therapy. The
ImmunoCyt assay has been FDA cleared for use as an aid in the early detection
of recurrent bladder cancer. ImmunoCyt is licensed by DAKO Corporation from
DiagnoCure Inc. of Quebec City, Canada. Following development activities and
FDA approval, these MDS(TM) imaging applications will be made available for
routine clinical use.
Cancer Pathology: Rare Cell/Micrometastasis Detection
Micrometastasis is the spread of cancer away from the primary tumor that is
not detectable with routine testing methods. Typically, these metastases are
too limited in size to be observed using routine examination techniques. The
majority of micrometastases are attributable to a subset of cancer known as
carcinomas, a malignant growth that arises from epithelial cells found in the
skin or the lining of body organs. Carcinomas tend to infiltrate into adjacent
tissue and then spread (metastasize) to distant organs such as bone, liver,
lung or the brain. The initial application for micrometastases testing is found
among patients at the time of initial diagnosis for breast, prostate,
colorectal and gastric carcinomas. When micrometastatic cells are identified in
distant locations, the staging of the patient's disease will typically change
to reflect the presence of distant metastases, an indication of much more
advanced disease. This testing is expected to be performed in addition to
normal staging parameters and will aid in the most appropriate diagnosis and
treatment of these patients.
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This market is large and developing with over 1.2 million new carcinoma
cases diagnosed each year and approximately 6.2 million patients being
monitored for the recurrence of cancer on an annual basis. Early detection and
treatment of micrometastatic disease would result in improved patient outcomes
and significant cost savings to the health care system.
The potential market for monitoring cancer patients for early disease
recurrence encompasses the 2,500 primary cancer centers in the United States,
Europe and Japan and is estimated at $300 million annually. In addition, we
have initiated pre-clinical trials of blood-based micrometastasis assays that
may expand the potential market opportunity for the MDS(TM) and related testing
reagents to $500 million annually.
The numerous commercial and clinical opportunities in the cancer pathology
and micrometastasis market are expected to allow us to shift our business model
from one that has been largely dependent on capital equipment sales to one that
is primarily based upon the recurrent sales of disposable products, such as
diagnostic reagent kits or proprietary systems for the isolation of rare cancer
cells from blood specimens.
Our current products marketed to the cancer pathology market are:
MDS(TM) System
The MDS(TM) consists of a custom scanning microscopy system that has been
optimized for the analysis of bone marrow, lymph node and stem cell
preparations to detect rare cancer cells that have been stained by a variety of
laboratory techniques. The MDS(TM) scans microscope slides to automatically
detect the presence of rare cancer cells in the sample. Additionally, the
MDS(TM) can genetically characterize these cells for specific gene sequences to
determine if a metastasizing cell comes from the patient's primary tumor or if
it is a biologically "aggressive" cell. It is capable of identifying cancer
cells in concentrations as low as one cancer cell per one million normal cells.
Designed with fully integrated fluorescent detection capabilities, the
MDS(TM) allows researchers to apply an extraordinarily wide range of DNA probes
to individual cells in order to characterize them at a molecular level. The
system's ability to automatically scan and characterize cancer cells is more
accurate, consistent and efficient than manual screening. The ability to detect
and characterize micrometastatic cancer cells provides the oncologist with
important additional information for the selection of the most appropriate
treatment for the patient. The detection of micrometastasis may lead to more
aggressive treatment and follow-up than would otherwise be indicated.
To date, clinical evaluations have shown significant improvements in the
ability of pathologists to detect tumor cells when aided by the MDS(TM).
Performance has been consistent and reproducible across multiple instruments
and sites. In August 2000, we received 510(k) clearance from the FDA to market
the MDS(TM) for in vitro diagnostic use as an aid to pathologists in the
detection and classification of specific rare cancer cells based on size, shape
intensity of staining patterns and other factors.
Cancer Detection Reagents
We have obtained an exclusive option from StemCell Technologies, Inc. for a
technology that may allow for the detection of circulating tumor cells in
peripheral blood samples. We initiated pre-clinical trials of this technology,
in conjunction with our MDS(TM) system, during 2001 and these trials will
continue into 2002. If the results of these pre-clinical trials are positive,
we plan to develop a consumable reagent kit that will be used to isolate
circulating tumor cells. We are also developing our own proprietary antibody
test that has been optimized for use with the MDS(TM) system alone, or in
conjunction with a circulating tumor cell kit, to detect cancer cells from a
wide range of tumor types. We expect to launch this product in 2003. We are
also evaluating strategic and product distribution relationships with companies
offering specialized clinical and research reagents targeted at the cancer
research market that we are pursuing for MDS(TM) placements.
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Plant and Animal Genetics
A highly active area of basic research and commercial product development is
the advanced analysis of plant and animal genomes. Researchers apply chromosome
analysis techniques to plants and animals that have wide variations in the
makeup of their chromosome complements. The analysis of chromosomes from animal
and plant species has proven valuable in the development and testing of genetic
improvements to crops, in cancer studies using animal models and in different
veterinary applications. This market is currently growing and is served by our
proprietary Genus(TM) system. Genus(TM) was adapted from technology pioneered
on our CytoVision(R) systems. Genus(TM) incorporates flexible modules that
allow researchers to customize the system, for studies of specific plant or
animal species. Certain of these analytical capabilities have also been made
available to Macintosh users of our PowerGene(R) systems.
Sales, Marketing and Distribution
We currently sell our image analysis products to government and private
clinical laboratories, hospital laboratories, research institutions,
universities and pharmaceutical companies. In North America, we sell our
products directly to end-users. As of March 1, 2002, the North American sales
team is comprised of 20 sales and application support specialists. Outside of
North America, we sell our products either directly, through independent
distributors, or through local agents who are remunerated on a commission
basis. We manage our international sales and distribution activities from
Applied Imaging International Ltd., a wholly owned subsidiary located in the
United Kingdom. As of March 1, 2002, the international sales team is comprised
of 16 sales and application support professionals, based in the United Kingdom,
France, Germany and Australia. Our primary distributors are located in France,
China, Italy, Japan, South Korea and Spain.
Because our products are technically sophisticated, we employ scientifically
qualified and highly trained product specialists to support the sales staff in
all major markets. Additionally, we offer an annual instrument maintenance
program to our customers. Our marketing activities include telemarketing,
product advertising and participation in trade shows and product seminars.
Sales by segment and geographic region are included in Footnote (12) in the
Notes to the Consolidated Financial Statements.
Manufacturing
We assemble and test components and subassemblies made by outside vendors to
our specifications and manufacture only when we believe significant value can
be added. We order components and subassemblies to forecast and assemble
specific configurations on receipt of firm orders. Our investigational and
clinical products are subject to regulation by the FDA and all products are
subject to regulation by the U.S. Department of Commerce export controls,
primarily as they relate to the associated personal computers.
Under current law, if we manufacture finished devices in the United States,
we will be required to comply with the FDA's Quality System Regulation and the
State of California's current Good Manufacturing Practice ("GMP") regulations.
In addition, the FDA and/or the California authorities may inspect our
manufacturing facilities on a regular basis to determine such compliance. Our
facilities in Newcastle, England and Santa Clara, California have successfully
completed third-party audits (in 2000 at Newcastle and in 2001 at Santa Clara)
that resulted in certification under ISO 9001 guidelines for design,
manufacture, installation and support of cancer and genetic testing equipment
and under ISO 13485 for medical device companies.
Research and Development
Our research and development efforts include various research, product
development, clinical evaluation and testing, quality assurance, regulatory and
process development activities. The current focus of our research
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and development efforts is the continued enhancement of the MDS(TM) system,
including new applications and the development of a second generation MDS(TM)
system for clinical use. In addition, we are collaborating with outside
investigators and other companies to develop new cancer testing applications
for the micrometastasis platform. Our future research and development efforts
are expected to include development of additional applications of our current
cytogenetic products, additional applications for the MDS(TM) system and novel,
high-throughput scanning platforms for tissue analysis.
Patents and Proprietary Rights
We have aggressively pursued patent protection and to date have been granted
twelve United States patents. Our patent portfolio also includes multiple
patents and pending applications that protect our technology in other countries.
In addition to patents, we rely upon trade secrets, know-how and contractual
arrangements to protect certain of our proprietary information and products. We
also generally enter into confidentiality agreements with our employees and
consultants designed to both protect our confidential information and prevent
the disclosure of confidential information of prior employers and others.
We also rely upon trademarks to protect certain of our products, and hold
United States trademark registrations for the marks "QUIPS", "CYTOSCAN",
"PowerGene" and "RxFISH." We hold registrations for these marks and the mark
"CYTOVISION" in certain foreign jurisdictions. We also have certain other
trademark rights in the United States and other foreign countries.
Competition
The market for our cytogenetic products is highly competitive. We believe
that our primary competitors in this market include Metasystems, Leica
Microsystems and Applied Spectral Imaging. The principal competitive factors in
this market are product features offered, ease of use, clarity of output,
customer service capabilities, price and installed base. We believe that we
compete favorably with regard to these factors.
The market for the MDS(TM) system in cancer pathology is new and under
development. Our primary competitors in this market are ChromaVision Medical
Systems, Inc. and Metasystems.
Government Regulation
The testing, manufacturing, labeling, distribution, sales, and marketing of
our products are subject to government regulation in the United States and in
other countries. We believe that our future success will be significantly
dependent upon commercial sales of our MDS(TM) system. We currently market this
system for research purposes globally. We have 510(k) clearance for our MDS(TM)
system in the United States and plan to seek clearance to market the system for
other specific clinical applications in the United States. In the United
States, our products are also subject to regulation in the State of California
whose requirements in this area include registration with the state and
compliance with state GMP regulations.
Before a new medical device can be introduced into the market, the
manufacturer must obtain FDA clearance of a 510(k) or Premarket Approval
("PMA"), unless the device is exempt from the requirement of such clearance or
approval. A 510(k) clearance will be granted if the submitted information
establishes that the device is substantially equivalent to a legally marketed
Class I or II medical device or to a legally marketed Class III device that
does not itself require an approved PMA prior to marketing ("predicate
device"). A 510(k) must contain information to support a claim of substantial
equivalence, which may include laboratory test results or the results of
clinical studies of the device in humans. The FDA is required to review 510(k)
submissions within 90 days, but it generally takes from five to twelve months
from the date of submission to obtain 510(k) clearance from the FDA; it may
take longer and 510(k) clearance may never be obtained. The FDA may determine
that a
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device is not "substantially equivalent" to a predicate device, or that
additional information is needed before a substantial equivalence determination
can be made.
In addition to domestic regulation of medical devices, our current products
and the products we have under development are subject to corresponding
regulations governing safety processes, manufacturing processes and quality in
foreign jurisdictions in which we operate or such products are sold. Upon the
adoption of the In Vitro Diagnostic Medial Device Directive of October 27,
1998, the European Community and its member countries currently are imposing
more substantial regulation on in vitro diagnostic devices and equipment-like
medical devices, and such regulation may affect the Company's current products
and products under development.
Laboratories who purchase the current products could be subject to the
Clinical Laboratory Improvement Amendments of 1988 ("CLIA"), which are intended
to ensure the quality and reliability of medical testing conducted in
laboratories in the U.S. Our products should support customer compliance with
CLIA regulations.
Marketed devices are subject to pervasive and continuing regulatory
oversight by the FDA and other agencies, including record-keeping requirements
and reporting of adverse experiences with the use of the device. Device
manufacturers are required to register their establishments and list their
devices with the FDA and certain state agencies. The Federal Food, Drug and
Cosmetic Act and certain state laws require that medical devices be
manufactured in accordance with the Quality System Regulations ("QSregs").
Manufacturing facilities are subject to periodic inspection by the FDA and
certain state agencies on a periodic basis to monitor compliance with GMP,
QSregs and other requirements.
We are also subject to other federal, state, local and foreign laws,
regulations and recommendations relating to safe working conditions and good
laboratory practices. The extent of government regulation that might result
from any future legislation or administrative action cannot be accurately
predicted.
Employees
As of March 1, 2002, we employed a total of 92 people, including 25 in
research and development, 8 in manufacturing, 47 in sales, marketing and
customer service and 12 in finance and administration. As of March 1, 2002, 55
of our employees were based in the United States, 32 in the United Kingdom, 2
in France, 1 in Germany, 1 in Australia and 1 in Israel. We are not subject to
any collective bargaining agreements and we believe that our relationship with
our employees is good.
Additional Factors That Might Affect Future Results
The following represent some of the factors that create risk and uncertainty
for us and our business. If any of the following factors actually occur, our
business, financial condition or results of operations could be materially
adversely affected.
We have a history of operating losses and may never achieve profitability.
We have not been profitable since our inception in 1986. We incurred net
losses of $3.5 million and $4.2 million in 2001 and 2000, respectively. As of
December 31, 2001, we had an accumulated deficit of $41.7 million. We will
continue to incur significant costs as we continue our efforts to market our
MDS(TM) system. If we do achieve profitability in any period, we may not be
able to sustain or increase our profitability on a quarterly or annual basis.
We expect quarterly revenue and operating results to vary significantly in
future periods, which could cause our stock price to fluctuate. If our
operating results are below expectations, our stock price could drop.
We have experienced significant fluctuations in our quarterly operating
results, and we expect to continue to experience fluctuations in the future.
Our customers, who are primarily public and private clinical laboratories,
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research organizations and hospitals, generally operate on annual budgets.
Their budgeting cycles and spending practices affect our revenues. Factors that
may have an influence on our operating results in any particular quarter
include:
. demand for our products,
. seasonality of our sales,
. new product introductions by us or our competitors, and the costs and
time required for a transition to the new products,
. timing of orders and shipments for capital equipment sales,
. our mix of sales between our distributors and our direct sales force,
. competition, including pricing pressures,
. timing and amount of research and development expenses, including
clinical trial-related expenditures,
. foreign currency fluctuations, and
. delays between our incurrence of expenses to develop new products,
including expenses related to marketing and service capabilities, and
the timing of sales and payments received for the new products.
It is possible in the future that our operating results will be below the
expectations of public market analysts and investors. If our operating results
fall below market expectations, the price of our common stock could drop
significantly.
We have substantial funding requirements. Additional funding may not be
available to us or may not be available on acceptable terms.
We have expended and will continue to expend substantial amounts of money
for research and development, preclinical testing, planned clinical
investigations, capital expenditures, working capital needs and manufacturing
and marketing of our products. Our future research and development efforts, in
particular, are expected to include development of additional applications of
our current cytogenetic products and additional applications for the MDS(TM)
system, which will likely require additional funds.
The exact timing and amount of spending required cannot be accurately
determined and will depend on several factors, including:
. progress of our research and development efforts and planned clinical
investigations,
. competing technological and market developments,
. commercialization of products currently under development by us and our
competitors, and
. market acceptance and demand for our products.
To the extent necessary, we may seek to obtain additional funds through
equity or debt financing, collaborative or other arrangements with other
companies, bank financing and other sources. If we raise funds by issuing
equity securities, you will experience dilution of your holdings in our common
stock. We cannot assure you that additional financing will be available when
needed or on terms acceptable to us. If adequate and acceptable financing is
not available, we may have to delay development or commercialization of certain
of our products or license to third parties the rights to commercialize certain
of our products or technologies that we would otherwise seek to commercialize.
We may also reduce our marketing, customer support or other resources devoted
to certain of our products. Any of these actions could have a material adverse
effect on our business, financial condition or results of operations.
10
Nasdaq could remove our common stock from the Nasdaq National Market, which
could materially adversely affect your investment in our common stock.
Our common stock is quoted on the Nasdaq National Market. We were notified
by Nasdaq on November 19, 2001 that we were not in compliance with the minimum
$4 million Net Tangible Assets requirement for continued listing on the Nasdaq
National Market. We received from Nasdaq a further letter stating that we had
until February 19, 2002 to show that we are in compliance with the Net Tangible
Assets requirement and to file an 8-K, including pro-forma financial
statements, with the Securities and Exchange Commission to attest to such
compliance. We completed an equity financing on January 28, 2002 and filed an
8-K on February 19, 2002 disclosing this transaction. Nasdaq subsequently
informed us that that we are now in compliance with the listing requirements.
Nasdaq recently promulgated new rules, which make continued listing of
companies on both the Nasdaq National Market and the Nasdaq SmallCap Market
more difficult. This means for us that, effective November 1, 2002, we will
have to meet a new standard requiring equity of $10 million for continued
listing on the Nasdaq National Market. This compares to our equity of $6.1
million at December 31, 2001. Alternatively, we can qualify for continued
listing on the Nasdaq National Market by meeting various stock market standards
including a minimum bid price on our shares of $3.00 per share and a market
capitalization of $50 million.
If we continue to experience losses from operations and are unable to raise
additional capital, we may be unable to maintain the standards for continued
listing on the Nasdaq National Market, and the shares of our common stock could
be subject to delisting from the Nasdaq National Market. Trading in our common
stock would therefore likely be conducted on the Nasdaq SmallCap Market, which
is a significantly less liquid market than the Nasdaq National Market. As a
result, an investor could find it more difficult to dispose of our common stock.
In addition, if our common stock were removed from the Nasdaq National
Market and did not qualify for listing on the Nasdaq SmallCap Market, our
common stock could be subject to the so-called "penny stock" rules that impose
additional sales practice and market making requirements on broker-dealers who
sell and/or make a market in those securities. Consequently, failure to qualify
for listing on, or removal from, the Nasdaq SmallCap Market, if it were to
occur, could affect the ability or willingness of broker-dealers to sell and/or
make a market on our common stock and the ability of purchasers of our common
stock to sell their securities in the secondary market. Certain "penny stock"
rules apply, however, even if our common stock is quoted on the Nasdaq SmallCap
Market if our stock price is below $5.00 per share. These rules could further
limit the market liquidity of our common stock and the ability of investors to
sell our common stock in the secondary market.
We will need to effectively manage our growth in order to achieve and
sustain profitability. Our failure to manage growth effectively could result in
continued net losses.
If we are able to achieve significant growth in our future sales and to
expand the scope of our operations, our management, financial, manufacturing
and other capabilities, procedures and controls could be strained. We cannot
assure you that our existing or any additional capabilities, procedures,
systems or controls will be adequate to support our operations. We may not be
able to design, implement or improve our capabilities, procedures, systems or
controls in a timely and cost-effective manner. Failure to implement, improve
and expand our capabilities, procedures, systems and controls in an efficient
and timely manner could reduce our ability to increase sales and have a
material adverse effect on our business, financial condition or results of
operations.
The market for medical diagnostic equipment for cancer, prenatal and other
genetic tests is extremely competitive. Our competitors may succeed in
developing products, and obtaining related regulatory approvals, faster than us.
The medical diagnostic equipment industry is highly competitive and
competition is likely to intensify. Certain of our competitors have greater
financial and technical resources and production and marketing
11
capabilities than us. We cannot assure you that these competitors will not
succeed in developing technologies and products that are more effective, easier
to use or less expensive than those which are currently offered or being
developed by us or that would render our technology and products obsolete and
noncompetitive. In addition, some of our competitors have significantly greater
experience than we have in conducting clinical investigations of new diagnostic
products and in obtaining FDA and other regulatory clearances and approvals of
products. Accordingly, our competitors may succeed in developing and obtaining
regulatory approvals for such products more rapidly than us.
We operate in a consolidating industry, which creates barriers to our market
penetration.
The healthcare industry in recent years has been characterized by
consolidation. Large hospital chains and groups of affiliated hospitals prefer
to negotiate comprehensive supply contracts for all of their supply needs at
once. Large suppliers can often equip an entire laboratory and offer these
hospital chains and groups "one-stop shopping" for laboratory instruments,
supplies and services. Larger suppliers also typically offer annual rebates to
their customers based on the customer's total volume of business with the
supplier. The convenience and rebates offered by these larger suppliers are
administrative and financial incentives that we do not offer our customers. The
success of our future plans will depend in part on our ability to overcome
these and any new barriers resulting from continued consolidation in the
healthcare industry.
Any disruption or delay in the supply of components or custom subassemblies
could materially adversely affect our financial condition or results of
operation.
We assemble our products from a combination of (i) commodity technology
components, such as computers and monitors, (ii) custom subassemblies, such as
automated filter wheels, (iii) proprietary hardware for scanning microscopy and
(iv) operating systems and proprietary applications software. Any disruption or
delay in the supply of components or custom subassemblies could have a material
adverse effect on our business. While we typically use components and
subassemblies that are available from alternate sources, any unanticipated
interruption of the supply of these components or subassemblies could require
us to redesign our products or otherwise delay our ability to assemble our
products for sale.
The marketing and sale of our products requires regulatory approval and
on-going certifications. In addition, new laws and regulations governing our
products may be enacted. Failure to obtain and maintain required regulatory
approvals and certifications could prevent or delay our ability to market and
sell our products, which would have a material adverse effect on our business.
The FDA regulates design, testing, manufacturing, labeling, distribution,
marketing, sales and service of our products. Our CytoScan products were
marketed until 1994 in the U.S. pursuant to pre-market notifications to the FDA
under Section 510(k) of the U.S. Food, Drug and Cosmetic Act. CytoVision(R),
the current model of our CytoScan product, is marketed pursuant to this
original 510(k) filing. Our Quips(R) products are marketed in the U.S. pursuant
to an original 510(k) clearance obtained by Vysis, Inc., whose instrumentation
business we acquired in 1999. Our PowerGene products are marketed in the U.S.
pursuant to an original 510(k) clearance obtained by Perceptive Scientific
Instruments, Inc., whose U.S. based assets we acquired in 2000. We may need to
seek regulatory approval for modifications to our existing products or for our
other products under development.
We received 510(k) clearance from the FDA to market the MDS(TM) for in vitro
use as an aid to pathologists in the detection and classification of specific
rare cancer cells in bone marrow specimens.
Our products are subject to state regulation, including California's GMP
regulations. Laboratories that purchase our current products may be subject to
the CLIA, which are intended to ensure the quality and reliability of medical
testing conducted in U.S. laboratories.
12
If we fail to comply with applicable FDA, other federal or state
requirements, we could be subject to, among other things, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, distribution, marketing and sales of our products, denial of
required governmental approvals, withdrawal of approvals or clearances, a
recommendation by the FDA that we or our distributors not be permitted to enter
into government contracts and, in some cases, criminal prosecution. In certain
circumstances, the FDA could order us to repair, replace or refund the cost of
one or more of our products. Any of these actions could have a material adverse
effect on our ability to market and sell our products or otherwise on our
business, financial condition or results of operations.
Our products are also subject to ongoing regulatory oversight by the FDA and
state agencies, including record-keeping requirements and reporting of adverse
experiences with the use of our products. The U.S. Food, Drug and Cosmetic Act
and certain state laws, for example, require that our products be manufactured
in accordance with the QSRegs. Our manufacturing facilities are subject to
periodic inspection by the FDA and certain state agencies to monitor compliance
with QSRegs, GMP and other requirements. Violations of applicable regulations
noted during inspections may result in prohibitions on manufacturing,
distribution and sale of our products until the violations are cured.
In addition, the regulation of medical diagnostic equipment continues to
develop. New laws or regulations could have a material adverse effect on our
business, financial condition or results of operations. Delays or our failure
to obtain newly required clearances or approvals could restrict our ability to
market and sell our products.
The marketing and sale of our products outside of the U.S. is subject to
regulations, which vary from those in the U.S. Failure to obtain and maintain
required regulatory approvals could prevent or delay our ability to market and
sell our products in international markets.
The regulatory environment for testing, manufacturing, labeling,
distributing, marketing and sale of our products varies from country to
country. Currently, some of our products, and modifications to these products,
may be subject to pre-market approval in selected countries that are members of
the European Union, or the EU. Our products, and modifications to these
products, are also subject to other regulatory requirements in those and other
countries. Our failure to comply with applicable regulatory requirements could
result in fines, injunctions, civil penalties, suspensions or loss of
regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution.
In addition, the regulation of in vitro diagnostic devices ("IVDs") and
other medical diagnostic equipment continues to evolve. In some countries, we
rely on our international distributors for compliance with regulatory
requirements. The distributors may not obtain the necessary regulatory
approvals and clearances. Any enforcement action by regulatory authorities with
respect to regulatory noncompliance may have a material adverse effect on our
business, financial condition or results of operations if we are prevented from
or delayed in marketing and selling our products in markets outside of the U.S.
In some countries, the time required to obtain regulatory approval or
clearance for marketing and selling of our products is longer than that
required by the FDA, and the requirements for clearance or approval differ from
the FDA requirements. There may also be additional foreign regulatory barriers
that prevent or delay our ability to market or sell our products. In addition,
certain countries and customers require evidence of our compliance with
international quality standards of the International Standards Organization
("ISO"). Our facilities in Newcastle, England and Santa Clara, California have
successfully completed third-party audits (in 2000 at Newcastle and in 2001 at
Santa Clara) that resulted in certification under ISO 9001 guidelines for
design, manufacture, installation and support of cancer and genetic testing
equipment and under ISO 13485 for medical device companies.
Our instruments are in compliance with the European Parliament's
Electromagnetic Compatibility Directive (the "ECD"), pursuant to which we are
able to apply the CE Mark to our instruments with respect to the ECD.
13
This CE Mark certification is an international symbol of adherence to quality
assurance standards and compliance with the ECD.
The European Parliament has made a distinction between medical devices and
IVDs. Our instruments are subject to the requirements of the In Vitro
Diagnostic Medical Device Directive (the "IVDD"). As provided by the IVDD, our
medical diagnostic equipment, once approved, may bear the CE Mark with respect
to the IVDD as well.
The EU, however, could redefine our products as being medical devices,
therefore subjecting them to the Medical Device Directive (the "MDD"). A
redefinition could have a material adverse effect on our business, financial
condition or results of operations if we were restricted from marketing or
selling our instruments until being able to comply with the MDD. Moreover, a
member state of the EU or any other European country could adopt other laws or
regulations that require approval to market and sell our products or that could
otherwise have a material adverse effect on our Company's business, financial
condition or results of operations.
We depend on distributors to sell our products outside of North America and
the United Kingdom. Sales through our distributors may be lower than direct
sales efforts and the distributor arrangements could be terminated before the
contract period ends.
We rely substantially on independent distributors and sales agents to market
and sell our products outside of North America and the United Kingdom. We
cannot assure you that distributors and agents will devote adequate resources
to support sales of our products.
Under our distribution agreements, we indemnify the distributors against
costs, expenses and liabilities relating to litigation regarding our products.
Despite our obligations, our distributors may decide to reduce or end their
selling efforts until an infringement dispute is resolved or settled.
Our international sales and operations are a significant portion of our
business. Changes in international markets and currency fluctuations could
materially adversely affect our financial condition or results of operations.
We have significant international operations based in the United Kingdom. As
of March 1, 2002, approximately 37 employees, constituting approximately 40% of
the total number of our employees, were based outside of the U.S. We generate a
substantial portion of our revenues from outside of the U.S. In 2001 and 2000,
we derived approximately 40% and 44% of our total revenues, respectively, from
our customers and distributors outside of the U.S. We expect that international
sales will continue to account for a significant portion of our revenues.
The international nature of our business subjects us and our
representatives, agents and distributors to laws and regulations of the
jurisdictions in which we operate and sell our products. Changes in overseas
economic conditions, currency exchange rates, foreign tax laws or tariffs or
other trade regulations could have an adverse effect on our financial condition
or results of operations. For example, most of our international sales are
denominated in U.S. dollars, U.K. pounds sterling or European Currency Units.
We do not attempt to reduce the risk of currency fluctuations by hedging.
Currency fluctuations against the U.S. dollar could substantially reduce our
U.S. dollar revenue. Changes in currency exchange rates could also make the
products of our competitors less expensive than ours, which could result in our
customers purchasing our competitors' products instead of ours.
Export controls could prevent us from exporting our products to certain
countries or customers, which could materially affect our business.
Our research, investigational and clinical products are subject to
regulation by U.S. Department of Commerce export controls, primarily as they
relate to the associated computers. These controls could prevent us
14
from exporting our products to certain countries or customers, which could
materially adversely affect our business, financial condition or results of
operations.
Our success depends, in part, on our ability to protect our intellectual
property rights. We could lose sales and our competitive advantage if we are
not able to prevent infringement of our rights. We may be prevented from
selling our current or future products if they infringe existing patents or
patents that have not yet been issued.
We rely primarily on trade secret protection and on our unpatented
proprietary know-how in the development and manufacturing of our products. Our
trade secrets or proprietary technology could become known or be independently
developed by our competitors. Our competitors may develop or acquire equivalent
expertise or develop products that render our current or future products
uncompetitive or obsolete. In addition, our patents may not be sufficiently
broad to protect what we believe to be our proprietary rights. Our issued
patents could also be disallowed or circumvented by our competitors.
Rights granted under our patents may not provide us with significant
competitive advantages. Certain companies have filed applications for, and have
been issued patents relating to, products or processes that are competitive
with certain of our products or processes. We cannot predict how the courts
would resolve issues relating to the validity and scope of those applications
and patents. An adverse ruling could materially adversely affect our sales with
respect to, or our competitive advantage over, our competitors.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions. We, therefore, cannot assure you that any
issued patent or patents based on pending patent applications or any future
patent application will exclude any of our competitors. Nor can we assure you
that any of our patents in which we have licensed rights will be held valid if
subsequently challenged or that others will not claim rights in or ownership of
the patents and other proprietary rights held or licensed by us.
Furthermore, our competitors may have already developed or may develop
products that are similar to ours, duplicate our products or design around any
patents issued to or licensed by us or that may be issued to or licensed by us
in the future. Patent applications in the U.S. are maintained in secrecy until
the patent issues. Patent applications in foreign countries are also maintained
in secrecy for a period after filing. Therefore, competitors may have first
filed applications for inventions covered by our pending patent applications.
We cannot be certain that we will not infringe any patents that may issue on
these possible applications.
In addition, publication of discoveries in scientific and patent literature
tends to lag behind actual discoveries and the filing of related patent
applications. Accordingly, patents may exist, may have been filed or could be
filed or issued that contain claims relating to our technology, products or
processes. Patents issued and patent applications filed in the U.S. or in other
countries relating to medical diagnostic equipment are numerous. We cannot
assure you that competitors or other parties have not filed or in the future
will not file applications for, or have not received or in the future will not
receive, patents or obtain additional proprietary rights relating to products
or processes used or proposed to be used by us. There are pending applications,
which if issued with claims in their present form, could provide proprietary
rights to other parties relating to products or processes used or proposed to
be used by us. In that case, we may be required to obtain licenses to patents
or proprietary rights of others.
The medical diagnostic equipment industry, in general, is extremely
competitive. Litigation among the participants regarding patent and other
intellectual property rights is common. Whether or not the litigation has
merit, it could be time consuming and expensive for us and divert the attention
of our technical and management personnel from other work. We may be involved
in litigation to defend against claims of infringement, to enforce our patent
rights or to protect our trade secrets. If any other party's claims are upheld
in any litigation or administrative proceeding, we could be prevented from
exploiting the subject matter of those claims or forced to obtain licenses from
the patent owners or to redesign our products or processes to avoid
infringement. In the
15
event of any infringement by us, we cannot assure you that we will be able to
successfully redesign our products or processes to avoid infringement.
Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent us from
manufacturing and selling our products, which would have a material adverse
effect on our business, financial condition or results of operations.
Furthermore, we may have to bring costly and time-consuming litigation to
enforce our patents, to protect our trade secrets or know-how or to determine
the enforceability, scope and validity of the proprietary rights of others.
Our customers rely substantially on availability of third-party
reimbursement. Their failure to obtain sufficient reimbursement from
third-party payors could materially adversely affect our financial condition or
results of operations.
Hospitals, physicians and other health care providers in the U.S. that
purchase our medical diagnostic equipment generally rely on third-party payors
and other sources for reimbursement of health care costs to reimburse all or
part of the cost of the procedures in which medical diagnostic equipment is
being used. Many third-party payors are moving toward a managed care system in
which they contract to provide comprehensive health care for a fixed cost per
person. The fixed cost per person established by these third-party payors may
be independent of the costs actually incurred for the specific procedures in
which our medical diagnostic equipment is used.
Medicare and other third-party payors are increasingly scrutinizing coverage
of new products and the level of reimbursement for covered products. We cannot
assure you that third-party reimbursement will continue to be available for our
current medical diagnostic equipment or available in the future for our
products under development. If hospitals, physicians and other health care
providers are unable to obtain adequate reimbursement from third-party payors
for the procedures in which our products or products currently under
development are intended to be used, our sales could be adversely affected,
which could have a material adverse effect on our business, financial condition
or results of operations.
Third-party payors that do not use prospectively fixed payments are
increasingly using other cost-containment procedures that may pose
administrative hurdles to the use of our products and products currently under
development. In addition, third-party payors may deny reimbursement if they
determine that our device used in a treatment is unnecessary, inappropriate,
experimental, used for a non-approved indication or is not cost-effective.
Potential purchasers of our products must determine that the clinical benefits
of our products justify the additional cost or the additional effort and
uncertainty in obtaining third-party payor coverage.
Market acceptability of our products and products under development in
countries outside of the U.S. is also dependent on availability of
reimbursement within prevailing health care payment systems in those countries.
Reimbursement and health care payment systems in international markets vary
significantly by country, and include both government-sponsored health care and
private insurance. We cannot assure you that we will be able to obtain
international reimbursement approvals in a timely manner, if at all. Failure to
receive international reimbursement approvals could have a material adverse
effect on market acceptance of our products in the international markets in
which such approvals are sought.
Reimbursement for our products will be subject to increased restrictions
both in the U.S. and in international markets. The overall escalating cost of
medical products and services will continue to lead to increased pressures on
health care industries to reduce the costs of products and services, including
our products and products currently under development. We cannot assure you
that third-party reimbursement and coverage will be adequate or even available
in the U.S. or in any other country. Furthermore, future legislation,
regulation or reimbursement policies of third-party payors may adversely affect
the demand for our products or products currently under development or our
ability to sell our products on a profitable basis. The unavailability of
third-party payor coverage or the inadequacy of reimbursement could have a
material adverse effect on our business, financial condition or results of
operations.
16
In addition, fundamental reforms in the health care industry in the U.S. and
Europe continue to be considered. We cannot assure you that any reform, if
enacted, will not materially adversely affect our business, financial condition
or results of operations.
We depend on key technical, scientific and management personnel. Any
difficulty in retaining our current employees or in hiring new employees could
materially adversely affect our financial condition or results of operation.
Our future success depends in significant part upon the continued service of
key scientific, technical and management personnel, and our continuing ability
to attract and retain highly qualified scientific, technical and managerial
personnel. Competition for these personnel is intense, and we cannot assure you
that we can retain our key scientific, technical and managerial personnel or
that we can attract or retain other highly qualified scientific, technical and
managerial personnel in the future. Our key employees include Jack Goldstein,
Ph.D., our Chairman, Carl Hull, our President and Chief Executive Officer,
Barry Hotchkies, our Chief Financial Officer, Padraig O'Kelly, our Vice
President-Operations, Dan Bowman, our Vice President-Worldwide Sales and
Marketing and Diane Oates, our Vice President-Regulatory Affairs and Quality
Assurance.
We have taken steps to retain our key employees, including the granting of
stock options that vest over time, and we have entered into employment
agreements with key employees. The loss of key personnel, especially if without
advanced notice, or the inability to hire or retain qualified personnel, could
have a material adverse effect upon our business, results of operations and
financial condition. Furthermore, we have no key man life insurance on any of
our key employees.
In addition, some companies have adopted a strategy of suing or threatening
to sue former employees and their new employers to discourage those employees
from leaving. As we hire new employees from our current or potential
competitors, we may become a party to one or more lawsuits involving our
employees. Any future litigation against us or our employees, regardless of the
merit or outcome, may result in substantial costs and expenses to us and may
divert management's attention away from the operation of our business.
Undetected errors or failures in our software could materially adversely
affect our financial condition or results of operations.
Our existing products and products under development involve one or more
software components that facilitate the detection of chromosomal, genetic or
protein abnormalities through the interaction of certain imaging algorithms
with the sample under examination. This software, including any new versions
that may be released, may contain undetected errors or failures. We cannot
assure you that, despite testing by us and our customers, all errors will be
found in the software components of our products. Errors in our software could
result in loss or delay in market acceptance or otherwise result in a material
adverse effect on our business, financial condition or results of operations
from lost sales or litigation.
A successful products liability claim brought in excess of our insurance
coverage could have a material adverse effect on our financial condition or
results of operation.
The manufacture and sale of our products involve the risk of product
liability claims. We cannot assure you that the coverage limits of our
insurance policies will be adequate in the event we are successfully sued. We
evaluate our coverage limits on a regular basis and in connection with the
introduction of products currently under development. However, liability
insurance is expensive and may not be available on commercially reasonably
terms, if at all, or in sufficient coverage amounts to cover all eventualities.
A successful claim brought against us in excess of our insurance coverage could
have a material adverse effect on our business, results of operations or
financial condition.
17
Insiders have substantial control and could delay or prevent a change in
corporate control.
Certain of our stockholders, including certain executive officers and
directors and their affiliates, own over 50% of our outstanding common stock.
These stockholders will, to the extent they act together, have the ability to
exert significant influence and control over matters requiring the approval of
our stockholders. Their interests may be different from yours. Matters that
typically require stockholder approval include: (i) election of directors; (ii)
approval of a merger or consolidation; and (iii) approval of a sale of all or
substantially all of our assets. Accordingly, you may not be able to influence
any action we take or consider taking, even if it requires a stockholder vote.
Our stock price has been volatile. It will likely be volatile in the future.
You could lose all or a portion of your investment.
The market prices for securities, generally, and for medical diagnostic
instrument companies, in particular, including our common stock, have
historically been highly volatile. Investment in our common stock is risky, and
you could lose all or part of your investment. Many factors could cause the
market price of our stock to fluctuate, perhaps substantially, including the
announcement of:
. technological innovations or new products,
. developments concerning proprietary rights, including patents and
litigation matters,
. publicity regarding actual or potential results with respect to products
under development,
. regulatory developments in the U.S. or other countries,
. developments in relationships with partners or distributors,
. public concern as to the safety of new technologies, or
. changes in financial estimates by securities analysts or our failure to
meet those estimates.
In addition, changes in our operating results may cause the market price of
our common stock to fluctuate.
Any future sale of a substantial number of shares eligible for resale could
depress the trading price of our stock, lower our value and make it more
difficult for us to raise capital.
According to Forms 13D and 13G filed by our stockholders, approximately
5,557,226 shares of our common stock and warrants (representing approximately
35% of the total shares outstanding) are held by affiliates and are therefore
subject to volume limitations pursuant to Rule 144. In the event any of such
stockholders ceases to be an affiliate (for example, by resigning from the
Board of Directors and holding less than 10% of the shares outstanding), (i)
certain of the shares held by such stockholder will be eligible for immediate
resale in the public market and (ii) pursuant to Rule 144(k), certain of such
shares will no longer be subject to the manner of sale and volume limitations
of Rule 144 and will be eligible for resale in the public market after 90 days
from the date such stockholder ceases to be an affiliate. Any sale of a
substantial number of shares may have the effect of depressing the trading
price of our common stock. In addition, these sales could lower our value and
make it more difficult for us to raise capital.
Anti-takeover provisions in our Preferred Shares Rights Agreement, our
charter documents and Delaware law could prevent or delay a change in control
of our company.
Certain provisions of our current Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire
us, or discouraging a third party from attempting to acquire us. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of our common stock. Certain of these provisions
provide for the elimination of the right of stockholders to act by written
consent without a meeting and specify procedures for director nominations by
stockholders and
18
submission of other proposals for consideration at stockholder meetings. In
addition, we have adopted a Preferred Shares Rights Agreement ("Rights Plan"),
sometimes referred to as a poison pill, designed to prevent hostile takeovers
not approved by the Board of Directors.
On May 28, 1998, the Board of Directors adopted the Rights Plan to
strengthen the Board of Directors ability to protect the Company's
stockholders. The Rights Plan is designed to protect against abusive or
coercive takeover tactics that are not in the best interests of the Company and
its stockholders. To implement the Rights Plan, the Board of Directors declared
a dividend of one preferred share purchase right (a "Right") for each
outstanding share of common stock, par value $0.001 per share, held on record
as of June 15, 1998. Each Right represents a contingent right to purchase,
under certain circumstances, one one-thousandth of a share (a "Unit") of Series
A Participating Preferred Stock, par value $0.001 per share (the "Preferred
Stock"), of the Company at a price of $50.00 per Unit, subject to adjustment.
The Rights become exercisable and trade independently from the Company's common
stock: (i) 10 days after the acquisition by a person or group of 20% or more
(25% in the case of Special Situations Funds and affiliates) of the Company's
common stock; or, (ii) ten business days after commencement of a tender or
exchange offer that would result in the acquisition of 20% or more (25% in the
case of Special Situations Funds and affiliates) of the Company's common stock.
Each share of Preferred Stock purchased upon exercise of the Rights will be
entitled to a dividend equal to 1,000 times any dividend declared per share of
common stock and will have one thousand votes, voting together with the common
stock. In the event of a liquidation, each share of Preferred Stock will be
entitled to receive an amount equal to 1,000 times any payment made per share
of common stock.
We also are authorized to issue 6,000,000 shares of undesignated preferred
stock. We may issue such shares of preferred stock without stockholder approval
and upon such terms as our Board of Directors may determine. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control, may discourage bids for our common stock at a premium over
the market price and may adversely affect the market price or the voting and
other rights of our common stock.
At present, we have no plans to issue any of the preferred stock. The rights
of the holders of common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be
issued in the future. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock.
Certain provisions of Delaware law could also delay or make more difficult a
merger, tender offer or proxy contest involving us, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years unless certain conditions are met.
ITEM 2. PROPERTIES
Our corporate headquarters are located in an approximately 14,000 square
foot facility in Santa Clara, California, under a lease, which terminates on
August 31, 2004. In the United Kingdom, we lease an approximately 12,500 square
foot facility in Newcastle under a lease that terminates in July 2008, with an
option to cancel in July 2003. We also lease approximately 4,400 square feet in
League City, Texas to house the product development and commercial support
organizations for our PowerGene(R) product line. This lease expires on October
31, 2006.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "AICX." The following table sets forth the range of the high and low
sale prices by quarter as reported on the Nasdaq National Market for the
periods indicated.
High Low
------- -------
2001
First Quarter.................................... 4 3/8 1 9/16
Second Quarter................................... 2.53 1.72
Third Quarter.................................... 2.70 1.01
Fourth Quarter................................... 3.11 1.25
2000
First Quarter.................................... 8 1/8 1 1/16
Second Quarter................................... 4 1/4 1 19/32
Third Quarter.................................... 7 13/64 2
Fourth Quarter................................... 4 3/4 2 1/8
On January 31, 2002, we completed a private placement of 571,500 shares of
our common stock to an institutional investor (purchasing for three separate
funds) at a purchase price of $1.75 per share. Additional shares may be
issuable to the investors under certain provisions of the Stock Purchase
Agreement between the investors and us. Subject to the occurrence of certain
events, beginning July 29, 2002, each investor shall be entitled to a warrant
exercisable for a number of shares of our common stock equal to the number of
shares of common stock purchased in the January 31 financing. The warrants
would be exercisable for four years from issuance at a price of $2.25 per share.
As of March 11, 2002, the number of common stockholders of record was 123.
The Company currently intends to retain any earnings for use in its business
and has not in the past, nor does it anticipate paying in the foreseeable
future any cash dividends.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's audited consolidated financial statements and
related notes thereto and with Management's Discussion and Analysis of
Financial Condition and Results of Operations, which are included elsewhere in
this Form 10-K. The consolidated statement of operations data for the years
ended December 31, 2001, 2000 and 1999 and the consolidated balance sheet data
at December 31, 2001, 2000 and 1999 are derived from, and are qualified by
reference to, the consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP. The consolidated statement of operations data for
the years ended December 31, 1998 and 1997 and the consolidated balance sheet
data at December 31, 1998 and 1997 are derived from consolidated financial
statements that have been audited by KPMG, LLP and are not included in this
Form 10-K.
Year Ended December 31,
------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues:
Product sales....................................... $ 13,954 $ 13,037 $ 11,533 $ 9,077 $ 10,513
Software maintenance, service and grant revenues.... 4,583 3,652 2,655 2,650 2,677
-------- -------- -------- -------- --------
Total revenues.................................. 18,537 16,689 14,188 11,727 13,190
Cost of revenues.................................... 7,726 7,564 6,744 6,053 6,340
-------- -------- -------- -------- --------
Gross profit.................................... 10,811 9,125 7,444 5,674 6,850
-------- -------- -------- -------- --------
Operating expenses:
Research and development............................ 3,900 3,525 4,299 6,662 7,381
Sales and marketing................................. 7,457 6,409 5,232 4,950 3,740
General and administrative.......................... 2,662 2,964 3,138 2,721 3,639
Amortization of intangibles......................... 306 280 124 -- --
Restructuring costs................................. -- -- 818 353 --
-------- -------- -------- -------- --------
Total operating expenses........................ 14,325 13,178 13,611 14,686 14,760
-------- -------- -------- -------- --------
Operating loss...................................... (3,514) (4,053) (6,167) (9,012) (7,910)
Other income (expense), net......................... (18) (140) 158 541 398
-------- -------- -------- -------- --------
Net loss............................................... $ (3,532) $ (4,193) $ (6,009) $ (8,471) $ (7,512)
======== ======== ======== ======== ========
Net loss per share--basic and diluted.................. $ (0.23) $ (0.31) $ (0.50) $ (0.86) $ (1.03)
======== ======== ======== ======== ========
Shares used to calculate basic and diluted net loss per
share................................................ 15,191 13,594 11,930 9,850 7,324
======== ======== ======== ======== ========
Year Ended December 31,
------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands)
Balance Sheet Data:
Cash, cash equivalents, restricted cash and short-term
investments.......................................... $ 3,435 $ 7,012 $ 8,406 $ 11,728 $ 8,378
Working capital........................................ 3,034 6,505 7,132 10,753 7,171
Total assets........................................... 14,097 19,442 19,744 18,808 14,714
Bank debt, less current portion........................ -- 500 1,167 -- --
Deferred revenue, non-current.......................... 396 345 518 -- --
Non-current of notes payable........................... -- -- 250 -- --
Capital lease obligation, net of current portion....... -- 9 37 64 89
Accumulated deficit.................................... (41,738) (38,206) (34,013) (28,004) (19,533)
Total stockholders' equity............................. 6,059 9,483 8,612 12,343 8,943
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in this Item 7 contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of risks and uncertainties, including, but not limited
to, those discussed below under "Factors That May Affect Future Results," those
discussed under Item One in this document, including "Factors That May Affect
Future Results," and those discussed in other reports filed with the Securities
and Exchange Commission. You should not rely on these forward-looking
statements, which reflect our position as of the date of this report. We are
under no obligation to revise or update any forward-looking statements.
Overview
The Company was founded in 1986 to develop, manufacture, and market
automated genetic imaging systems for use in cytogenetic laboratories for
cancer testing, prenatal testing and other genetic testing applications. We
sell our products to government and private clinical laboratories, research
institutions, universities, and pharmaceutical companies located in the United
States, Canada, Europe, Japan and other countries. We also market imaging
systems designed for use in plant and animal genetic research programs. In
addition, we recently introduced and have received FDA clearance for a clinical
system to detect micrometastatic cancer cells in bone marrow from cancer
patients. This system and its research capabilities assists physicians in
determining the initial staging of cancer cases, in detecting disease
recurrence and in genetically characterizing cancer cells.
We are headquartered in Santa Clara, California, and have facilities in
League City, Texas and the United Kingdom. We are the world's leading provider
of automated cytogenetic instrument systems. Our products are sold worldwide
through a direct sales force, third-party distributors and independent sales
representatives. We employ 92 people worldwide.
We have an installed base of over 2,500 instruments in over 1,000
laboratories and clinics in more than 60 countries. Our CytoVision(R),
PowerGene(R) and QUIPS(R) systems are widely utilized because of their ability
to analyze human chromosome preparations using powerful software classification
algorithms and a specialized user interface. These systems also incorporate the
capability to analyze and record images produced by advanced genetic research
assays that employ fluorescent in situ hybridization ("FISH") or comparative
genomic hybridization ("CGH") methods.
Our MDS(TM) system combines the ability to find targeted cancer cells using
brightfield microscopy techniques with our decade-long experience in
fluorescence microscopy imaging and analysis. Taken together, these
technologies allow us to analyze the proteins on or within a cell while
simultaneously assessing which genes within that cell have been activated or
expressed. Both protein and gene expression data are emerging as required
parameters when assessing the precise nature of a given tumor or cancer cell.
Gene expression data are increasingly being used to determine appropriate
cancer therapies.
We achieved a number of important operational and financial milestones in
2001. Sales for the year were a record at $18.5 million, an increase of 11%
over 2000. Our net loss for the year was $3.5 million, a decrease of $0.7
million or 16% from the net loss of $4.2 million recorded in 2000. We achieved
our first profitable quarter in the fourth quarter of 2001, with a net profit
of $30,000.
In 2001, we expanded the menu of the MDS(TM) system with the introduction of
several new applications to assist pathologists in their review of key breast
cancer tests. These new applications included our PathVysion(TM) Digital
Scoring Application that provides the first automated imaging capability to
assist in detecting amplification of the HER-2/neu gene. (PathVysion is a
trademark of Vysis, Inc. used under license by Applied Imaging.)
22
Our operating results have fluctuated significantly in the past on an annual
and quarterly basis. We expect that operating results will fluctuate
significantly from quarter to quarter and year to year in the future and will
depend on a number of factors. These factors include, but are not limited to,
demand for our products, release and acceptance of new systems and new
applications, timing of capital equipment orders and shipments, competition and
its related pricing pressures, and seasonal factors, many of which are outside
of our control.
Results of Operations
Fiscal 2001 Compared With Fiscal 2000
Revenues. Revenues increased to $18.5 million in 2001 from $16.7 million in
2000, an increase of 11%. This reflected a revenue increase of 19% in North
America and an increase of 1% in the rest of the world. Sales, particularly in
North America, benefited from the purchase of the PowerGene(R) instrument
business from International Remote Imaging Systems, Inc. on July 6, 2000. As a
result, we had a full year of PowerGene(R) sales in 2001 compared to six months
in 2000. In addition, sales in North America benefited from growth in our base
cytogenetic markets and related service revenues. For 2001 and 2000 revenues
derived outside of North America were approximately 40% and 44% of total
revenues, respectively, reflecting increased North American instrument and
service sales during 2001.
Sales of systems were $14.0 million in 2001, an increase of 7.0% over the
$13.0 million achieved in 2000, primarily due to growth in North American
markets.
Service contract, software maintenance and grant revenues at $4.6 million in
2001 increased 25% from the $3.7 million recorded in 2000, reflecting the
increased emphasis placed on marketing service contracts to our customers. In
addition, grant proceeds amounted to $400,000 in 2001 compared to $213,000 in
2000. Grant revenues fluctuate based on the completion of milestones for
existing programs, with revenue being recognized as the work is performed.
Cost of Revenues. Cost of revenues as a percentage of revenues was 42% in
2001 compared to 45% in 2000. The lower costs as a percent of revenues are due
to favorable product mix, reduced manufacturing costs and the increase in grant
revenues discussed above. Cost of system revenues decreased from $5.9 million
in 2000 to $5.7 million in 2001 (or by 2.4%) and as a percentage of revenues
from 45% in 2000 to 42% in 2001 due primarily to favorable product mix and
reduced manufacturing costs. Cost of service contract, software maintenance and
grant revenues increased from $1.7 million in 2000 to $2.0 million in 2001 (or
by 18%) and as a percentage of revenues decreased from 46% in 2000 to 43% in
2001 due primarily to the addition of personnel in the service function.
Research and Development Expenses. Research and development expenses of
$3.9 million in 2001 increased approximately $0.4 million, or 11%, from 2000
levels. The increase is primarily due to increased personnel and consulting
expenses related to the development of new applications for the MDS(TM) system
and the development of a second generation MDS(TM) system as we focus our
product development efforts on the cancer research and cancer pathology
markets. Research and development costs were 21% of total revenues in both 2001
and 2000.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$7.5 million in 2001 from $6.4 million in 2000, or by 16%. In 2001 and 2000
sales and marketing expenses as a percentage of total revenues were 40% and
38%, respectively. The increase in spending in 2001 is due primarily to an
increase in sales personnel and marketing expenses related to the introduction
of the new MDS(TM) applications, and higher commission expenses as a result of
increased sales in North America.
General and Administrative Expenses. General and administrative expenses in
2001 amounted to $2.7 million compared to $3.0 million in 2000, a decrease of
10%. As a percentage of revenue, general and
23
administrative costs were 14% of total revenues for 2001 compared to 18% of
total revenues in 2000. The reduction in the absolute dollar amount of spending
and percentage of sales ratio is due to our continued focus on cost control.
There were also limited one-time operational costs in 2000 related to the
post-acquisition integration of the U.S.-based PowerGene(R) business acquired
from Perceptive Scientific Instruments, LLC in July 2000.
Amortization of Intangibles. Amortization expense amounted to $306,000 in
2001 and $280,000 in 2000. Amortization expense relates to the amortization of
the intangible assets that included goodwill and intellectual and software
property in connection with our acquisition of the cytogenetic imaging business
of Vysis Inc. on July 16, 1999 and the PowerGene(R) product line on July 6,
2000. The increase in 2001 versus 2000 is due to the inclusion of a full year
of amortization related to the PowerGene(R) acquisition in 2001 compared to six
months amortization in 2000.
Other Income (Expense), Net. In 2001, other expense amounted to $18,000
compared to other expense of $140,000 in 2000. This reduction of $122,000 in
2001 when compared to the prior year is due primarily to reduced foreign
currency exchange losses due to the strengthening of the U.S. dollar versus the
pound sterling and other foreign currencies that occurred primarily in the
first quarter of 2000. There was a swing from net interest income in 2000 of
$41,000 to a net interest expense in 2001 of $10,000, primarily reflecting a
lower cash and investment position in 2001.
Fiscal 2000 Compared With Fiscal 1999
Revenues. Revenues increased to $16.7 million in 2000 from $14.2 million in
1999, an increase of 18%. This reflected a revenue increase of 62% in North
America and a decrease of 12% in the rest of the world. The decrease in the
rest of the world reflected weak economic conditions and the strength of the
U.S. dollar versus the British pound and the European Currency Unit (Euro).
Sales, particularly in North America, benefited from the purchase of the
PowerGene(R) instrument business from International Remote Imaging Systems,
Inc. on July 6, 2000. For 2000 and 1999 revenues derived outside of North
America were approximately 44% and 60% of total revenues, respectively,
reflecting increased North American instrument sales during 2000.
Service contract and software maintenance revenues at $3.7 million in 2000
increased 38% from the $2.7 million recorded in 1999, reflecting the increased
emphasis placed on marketing service contracts to our customers. In addition,
grant proceeds amounted to $213,000 compared to $99,000 in 1999. Grant revenues
fluctuate based on the completion of milestones for existing programs and the
receipt of any new grant awards.
Cost of Revenues. Cost of revenues as a percentage of revenues was 45% in
2000 compared to 48% for 1999. The lower costs as a percent of revenues are due
to the benefit of improved instrument pricing in the U.S. and the impact of the
reversal of a royalty-related accrual that was no longer required in the second
quarter of 2000 ($254,000). In addition, the Company reduced its warranty
accrual by $160,000 in the third and fourth quarters of 2000 reflecting
improved experience with warranty claims.
Research and Development Expenses. Research and development expenses of
$3.5 million in 2000 decreased approximately $0.8 million, or 18%, from 1999
levels. The decrease is primarily due to reduced direct expenditures on
prenatal genetics programs as we focused our product development efforts on the
cancer research and cancer pathology markets. Reflecting this change, research
and development costs were 21% and 30% of total revenues for 2000 and 1999,
respectively.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$6.4 million in 2000 from $5.2 million in 1999. In 2000 and 1999 sales and
marketing expenses as a percentage of total revenues were 38% and 37%,
respectively. The increase in spending in 2000 is due primarily to higher
commission and travel expenses as a result of increased sales in North America.
There was also an increase in sales personnel and marketing expenses related
primarily to the introduction of the new Genus(TM) and MDS(TM) products.
24
General and Administrative Expenses. General and administrative expenses in
2000 amounted to $3.0 million compared to $3.1 million in 1999, a decrease of
6%. As a percentage of revenue, general and administrative costs were 18% of
total revenues for 2000 compared to 22% for 1999. The reduction in the absolute
amount of spending and percentage of sales ratio is due to our continued focus
on cost effectiveness and the favorable effects of restructuring programs
completed in 1999.
Amortization of Intangibles. Amortization expense amounted to $280,000 in
2000 and $124,000 in 1999. Amortization expense relates to the amortization of
the intangible assets that included goodwill and intellectual and software
property in connection with our acquisition of the cytogenetic imaging business
of Vysis Inc. on July 16, 1999 and the PowerGene(R) product line on July 6,
2000.
Restructuring Costs. There were no restructuring expenses in 2000. Results
for 1999 included an $818,000 charge relating to the transition from prenatal
genetics programs to cancer research and cancer pathology markets. We
eliminated 15 mostly R&D positions in 1999 in the United States and United
Kingdom facilities. Of the $818,000 charge, $302,000 of non-cash costs was
incurred, $255,000 of costs was paid in 1999 and the balance was paid in 2000.
Other Income (Expense), Net. In 2000, other expense amounted to $140,000
compared to other income of $158,000 in 1999. The other expense total for 2000
represented a decrease in interest income, increased interest expenses related
to higher average borrowings and an increase in foreign exchange losses due to
the strength of the U.S. dollar against the British pound.
Factors That May Affect Future Results
We have experienced significant fluctuations in our quarterly operating
results in the past, and we expect to continue to experience fluctuations in
the future. Our customers, who are primarily public and private clinical
laboratories, research organizations and hospitals, generally operate on annual
budgets. Their budgeting cycles and spending practices affect our revenues.
Factors that may have an influence on our operating results in any particular
quarter include: demand for our products, seasonality of our sales, new product
introductions by us or our competitors, and the costs and time required for a
transition to the new products, timing of orders and shipments for capital
equipment sales, our mix of sales between our distributors and our direct sales
force, competition, including pricing pressures, timing and amount of research
and development expenses, including clinical trial-related expenditures,
foreign currency fluctuations, delays between our incurrence of expenses to
develop new products, including expenses related to marketing and service
capabilities, and the timing of sales and payments received for the new
products and the uncertainty of FDA or other domestic and international
regulatory clearances or approvals.
Due to the factors noted above, our future earnings and stock price may be
subject to significant volatility, particularly on a quarterly basis. It is
possible that our future operating results will be below the expectations of
public market analysts and investors. If our operating results fall below
market expectations, the price of our common stock could decline significantly.
Liquidity and Capital Resources
As of December 31, 2001, we had cash, cash equivalents, restricted cash and
short-term investments of $3.4 million and working capital of $3.0 million
compared to $7.0 million and $6.5 million, respectively, at December 31, 2000.
We maintain our cash equivalents primarily in securities with maturities of 90
days or less. Restricted cash, which collateralizes various credit and bank
guarantees in the United Kingdom, amounted to $0.2 million at December 31, 2001
and $1.7 million at December 31, 2000 (including restricted cash
collateralizing all bank debt). The reduction in cash, cash equivalents and
short-term investments in 2001 was due primarily to the net loss for the year
of $3.5 million.
25
Cash used in operations for the year ended December 31, 2001 was $2.1
million compared to $4.1 million for 2000. The $2.0 million decrease in cash
used in operations was primarily due to reduced requirements for accounts
receivables of $1.4 million (a decrease of $1.0 million in 2001 versus an
increase of $355,000 in 2000) and for inventories of $681,000 (a decrease of
$617,000 versus an increase of $64,000), reflecting our focus on effective
control of these items, and a $661,000 reduction in the operating loss for the
year discussed above. These were partially offset by a reduction in accounts
payable and accrued expenses of $403,000 and $664,000, respectively, excluding
the effect of the PSI purchase.
Cash used in investing activities was $335,000 in 2001 compared to cash
provided by investing activities of $4.2 million in 2000 primarily. This change
was primarily due to a decrease in our short-term investments of $4.7 million
in 2000 versus an increase in our short-term investments of $247,000 in 2001.
We invested $581,000 in 2001 for purchases of capital equipment compared to
$304,000 in 2000.
Cash provided by financing activities was $503,000 in 2001 compared to $1.4
million in 2000. We received $102,000 from the issuance of common stock in
2001(from the exercise of employee stock options) compared to $4.1 million in
2000, primarily from $3.2 million in net proceeds from a private placement of
our common stock in December 2000. Restricted cash amounted to $1.7 million at
the end of 2000, representing cash collateralizing our bank loans. This was
reduced to $245,000 at the end of 2001 as we entered into new loan agreements
in 2001.
On December 14, 2000, we completed a private placement of $3.5 million with
the sale of 1,280,908 shares of our common stock to two institutional investors
(purchasing for five separate funds) at a purchase price of $2.75 per share.
The Company received proceeds of $3.2 million from the private placement net of
issuance costs of $0.3 million. Warrants were also issued to the investors
entitling them to purchase an additional 422,700 shares of our common stock at
an exercise price of $3.75 per share. Additional shares and warrants may be
issuable to the investors under anti-dilution provisions of the Stock Purchase
Agreement between the Company and the investors, and terms of the warrants
issued to the investors. No such additional shares or warrants have been issued.
On July 6, 2000 we acquired the United States-based genetic imaging business
of PSI from International Remote Imaging Systems, Inc. The consideration paid
was 385,371 shares of common stock valued at $915,000, the assumption of
certain liabilities, and potential future cash payments to a maximum of $0.9
million based on the future performance of the business. No such performance
payments were required in 2001 and 2000.
In November 1999, we raised $2.0 million of additional equity via a private
placement of one million shares of our Common Stock at a price of $2.00 per
share. The investors also entered into an exclusive distribution agreement for
the Company's products. The price exceeded the closing price of our common
stock as reported on the Nasdaq National Market System. As part of the private
placement, we recognized deferred revenue of $720,000 to be amortized over 50
months, the term of the distribution agreement. As of December 31, 2001, the
remaining balance of the deferred revenue as a result of this private placement
was $346,000.
We had a (Pounds)750,000 gross and (Pounds)500,000 net unsecured revolving
line of credit with an international bank in the United Kingdom that expired on
March 31, 2001. The international bank subsequently provided us with a
(Pounds)750,000 gross and net zero borrowing facility with various renewals
through October 31, 2001. The line of credit expired at that time and we had no
loans under that facility at December 31, 2001. We collateralize various credit
and bank guarantees with cash deposits at the international bank amounting to
(Pounds)169,000 at December 31, 2001.
In September 1999, we established a $2.0 million, three-year term loan with
Silicon Valley Bank ("SVB"). The loan had monthly principal payments of $55,556
plus interest at SVB prime rate plus one and a quarter percent. In June 2000,
we expanded the loan agreement to include a $500,000 revolving line of credit.
26
We executed a new loan agreement with SVB on September 28, 2001. This new
facility replaced the three-year term loan and the revolving line of credit
that had an outstanding balance of $1.2 million on September 28, 2001. The new
loan agreement provides the capability to borrow up to $2.0 million based on
the level of certain of our North American accounts receivable and inventories.
At December 31, 2001, we had used $1.7 million of the facility, with $292,000
available but not used. The interest rate on the new facility was 6.75% at
December 31, 2001, based on the SVB prime rate plus 2 percent. The loan is
collateralized by substantially all of the assets of the U.S. corporation and
requires the Company to maintain a minimum level of tangible net worth. The
Company was in compliance with the SVB loan covenants through December 31, 2001.
In July 1999, we acquired certain cytogenetic instrumentation assets of
Vysis, Inc. Total consideration paid was $2,350,000 consisting of 497,368
shares of the Company's common stock, a cash payment of one million dollars and
installment payments of $500,000 paid July 16, 2000 and $250,000 paid January
16, 2001.
Since our formation in July 1986 through December 2001, we have generated an
accumulated deficit of approximately $41.7 million. We expect negative cash
flow from operations to continue through at least 2002, as we continue the
development of our MDS(TM) system, conduct clinical trials required for FDA
clearance of new products, expand our marketing, sales and customer support
capabilities, and add additional administrative infrastructure. In January
2002, we raised $1.0 million with a private placement of 571,500 shares of our
common stock at a price of $1.75 per share. In addition, in January 2002, we
instituted a series of actions to rationalize our operations to provide a lower
operating cost while increasing efficiencies. We are closing our League City,
Texas office and consolidating our manufacturing and engineering facilities.
This is expected to result in a reduction in our operating expenses of
approximately $0.4--$0.5 million per quarter, beginning in the second quarter
of 2002, with a first quarter restructuring charge estimated at $150,000. As a
result of these actions, we currently estimate that our capital resources will
enable us to meet our short-term capital needs through at least 2002.
However, expenditures required to achieve the Company's plans may be greater
than projected or the cash flow generated from operations may be less than
projected. As a result, our long-term capital needs may require us to seek to
obtain additional funds through equity or debt financing, collaborative or
other arrangements with other companies, bank financing and other sources. We
have expended and will continue to expend substantial amounts of money for
research and development, preclinical testing, planned clinical investigations,
capital expenditures, working capital needs and manufacturing and marketing of
our products. Our future research and development efforts, in particular, are
expected to include development of additional applications of our current
cytogenetic products and additional applications for the MDS(TM) system, which
will likely require additional funds.
The exact timing and amount of spending required cannot be accurately
determined and will depend on several factors, including:
. progress of our research and development efforts and planned clinical
investigations,
. competing technological and market developments,
. commercialization of products currently under development by us and our
competitors, and
. market acceptance and demand for our products.
To the extent necessary, we may seek to obtain additional funds through
equity or debt financing, collaborative or other arrangements with other
companies, bank financing and other sources. If we raise funds by issuing
equity securities, you will experience dilution of your holdings in our common
stock. We cannot assure you that additional financing will be available when
needed or on terms acceptable to us. If adequate and acceptable financing is
not available, we may have to delay development or commercialization of certain
of our products or license to third parties the rights to commercialize certain
of our products or technologies that we
27
would otherwise seek to commercialize. We may also reduce our marketing,
customer support or other resources devoted to certain of our products. Any of
these actions could have a material adverse effect on our business, financial
condition or results of operations.
Critical Accounting Policies
We have prepared our financial statements in conformity with generally
accepted accounting principles. This requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
We recognize revenue on product sales upon shipment, provided that, at the
time of shipment, there is evidence of contractual arrangement with the
customer, the fee is fixed and determinable, collection of the resulting
receivable is probable and there are no significant remaining obligations.
Concurrent with shipment, we accrue for expected hardware warranty expenses and
establish reserves, based on our historical experience, for product returns. We
establish an accounts receivable allowance for estimated amounts that may not
be collectible from customers.
We use the asset and liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. We have not recorded an income tax benefit in 2001, 2000 and 1999 due to
the recording of a valuation allowance as an offset to net deferred tax assets.
A valuation allowance is provided due to uncertainties surrounding the
realization of deferred tax assets due to our history of operating losses.
In accordance with Financial Accounting Standards Board Statement No. 142,
"Goodwill and Other Intangible Assets", goodwill and intangible assets deemed
to have indefinite lives will no longer be amortized but, instead will be
subject to annual impairment tests. The Company will apply the new rules on
accounting for goodwill and other intangible assets beginning in the first
quarter of 2002. During 2002, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002, and has not yet determined what effect, if any, applying
those tests will have on the Company's financial position and results of
operations. The Company is subject to financial statement risk to the extent
that the goodwill and indefinite lived intangible assets become impaired. At
December 31, 2001, the Company had $2.3 million in unamortized goodwill and
intangible assets that was being amortized over 10 years at December 31, 2001.
Any resulting impairment loss could have a material adverse impact on our
financial condition and results of operations.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations," which establishes financial accounting and reporting for
business combinations and supersedes Accounting Principles Board ("APB")
Opinion No. 16, "Business Combinations", and Statement of SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises". It
requires that all business combinations in the scope of this statement are to
be accounted for using one method, the purchase method. The provisions of this
statement apply to all business combinations initiated after June 30, 2001, and
also applies to all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements
28
upon their acquisition, and after they have been initially recognized in the
financial statements. The provisions of this statement are effective starting
with fiscal years beginning after December 15, 2001. The Company will adopt
SFAS No. 142 during the first quarter of fiscal 2002, and is in the process of
evaluating the impact of implementation on the financial position and results
of operations of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
periods. This statement supersedes SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets" and APB Opinion No. 30, however, this statement retains
the requirement of Opinion No. 30 to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, by abandonment, or in a
distribution to owners) or is classified as held for sale. This statement
addresses financial accounting and reporting for the impairment of certain
long-lived assets and for long-lived assets to be disposed of. The Company
adopted SFAS No. 144 during the first quarter of fiscal 2002. The adoption had
no material impact on the financial position and results of operations of the
Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVES
AND FINANCIAL INSTRUMENTS
Foreign currency hedging instruments
We transact business in various foreign currencies. Accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
This exposure is primarily related to revenues and operating expenses in the
U.K. denominated in the respective local currency.
We currently do not use financial instruments to hedge operating expenses in
the U. K. denominated in the respective local currency. Instead, we believe
that a natural partial hedge exits, because local currency revenues will
substantially offset the operating expenses denominated in the respective local
currency. We assess the need to utilize financial instruments to hedge currency
exposure on an ongoing basis. We did not engage in hedging activities in 2001
and 2000 and, as of December 31, 2001, we had no hedging contracts outstanding.
We do not use derivative financial instruments for speculative trading
purposes, nor do we hedge our foreign currency exposure in a manner that
entirely offsets the effects of changes in foreign exchange rates. We regularly
review our hedging program and may as a part of this review determine at any
time to change our hedging program.
Fixed income investments
Our exposure to market risks due to changes in interest rates relates
primarily to investments in debt securities issued by U.S. government agencies
and corporate debt securities. Our general policy is to limit the risk of
principal loss and ensure the safety of invested funds by limiting market and
credit risk. We place our investments with high credit quality issuers and, by
policy, limit the amount of the credit exposure to any one issuer. All highly
liquid investments with maturity of three months or less at the date of
purchase are considered to be cash equivalents; investments with maturities
over three months are considered to be short-term investments. At December 31,
2001, all of the short-term investments (with a market value of $652,000)
mature prior to February 15, 2002. The weighted average pre-tax interest rate
on the investment portfolio is approximately 5.2%.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Applied Imaging Corp.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive loss, of stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Applied Imaging Corp. and its subsidiaries at December
31, 2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 50 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, CA
February 1, 2002
30
APPLIED IMAGING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
------------------
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 2,538 $ 4,447
Restricted cash..................................................................... 245 1,667
Short-term investments.............................................................. 652 898
Trade accounts receivable, net of allowance for doubtful accounts of $222 and $289,
respectively...................................................................... 5,684 6,732
Inventories......................................................................... 1,010 1,627
Prepaid expenses and other current assets........................................... 547 239
-------- --------
Total current assets............................................................ 10,676 15,610
Property and equipment, net............................................................ 1,021 1,127
Intangibles, net....................................................................... 2,344 2,650
Other assets........................................................................... 56 55
-------- --------
Total assets.................................................................... $ 14,097 $ 19,442
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank debt........................................................ $ 1,687 $ 1,929
Current portion of capital lease obligation......................................... 14 34
Current portion of related party notes payable...................................... -- 250
Accounts payable.................................................................... 1,758 1,829
Accrued expenses.................................................................... 1,404 2,646
Deferred revenue, current........................................................... 2,779 2,417
-------- --------
Total current liabilities....................................................... 7,642 9,105
Bank debt, less current portion..................................................... -- 500
Deferred revenue, non-current....................................................... 396 345
Capital lease obligation, net of current portion.................................... -- 9
-------- --------
Total liabilities............................................................... 8,038 9,959
-------- --------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.001 par value; 6,000,000 shares authorized; none issued and
outstanding at December 31, 2001 and 2000......................................... -- --
Common stock; $0.001 par value; 50,000,000 shares authorized; 15,242,417 and
15,140,936 issued and outstanding December 31, 2001 and 2000, respectively........ 15 15
Additional paid-in capital.......................................................... 48,154 48,070
Accumulated deficit................................................................. (41,738) (38,206)
Deferred stock compensation......................................................... (7) (30)
Accumulated other comprehensive loss................................................ (365) (366)
-------- --------
Total stockholders' equity...................................................... 6,059 9,483
-------- --------
Total liabilities and stockholders' equity...................................... $ 14,097 $ 19,442
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
31
APPLIED IMAGING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Year Ended December 31,
-------------------------
2001 2000 1999
------- ------- -------
Revenues:
Product sales........................................... $13,954 $13,037 $11,533
Software maintenance, service and grant revenues........ 4,583 3,652 2,655
------- ------- -------
Total revenues...................................... 18,537 16,689 14,188
------- ------- -------
Cost of revenues:
Product sales........................................... 5,748 5,891 5,640
Software maintenance, service and grant revenue......... 1,978 1,673 1,104
------- ------- -------
Total cost of revenues.............................. 7,726 7,564 6,744
------- ------- -------
Gross profit........................................ 10,811 9,125 7,444
------- ------- -------
Operating expenses:
Research and development................................ 3,900 3,525 4,299
Sales and marketing..................................... 7,457 6,409 5,232
General and administrative.............................. 2,662 2,964 3,138
Amortization of intangibles............................. 306 280 124
Restructuring costs..................................... -- -- 818
------- ------- -------
Total operating expenses............................ 14,325 13,178 13,611
------- ------- -------
Operating loss...................................... (3,514) (4,053) (6,167)
Other income (expense), net................................ (18) (140) 158
------- ------- -------
Net loss............................................ (3,532) (4,193) (6,009)
Other comprehensive loss, net of tax:
Change in unrealized loss on short-term investments..... 1 13 (12)
------- ------- -------
Comprehensive loss...................................... $(3,531) $(4,180) $(6,021)
======= ======= =======
Net loss per share--basic and diluted...................... $ (0.23) $ (0.31) $ (0.50)
======= ======= =======
Shares used to calculate basic and diluted net loss per
share.................................................... 15,191 13,594 11,930
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
32
APPLIED IMAGING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2001, 2000, and 1999
(in thousands)
Accumulated
Common Stock Additional Deferred other Total
------------- paid-in Accumulated stock comprehensive stockholders'
Shares Amount capital deficit compensation loss equity
------ ------ ---------- ----------- ------------ ------------- -------------
Balances as of December 31,
1998......................... 11,530 $12 $41,121 $(28,004) $(419) $(367) $12,343
Exercise of common stock
options...................... 6 -- 10 -- -- -- 10
Private placement............. 1,000 1 1,280 -- -- -- 1,281
Employee stock purchase....... 22 -- 23 -- -- -- 23
Vysis acquisition............. 497 -- 600 -- -- -- 600
Amortization of deferred stock
compensation................. -- -- -- -- 376 -- 376
Change in unrealized loss from
short-term investments....... -- -- -- -- -- (12) (12)
Net loss...................... -- -- -- (6,009) -- -- (6,009)
------ --- ------- -------- ----- ----- -------
Balances as of December 31,
1999......................... 13,055 13 43,034 (34,013) (43) (379) 8,612
Exercise of common stock
options...................... 398 1 857 -- -- -- 858
Private placement--net
proceeds.................... 1,281 1 3,183 -- -- -- 3,184
Employee stock purchase....... 22 -- 47 -- -- -- 47
PSI Asset Purchase............ 385 -- 915 -- -- -- 915
Deferred stock compensation... -- -- 34 -- (34) -- --
Amortization of deferred stock
compensation................. -- -- -- -- 47 -- 47
Change in unrealized loss from
short-term investments....... -- -- -- -- -- 13 13
Net loss...................... -- -- -- (4,193) -- -- (4,193)
------ --- ------- -------- ----- ----- -------
Balances as of December 31,
2000......................... 15,141 15 48,070 (38,206) (30) (366) 9,483
Exercise of common stock
options...................... 34 -- 53 -- -- -- 53
Private placement expenses.... -- -- (58) -- -- -- (58)
Employee stock purchase....... 67 -- 106 -- -- -- 106
Deferred stock compensation... -- -- (17) -- 17 -- --
Amortization of deferred stock
compensation................. -- -- -- -- 6 -- 6
Change in unrealized gain from
short-term investments....... -- -- -- -- -- 1 1
Net loss...................... -- -- -- (3,532) -- -- (3,532)
------ --- ------- -------- ----- ----- -------
Balances as of December 31,
2001......................... 15,242 $15 $48,154 $(41,738) $ (7) $(365) $ 6,059
====== === ======= ======== ===== ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
33
APPLIED IMAGING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31,
------------------------------
2001 2000 1999
------- -------- -------
Cash flows from operating activities:
Net loss......................................................................... $(3,532) $ (4,193) $(6,009)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation & amortization..................................................... 955 706 1,092
Provision for doubtful accounts................................................. -- 162 89
Amortization related to deferred stock compensation............................. 6 47 376
Loss on sale of fixed assets.................................................... 37 -- 41
Changes in operating assets and liabilities:
Trade accounts and related party receivable................................... 1,048 (355) (2,598)
Inventories................................................................... 617 (64) (200)
Prepaid expenses and other assets............................................. (308) (42) 249
Accounts payable.............................................................. (71) (474) 654
Accrued expenses.............................................................. (1,242) (578) 515
Deferred revenue.............................................................. 413 719 813
------- -------- -------
Net cash used in operating activities....................................... (2,077) (4,072) (4,978)
------- -------- -------
Cash flows from investing activities:
Purchase of short-term investments............................................... (9,306) (27,493) (3,685)
Proceeds from sale and maturities of investments................................. 9,553 32,182 4,347
Proceeds from sale of equipment.................................................. -- -- 60
Acquisition of assets............................................................ -- (170) (1,000)
Purchases of equipment........................................................... (581) (304) (515)
Other assets..................................................................... (1) 25 5
------- -------- -------
Net cash provided by (used in) investing activities......................... (335) 4,240 (788)
------- -------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock....................................... 102 4,089 1,314
Bank and other loan proceeds..................................................... 3,899 1,296 2,000
Bank and other loan payments..................................................... (4,891) (2,243) (169)
Capital lease payments, principal portion........................................ (29) (28) (27)
Restricted cash.................................................................. 1,422 (1,667) --
------- -------- -------
Net cash provided by financing activities:.................................. 503 1,447 3,118
------- -------- -------
Net increase (decrease) in cash and cash equivalents............................... (1,909) 1,615 (2,648)
Cash and cash equivalents at beginning of year..................................... 4,447 2,832 5,480
------- -------- -------
Cash and cash equivalents at end of year........................................... $ 2,538 $ 4,447 $ 2,832
======= ======== =======
Supplemental disclosure of cash flow information:
Cash paid for interest during the period......................................... $ 189 $ 362 $ 114
======= ======== =======
Cash paid for taxes during the period............................................ $ 23 $ 15 $ 28
======= ======== =======
Supplemental disclosure of non-cash investing and financing activities
Accrual recorded for business acquired........................................... $ -- $ 90 $ 132
======= ======== =======
Stock issued in connection with acquisition...................................... $ -- $ 915 $ 600
======= ======== =======
Debt assumed for acquisition of intangible assets related to business acquired... $ -- $ -- $ 750
======= ======== =======
Change in unrealized loss from short-term investments............................ $ 1 $ 13 $ (12)
======= ======== =======
Deferred stock compensation...................................................... $ (17) $ 34 $ --
======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
34
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of the Company and Significant Accounting Policies
The Company
Applied Imaging Corp (the "Company") was incorporated in California in July
1986 and subsequently reincorporated in Delaware in October 1996 to develop,
manufacture, and market automated genetic imaging systems for use in
cytogenetic laboratories for cancer testing, prenatal testing and other genetic
testing applications. The Company sells products to government and private
clinical laboratories, research institutions, universities, and pharmaceutical
companies located in the United States, Canada, Europe, Japan and other
countries. The Company also markets imaging systems designed for use in plant
and animal genetic research programs. In addition, the Company recently
introduced and has received clearance from the Food and Drug Administration
(FDA) for a clinical system to detect micrometastatic cancer cells in bone
marrow from cancer patients. This system and its research capabilities allows
physicians to better determine the initial staging of cancer cases, to detect
disease recurrence earlier than is currently possible and to genetically
characterize cancer cells. The Company is headquartered in Santa Clara,
California, and has facilities in League City, Texas and the United Kingdom.
The Company's products are sold worldwide through a direct sales force,
third-party distributors and independent sales representatives. The Company
employs approximately 92 people worldwide.
Liquidity
These consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business.
The Company has incurred net losses in fiscal 2001 and 2000 and there can be no
assurance that the Company will attain profitability.
At December 31, 2001, the Company had aggregate consolidated net losses of
$41.7 million. The Company expects negative cash flow from operations to
continue through at least 2002, with the need for funding additional
development of the MDS(TM) system, conducting clinical trials required for FDA
clearance of new products, expanding marketing, sales and customer support
capabilities, and adding additional administrative infrastructure. Subsequent
to year-end, the Company raised $1.0 million in January 2002 with a private
placement of 571,500 shares of its common stock at a price of $1.75 per share.
In addition, in January 2002, the Company instituted a series of actions to
rationalize its operations to provide a lower operating cost. The Company is
closing its League City, Texas office and consolidating its manufacturing and
engineering facilities. This is expected to result in a reduction in operating
expenses beginning in the second quarter. As a result of these actions,
management believes that its existing cash balances and other potential
financing alternatives will be sufficient to meet the Company's capital and
operating requirements through at least 2002.
However, expenditures required to achieve the Company's plans may be greater
than projected or the cash flow generated from operations may be less than
projected. As a result, the Company's long-term capital needs may require the
Company to seek to obtain additional funds through equity or debt financing,
collaborative or other arrangements with other companies, bank financing and
other sources. There can be no assurance that the Company will be able to
obtain additional debt or equity financing on terms acceptable to the Company,
or at all. If adequate funds are not available, the Company could be required
to delay development or commercialization of certain products, to license to
third parties the rights to commercialize certain products or technologies that
the Company would otherwise seek to commercialize internally, or to reduce the
marketing, customer support, or other resources devoted to product development.
Accordingly, the failure of the Company to obtain sufficient funds on
acceptable terms when needed could have a material adverse effect on the
Company's business, results of operations and financial condition.
35
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
Reclassifications
Certain financial statement items have been reclassified to conform to the
current year's presentation. These reclassifications had no impact on
previously reported net earnings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
All investments with original maturities at date of purchase of three months
or less are considered by the Company to be cash equivalents.
Restricted Cash
At December 31, 2001 cash of $245,000 was restricted from withdrawal and
held at the Company's international bank in the U.K. as collateral for various
credit and bank guarantees.
Short-Term Investments
Short-term investments consist of investments acquired with maturities
exceeding three months. While the Company's intent is to hold debt securities
to maturity, consistent with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company has classified all securities as available-for-sale,
as the sale of such securities may be required prior to maturity to implement
management strategies. Such securities are reported at fair value with
unrealized gains or losses excluded from earnings and reported as a separate
component of stockholders' equity, net of applicable taxes. As of December 31,
2001, the difference between the fair value and the amortized cost of
available-for-sale securities was recorded as an unrealized gain in
stockholders' equity.
As of December 31, 2001 and 2000, the Company's short-term investments
consisted of the following (in thousands):
2001 2000
------------------------------- -------------------------------
Amortized Unrealized Amortized Unrealized
Cost Gain Fair Value Cost Gain Fair Value
--------- ---------- ---------- --------- ---------- ----------
Corporate bonds.............. $650 $2 $652 $897 $1 $898
As of December 31, 2001 the maturities of the short-term investments are as
follows: $652,000 within one year. There were no realized gains or losses in
2001 or 2000.
36
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are stated at the lower of cost (first in, first out) or market.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three to five years. When
assets are disposed of, the cost and related accumulated depreciation are
removed from the accounts and the resulting gains or losses are included in
other income or loss. Equipment under capital leases are amortized over the
lesser of their estimated useful lives or the term of the lease. Maintenance
and repairs are charged to expense as incurred.
Intangibles, net
Net intangible assets amounted to $2.3 million at December 31, 2001.
Intangible assets include goodwill and intellectual property in connection with
the acquisition of the cytogenetic imaging instrumentation businesses of Vysis,
Inc. and Perceptive Scientific Instruments, LLC ("PSI"). The intangible assets
are being amortized on a straight-line basis over 10 years. Accumulated
amortization was $710,000 as of December 31, 2001. During the years ended
December 31, 2001, 2000 and 1999, the Company recorded amortization expense of
$306,000, $280,000 and $124,000, respectively.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets under SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which requires the Company to review for impairment of long-lived
assets, whenever events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable. When such an event occurs,
management determines whether there has been an impairment by comparing the
anticipated undiscounted future net cash flows to the related asset's carrying
value. If an asset is considered impaired, the asset is written down to fair
value, which is determined based either on discounted cash flows or appraised
value, depending on the nature of the asset.
Fair Value of Financial Instruments
Financial instruments consist principally of cash equivalents, short-term
investments, trade receivables, notes receivable, accounts payable, and bank
debt. The carrying amounts of these financial instruments approximate fair
value.
Financial instruments that potentially subject the Company to concentrations
of credit risk are accounts receivable, cash equivalents and short-term
investments which the Company places with high-credit qualified financial
institutions and, by policy, limits the amount of credit exposure to any one
financial institution. The Company sells its products to government and private
clinical cytogenetic laboratories, research institutions, universities, and
pharmaceutical companies located primarily in the United States, Canada,
Europe, Japan and other countries. The Company's credit risk is concentrated
primarily in the United States and Europe. The Company does not have a
significant concentration of credit risk with any single customer. The Company
performs on-going credit evaluations of its customer's financial condition and,
generally requires no collateral from its customers. The Company maintains an
allowance for doubtful accounts to cover potential credit losses.
37
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company recognizes revenue on product sales upon shipment, provided
that, at the time of shipment, there is evidence of contractual arrangement
with the customer, the fee is fixed and determinable, collection of the
resulting receivable is probable and there are no significant remaining
obligations. Concurrent with shipment, the Company accrues for expected
hardware warranty expenses and establishes reserves, based on the Company's
historical experience, for product returns.
Revenue attributable to software maintenance and support is deferred and
recognized ratably over the term of the maintenance agreement, generally one
year. Grant revenues are recognized as the work is performed
Capitalized Software Costs
Computer software development costs incurred subsequent to the determination
of product technological feasibility are capitalized in accordance with the
provisions of SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed". Amortization of these capitalized costs is
provided using the greater of the ratio of revenues generated in the period
over total future revenues of the product, or the straight-line method over the
estimated market life of the related products, generally three years,
commencing when the product becomes generally available to customers. For the
years ended December 31, 2001, 2000 and 1999, software development costs
incurred subsequent to the establishment of technological feasibility have not
been material. The net book value of capitalized costs is not significant and
is included in other assets in the consolidated balance sheets.
Stock Based Compensation
The Company uses the intrinsic-value method to account for its stock-based
compensation arrangements. The Company accounts for equity instruments issued
to non-employees in accordance with the provisions of SFAS No. 123 "Accounting
for Stock-based Compensation" and EITF Issue No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring or in
Conjunction With Selling Goods and Services."
Foreign Exchange
The Company accounts for its foreign operations in accordance with SFAS No.
52, "Foreign Currency Translation". Prior to April 1994, the functional
currency for Applied Imaging International, Limited was the British pound and,
accordingly, translation adjustments resulting from the conversion of the
subsidiary's financial statements into U.S. dollars were accumulated and
reported as a separate component of stockholders' equity. Beginning in April
1994, certain operational and organizational changes within the Company caused
the functional currency for the Company's subsidiary to become the U.S. dollar.
Therefore, monetary assets and liabilities of the subsidiary are remeasured to
the U.S. dollar at year-end exchange rates while nonmonetary items are
remeasured at historical rates. Revenue and expense accounts related to
monetary assets and liabilities are remeasured at the average rates in effect
during the year. Revenue and expenses related to non-monetary assets and
liabilities are translated at historical rates. Foreign currency gains and
losses resulting from the conversion of the subsidiary's financial statements
into U.S. dollars are currently recognized in the consolidated statement of
operations and comprehensive loss in other income and expense. The functional
currency of Applied Imaging, Limited is also the U.S. dollar.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
38
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A
valuation allowance is provided to reduce the deferred tax assets when it is
more likely than not that all or a portion of the deferred tax assets will not
be realized.
Loss per Share
Basic and diluted net loss per share is computed using the weighted average
number of outstanding shares of common stock. There were no reconciling items
of the numerators and denominators of the basic and diluted EPS computation.
Shares excluded from the computation of EPS because their effect on EPS was
antidilutive, but could dilute basic EPS in future periods are as follows:
2001 2000 1999
-------------------------- -------------------------- --------------------------
Weighted average Weighted average Weighted average
Shares exercise price Shares exercise price Shares exercise price
--------- ---------------- --------- ---------------- --------- ----------------
Options............ 2,517,473 $2.56 2,012,391 $2.59 1,988,568 $2.10
Warrants........... 650,790 3.61 650,790 3.61 313,010 5.10
--------- --------- ---------
Total........... 3,168,263 2,663,181 2,301,578
========= ========= =========
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations," which establishes financial accounting and reporting for
business combinations and supersedes Accounting Principles Board ("APB")
Opinion No. 16, "Business Combinations", and Statement of SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises". It
requires that all business combinations in the scope of this statement are to
be accounted for using one method, the purchase method. The provisions of this
statement apply to all business combinations initiated after June 30, 2001, and
also applies to all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon
their acquisition, and after they have been initially recognized in the
financial statements. The provisions of this statement are effective starting
with fiscal years beginning after December 15, 2001. The Company will adopt
SFAS No. 142 during the first quarter of fiscal 2002, and is in the process of
evaluating the impact of implementation on the financial position and results
of operations of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
periods. This statement supersedes SFAS No. 121 "Accounting for the Impairment
of Long-lived Assets" and APB Opinion No. 30, however, this statement retains
the requirement of Opinion No. 30 to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, by abandonment, or in a
distribution to owners) or is classified as held for sale. This statement
addresses financial accounting and reporting for the impairment of certain
long-lived assets and for long-lived assets to be disposed of. The Company
adopted SFAS No. 144 during the first quarter of fiscal 2002. The adoption had
no material impact on the financial position and results of operations of the
Company.
39
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Inventories
A summary of inventories follows (in thousands):
December 31,
-------------
2001 2000
------ ------
Raw materials.................................... $ 898 $1,443
Work in process.................................. 49 122
Finished goods................................... 63 62
------ ------
$1,010 $1,627
====== ======
(3) Property and Equipment
A summary of property and equipment follows (in thousands):
December 31,
-------------
2001 2000
------ ------
Equipment........................................ $2,757 $2,855
Demonstration equipment.......................... 1,330 1,604
Furnitures and fixtures.......................... 692 726
------ ------
4,779 5,185
Less accumulated depreciation.................... 3,758 4,058
------ ------
$1,021 $1,127
====== ======
As of December 31, 2001 and 2000, the Company had $14,000 and $41,000
respectively, of equipment under capital lease net of accumulated amortization
of $124,000 and $97,000 respectively. Depreciation expense was $622,000,
$420,000, and $968,000 for 2001, 2000 and 1999 respectively.
(4) Accrued Expenses
A summary of accrued expenses follows (in thousands):
December 31,
-------------
2001 2000
------ ------
Compensation and related costs................... $ 767 $1,037
Warranty related costs........................... 148 187
Royalties........................................ 83 148
Audit, tax, legal and external reporting costs... 79 231
Consulting related expenses...................... 22 150
Other............................................ 305 893
------ ------
$1,404 $2,646
====== ======
(5) Debt Obligations
The Company had a (Pounds)750,000 gross and (Pounds)500,000 net unsecured
revolving line of credit with an international bank in the United Kingdom that
expired on March 31, 2001. The international bank subsequently
40
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
provided the Company with a (Pounds)750,000 gross and net zero borrowing
facility with various renewals through October 31, 2001. The line of credit
expired at that time and the Company had no loans under that facility at
December 31, 2001. The Company collateralizes various credit and bank
guarantees with cash deposits at the international bank amounting to
(Pounds)169,000 ($245,000) at December 31, 2001.
In September 1999, the Company established a $2.0 million, three-year term
loan with Silicon Valley Bank ("SVB"). The loan had monthly principal payments
of $55,556 plus interest at SVB prime rate plus one and a quarter percent. In
June 2000, the Company expanded the loan agreement to include a $500,000
revolving line of credit.
The Company executed a new one-year loan agreement with SVB on September 28,
2001. This new facility replaced the three-year term loan and the revolving
line of credit that had an outstanding balance of $1.2 million on September 28,
2001. The new loan agreement provided the capability to borrow up to $2.0
million based on the level of certain of the Company's North American accounts
receivable and inventories. At December 31, 2001 the Company had used $1.7
million of the facility with $292,000 available but not used. The interest rate
on the new facility was 6.75% at December 31, 2001, based on the SVB prime rate
plus 2 percent. The loan is collateralized by substantially all of the assets
of the U.S. corporation and requires the Company to maintain a minimum level of
tangible net worth. The Company was in compliance with the SVB loan covenants
through December 31, 2001.
As part of the payment terms to Vysis Inc., for the acquisition by the
Company of the intellectual and software property related to the former's
cytogenetic imaging instrumentation business, the Company agreed to a note
obligation of $750,000 payable in two installments each at 7% interest rate:
the first for $500,000 was paid in July 2000 and the second for $250,000 was
paid in January 2001.
(6) Commitments and Contingencies
The Company has various noncancelable operating leases for equipment,
vehicles, and facilities expiring through 2006. The facility leases generally
contain renewal options for periods ranging from two to five years and require
the Company to pay all executory costs such as maintenance, property taxes, and
insurance. Rent expense under operating leases aggregated $853,000, $535,000
and $455,000 during 2001, 2000 and 1999, respectively. The Company's primary
lease commitments are for its facilities in the United Kingdom, which aggregate
approximately (Pounds)119,000 ($173,000) per year through 2008, with an option
to cancel in July 2003, and for its facilities in Santa Clara, California,
which aggregated approximately $589,000 for 2001. The lease on the Santa Clara
facilities expired in November 2000 and converted to a month-to-month lease at
that time. The Company signed a new lease on the Santa Clara facilities
effective April 1, 2001 through August 31, 2004 at a monthly rent of $52,100,
including operating expenses.
The Company leased approximately 9,000 square feet in League City, Texas to
house the product development and commercial support organizations for the
PowerGene(R) product line. This lease expired in August 2001. Approximately
one-third of the space in League City was sub-leased to a third party. The
company signed a new lease for approximately 4,400 square feet of office space
in the same building in League City effective November 1, 2001 through October
31, 2006 at a monthly rent of $7,000, including operating expenses.
The Company has future minimum lease payments under non-cancelable operating
leases amounting to: $882,000 in 2002, $796,000 in 2003, $501,000 in 2004,
$84,000 in 2005 and $70,000 in 2006, totaling $2,333,000.
41
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has a capital lease commitment of $14,000 including interest at
10%, which is required to be paid in 2002.
In October 2001, the Company established The Applied Imaging, Corp.
Retention Incentive Program (the "Program") to provide retention incentives to
officers and outside directors in the event of a change in control of the
Company.
The Company is subject to claims and assessments from time to time in the
ordinary course of business. Management does not believe that any such matters,
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
(7) Stockholders' Equity
Common Stock
The Company is authorized to issue 50,000,000 shares of common stock. As of
December 31, 2001, there were 15,242,417 shares of common stock outstanding and
warrants outstanding to purchase 422,700 shares of common stock at $3.75 per
share, 100,000 shares at $3.67 and 128,090 shares at $3.10 per share. These
warrants expire in 2005.
Private Placement Transactions
On December 14, 2000, the Company completed a private placement of $3.5
million with the sale of 1,280,908 shares of its common stock to two
institutional investors (purchasing for five separate funds) at a purchase
price of $2.75 per share. The Company received net proceeds of $3.2 million
from the private placement after deducting fees and costs of $0.3 million. The
purchase price was negotiated with the investors and represented a discount
from the previous day's closing price of $3.00 per share as reported by the
Nasdaq National Market System. Warrants were also issued to the investors
entitling them to purchase an additional 422,700 shares of common stock at an
exercise price of $3.75 per share. The Company has assigned a value, determined
using the Black-Scholes pricing model, of $747,000 to these warrants.
Additional shares and warrants may be issuable to the investors under
anti-dilution provisions of the Stock Purchase Agreement between the Company
and the investors, and terms of the warrants issued to the investors.
On November 3, 1999, the Company consummated a private sale of one million
shares of its Common Stock to certain accredited investors at a purchase price
of $2.00 per share. The investors also entered into a distribution agreement
for the Company's products. The price exceeded the closing price of the
Company's Common Stock as reported on the Nasdaq National Market System. As
part of the private placement, the Company recognized deferred revenue of
$720,000 to be amortized over 50 months. The total recognized to date is
$374,000.
Stock Plans
As of December 31, 2001, 2,662,348 shares of common stock were reserved for
issuance under the Company's 1998 Incentive Stock Option Plan ("1998 Stock
Plan"), 3,415,095 shares reserved for issuance under all plans. This represents
the maximum aggregate number of shares that remain to be optioned or sold under
the 1998 Stock Plan. A total of 1,778,164 options are outstanding at December
31, 2001 under the 1998 Stock Plan (2,517,473 options under all plans). Under
the 1998 Stock Plan, stock options may be granted to Board members, officers,
key employees, and consultants at the fair market value of the common stock at
the date of the grant, as determined by the Board. Options are exercisable over
10 years from the date of grant, and typically vest ratably
42
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
over 4 years. An amendment of the Company's 1998 Stock Plan was approved by the
Company's stockholders on May 16, 2001 to increase the total number of shares
authorized for issuance under the 1998 Stock Plan to 2,850,000 shares, an
increase of 950,000 shares. As of December 31, 2001, there were 884,184 options
available for grant under the 1998 Stock Plan.
In October 1998, the Company's 1988 Amended and Restated Incentive Stock
Option Plan ("1988 Stock Plan"), expired. No options were granted after October
1998. As of December 31, 2001, 639,309 options were outstanding under the 1988
Plan.
In 1994, the Company enacted a Directors Option Plan designed to encourage
participation on the Company's Board. Under this plan, 10,000 shares per year
are automatically granted to non-employee directors. The terms of the plan
allow the granting of stock options upon initial election to the Board and for
each subsequent term on the Board. As of December 31, 2001 there were 113,438
shares reserved for issuance under this plan and a total of 100,000 options
have been granted and are outstanding at December 31, 2001.
On February 2, 1998, the Company's Board of Directors approved an amendment
to reprice options outstanding under the Company's 1988 Stock Option Plan with
exercise prices over $3.00 per share. On February 2, 1998, holders of such
options were offered the choice of retaining their existing options without
amendment or accepting the amendment of their stock options. The exercise price
of the amended options is $2.44 per share, which equals the fair market value
of the Company's common stock on February 2, 1998. Vesting of the amended
options occurs over four years and begins on February 2, 1998. Holders of the
options had until March 30, 1998 to make an irrevocable decision to either
retain their existing options without amendment or accept the amendment to
their options. The amendment of the options is treated for accounting purposes
as if the Company cancelled the existing options and issued new options with
the lower exercise price and new vesting schedule. The compensation expense
measured for the difference between the fair value of the Company's common
stock on the date employees elected to accept new repriced options and the
exercise price of the repriced options ($2.44 per share) was not significant.
A summary of the status of the Company's stock option activity for the years
ended December 31, 2001, 2000 and 1999, is as follows:
Weighted- Weighted-
average exercise average fair
Shares price value
--------- ---------------- ------------
Outstanding at December 31, 1998....... 1,787,405 $2.32
Granted................................ 377,500 0.99 $0.48
Cancelled.............................. (170,837) 2.34
Exercised.............................. (5,500) 1.80
---------
Outstanding at December 31, 1999....... 1,988,568 $2.10
Granted................................ 670,300 3.64 $1.77
Cancelled.............................. (247,724) 2.22
Exercised.............................. (398,753) (a) 2.15
---------
Outstanding at December 31, 2000....... 2,012,391 $2.59
Granted................................ 735,000 2.68 $1.36
Cancelled.............................. (196,018) 3.50
Exercised.............................. (33,900) 1.71
---------
Outstanding at December 31, 2001....... 2,517,473 $2.56
=========
- --------
(a) Includes 467 options exercised in 2000 but shares issued in 2001
43
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
as of December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------- ------------------------
Weighted
average Weighted Weighted
Number of remaining average exercise Number of average
Range of exercise prices options contractual life price options exercise price
- ------------------------ --------- ---------------- ---------------- --------- --------------
From $0.72 to $1.19... 229,300 7.69 years $1.06 141,819 $1.05
From $1.25 to $1.80... 196,750 4.40 years 1.73 176,750 1.76
From $1.85 to $1.88... 411,163 7.57 years 1.87 305,163 1.88
From $2.03 to $2.44... 620,247 7.15 years 2.40 428,398 2.41
From $2.75 to $3.44... 663,013 8.44 years 3.05 133,716 2.93
From $3.63 to $4.03... 397,000 8.56 years 3.97 122,417 3.97
--------- ---------
2,517,473 1,308,263
========= =========
The number of options exercisable increased 226,527 from December 31, 2000
to December 31, 2001 and 163,035 from December 31, 1999 to December 31, 2000.
Employee Stock Purchase Plan
On June 19, 1996, the Board adopted, effective upon the closing of the IPO,
the Company's Employee Stock Purchase Plan (the "Plan") which has a term of 10
years whereby eligible employees may purchase common stock through payroll
deductions of up to 10% of compensation, at a per share price of 85% of the
fair market value of the Company's common stock on the enrollment date or the
exercise date six months later, whichever is lower. As of December 31, 2001
there were 144,578 shares issued and 55,422 shares reserved for issuance under
the Plan. There were 67,114 shares issued under the Plan in 2001.
Accounting for Stock-Based Compensation
In 1996, the Company recorded a deferred charge of $1,473,000, representing
the difference between the exercise price and the deemed fair value of the
Company's common stock for 246,750 shares subject to common stock options
granted in the 12-month period preceding the IPO. As of December 31, 2001, all
related deferred stock compensation has been amortized to compensation expense.
The Company has adopted the pro forma disclosure provisions of SFAS No. 123
for the 1998 Stock Plan and Employee Stock Purchase Plan. Had compensation cost
for the Company's stock-based compensation plans been determined in a manner
consistent with the fair value approach described in SFAS No. 123, the
Company's net loss and pro forma net loss per share as reported would have been
increased to the pro forma amounts indicated below (in thousands, except per
share data):
December 31,
-------------------------
2001 2000 1999
------- ------- -------
Net loss:
As reported............... $(3,532) $(4,193) $(6,009)
Pro forma................. (4,106) (4,542) (6,886)
Net loss per share:
As reported:
Basic and diluted..... (0.23) (0.31) (0.50)
Pro forma....................
Basic and diluted..... (0.27) (0.33) (0.58)
44
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option is estimated on the date of grant using the
fair value method with the following weighted-average assumptions:
2001 2000 1999
---- ---- ----
Risk-free interest rate.......................... 4.5% 6.0% 6.0%
Expected life (in years)......................... 3 3 3
Dividend yield................................... -- -- --
Expected volatility.............................. 60% 60% 60%
All of the above assumptions were used for the Employee Stock Purchase Plan
except that the expected life is six months.
Stock-based compensation expense related to stock options granted to
non-employees is recognized as the stock options are earned. The Company
believes that the fair value of the stock options is more readily measurable
than the fair value of the services received. The fair value of the stock
options granted is calculated at each reporting date using the Black-Scholes
option pricing model. The stock-based compensation expense will fluctuate as
the fair market value of the common stock fluctuates. In connection with the
grant of stock options to non-employees, the Company recorded a reduction in
deferred stock compensation of $17,000 in 2001 and an increase of $34,000 in
2000, of which $6,000 was amortized to expense in 2001 and $4,000 in 2000. The
Company did not incur any stock-based compensation charges for non-employees in
1999.
(8) Acquisitions of Assets
On July 6, 2000 the Company acquired the United States-based genetic imaging
business of PSI from International Remote Imaging Systems, Inc. The acquisition
was accounted for as a purchase. The consideration paid was 385,371 shares of
common stock valued at $915,000. There are additional potential future cash
payments to a maximum of $883,000 based on the future performance of the
business which are contingent and will be accounted for upon resolution of the
contingencies. No such payments were required in 2001 and 2000. The Company has
recorded goodwill of $578,000 and is amortizing the goodwill over ten years.
The purchase price, including $170,000 of costs incurred by the Company, was
allocated as follows (in thousands):
Accounts receivable........................................ $ 209
Inventories................................................ 194
Other assets............................................... 10
Property and equipment..................................... 229
Liabilities................................................ (135)
Goodwill................................................... 578
------
Total purchase price.................................... $1,085
======
On July 16, 1999, the Company acquired the intellectual and software
property related to the cytogenetic imaging instrumentation business of Vysis
Inc. The acquisition was accounted for as a purchase. The consideration paid
was $2,350,000 consisting of a cash payment of $1.0 million, $500,000 in cash
paid in July 2000, $250,000 in cash paid in January 2001 and 497,368 shares of
the Company's common stock issued at $1.206 per share. The installment payments
bear interest at the annual rate of seven percent. The interest is due and
payable at the time the installment is due. In addition, the Company recorded a
liability of approximately $100,000 for the estimated costs associated with
certain warranties and service contracts that the Company has taken
responsibility for. In addition, the Company incurred approximately $32,000 in
legal expenses directly related to this acquisition. The Company has recorded
goodwill of $2,482,000 and is amortizing the goodwill over ten years.
45
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Other Income (Expense), Net
The components of other income (expense), net are as follows (in thousands):
December 31,
-------------------
2001 2000 1999
----- ----- -----
Interest income.................................. $ 179 $ 337 $ 472
Interest expense................................. (189) (296) (128)
Gain (loss) on foreign exchange.................. 1 (208) (154)
Provision for income taxes....................... (16) (10) (31)
Miscellaneous income (expense)................... 7 37 (1)
----- ----- -----
$ (18) $(140) $ 158
===== ===== =====
(10) Income Taxes
The Company has not recorded an income tax benefit in 2001, 2000 and 1999
due to the recording of a valuation allowance as an offset to net deferred tax
assets. A valuation allowance is provided due to uncertainties surrounding the
realization of deferred tax assets due to the history of operating losses
incurred by the Company.
Deferred tax assets (liabilities) consist of the following (in thousands):
December 31,
------------------
2001 2000
-------- --------
Deferred tax assets
Bad debt reserve................................ $ 66 $ 74
Inventory reserve............................... 118 146
Depreciation & amortization..................... (48) 54
Other deferreds................................. 851 488
Accrued expenses................................ 223 355
Net operating loss carryforwards................ 12,338 11,490
Business credit carryforwards................... 1,290 1,494
-------- --------
Total gross deferred assets................. 14,838 14,101
Valuation allowance......................... (14,838) (14,101)
-------- --------
Net deferred tax assets............................ $ -- $ --
======== ========
The valuation allowance increased $737,000 from December 31, 2000 to
December 31, 2001 and $1,971,000 from December 31, 1999 to December 31, 2000,
respectively.
As of December 31, 2001, the Company had net operating loss carryforwards
for U.S. federal, California and foreign tax return purposes of approximately
$33.0 million, $10.4 million and $1.5 million respectively. In addition, the
Company has federal and state credit carryforwards of approximately $814,000
and $720,000 available to offset future tax liabilities. The Company's federal
net operating loss carryforwards, as well as credit carryforwards, will expire
at various dates beginning in 2004 through 2021 if not utilized. The Company's
state net operating loss carryforwards expire in the years between 2002 and
2011.
Under the Internal Revenue code, the amounts of the benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
46
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
losses that the Company may utilize in any one year include, but are not
limited to, a cumulative ownership change of more than 50%, as defined, over a
three year period.
(11) Employee Benefit Plans
In January 1994, the Company implemented a retirement savings and investment
plan that is intended to qualify under Section 401(k) of the Internal Revenue
Code (the "401(k) Plan") covering all of the Company's United States-based
employees. An employee may elect to defer, in the form of contributions to the
401(k) Plan on his or her behalf, up to 15% of the total compensation that
would otherwise be paid to the employee, not to exceed the amount allowed by
applicable Internal Revenue Service guidelines. The Company matches 100% of the
amounts deferred by the employee participants up to 3% of such employee's total
compensation and such matching amounts vest over a three-year period from the
initial participation date. The Company contributed $63,000, $72,000 and
$72,000 in 2001, 2000 and 1999, respectively.
The Company's United Kingdom-based employees are covered by retirement
savings plans (the International Retirement Plans). Under such plans, an
employee may elect to make contributions of 3.5% of such employee's earnings.
Amounts contributed by the Company range from 5.5% to 10.5% of such employee's
earnings. During 2001, 2000 and 1999, respectively, the Company made
contributions to the Internal Retirement Plans totaling $61,000, $66,000 and
$63,000, respectively.
(12) Segment and Foreign Operations
The Company operates in one segment. The Company's chief operating decision
maker is considered to be the Company's Chief Executive Officer ("CEO"). The
CEO reviews financial information presented on a consolidated basis for
purposes of making operating decisions and assessing financial performance. The
consolidated financial information is identical to the information presented in
the accompanying consolidated statements of operations. The following table
represents revenues by geographic area (in thousands):
United States United Kingdom Consolidated
------------- -------------- ------------
Revenues
2001............ $11,068 $7,469 $18,537
2000............ 9,277 7,412 16,689
1999............ 5,717 8,471 14,188
Identifiable Assets
2001............ $ 9,704 $4,393 $14,097
2000............ 11,586 7,856 19,442
1999............ 10,736 9,008 19,744
No single customer accounted for greater than 10% of revenues or accounts
receivable in any period reported.
(13) Restructuring
To focus the Company on the execution of its sales and marketing strategy
and to transition from working in fetal cell research to work in cancer
metastasis, and to reduce operating costs, the Company eliminated 15 positions
in 1999 at both its United States and United Kingdom facilities. The Company
recorded a net restructuring charge for the year of $818,000. The charge is
largely related to the severance costs of the terminated employees and certain
costs associated with discontinued products. As of December 31, 2001 all
amounts have been paid against the liability related to the termination
benefits for the terminated employees.
47
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the amounts that were charged and where they
are reflected in the accompanying statement of operations (in thousands):
December 31,
Description 1999 Classification on Statement of Operations
----------- ------------ -----------------------------------------
Employee separation costs........................ $516 All restructuring charges have been reflected
in the Statement of Operations as a separate
Costs associated with product close-down......... 302 line item under operating expenses
----
Total............................................ $818
====
There were no restructuring charges during 2001 and 2000. The restructuring
charge was incurred in 1999. All amounts were paid against the restructuring
liability during 1999 and 2000.
(14) Quarterly Financial Data (unaudited)
The following tables summarize the quarterly financial data for the last two
fiscal years (in thousands, except per share data):
Fiscal 2001 Quarter Ended
--------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Total revenues............................................. $ 3,930 $4,528 $4,827 $ 5,252
Operating income (loss).................................... (1,811) (875) (857) 29
Net income (loss).......................................... (1,762) (868) (932) 30
Net loss per share--basic and diluted...................... (0.12) (0.06) (0.06) 0.00
Fiscal 2000 Quarter Ended
--------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Total revenues............................................. $ 3,693 $4,343 $4,006 $ 4,647
Operating loss............................................. (1,185) (568) (939) (1,361)
Net loss................................................... (1,282) (544) (946) (1,421)
Net loss per share--basic and diluted...................... (0.10) (0.04) (0.07) (0.10)
(15) Subsequent Events
On January 31, 2002, we completed a private placement of 571,500 shares of
our common stock to an institutional investor (purchasing for three separate
funds) at a purchase price of $1.75 per share. Additional shares may be
issuable to the investors under certain provisions of the Stock Purchase
Agreement between the investors and us. Subject to the occurrence of certain
events, beginning July 29, 2002, each investor shall be entitled to a warrant
exercisable for a number of shares of our common stock equal to the number of
shares of common stock purchased in the January 31 financing. The warrants
would be exercisable for four years from issuance at a price of $2.25 per share.
In January 2002, we instituted a series of actions to rationalize our
operations to provide a lower operating cost. We are closing our League City,
Texas office and consolidating our manufacturing and engineering facilities.
This is expected to result in a reduction in our operating expenses, beginning
in the second quarter of 2002.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
PART III
Certain information required by Part III is omitted from this Report on Form
10-K in that the Registrant will file a definitive proxy statement within 120
days after the end of its fiscal year pursuant to Regulation 14A with respect
to the 2002 Annual Meeting of Stockholders (the "Proxy Statement") and certain
information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors and executive
officers is incorporated by reference to the information under the caption
"Proposal No. 1--Election of Directors" and "Executive Officers", respectively,
in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Record Date and Stock Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following Financial Statements of Applied Imaging Corp. and Report of
PricewaterhouseCoopers LLP, have been provided as Item 8, above:
Report of Independent Accountants........................... 30
Consolidated Balance Sheets................................. 31
Consolidated Statements of Operations and Comprehensive Loss 32
Consolidated Statements of Stockholders' Equity............. 33
Consolidated Statements of Cash Flows....................... 34
Notes to Consolidated Financial Statements.................. 35
2. Financial Statement Schedule
The financial statement schedule entitled "Valuation and Qualifying
Accounts" is included at page 54 of this Form 10-K.
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the notes
thereto.
3. Exhibits
Refer to (c) below.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the year ended December 31,
2001.
50
(c) Exhibits
Exhibit No. Description
----------- -----------
3.1(1) Restated Certificate of Incorporation of the Registrant.
3.2(2) Bylaws of the Registrant as amended.
3.3 Certificate of Amendment of the Certificate of Incorporation of the Registrant.
4.1(1) Specimen Common Stock Certificate.
4.3(3) Preferred Shares Rights Agreement dated as of May 29, 1998, between the Registrant and
Norwest Bank Minnesota, N.A. including the form of Rights Certificate, the Certificate of
Designation and the summary of Rights attached thereto as Exhibits A, B, and C, respectively.
10.1(1) Form of Indemnification Agreement for directors and officers.
10.2(b)(4) 1998 Incentive Stock Option Plan and form of Stock Option Agreement thereunder.
10.4(1) Employee Stock Purchase Plan.
10.5(1) Amended and Restated Registration Rights Agreements.
10.9(12) Lease dated July 1998 between Bio Science Center and Applied Imaging International Ltd.
10.18(1) Development Agreement dated February 5, 1996 between EM Industries and Registrant.
10.21(2) License Agreement dated October 24, 1997 between Cambridge University and the Registrant.
10.23(b)(5) Stock and Warrant Purchase Agreement dated May 22, 1997 between the registrant and certain
investors.
10.24(6) Form of Stock Purchase Agreement between the Registrant and certain investors used in
connection with sales of Common Stock on July 7 and July 15, 1998.
10.25(7) Asset Purchase, License and Distribution Agreement between the Company and Vysis, Inc.
dated July 16,1999.
10.26(8) Form of Stock Purchase Agreement between Applied Imaging Corp. and certain investors dated
October 27, 1999 and October 29, 1999.
10.27(9) Form of Stock Purchase Agreement between Applied Imaging Corp. and certain investors, dated
December 13, 2000.
10.28(10) Form of Warrant between Applied Imaging Corp. and certain investors, dated December 14,
2000.
10.34(13) Lease renewal to the Registrant's headquarters in Santa Clara, CA dated April 10, 2001.
10.35(13) Loan Modification Agreement dated June 21, 2001 between Registrant, Applied Imaging
International Limited and Silicon Valley Bank.
10.36(14) Loan and Security Agreement dated September 28, 2001 between Registrant and Silicon Valley
Bank.
10.37(14) Amendment to Loan Documents dated September 28, 2001 between Registrant and Silicon
Valley Bank.
10.38 Intellectual Property Mortgage and Security Agreement dated September 28, 2001 between
Registrant and Silicon Valley Bank.
10.39 Employment Letter Agreement dated October 19, 2001 between the Company and Carl Hull.
10.40 Employment Letter Agreement dated October 19, 2001 between the Company and Jack
Goldstein.
10.41 Form of Employment Letter Agreement dated October 19, 2001 between the Company and its
Vice Presidents.
51
Exhibit No. Description
----------- -----------
10.42 Retention Agreement.
21.1(1) List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.2 Power of Attorney (included at page 53 below).
- --------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
filed on June 24, 1996, as amended, and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10-K405 for the year ending
December 31, 1997 and incorporated herein by reference.
(3) Filed as exhibit 3 to the Registrant's Report on Form 8-A12G filed with
the Commission on June 5, 1998 and incorporated herein by reference.
(4) Filed as exhibit 4.1 to the Registrant's Report on Form S-8 filed with the
Commission on June 26, 1998 and incorporated herein by reference.
(5) Filed as exhibit 10.1 to the Registrant's Report on Form 8-K filed with
the Commission on June 4, 1997 and incorporated herein by reference.
(6) Filed as exhibit 10.1 to the Registrant's Report on Form 8-K filed with
the Commission on July 28, 1998 and incorporated herein by reference.
(7) Filed as exhibit 2.1 to the Registrant's Report on Form 8-K filed with the
Commission on July 30, 1999 and incorporated herein by reference.
(8) Filed as exhibit 4.2 to the Registrant's Report on Form S-3 filed with the
Commission on January 25, 2001 and incorporated herein by reference.
(9) Filed as exhibit 4.3 to the Registrant's Report on Form S-3 filed with the
Commission on January 25, 2001 and incorporated herein by reference.
(10) Filed as exhibit 4.4 to the Registrant's Report on Form S-3 filed with the
Commission on January 25, 2001 and incorporated herein by reference.
(11) Filed as exhibit 10.8(b) to the Registrant's Form 10-K405 for the year
ending December 31, 1998 and incorporated herein by reference.
(12) Filed as exhibit 10.9 to the Registrant's Form 10-K405 for the year ending
December 31, 1998 and incorporated herein by reference.
(13) Filed as an exhibit to the Registrant's Report on Form 10-Q filed with the
Commission on August 8, 2001 and incorporated herein by reference.
(14) Filed as an exhibit to the Registrant's Report on Form 10-Q filed with the
Commission on November 13, 2001 and incorporated herein by reference.
52
SIGNATURES
Pursuant to the requirements of 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.
APPLIED IMAGING CORP.
By: /s/ CARL HULL By: /s/ BARRY HOTCHKIES
---------------------------------- ----------------------------------
Carl Hull Barry Hotchkies
President and Chief Executive Vice President, Chief Financial
Officer Officer
Date: March 25, 2001
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Carl Hull and Barry Hotchkies his or her
attorney-in-fact, with the power of substitution, for him or her in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorneys-in-fact, or his or her substitute or substitutes, may do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/s/ CARL HULL Chief Executive Officer and March 25, 2001
- ------------------------------- Director (Principal Executive
(Carl Hull) Officer)
/s/ BARRY HOTCHKIES Chief Financial March 25, 2001
- ------------------------------- Officer (Principal Accounting
(Barry Hotchkies) Officer)
/s/ JOHN F. BLAKEMORE, JR. Director March 25, 2001
- -------------------------------
(John F. Blakemore, Jr.)
/s/ JACK GOLDSTEIN Director and Chairman of the March 25, 2001
- ------------------------------- Board
(Jack Goldstein)
/s/ ANDRE MARION Director March 25, 2001
- -------------------------------
(Andre F. Marion)
/s/ G. KIRK RAAB Director March 25, 2001
- -------------------------------
(G. Kirk Raab)
/s/ PABLO VALENZUELA Director March 25, 2001
- -------------------------------
(Pablo Valenzuela)
53
APPLIED IMAGING CORP.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged Write-offs Balance at
Beginning to Costs and Net of End of
of Year Expenses Recoveries Year
---------- ------------ ---------- ----------
Allowance for doubtful accounts
Year ended December 31, 2001... $289 $ -- $ (67) $222
==== ==== ===== ====
Year ended December 31, 2000... $251 $162 $(124) $289
==== ==== ===== ====
Year ended December 31, 1999... $162 $ 89 $ -- $251
==== ==== ===== ====
54