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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2002

Commission File No. 1-9767

International Remote Imaging Systems, Inc.

9172 Eton Avenue, Chatsworth, California 91311

Telephone Number: (818) 709-1244

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      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.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)     Yes o          No þ

      The aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant was approximately $24.7 million based upon the closing price of $2.84 per share of Common Stock as reported on the American Stock Exchange on June 30, 2002. Solely for the purpose of determining “non-affiliates” in this context, shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded. This determination of affiliate status is not necessarily a determination for other purposes.

      The Registrant had 10,972,857 shares of Common Stock outstanding on March 10, 2003.

      Part III incorporates information by reference from the Proxy Statement for the Registrant’s 2003 Annual Meeting of Stockholders.

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INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

FORM 10-K ANNUAL REPORT

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PART I

Item 1.     Business

Overview

      We design, develop, manufacture, and market in vitro diagnostic, or IVD, imaging systems for urinalysis testing based on patented and proprietary automated intelligent microscopy, or AIM, technology for automating microscopic procedures performed in clinical laboratories, as well as special purpose centrifuges and other small instruments. Our microscopy technology combines our capabilities in automated specimen presentation, including our patented slide-less microscope, and proprietary high-speed digital processing hardware and software to classify and present images of microscopic particles in easy-to-view displays. Our systems provide customers better and more rapid results and labor cost-savings over manual methods of performing microscopy. We sell our products directly and through distributors to hospital and reference clinical laboratories, as well as to veterinary, physician office and research laboratories. We incorporated in California in 1979 and reincorporated in 1987 in Delaware.

      We pioneered our first urinalysis system in 1983 with the introduction of The Yellow IRIS family of workstations and we introduced a high volume, fully-automated urine pathology system, the Model 939UDx, in 2000. We believe our Iris Diagnostics division is the only supplier of laboratory systems that fully automate a complete urinalysis. We also provide ongoing sales of supplies and service for our urinalysis workstations. Most supplies are purchased under standing orders and, following an initial one year warranty period, the majority of customers purchase annual service contracts. In 2001, we also became the exclusive U.S. distributor for the ARKRAY AUTION MAX^TM AX-4280 Automated Urine Chemistry Analyzer. During 2002, the Company received 510(k) clearance from the Food and Drug Administration to market the Company’s new product platform, the iQ^TM200 System. This system addresses the needs of the mid-sized laboratory market, and was introduced in November at the Medica Trade Show in Düsseldorf, Germany. The Company expects to launch this product towards the end of the second quarter of 2003.

      Through our StatSpin subsidiary, we manufacture and market a variety of benchtop centrifuges, small instruments and supplies for the laboratory market. These products are used primarily for specimen preparation and dedicated applications in cytology, hematology and urinalysis. The urinalysis products appeal to laboratories and physician offices performing too few tests to justify the cost of an automated IVD imaging system.

      Our research and development subsidiary, Advanced Digital Imaging Research, LLC, assists in the advancement of proprietary imaging technology while conducting government-sponsored research and development in medical imaging and software, as well as contract research for corporate clients.

The Industry

      The healthcare industry has undergone profound changes in the last decade, and healthcare providers are continually focusing on the most efficient use of their resources. This goal drives them to reduce costs while simultaneously improving the outcome potential of patient care. Toward that end, they must reduce the cost and improve the accuracy of medical tests for diagnosing and monitoring diseases and improve the reporting of test results.

      Medical tests are performed either on the patient or on a specimen removed from the patient. In vitro diagnostic, or IVD, testing is conducted outside of the body in a laboratory apparatus using a specimen obtained from the patient (blood, urine, tissue, etc.) to identify or monitor a disease. The specimen is examined from the patient, usually in the clinical laboratory. Many IVD tests rely on chemical or simple physical measures of specific characteristics of the specimen. Over the last five decades, the chemical and particle-counting aspects of these tests have been largely converted from manual methods to automated instruments, such as clinical chemistry analyzers and blood cell counters. However, many other IVD tests still require a manual microscopy — the visual examination of the specimen through a microscope. Manual microscopy requires numerous steps, from specimen preparation to visual examination, making the method

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      The pressure to reduce the costs and improve the accuracy of IVD tests, together with recent technological developments, has created an opportunity for automating microscopic procedures. Advances in image processing software, computer hardware and solid-state cameras have made it possible uniformly to capture digital images of microscopic specimens and to perform sophisticated image analysis and classification. The test results can then be electronically transmitted to the central computer system of the hospital or reference laboratory for clinical use and billing. The digital images of the specimen can also be stored in electronic format for future review and, theoretically, transmitted to remote locations for review by other technologists or specialists.

The Company’s Strategy

      Our current objectives are to enhance our core business in urinalysis, continue market penetration of our existing products, expand the geographic markets for existing and upcoming products and increase sales of related supplies and service. We are pursuing these objectives through the following strategies:

	•	Enhancement of Existing Product and Continued Market Penetration. Our business plan emphasizes the continuous development of new product enhancements that will improve our new generation urinalysis workstation. Our goal is to provide a higher performance, lower-cost platform for our urinalysis workstations that will enable us to maintain a competitive advantage and penetrate the market for those laboratories and hospitals who are in need of cost-effective urinalysis technology.
	•	Expanding into New Geographic Markets. In contrast to the past, where we focused on domestic sales for our urinalysis business, in 1999 we began to selectively market our product internationally. With the launch of our new iQ200 system, which is more cost effective, we will increase dramatically our focus on the international market, with the ultimate goal of balancing our urinalysis business equally between the domestic and international markets.
	•	Increasing Sales of Supplies and Service. Once our urinalysis workstation is installed, we generate significant recurring revenue from sales of supplies and service for its operation. We are expanding these revenues by installing more systems and increasing our product offering of supplies for our workstations.

AIM Technology

      An effective system for most automated microscopy applications requires technology for fast, consistent and easily discernable presentation of the specimen to the microscope (“front end processing”) and for rapidly capturing, analyzing, classifying, enhancing, arranging and displaying images of the specimen (“back end imaging”). Over the past twenty years, we have created and developed our patented and proprietary Automated Intelligent Microscopy, or AIM, technology to address both of these requirements. AIM technology involves the synthesis of visual microscopy, digital image processing and automated image interpretation/ pattern recognition to analyze microscopic specimens.

      Traditional urine sediment analysis requires manual preparation of a slide from the specimen requiring several steps, including centrifugation followed by carefully positioning, staining and coverslipping a sample extracted from the specimen. The slide is then placed under the microscope and manually manipulated and scanned by a technologist. This procedure is time-consuming, imprecise, and potentially biohazardous. In contrast, our patented slide-less microscope automates the front end processing and allows microscopic examination of a moving specimen precisely positioned in a stream of fluid. This eliminates the need for manual slide preparation, manipulation and scanning. The slide-less microscope positions the specimen to within microns as it flows past the microscope at high-speed ensheathed in a larger stream of fluid. This method of alignment, particle orientation, focus and measurement is called “imaging flow cytometry.” We

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      Once the specimen is located and presented to the microscope, AIM’s back end processing automatically captures, digitizes, classifies, organizes and presents the microscopic images displayed on a video monitor for review by the medical specialist. These digital images of the specimen can then be stored on magnetic or optical media for later retrieval, even years later.

Products

      In November 2002, we introduced the iQ^TM200 Automated Urinalysis System (iQ200 System) at the MEDICA exposition in Germany. First product shipments will occur towards the end of the second quarter of 2003 on a worldwide basis. The iQ200 System incorporates the iQ200 Automated Urine Microscopy Analyzer (iQ200) and the AUTION MAX^TM AX-4280 Automated Urine Chemistry Analyzer (AX-4280) to provide a fully integrated chemical and microscopic analysis, including a single bi-directional LIS interface. This new platform addresses the major barriers for additional market penetration worldwide — cost and size. The design of the iQ200 System increases the number of customer sites now accessible to IRIS by several thousand. It is the only fully automated system that performs complete urinalyses, chemistry and microscopy combined. The system is very user friendly and is designed for the laboratory bench-top. In addition, each module of the iQ200 System can be used as a stand-alone instrument. The iQ200 is available through IRIS on a worldwide basis while the AX-4280 is available through IRIS in the U.S. only. However, the iQ200 can be integrated with the AX-4280 outside of the U.S. through the use of hardware and software available from IRIS.

      Traditionally, our product line has been a family of urinalysis workstations, which require customers to make significant capital investments ranging from approximately $100,000 to $195,000. In 2003, we will redefine our product offering completely with the commercialization of our new iQ200 product platform. This new product platform will enable us to compete effectively in the global market, expand our market to include the medium-sized hospitals and laboratories and, as well, expand our product line to include stand-alone urine chemistry diagnostics systems.

      The high cost of acquisition of our legacy platform has limited our sales of IRIS proprietary and patented technology mainly to large-sized hospitals and laboratories that can justify this high level of capital investment. The new product line will be competitively priced to penetrate the mid-sized hospitals and laboratories, both domestically and internationally. A revamped international distribution network will back the new product platform. We have established collaborations with the most reputable Laboratory Information System (LIS) companies, which have produced the necessary interfaces to their state of the art information systems.

      We will continue to sell its Model 500 Urine and Body Fluids Analyzer for its unique capability to perform microscopic analysis of other body fluids. The Model 500 is an attended workstation which can perform 10 urine chemistries, specific gravity, and IVD imaging tests on urine and a number of other body fluids.

      The AX-4280 is produced by Arkray, Inc. Kyoto, Japan. The AX-4280 is a well-established product with hundreds of units installed outside of the United States.

      We realize significant recurring revenue from sales of supplies used in the operation of our urinalysis workstations and from their servicing. These supplies include the sheath fluid used to position the particles and cleanse the system in slideless microscopy and “controls” used in monitoring the performance quality of the systems. We also sell the CHEMSTRIP/ IRIStrips for testing urine chemistry on some or our workstations. CHEMSTRIP/ IRIStrips urine test strips are produced for us through a distribution agreement with Roche Diagnostics. Roche Diagnostics has exercised its right to terminate the distribution agreement effective in 2003. They will continue to supply CHEMSTRIP/ IRIStrips for our installed base of workstations after

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      We also manufacture and market a variety of small instruments and supplies for the clinical laboratory market through our StatSpin subsidiary. Some of these products complement our line of urinalysis systems because they appeal to smaller laboratories and physician offices that do not perform enough tests to justify the capital cost of a large automated system. StatSpin’s technologically advanced small benchtop centrifuges prepare certain biological specimens for instrumental or microscopic examination in a fraction of the time required by larger, common laboratory centrifuges. They have proven ideal for on-demand, point-of-use testing in hospitals, physicians’ offices and veterinary laboratories. The basic StatSpin centrifuge unit is adaptable to a variety of uses through application-specific rotors and consumables. Noted for their compact design and simple, quiet, and unobtrusive operation, they are well-suited to laboratories in which technicians are located close to the equipment. These products also serve integrated healthcare providers who want to purchase systems and supplies for a variety of clinical settings (both large and small) from one supplier. This category of products includes special-purpose centrifuges, digital refractometer for measuring the specific gravity of urine, the CenSlide System for manual microscopic examination of urine and other supplies intended primarily for specimen preparation.

      The following tables present a summary of revenues for each segment by product line for the three years ended December 31, 2002:

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Backlog

      We did not have a material amount of backlog at December 31, 2002 or 2001. Products are usually shipped within ninety days of receipt of sales orders. The Company believes that backlog is not necessarily indicative of sales for any succeeding period.

Research and Development

      In 1999, we began a major project to completely redesign our family of urinalysis workstations and develop the next generation operating platform, now introduced as the iQ200 system. Consequently, over the past two years, we have significantly ramped up these expenditures, whereby our product technology investments (including amounts reimbursed by third parties under research and development contracts and capitalized software costs) have increased from $3.8 million in 2000 to $6.4 million in 2001 and $6.3 million in 2002.

      As we mentioned in the preceding paragraph, we have devoted substantially all of our research and development efforts over the past two years to the iQ200 program, incurring expenditures, net of capitalized software, in 2002 of $4.7 million, an increase of $400,000 over the net research and development expenditures in 2001. In 2001, the $4.3 million net expenditures were $1.4 million greater than those spent in 2000. By incorporating more than 20 years of experience and the latest developments in computer technology, we have developed the iQ200 system which is expected to (1) significantly improve the image quality of our workstations, (2) further reduce the time required to operate the system and (3) reduce our cost of goods and our historical dependence on single-source suppliers by incorporating more “off-the-shelf” components. In October 2002, we obtained 510K clearance for the iQ200 system from the Food and Drug Administration. We will continue to invest significant research and development dollars in the first part of 2003 to prepare the new resulting system for launch towards the end of the second quarter of 2003. We then plan on continuing development efforts throughout the balance of 2003. We also expect to increase the funds spent in support of the research and development efforts of our sample separation business in Massachusetts (StatSpin).

      Advanced Digital Imaging Research, LLC (ADIR) is a research and development organization specializing in digital imaging software and algorithm development for IRIS and government entities. Under a typical government grant program, the government has the right to use any new technology royalty-free, but ADIR retains the right to commercially exploit the new technology. ADIR applies for government grants, which have potential applications to the imaging part of our business. We believe ADIR’s existing and expected government research grants will be sufficient to fund all of its planned operations through at least 2003. ADIR also performs some of our internal research and development work as well as contract research for corporate clients.

Marketing and Sales

      In the United States, we sell and service our products through our own sales and service forces. Sales activities consist of direct sales by field sales representatives, telesales to initiate and aid in pursuing sales opportunities, logistics support of the field sales representatives and after-sales support to customers in the operation of their systems. In addition to our sales activities, we promote our products through advertising in

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      Internationally, we sell and service our products through distributors in selected markets around the world. The continuing global economic downturn directly impacted our distributors ability to purchase our high end capital equipment and sell these new systems into their respective country markets. With the recent introduction of our new iQ200 system, we are in the process of negotiating many new distributor agreements throughout the world. We anticipate the international market to play a major role in the success of our new product launch.

      We also maintain a rental program for our urinalysis workstations. Under the terms of the rental agreements, payments generally are based on the number of tests performed, with a guaranteed monthly minimum payment. We are responsible for supply and service of the systems. Alternatively, some customers lease our workstations from medical equipment leasing companies that, in turn, purchase the systems from us.

      We market most of the supplies used in the operation of our urinalysis workstations and maintain these systems through our own national service organization domestically, and through our distributor network internationally. Service (after generally a one-year warranty period) is usually sold under an annual service contract or, less frequently, on a per-call basis.

Competition

      Our primary product is the IRIS urinalysis workstation. The principal competitive factors in the urinalysis market are cost-per-test, ease of use, and quality of result. We believe our workstation competes favorably with regard to these factors in its target markets.

      Bayer Diagnostics and Roche Diagnostics sell lines of urine test strips that are used in determining the concentration of various chemical substances found in urine. Despite the Company obtaining FDA clearance to claim improved performance of our urinalysis workstations over urine test strip measures in detecting microscopic abnormalities in urine, a substantial portion of the urinalysis market has subscribed to the theory that these test strips can be relied upon to reduce the number of microscopic examinations. We believe that this is largely due to laboratories reacting to cost-cutting pressures and has resulted in significantly slower growth in the demand for microscopic examinations at certain hospitals and reference laboratories. As urine chemistry test strips remain a large segment of the urinalysis market and a revenue source for the Company, the exclusive US distribution agreement with ARKRAY for the AUTION MAX AX-4280 Automated Urine Chemistry Analyzer offers a competitive alternative in the form of a compact, high-throughput analyzer with a complete test strip menu.

      Our urinalysis workstations currently support only automated test strip readers supplied by Roche Diagnostics. Some potential customers who have previously purchased automated test strip readers from Bayer Diagnostics (the dominant company in the urine test strip business) cannot connect those readers to our workstations. Our ability to modify our workstations to support a connection to test strip readers from Bayer Diagnostics and other suppliers is presently subject to significant restrictions under our existing agreements with Roche Diagnostics. Roche Diagnostics has exercised its right to terminate these agreements effective in 2003. After termination, we will be permitted to modify our workstations to accommodate other test strip readers.

      Sysmex Corporation markets its automated urine sediment analyzers globally, and remains the Company’s chief competitor in the urinalysis business segment. The Sysmex systems, although automated and easy to use, do have several limitations. The systems are not capable of direct integration of both the chemistry and sediment analysis of urine. Additionally, these systems are limited in terms of the number of automatically reported analytes and cannot perform body fluid analysis. When further examination is needed, Sysmex systems, which do not use image analysis, require the technologist to remove the sample, prepare a slide and conduct a manual microscopic analysis.

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      We are also experiencing increased domestic competitive pressures in the urinalysis market due to the ongoing consolidation of both hospitals and medical device suppliers. Large hospital chains and groups of affiliated hospitals are negotiating comprehensive supply contracts with the larger medical device suppliers, who can offer one-stop shopping for laboratory instruments, supplies and service. In addition, they typically offer the hospitals annual rebates based on the total volume of business with the suppliers. These rebates create financial incentives against purchasing instruments or supplies from others and act as a barrier to the penetration of hospital laboratories covered by the contract.

Intellectual Property

      Our commercial success depends on our ability to protect and maintain our proprietary rights. We protect our proprietary technology by filing various patent applications. We have received numerous United States patents for our AIM technology and related applications, as well as a number of corresponding foreign patents. These patents also cover developments in image analysis and blood processing. We have applied for a number of additional patent applications which are pending in the United States and abroad. These patents also cover image analysis, urine and blood processing. Also, numerous patents relating to digital refractometers, centrifuges, automated slide handling and disposable urinalysis products were acquired in various acquisitions.

      We granted Sysmex a royalty-bearing license to use pre-1989 technology for urine sediment analyzers and non-medical industrial instruments. We also granted Dade International a royalty-bearing license to use certain centrifuge technology.

      We have trade secrets and unpatented technology and proprietary knowledge about the sale, promotion, operation, development and manufacturing of our products. We have confidentiality agreements with our employees and consultants to protect these rights.

      We claim copyright in our software and the ways in which it assembles and displays images, and have filed copyright registrations with the United States Copyright Office. We also own various federally registered trademarks, including “IRIS,” “The Yellow IRIS” and “StatSpin.” We own numerous other registered and unregistered trademarks, and have certain trademark rights in foreign jurisdictions. We intend to aggressively protect our copyrights and trademarks.

Government Regulations

      Most of our products are subject to stringent government regulation in the United States and other countries. These laws and regulations govern product testing, manufacture, labeling, storage, record keeping, distribution, sale, marketing, advertising and promotion. The regulatory process can be lengthy, expensive and uncertain, and securing clearances or approvals often requires the submission of extensive testing of data and other supporting information. If we don’t comply with regulatory requirements, we may be subject to fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution. Further, any change in existing federal, state or foreign laws or regulations, or in their interpretation or enforcement, or the enactment of any additional laws or regulations, could affect us both materially and adversely.

      In the United States, the FDA regulates medical devices under the Food, Drug, and Cosmetic Act (the “FDC Act”). Before a new medical device can be commercially introduced in the United States, the manufacturer usually must obtain FDA clearance by filing a pre-market notification under Section 510(k) of the FDC Act (a “510(k) Notification”) or obtain FDA approval by filing a pre-market approval application (a “PMA Application”). The PMA Application process is significantly more complex, expensive, time-consuming and uncertain than the 510(k) Notification process. To date, we have cleared all of our regulated products with the FDA through the 510(k) Notification process. We cannot guarantee that we will be able to use the 510(k) Notification process for future products. Furthermore, FDA clearance of a 510(k) Notification or approval of a PMA Application is subject to continual review, and the subsequent discovery of previously unknown facts may result in restrictions on a product’s marketing or withdrawal of the product from the market.

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      We are also required to register as a medical device manufacturer with the FDA and comply with FDA regulations concerning good manufacturing practices for medical devices (“GMP Standards”). In 1997, the FDA expanded the scope of the GMP Standards with new regulations requiring medical device manufacturers to maintain control procedures for the design process, component purchases and instrument servicing. The FDA periodically inspects our manufacturing facilities for compliance with GMP Standards. We believe that we are in substantial compliance with the expanded GMP Standards.

      The FDA also regulates computer software of the type used in our urinalysis workstations and is currently reevaluating the regulation of such software. We can’t predict the extent to which the FDA will regulate such software in the future.

      Labeling, advertising and promotional activities for medical devices are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The FDA also enforces statutory and policy prohibitions against promoting or marketing medical devices for unapproved uses.

      Many states have also enacted statutory provisions regulating medical devices. The State of California’s requirements in this area, in particular, are extensive, and require registration with the state and compliance with regulations similar to the GMP Standards established by the FDA. While the impact of such laws and regulations has not been significant to date, it is possible that future developments in this area could affect us both materially and adversely.

      In addition to domestic regulation of medical devices, many of our products are subject to regulations in foreign jurisdictions. The requirements for the sale of medical devices in foreign markets vary widely from country to country, ranging from simple product registrations to detailed submissions similar to those required by the FDA. We have not yet applied for regulatory clearances or approvals to market our urinalysis workstation in most of these foreign countries. Our business strategy includes expanding the geographic distribution of these and other products, and we cannot guarantee that we will be able to secure the necessary clearances and approvals in the relevant foreign jurisdictions. Furthermore, the regulations in certain foreign jurisdictions continue to develop and we cannot be sure that new laws or regulations will not have a material adverse effect on our existing business or future plans. Among other things, CE Mark certifications are, or may soon be required for the sale of many products in certain international markets such as the European Community. We secured CE Mark certification for our existing lines of urinalysis workstations in 2000 and we will receive the CE Mark certification for our new iQ200 system once we ship the product toward the end of the second quarter of 2003.

      We obtained the ISO 9001 and EN 46001 certification at our Small Laboratory Devices division in Massachusetts in 2002, and in December, 2002 obtained approval of these and EN 13485 certification for our urinalysis division.

      In October 2002, we received 510(k) clearance from the FDA for the marketing of our iQ200 system. In February 2003, the substantial improvements to our manufacturing facilities resulted in a flawless inspection by the FDA.

      Our products are also subject to regulation by the United States Department of Commerce export controls, primarily as they relate to the associated computers and peripherals. We have not experienced any material difficulties in obtaining necessary export licenses to date.

Segment and Geographic Information

      See Note 15 to the Consolidated Financial Statements, “Segment and Geographic Information,” for financial information regarding our operating segments and geographic areas.

Employees

      We had 151 full-time employees at December 31, 2002 and 137 full-time employees at December 31, 2001. We also use outside consultants and part-time and temporary employees in production, administration,

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      We lease all of our facilities. The leases expire at various times over the next five years. Our headquarters are located at 9172 Eton Avenue, Chatsworth, California 91311. The table below sets forth certain information regarding our leaseholds as of March 10, 2003:

      We believe our facilities are adequate to meet our current needs.

      We are not presently involved in any litigation.

      We did not submit any matters to vote of security holders during the quarter ended December 31, 2002.

PART II

      IRIS Common Stock is traded on the American Stock Exchange under the symbol “IRI.” The closing price of the Common Stock on March 10, 2003 was $2.65 per share. The table below sets forth high and low closing prices reported by American Stock Exchange for the period January 1, 2001 through December 31, 2002:

      As of March 10, 2003, we had approximately 3,800 holders of record of our common stock.

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      We intend to use all available funds in business development and debt repayment. As a result, we do not expect to pay any cash dividends for the foreseeable future. Furthermore, we may not pay any cash dividends on the common stock, or repurchase any shares of the common stock, without the written consent of our lender.

Securities Authorized for Issuance Under Equity Compensation Plans

      The securities authorized for issuance under equity compensation plans is incorporated by reference to the information set forth in the caption, “Equity Compensation Plan Information” in the Company’s Proxy Statement for the Annual Meeting of Stockholders.

      This information as of December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000, is derived in part from, and should be read in conjunction with, the our Consolidated Financial Statements, including the Notes thereto, included elsewhere in this Annual Report.

(1)	The year ended December 31, 1998 includes unusual charges totaling $193,000 primarily for legal expenses associated with an arbitration matter. Unusual charges in the year ended December 31, 1999 totaled $4.2 million and primarily relate to a litigation settlement, write off of assets related to the White IRIS leukocyte differential analyzer program and a retirement agreement.

Forward-Looking Statements

      This Annual Report on Form 10-K contains forward-looking statements, which reflect our current views about future events and financial results. We have made these statements in reliance on the safe harbor created by that Private Securities Litigation Reform Act of 1995. Forward-looking statements include our views on future financial results, financing sources, product development, capital requirements, market growth and the like, and are generally identified by phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans” and similar words. Forward-looking statements are merely predictions and therefore

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	•	unexpected technical and marketing difficulties inherent in major product development efforts such as the new platform for our urinalysis workstation,
	•	the potential need for changes in our long-term strategy in response to future developments,
	•	future advances in diagnostic testing methods and procedures, as well as potential changes in government regulations and healthcare policies, both of which could adversely affect the economics of the diagnostic testing procedures automated by our products,
	•	rapid technological change in the microelectronics and software industries, and
	•	increasing competition from imaging and non-imaging based in-vitro diagnostic products.

      We have attempted to identify additional significant uncertainties and other factors affecting forward-looking statements in Exhibit 99 to this Annual Report. Stockholders should understand that the uncertainties and other factors identified in this Annual Report and in Exhibit 99 are not a comprehensive list of all the uncertainties and other factors that may affect forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements or the list of uncertainties and other factors that could affect those statements.

Overview

      We generate revenues primarily from sales of our urinalysis workstation, an in vitro diagnostic, or IVD, imaging system based on our patented and proprietary AIM technology, and the related supplies and service required to operate this workstation. We also earn revenues from sales of ancillary lines of small laboratory instruments and supplies.

      We make significant investments in research and development for new products and enhancements to existing products. We fund our research and development programs primarily with internal funds, but we also receive grants from the National Institutes of Health and to a lesser extent, contracts from third parties. The following table summarizes total product technology expenditures for the periods indicated: