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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File No. 1-9767
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
Delaware 94-2579751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9162 Eton Avenue, Chatsworth, California 91311
(Address of principal executive offices) (Zip Code)
Telephone Number: (818) 709-1244
Securities registered pursuant to Section 12(b) of the Act: Common Stock
(American Stock Exchange)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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.
On March 20, 1998, the aggregate market value of the shares of Common
Stock held by non-affiliates of the Registrant was approximately $25.0 million
based upon the closing price of $4.25 per share of Common Stock as reported on
the American Stock Exchange. 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 6,339,265 shares of Common Stock outstanding on
March 20, 1998.
Part III incorporates information by reference from the Proxy Statement
for the Registrant's 1998 Annual Meeting of Stockholders.
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INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1997
Caption Page
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PART I
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 12
Item 3. Legal Proceedings......................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders....................................... 12
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters................................................................................... 13
Item 6. Selected Financial Data................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 14
Item 8. Financial Statements and Supplementary Data............................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................................... 21
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 21
Item 11. Executive Compensation.................................................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 21
Item 13. Certain Relationships and Related Transactions............................................ 21
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K........................ 21
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PART I
ITEM 1. BUSINESS.
A glossary of selected technical terms is included at the end of this
section, and stockholders are encouraged to review the glossary before reading
the description of business.
OVERVIEW
International Remote Imaging Systems, Inc. and its subsidiaries ("IRIS"
or the "Company") design, develop, manufacture and market in vitro diagnostic
("IVD") imaging systems based on patented and proprietary automated intelligent
microscopy ("AIM") technology for automating microscopic procedures performed in
clinical laboratories, and special purpose centrifugal and other small
instruments for automating microscopic procedures performed in clinical
laboratories. AIM combines the Company's capabilities in automated specimen
presentation, including its patented slideless microscope, and proprietary
high-speed digital processing hardware and software to classify and present
images of microscopic particles in easy-to-view displays. The Company's IVD
imaging systems are designed to provide customers with better and more rapid
results and labor cost-savings over manual methods of performing microscopy. The
Company's products are sold directly and through distributors primarily to
hospital and reference clinical laboratories, as well as veterinary and
physician offices and research laboratories.
The Company pioneered its first IVD imaging system application in 1983
with its introduction of The Yellow IRIS family of workstations for urinalysis.
The Company believes that it is still the only supplier of laboratory systems
which fully automate a complete urinalysis, and it introduced its fourth
generation models in 1996 which incorporate significant advancements in speed,
utility and ease of use. In 1996, the Company also received Food and Drug
Administration ("FDA") clearance and began to market the Model 900UDx urine
pathology system designed especially for the high-volume testing requirements of
larger laboratories. The Company also provides ongoing sales of supplies and
service necessary for operation of The Yellow IRIS workstations. Most supplies
are purchased under standing orders and, following an initial one-year warranty
period, the majority of customers purchase annual service contracts. The FDA
cleared The White IRIS leukocyte differential analyzer in May 1996, but its
commercial release has been delayed by other priorities. The Company also
anticipates selling supplies and service for The White IRIS comparable to those
sold for The Yellow IRIS. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
In July 1996, the Company entered the field of genetics with the
acquisition (the "PSI Acquisition") of the digital imaging business of
Perceptive Scientific Instruments, Inc. ("PSI"). PSI's principal product line is
the PowerGene family of genetic analyzers -- IVD imaging systems for
karyotyping, DNA probe analysis and comparative genomic hybridization. The
Company also acquired international operations from PSI.
In February 1996, the Company acquired StatSpin, Inc. ("StatSpin"), in
a pooling-of-interests transaction. Through StatSpin, the Company manufactures
and markets a variety of benchtop centrifuges, small instruments and supplies
for the laboratory market. These products are used primarily for manual specimen
preparation and dedicated applications in cytology, hematology and urinalysis.
They appeal to smaller laboratories and physician offices performing too few
tests to justify the cost of an automated IVD imaging system.
THE INDUSTRY
As a result of cost containment pressures from third-party payors,
healthcare providers are focusing on the most efficient use of their resources.
This goal is driving them to reduce costs while simultaneously improving the
outcome potential of patient care. Meeting this goal depends to a large degree
on reducing the cost and improving the accuracy of medical tests for diagnosing
and monitoring diseases, as well as reporting the results of these tests in
timely and useful ways.
Medical tests are performed either on the patient or on a specimen
removed from the patient. IVD testing refers to analysis of a specimen -- a
sample of blood ("hematology"), urine ("urinalysis"), chromosomes
("genetics") or other tissue or material removed 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 past 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.
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However, many other IVD tests require visual examination of the
specimen through a microscope ("microscopy"). Manual microscopy requires
numerous steps from specimen preparation to visual examination, making the
method labor-intensive, cumbersome, biohazardous, inefficient and imprecise.
More labor time is spent in performing manual microscopy, collectively, than in
any other IVD testing procedure in the clinical laboratory. Nonetheless, the
vast majority of microscopic procedures are still performed manually.
The pressure to reduce the costs and improve the accuracy of IVD tests,
together with recent technological developments, have created an opportunity for
automating microscopic procedures. Advances in image processing software,
computer hardware and solid-state cameras have made it possible to capture
digital images of microscopic specimens in a uniform manner and perform
sophisticated analysis and classification of these images. 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
The Company's objectives are to maintain its technological leadership,
develop new products, continue market penetration of existing products, expand
the geographic markets for existing products and increase sales of supplies and
service. The Company is pursuing these objectives through the following
strategies:
o Adding New IVD Imaging Applications. The Company believes
automated microscopy has a number of potential applications in
the clinical laboratory and is expanding beyond the field of
urinalysis. In July of 1996, the Company strategically
expanded into the field of genetics through the PSI
Acquisition, which included the acquisition of the PowerGene
family of IVD imaging systems. The Company completed
development of The White IRIS leukocyte differential analyzer
for hematology in 1997, but its commercial release has been
delayed by other priorities.
See "--Overview."
o Continuing Market Penetration for Current Applications of IVD
Imaging Technology. Although The Yellow IRIS urinalysis
workstation is used in hospital laboratories affiliated with
more than 75% of United States medical schools, the Company
estimates that it has penetrated less than 20% of the
potential market in the United States for this family of
systems. It plans to continue penetrating this segment of the
IVD testing market with additional sales of its newest
generation models of The Yellow IRIS family and the Model
900UDx Urine Pathology System which was designed especially
for the high-volume testing requirements of larger
laboratories. The Company also plans to expand its rental
program for The Yellow IRIS which generates revenues based on
the number of tests performed by the customer.
o Expanding in New Geographic Markets. The Company's growth
strategy also calls for the successful penetration of overseas
markets, where its PowerGene systems have already achieved a
strong market presence with sales in 40 countries. Neither The
Yellow IRIS line nor the StatSpin products, however, have been
marketed to a significant degree outside the United States.
International markets have witnessed the same trend toward
consolidation and emphasis on labor productivity that has
characterized the US market for the past 15 years. From a
strategic standpoint, management intends to proceed with the
introduction of The Yellow IRIS in selected markets where
consolidation has already been a factor, by developing
relationships with distributors in those countries capable of
selling both its clinical systems and small instruments.
o Increasing Sales of Supplies and Service. Once an IVD imaging
system is installed, the Company generates significant
recurring revenue from sales of supplies and service for its
operation. The Company seeks to enhance this revenue stream by
installing more systems as well as increasing its product
offering of supplies for each system. For example, the Company
began selling the CHEMSTRIP/IRIStrip urine test strips for The
Yellow IRIS systems at the end of 1994. The Company also hopes
to introduce specific DNA probe kits and other consumables for
chromosome analysis to its PowerGene line and to sell the
patented 2-methylpolymethine (2- MPM) cytoprobe for The White
IRIS.
o Maintaining Technological Edge. The Company maintains an
active research and development program to continually enhance
its IVD imaging systems and explore other potential IVD
imaging applications for its AIM technology.
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o Adding Complementary Product Lines. Over the past two years,
the Company has also added several complementary lines of
small instruments and supplies which appeal to smaller
laboratories and respond to the desire of integrated
healthcare providers to purchase systems and supplies for a
variety of clinical settings from one supplier.
AIM TECHNOLOGY
An effective system for automated microscopy in most 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"). The Company has over the past nineteen years
created and developed its patented and proprietary AIM technology to address
both of these requirements.
The Company's AIM technology automates all or most of the front end
processing in its IVD imaging systems. For example, 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 often time-consuming, imprecise and carries the
potential for human exposure to biohazards. In contrast, the Company's patented
slideless microscope, used in The Yellow IRIS and The White IRIS allows
microscopic examination of a moving specimen precisely positioned in a stream of
fluid and eliminates the need for manual slide preparation, manipulation and
scanning. The slideless microscope precisely positions the specimen to within
microns in a thin layer for proper focusing as it flows past the microscope at
high-speed ensheathed in a larger stream of fluid. The method of ensuring proper
alignment, particle orientation, focus and measurement, called "imaging flow
cytometry," is patented, and the Company is unaware of any other company which
has developed similar technology. For those IVD tests where imaging flow
cytometry is not optimal or possible, AIM technology automates the slide
manipulation and scanning process. The Company's PowerGene genetic analyzers use
this technology to automatically locate and focus microscopic particles on a
slide as it is precisely manipulated and scanned by the system.
Once the specimen is located and presented to the microscope, AIM's
back end imaging 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
AIM SYSTEMS
The Company currently markets two families of AIM systems -- The Yellow
IRIS and the PowerGene. These systems incorporate sophisticated front end
processing and back end imaging, require customers to make substantial capital
investments and are designed for sale to clinical laboratories performing a
relatively high-volume of IVD tests.
The Yellow IRIS of urinalysis workstations are widely used nationwide,
including hospitals affiliated with over 75% of all United States medical
schools. This family of IVD imaging systems currently consists of three models.
Two models can also perform IVD imaging tests on a number of body fluids other
than urine, including cerebrospinal, peritoneal, pleural, pericardial, synovial
and seminal fluids as well as peritoneal dialyzates and lavages. The third
model, the Model 900UDx, is designed for laboratories testing high numbers of
urine specimens. The Yellow IRIS family of IVD imaging systems currently has
list prices ranging from $100,000 to $195,000.
The PowerGene family of genetic analyzers perform certain chromosome
tests such as karyotyping, DNA probe analysis in FISH and M-FISH procedures and
comparative genomic hybridization. These tests are typically used for analyzing
genetic abnormalities for both clinical uses (e.g. prenatal screening) and
research applications (e.g. cancer studies). The Company believes the genetics
market is one of the fastest growing segments of the global IVD market. The
Company purchased this family of analyzers in July 1996 in conjunction with the
PSI Acquisition. The PowerGene analyzers currently have list prices ranging from
$20,000 to over $100,000 depending upon the selected options and configuration.
OTHER SYSTEMS
In the fourth quarter of 1997, the Company began marketing the UF-100
urine cell analyzer in the United States. The UF-100, developed in Japan by
TOA Medical Electronics Co., Ltd. ("TOA"), utilizes flow
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cytometric laser scanning principles to screen large volumes of urine specimens
for the presence of abnormal sediment compositions. The UF-100 is not an AIM
system, and many abnormal specimens require subsequent microscopic analysis
through manual methods or with an automated IVD imaging system such as The
Yellow IRIS. The Company is the exclusive distributor for the UF-100 in North
America and receives royalties from TOA on sales of the UF-100 outside of North
America. The UF-100 currently has a list price in the United States of $115,000.
It provides only the sediment portion of a complete urinalysis. Laboratories
desiring to completely automate urinalysis testing can purchase The Yellow IRIS
which, in addition to microscopy, automates the chemistry and specific gravity
portions of a complete urinalysis.
SYSTEM SUPPLIES AND SERVICE
In addition to sales of IVD imaging systems and the UF-100, the Company
obtains significant recurring revenue from sales of supplies used in the
operation of these systems and from their service and repair. Supplies for The
Yellow IRIS family include the sheath fluid used to position the particles and
cleanse the system in slideless microscopy and "controls" used in calibrating
and monitoring the performance quality of the systems. The Company also sells
the CHEMSTRIP/IRIStrip for testing urine chemistry on The Yellow IRIS. The
Company introduced the CHEMSTRIP/IRIStrip urine test strips in late 1994 and has
converted over 95% of the installed base of systems to these new test strips.
CHEMSTRIP/IRIStrips urine test strips are produced through an agreement with the
Boehringer Mannheim Group of companies, recently bought by Hoffman-LaRoche,
reorganized and now operated as Roche Diagnostics.
SMALL INSTRUMENTS AND SUPPLIES
The Company also manufactures and markets a variety of small
instruments and supplies for the clinical laboratory market. These products
complement the Company's line of IVD imaging systems because they appeal to
smaller laboratories and physician offices performing an insufficient number of
tests to justify the capital cost of an IVD imaging system. StatSpin's
technologically-advanced small benchtop centrifuges are designed to 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, physician's
offices and veterinary laboratories. The basic StatSpin centrifuge unit is
adaptable to a variety of uses by means of application-specific rotors and
consumables. Noted for their compact design and simple, quiet and unobtrusive
operation, they are particularly well-suited to laboratories in which
technicians are located in close proximity to the equipment. These products also
take advantage of the Company's reputation and expertise in urinalysis and
respond to the desire of integrated healthcare providers 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 refractometers for measuring the specific gravity of urine, the CenSlide
System for manual microscopic examination of urine and other supplies intended
primarily for specimen preparation.
RESEARCH AND DEVELOPMENT
The Company maintains an active research and development program to
continually enhance its existing IVD imaging systems and explore other IVD
imaging applications for its AIM technology. In 1995, 1996 and 1997, the Company
focused its research and development efforts on the following major projects, as
well as numerous other smaller projects:
o Developing the Model 900UDx. The Company completed development
of its newest model in The Yellow IRIS family, the Model
900UDx. The Model 900UDx is the industry's first and only
fully-automated walkaway system for performing complete
macroscopic, chemical and microscopic urinalysis profiles.
o Upgrading The Yellow IRIS. The Company conducts an ongoing
process of refining its AIM technology and the
cost-effectiveness of its systems. Late in the third quarter
of 1995, the Company completed development work on its fourth
generation models of The Yellow IRIS family which offer
increased speed and other performance advantages over the
previous generation of systems.
o Expanding PowerGene. The Company has dedicated significant
research and development efforts toward fluorescent in-situ
hybridization ("FISH"). FISH is providing new tools for direct
and specific evaluation, and prediction of human genetic
disease. Utilizing multi-spectral fluorescent chemical probes,
M-FISH methods enhance the sensitivity of classical
karyotyping and provide easier interpretation of chromosome
abnormalities permitting such procedures to be performed
rapidly on uncultured amniotic or cancer cells.
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o Developing The White IRIS. The Company has had a major program
over a number of years, under sponsorship of the National
Institutes of Health and later in conjunction with a Company-
sponsored research and development entity, to develop The
White IRIS leuckocyte differential analyzer. The White IRIS is
an automated high-speed workstation used to classify normal,
as well as immature and other abnormal white blood cells. The
White IRIS performs a differential analysis which includes
identifying the five types of normally occurring white blood
cells plus a number of abnormally occurring immature white
blood cells, variant lymphocytes and other cells.
The Company also holds an exclusive, worldwide license to
several patents which cover the unique cytoprobe used by The
White IRIS, as well as the multi-colored expression of 2-MPM
in white blood cells. The White IRIS, FDA cleared in 1996, is
undergoing additional refinements pending its commercial
launch which has been delayed by other priorities. See
"--Overview."
The Company's current research and development efforts include, among
other things:
o Developing the Next Generation Platform for Its IVD Systems.
The Company is pursuing improvements designed to significantly
increase speed and image resolution while simultaneously
reducing the amount of technologist time required to operate
the system.
o Upgrading the PowerGene Cytogenetic Capabilities. Research and
development efforts for this system are focused upon
developing improved karyotyping image classification
algorithms and expanded measures in chromosome analysis using
M-FISH methods.
o Developing the Poly Products. The Company is developing the
Poly Products (discussed below), which are expected, among
other things, to enhance future generations of The Yellow IRIS
family by improving the automated classification of the urine
sediment and reducing the amount of specimen handling.
o Identifying Future Applications. The Company also performs
market research and experiments to identify future
applications of its technology. The Company believes its AIM
technology may have a number of other potential IVD imaging
applications such as cytology, microbiology and histology.
The Company has in the past partially funded its research and
development programs through (i) grants from NASA and National Institutes of
Health, (ii) joint development programs with strategic partners and (iii)
Company-sponsored research and development entities. In recent years, the
Company has entered into four significant projects, two joint development
projects with strategic partners--Boehringer Mannheim Corporation ("BMC") and
Boehringer Mannheim GmbH ("BMG")--and two projects with Company-sponsored
research and development entities--LDA Systems, Inc. ("LDA") and Poly U/A
Systems, Inc. ("Poly"). From 1994 to 1996, the Company collaborated with BMC and
BMG in the development of CHEMSTRIP/IRIStrip urine test strips and the Model
900UDx. BMC supplies the Company with CHEMSTRIP/IRIStrip urine test strips and
has agreed to supply the Company with certain raw materials should the Company
elect to manufacture its own urine test strips, subject to royalty payments. The
Company was granted the non-exclusive right to distribute certain other BMC
urinalysis products to hospitals and commercial laboratories in the United
States. The Company manufactures the Model 900UDx with BMG providing certain
components on an OEM basis at cost. The Company has exclusive marketing rights
to the Model 900UDx in Taiwan and non-exclusive rights for the rest of the world
outside of Germany and Italy. During 1997, Hoffman-LaRoche acquired the
Boehringer Mannheim Group of companies, and BMC and BMG are now operated as
Roche Diagnostics.
In 1992, the Company entered into a project with LDA for development of
The White IRIS leukocyte differential analyzer and later acquired LDA for
approximately 498,000 shares of the Company's common stock. In 1995, the Company
entered into a similar project with Poly which is ongoing for development of
several new products to enhance automated urinalysis (the "Poly Products"). The
Company has an option to acquire all the common stock of Poly for $5.1 million
payable, at the Company's discretion, in cash or shares of the Company's Common
Stock.
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MARKETING AND SALES
In the United States, the Company's IVD imaging systems are sold and
serviced through the Company's own sales and service forces. Sales activities
consist of direct sales by field sales representatives, telemarketing 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 its sales activities, the Company promotes the
advantages of its products through advertising in trade journals, attendance at
trade shows and direct mail. All sales of IVD imaging systems include
installation, customer training and a one-year warranty. The Company's small
instruments, targeted primarily at smaller customers, are sold through
distributors. The Company has an overseas sales office and staff based in
Chester, England that supports agents and distributors and promotes the products
in more than forty foreign countries.
The Company also maintains a rental program under which it has a number
of systems currently in place. Under the terms of the rental agreements,
payments generally are based on the number of tests performed with
a guaranteed monthly minimum payment to the Company. The Company is responsible
for supply and service of the systems. Alternatively, some customers lease the
Company's IVD systems from medical equipment leasing companies which, in turn,
purchase the systems from the Company.
In addition, the Company markets most of the supplies used in the
operation of its IVD systems and maintains these systems through its own
national service organization. Service (after a one-year warranty period) is
generally sold under an annual service contract or, less frequently, on a
per-call basis.
COMPETITION
URINALYSIS
The Company's primary products for the urinalysis market are The Yellow
IRIS family of urinalysis workstations and the UF-100 urine cell analyzer. The
principal competitive factors in this market are cost-per-test, ease of use, and
quality of result. The Company believes The Yellow IRIS competes favorably with
regard to these factors in its target markets.
A number of hospitals conduct urine sediment examinations using the
Kova system made by Hycor Biomedical, Inc., as well as several other similar
products, all of which are composed largely of disposable plastic parts. These
products provide a more standardized method of preparing urine sediment for
microscopical examination as opposed to traditional means. While these
disposable products help somewhat to overcome manipulative imprecision, most of
them do so at the added expense of an increased number of disposable parts and
offer little in time savings. One exception is the CenSlide System acquired by
the Company in March of 1996. This system uses a combination centrifuge tube and
microscope slide, thereby actually eliminating much of the manipulation required
in preparing the urine specimen for microscopic observation. The Company views
these types of products as better suited for laboratories performing a lower
volume of urinalysis tests. Roche Diagnostics, Dade Behring Corporation and
Bayer Diagnostics sell lines of urine test strips which are useful in
determining the concentration of various chemical substances often found in
urine. Some claims have been made that the absence of certain results determined
with these test strips can preclude the need for microscopic examinations of
some specimens. IRIS recently obtained FDA clearance of its claims of improved
performance of The Yellow IRIS over reagent strip measures in detecting
microscopic abnormalities in urine.
GENETICS
The Company's products for the genetics market are the PowerGene family
of analyzers. The principal competitive factors in this market are comparative
product features, such as ease-of-use, software utility and user friendliness,
clarity of visual output and the quality and responsiveness of customer service.
The Company believes the PowerGene analyzers compete favorably with regard to
these factors.
The Company's primary competitors in this worldwide market are Applied
Imaging and Vysis, Inc. which market IVD imaging systems for prenatal and other
genetic testing. Vysis utilizes a strategy of offering its systems as a vehicle
for selling its DNA probes, a strategy that has made it the fastest growing
competitor. Leica (a German microscope manufacturer), MetaSystems and ASI (an
Israeli camera manufacturer) also sell systems for genetic analysis.
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HEMATOLOGY
The Company's proposed product for the hematology market is The White
IRIS leukocyte differential analyzer. See "Research and Development."
Intelligent Medical Imaging, Inc. ("IMI") is presently manufacturing an IVD
imaging system, called the Micro 21, for performing certain aspects of white
blood cell differential analysis and certain other analyses. Unlike The White
IRIS, which uses imaging flow cytometry, the Micro 21 is a slide- based system.
The Company believes The White IRIS has certain performance advantages over the
Micro 21. For example, The White IRIS (1) uses a closed-tube sampling procedure
which is safer and more convenient because it does not require slide
preparation, (2) is more sensitive and precise because it counts significantly
more white blood cells, (3) allows an easier-to-obtain and more complete answer
because it automatically classifies variant, immature and other abnormal cells,
as compared only to automated classification of normal cells by the Micro 21,
and (4) is more cost effective because it has higher throughput and requires
less attended time. See "Overview".
While other automated blood smear reading instruments capable of
varying degrees of white blood cell differential analysis exist, they are
relatively expensive. There is at least one such instrument currently in
production (made by Omron, a Japanese company), but, to the Company's knowledge,
it is not marketed outside of Japan. The Company is not aware of any current
plans by Omron to market its white blood cell slide readers in the United
States. TOA, Abbott Laboratories and Coulter Corporation, all manufacturers of
blood cell counters, have begun displaying devices which automate the blood
smear preparation process and are attachable to their respective analyzers but
do not provide for automation of white blood cell differential analysis. IMI has
also displayed a prototype blood smear preparation device it is developing.
OTHER POTENTIAL COMPETITORS
The Company is aware of at least four other companies that sell IVD
imaging systems, all for cytology and/or histology applications. Neuromedical
Systems, Inc. and NeoPath, Inc. offer IVD imaging systems for PAP smears.
Auto-Cyte, Inc. and ChromaVision Medical Systems, two newer ventures, recently
obtained significant funding through initial public offerings. AutoCyte plans to
compete in the PAP smear arena. ChromaVision sells a system for rare event
finding for applications similar in concept to the PowerGene automated rare
event finder recently delivered to the Johnson Space Center of NASA.
INTELLECTUAL PROPERTY
The Company's commercial success depends in large part on its ability
to protect and maintain its proprietary rights. As such, the Company pursues
broad protection of its proprietary technology through the filing of various
patent applications. The Company has received numerous United States patents for
its 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. A number of additional patent applications are pending in the
United States and abroad. Also, numerous patents relating to digital
refractometers, centrifuges, automated slide handling and disposable urinalysis
products were acquired in its recent acquisitions.
The Company has an exclusive license from Cytocolor, Inc. for the
patented 2-MPM cytoprobe used in the operation of The White IRIS. Cytocolor has
pursued patent protection of this unique reagent through the filing of patent
applications in the United States and abroad. Under the terms of the license,
the Company will pay Cytocolor royalties of $1,000 per system for the first
1,000 sales of The White IRIS plus 8% of the net sales price of all consumable
products containing 2-MPM.
The Company has granted TOA a royalty-bearing license to use pre-1989
technology for urine sediment analyzers and non-medical industrial instruments.
The Company has trade secrets and unpatented technology and proprietary
knowledge related to the sale, promotion, operation, development and
manufacturing of its products. To protect these rights, the Company enters into
confidentiality agreements with its employees and consultants.
The Company claims copyright in its software and the ways in which it
assembles and displays images, but it has not filed copyright registrations with
the United States Copyright Office or any comparable state or foreign agency.
The Company also owns various federally registered trademarks, including "IRIS,"
"The Yellow IRIS," "The White IRIS" and "PowerGene." The Company owns numerous
other registered and unregistered trademarks. The Company also has certain
trademark rights in foreign jurisdictions. The Company intends to aggressively
protect its copyrights and trademarks.
10
GOVERNMENT REGULATION
Most of the Company's products are subject to stringent government
regulation in the United States and other countries which govern the testing,
manufacture, labeling, storage, record-keeping, distribution, sale, marketing,
advertising and promotion of such products. The regulatory process can be
lengthy, expensive and uncertain, and securing clearances or approvals may
require the submission of extensive official data and other supporting
information. Failure to comply with applicable requirements can result in 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.
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 510(k) Notification
process can be lengthy, expensive and uncertain, but the PMA Application process
is significantly more complex, expensive, time-consuming and uncertain. To date,
the Company has cleared all of its regulated products with the FDA through the
510(k) Notification process.
The Company's business strategy includes the development of additional
products for which FDA clearance or approval may be required, and no assurance
can be given that the Company can secure any necessary FDA clearance to market
these products or that the FDA will not require the filing of a PMA Application
for these 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.
The Company is 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"). The FDA recently
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 the
Company's manufacturing facilities for compliance with GMP Standards. Based in
part upon the results of prior FDA inspections, the Company believes that it can
achieve substantial compliance with GMP Standards. The Company also believes
that it can achieve substantial compliance with the expanded GMP Standards prior
to the FDA's announced deadline of June 1998 and that achieving compliance will
not require significant capital expenditures or have a material adverse effect
on its business.
The FDA also regulates computer software of the type used in the
Company's IVD imaging systems and is currently reevaluating the regulation of
such software. The Company cannot 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, there can
be no assurance that future developments in this area will not have a material
adverse effect on the Company.
In addition to domestic regulation of medical devices, many of the
Company's products are subject to regulations in the foreign jurisdictions in
which it operates or sells products. 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. Although the Company distributes the PowerGene analyzer in more than
39 foreign countries, it has not yet applied for regulatory clearances or
approvals to market The Yellow IRIS or The White IRIS in most of these foreign
countries. The Company's business strategy includes expanding the geographic
distribution of these and other products, and there can be no assurance that the
Company can secure the necessary clearances and approvals in the relevant
foreign jurisdictions. Furthermore, the regulations in certain foreign
jurisdictions continue to develop and there can be no assurance that new laws or
regulations will not have a material adverse effect on the Company's 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. The Company is actively pursuing CE Mark
certification for many of its products, but there can be no assurance that the
Company will be successful in securing such certification.
11
In addition, the Company's products are subject to regulation by the
United States Department of Commerce export controls, primarily as they relate
to the associated computers and peripherals. The Company has not experienced any
material difficulties in obtaining necessary export licenses to date.
Any change in existing federal, state or foreign laws or regulations,
or in the interpretation or enforcement thereof, or the discussion or
promulgation of any additional laws or regulations could have a material adverse
effect on the Company.
FORWARD LOOKING STATEMENTS
The foregoing description of the Company's business, as well as the
remaining sections of this Annual Report on Form 10-K, contain various
forward-looking statements which reflect the Company's current views with
respect to future events and financial results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Forward Looking
Statements."
GLOSSARY OF SELECTED TERMS
The following glossary defines certain technical terms used to describe
the Company's business.
AUTOMATED INTELLIGENT MICROSCOPY (AIM). The synthesis of visual
microscopy, digital image processing and automated image interpretation/pattern
recognition to analyze microscopic specimens. The Yellow IRIS, The White IRIS
and PowerGene are all examples of instruments which are based on AIM technology.
AUTOMATIC KARYOTYPING. A procedure to capture and digitize an image of
a spread of chromosomes from a dividing nucleus (metaphase) which may be further
enhanced by image processing. The individual chromosomes in the enhanced image
are then automatically separated and matched into their respective pairs
(karyotype).
COMPARATIVE GENOMIC HYBRIDIZATION (CGH). A molecular biology method to
globally view DNA for gain or loss (amplifications or deletions) of genetic
material using a FISH procedure.
CYTOPROBE. A chemical reagent which reacts with enzymatic granules
within a cell to produce unique color characteristics which are useful in
identifying the cell.
DNA. Deoxyribonucleic acid, the chemical composition of chromosomes in
the nuclei of living cells, consisting of two long chains of alternating
phosphate and deoxyribose units twisted into a double helix and joined by
hydrogen bonds between the complementary bases adenine and thymine or cytosine
and guanine bound in unique sequences that determine genetic characteristics.
DNA PROBE ANALYSIS. A molecular biology method using synthesized unique
short sequences of DNA (deoxyribonucleotides) to locate their exact template
along the DNA chain in the nucleus of a cell.
FLUORESCENT IN-SITU HYBRIDIZATION (FISH). A procedure which allows
microscopic observation of the location of a unique sequence of DNA by using a
DNA probe with a molecule attached to it which emits a distinctive color when
illuminated.
IN VITRO DIAGNOSTIC (IVD) TESTING. Testing 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.
LEUKOCYTE DIFFERENTIAL ANALYZER. An automated, high-speed laboratory
instrument for classifying the white blood cells (or leukocytes) in a blood
specimen into different categories and determining the relative proportion of
each category.
MULTIPLEX FLUORESCENT IN-SITU HYBRIDIZATION (M-FISH). A procedure which
allows the combination of microscopic observations of the locations of a
multiplicity of unique DNA sequences by using a multiplicity of DNA probes, each
specific for one of the unique sequences, and each with one of several
fluorescent molecules attached such that each location is observed to have a
distinguishable color when illuminated.
REFERENCE LABORATORY. A commercial clinical laboratory which performs
general IVD testing of specimens referred from physician offices and more
specialized IVD testing for physician offices and hospitals.
REFRACTOMETER. A device which measures the index of refraction of a
solution, typically to determine its concentration or specific gravity.
12
SLIDELESS MICROSCOPY. The process of presenting a microscopic specimen
to the optical portion of a microscope without using a conventional microscope
slide. Slideless microscopy is implemented in The Yellow IRIS and The White IRIS
using a patented flowcell through which the specimen literally flows past a
microscope objective.
ITEM 2. PROPERTIES.
The Company leases all of its facilities. The leases expire at various
times over the next four years. The Company's headquarters are located at 9162
Eton Avenue, Chatsworth, California 91311. The table below sets forth certain
information regarding the Company's leaseholds as of December 31, 1997:
Approximate Floor Monthly
Location Space (Sq. Ft.) Rent Use
- ----------------------------------------------------------------------------------------------------------------------
Chatsworth, CA 26,000 $14,100 Sales and Marketing, Research and Development,
Manufacturing and Corporate Administration
League City, TX 7,000 $8,300 Sales and Marketing, Research and Development
and Manufacturing
Norwood, MA 11,000 $7,200 Sales and Marketing, Research and Development
and Manufacturing
Chester, England 5,000 (pound)4,200 Sales and Marketing and Manufacturing
The Company believes that its facilities are adequate to meet its
current needs. Although it has limited expansion space at its Chatsworth
facility, the Company believes that it can accommodate planned growth at this
facility for the near term by leasing additional office space for certain
non-manufacturing related activities, making modifications to the Chatsworth
facility and adding a second shift to its manufacturing operations.
ITEM 3. LEGAL PROCEEDINGS.
In July 1996, the Company acquired PSI from Digital Imaging
Technologies, Inc. ("DITI"). As part of the purchase price, the Company issued
to DITI a five-year warrant to purchase 875,000 shares of Common stock at $8.00
per share. In August 1997, the Company filed a demand for arbitration against
DITI with the American Arbitration Association. The Company's demand for
arbitration alleges material breaches of the representations, warranties and
covenants in the purchase agreement governing the PSI acquisition. DITI
subsequently filed a counterclaim in the arbitration proceeding alleging that
the Company misrepresented or omitted to disclose material facts in connection
with the PSI acquisition. DITI had previously requested a reduction in the
exercise price of the warrant but elected to seek unspecified monetary damages
in the counterclaim. Although the Company does not presently anticipate any
material adverse effect as a result of this arbitration proceeding, there can be
no assurance that it will not have such an effect on the Company or result in
additional dilution to holders of the Common Stock.
The Company is involved in routine litigation arising in the ordinary
course of its business, and, while the results of the proceedings cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the American Stock Exchange
("Amex") under the symbol "IRI." The closing price of the Common Stock on March
20, 1998 was $4.25 per share. The table below sets forth high and low closing
prices reported by Amex for the period January 1, 1996 through December 31,
1997:
Price per share
---------------
High Low
FISCAL 1996
First Quarter.............................................. 7-7/8 6-1/4
Second Quarter............................................. 12-3/4 6-5/8
Third Quarter.............................................. 9-1/2 7-1/4
Fourth Quarter............................................. 7-1/2 3-3/8
FISCAL 1997
First Quarter.............................................. 5-1/4 3-9/16
Second Quarter............................................. 4-3/16 3-3/8
Third Quarter.............................................. 4-15/16 3-11/16
Fourth Quarter............................................. 5-3/16 3-1/4
As of March 20, 1998, IRIS had approximately 4,300 holders of record of
its Common Stock.
The Company intends to employ all available funds in the development of
its business and the repayment of indebtedness and, as a result, does not expect
to pay any cash dividends for the foreseeable future. Furthermore, the Company
may not pay any cash dividends on the Common Stock, or repurchase any shares of
the Common Stock, without the written consent of the holders of a majority of
the outstanding shares of Series A Preferred Stock.
As partial consideration for renegotiating the Company's loan
agreements in March 1997, the Company issued to City National Bank warrants to
purchase (1) 50,000 shares until January 15, 2000 at $3.875 per share, (2)
25,000 shares until June 1, 2000 at $4.375 per share and (3) 25,000 shares until
July 1, 2000 at $4.0625 per share. The warrant certificates bear appropriate
restrictive legends concerning the registration requirements of the Securities
Act. The Company believes this transaction was exempt from the registration
requirements of the Securities Act based on Section 4(2) of the Securities Act.
In May 1997, the Company amended an existing agreement with M. Kane &
Company, Inc., an investment banker, to provide ongoing financial advisory
services. Under the terms of the amendment, the Company agreed to issue to M.
Kane & Company a warrant to purchase 10,000 shares of Common Stock until May 15,
2001 at $4.3125 per share. The Company has not yet issued the warrant
certificate, but it will bear an appropriate restrictive legend concerning the
registration requirements of the Securities Act. The Company believes this
transaction was exempt from the registration requirements of the Securities Act
based on Section 4(2) of the Securities Act.
Between February and May 1997, the Company issued a total of 75,376
shares of Common Stock to Irell & Manella, LLP, as partial payment for legal
services. The certificates bear appropriate restrictive legends concerning the
registration requirements of the Securities Act. The Company believes these
transactions were exempt from the registration requirements of the Securities
Act based on Section 4(2) of the Securities Act.
In November 1997, the Company offered to reduce the exercise price of
its outstanding Series D Warrants from $6.50 to $4.00 per share for holders
exercising their warrants during a one-week period. The holders that accepted
the offer and exercised their Series D Warrants during that period also received
a new Series F Warrant exercisable until March 29, 2000 at an exercise price of
$4.00 per share of Common Stock. The Company received gross proceeds of
approximately $783,000 through the exercise of Series D Warrants and issued
Series F Warrants to purchase an aggregate of 205,633 shares of Common Stock.
The Company also sold to two Series D Warrant holders for $35,000 additional
Series F Warrants covering an aggregate of 75,000 shares of Common Stock.
Concurrently with making the offer, the Company provided the Series D
Warrant holders with copies of its most recent Annual Report (Form 10K),
Quarterly Report (Form 10Q) and Proxy Statement. The Company also obtained
written representations from the participants in the offer confirming their
status as "accredited investors" under Regulation D and confirming their intent
to acquire the securities for their own account and not with a view to resale or
distribution in violation of the Securities Act. The Company did not engage in
general solicitation or advertising, and the securities issued in the
transaction bear appropriate restrictive legends concerning the registration
requirements of the Securities Act. The Company believes this transaction was
exempt from the registration requirements of the Securities Act based on
Regulation D and Section 4(2) of the Securities Act.
In February 1998, the Company issued Series F Warrants covering 27,000
shares of Common Stock to Alan Stone & Co., a former financial consultant, and
his attorney to settle litigation between the parties. As part of the
settlement, Alan Stone & Co. also surrendered for cancellation Series E Warrants
(exercisable at $7.80 per share) to purchase an equal number of shares of Common
Stock. The Company obtained written representations from the recipients
confirming their status as "accredited investors" under Regulation D and
confirming their intent to acquire the securities for their own account and not
with a view to resale or distribution in violation of the Securities Act. The
securities issued in the transaction bear appropriate restrictive legends
concerning the registration requirements of the Securities Act. The Company
believes this transaction was exempt from the registration requirements of the
Securities Act based on Section 4(2) of the Securities Act.
14
ITEM 6. SELECTED FINANCIAL DATA.
This information as of December 31, 1996 and 1997 and for the years
ended December 31, 1995, 1996 and 1997 is derived in part from, and should be
read in conjunction with, the Company's Financial Statements, including the
Notes thereto, as included elsewhere in this Annual Report.
Year Ended December 31,
------------------------------------------------------------------
1993 1994 1995(1) 1996(1) 1997(1)
------------------------------------------------------------------
(in thousands, except per share data)
FINANCIAL STATEMENT DATA
Net revenues.................................. $12,428 $12,580 $14,488 $20,597 $27,495
Operating income (loss)....................... 1,313 1,495 (1,802) (10,434) 284
Interest and other income (expense), net...... 33 95 282 (452) (1,080)
Net income (loss)............................. 1,323 1,622 2,126 (7,428) (503)
Net income (loss) per share - basic........... .26 .30 .35 (1.21) (.16)
Net income (loss) per share - diluted......... .25 .28 .34 (1.21) (.16)
Working capital............................... 6,812 7,779 11,234 1,914 1,650
Total assets.................................. 11,181 13,282 22,203 37,860 32,735
Long term debt, including current portion..... 603 367 311 13,000 10,942
Total liabilities............................. 3,415 3,122 3,261 24,096 17,942
Shareholders' equity.......................... 7,766 10,160 18,942 13,765 14,792
Cash dividends per share...................... -- -- -- -- --
OTHER FINANCIAL DATA
Operating income (loss) - as adjusted(3) ..... 1,313 1,495 1,098 (1,147) 1,622
EBITDA (2).................................... 2,044 2,407 2,150 (849) 4,050
(1) The years ended December 31, 1995 and 1996 include write-offs of acquired in
process research and development totaling $2.9 million and $7.3 million,
respectively. The year ended December 31, 1996 also includes unusual charges
totaling $2.0 million relating primarily to pooling-of-interest expenses, the
write-off of deferred public offering costs, expenses relating to litigation and
arbitration matters, severance and other incremental costs associated with a
restructuring of the Company's personnel. The year ended December 31, 1997
includes unusual charges totaling $1.3 million relating to expenses relating to
litigation and arbitration matters, the write-down of deferred private offering
costs and the write-off of goodwill no longer considered recoverable.
(2) EBITDA represents earnings before taxes, interest expense, write-off of
acquired in process research and development, depreciation and amortization,
including common stock and stock option compensation amortization. The Company
believes that EBITDA serves as a financial analysis tool for measuring financial
information such as operating performance leverage ratios. EBITDA should not be
considered by the reader as an alternative to net income, as an indicator of the
Company's performance or as an alternative to cash flows as a measure of
liquidity.
(3) Operating Income (Loss) - as adjusted represents operating income (loss)
before the write-off of acquired in process research and development totaling
$2.9 million and $7.3 million in the years ended December 31, 1995 and 1996,
respectively, and before unusual charges of $2.0 million and $1.3 million in
the years ended December 31, 1996 and 1997, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company generates revenues primarily from sales of IVD imaging
systems based on its patented and proprietary AIM technology. Following the
initial sale, these systems become part of the "installed base" and generate
follow-on sales of supplies and service necessary for their operation. The
Company also generates revenues from sales of ancillary lines of small
laboratory instruments and supplies.
Until 1996, the Company generated most of its revenues from sales of
just two models of The Yellow IRIS urinalysis workstation and related supplies
and services. These two models differ mainly by their speed and price. In 1996,
the Company introduced a third model of The Yellow IRIS, the Model 900UDx urine
pathology system which is a higher capacity automated urinalysis workstation
designed especially for the high-volume testing requirements of large hospitals
and reference laboratories. Finally, the Company began selling the PowerGene
family of genetic analyzers in August 1996 after completing the PSI Acquisition.
See "Business - Overview."
The Company invests significant amounts in research and development for
new products and enhancements to existing products. The following table
summarizes total product technology expenditures for the periods indicated:
15
Year Ended December 31,
1995 1996 1997
------------------------------------
(in thousands)
Research and development expense, net........................................... $1,220 $1,978 $2,125
Capitalized software development costs.......................................... 299 577 535
Reimbursed costs for research and development grants and contracts.............. 843 1,780 1,015
------- ------- -------
Total product technology expenditures................................... $2,362 $4,335 $3,675
====== ====== ======
The Company has in the past partially funded its research and
development programs through (i) grants from NASA and the National Institutes of
Health, (ii) joint development programs with strategic partners and (iii)
Company-sponsored research and development entities. See "Business--Research and
Development."
RESULTS OF OPERATIONS
The consolidated financial statements reflect the consummation of the
PSI Acquisition on July 31, 1996 which was accounted for using the purchase
method of accounting. Accordingly, the consolidated statements of operations
include the financial results of PSI for the entire 1997 fiscal year, but only
for the period from August 1 to December 31 for fiscal 1996.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31,
1996
Net revenues for the year ended December 31, 1997 increased to $27.5
million from $20.6 million, an increase of $6.9 million or 33% over the prior
year. Sales of IVD imaging systems increased to $11.8 million from $6.4 million,
an increase of $5.4 million or 86% over the prior year. The increase is due
primarily to the addition of the PowerGene family of genetic analyzers to the
Company's product line in August 1996 as a result of the PSI Acquisition and
increased sales of The Yellow IRIS.
Sales of IVD imaging system supplies and services increased to $10.6
million from $9.1 million, an increase of $1.5 million or 16% over the prior
year, due to the larger installed base of IVD imaging systems and the conversion
of The Yellow IRIS installed base to the new CHEMSTRIP/IRIStrip urine test
strips marketed exclusively by the Company. Sales of small instruments and
supplies decreased to $4.4 million from $5.1 million, a decrease of $619,000 or
12%, over the prior year. The decrease reflects lower sales levels of the
StatSpin products to one of its distributors.
The Company believes that the ongoing consolidation in the healthcare
industry may be adversely affecting sales of The Yellow IRIS as some hospitals
and reference laboratories appear to be postponing large capital investment
decisions due to the resulting uncertainty. The Company also believes that there
is a growing trend among potential customers for The Yellow IRIS toward leasing
these systems on a cost-per-test basis rather than purchasing them. This trend
is expected to spread revenue from system placements over several years.
Royalties and licensing revenues for the year ended December 31, 1997
increased to $603,000 from $43,000, an increase of $560,000 over the prior year.
The increase is primarily the result of increased royalties received, the
receipt of previously disputed royalties relating to the fourth quarter of 1996
and initial fees earned for the license of certain technology. Amounts are
expected to decrease to historical levels in 1998.
Cost of goods for IVD imaging systems as a percentage of sales of IVD
imaging systems was 51% for the year ended December 31, 1997 and is comparable
to the prior year. Cost of goods for IVD imaging system supplies and services
decreased as a percentage of sales of such products to 50% for the year ended
December 31, 1997 from 56% for the prior year. This decrease is principally due
to decreased costs and increased sales prices. Cost of goods for small
instruments and supplies as a percentage of sales of small instruments and
supplies totaled 53% for the year ended December 31, 1997, and is comparable to
the prior year. The net result of these changes and increased royalties and
licensing revenues was an increase in gross margin for the year ended December
31, 1997 to 50%, as compared to 46% for the year ended December 31, 1996.
Marketing and selling expenses consist primarily of salaries,
commissions and related travel expenses of the Company's direct sales force, as
well as salaries for the marketing and distributor relations departments.
Marketing and selling expenses increased to $5.2 million for the year ended
December 31, 1997 from $4.6 million, an increase of $597,000 or 13% over the
prior year, primarily due to the addition of the sales force from the PSI
Acquisition partially offset by decreased marketing and selling expenses related
to The Yellow IRIS. Marketing and selling expenses as a percentage of net
revenues decreased from 22% in the prior year to 19% in the current year.
General and administrative expenses consist primarily of payroll costs
associated with the Company's management and support personnel, facilities
related costs and legal and accounting fees. General and administrative expenses
increased to $3.5 million for the year ended December 31, 1997 from $3.3
million, an increase of $205,000 or 6% over the comparable period in the prior
year. This increase is the result of the addition of administrative functions
following the PSI Acquisition, partially offset by decreased expenses resulting
from the
16
restructuring implemented in the fourth quarter of 1996 and decreased
acquisition activities in the current year. General and administrative expenses
as a percentage of net revenues decreased from 16% for 1996 to 13% for the
current year.
Net research and development expenses consist of costs incurred for the
development of new products and improvements to existing products less
third-party reimbursements under joint development programs, grants and research
and development contracts. Net research and development expenses increased to
$2.1 million for the year ended December 31, 1997 from $2.0 million, an increase
of $147,000 or 7% over the prior year, and decreased as a percentage of net
revenues from 10% to 8%. Reimbursements under joint development programs
decreased to $1.0 million in 1997 from $1.8 million in 1996. Total product
technology expenditures decreased to $3.7 million from $4.3 million, a decrease
of $660,000 or 15% over the prior year, due primarily to reduced spending on the
development of The White IRIS and decreased expenditures on the Poly Products,
partially offset by the addition of research and development staff from the PSI
Acquisition.
Amortization of intangible assets reflects the amortization of deferred
expenses for warrants issued in connection with joint development projects and
intangible assets arising from acquisitions and patents. Amortization of
intangible assets for the year ended December 31, 1997 increased to $1.3 million
from $794,000, an increase of $515,000 or 65% over the prior year, primarily as
a result of the acquisition of intangible assets in the PSI Acquisition and a
small product line acquisition.
The results of operations for the year ended December 31, 1997 include
certain unusual charges to earnings of $1.3 million, primarily for the write-off
in the fourth quarter of deferred private offering expenses ($481,000), goodwill
no longer considered recoverable associated with the digital refractometer line
of business ($705,000) and legal expenses ($152,000) relating to a completed
patent litigation matter and the pending arbitration matter against Digital
Imaging Technologies, Inc. See "Legal Proceedings." The unusual charges in the
prior year totaled $2.0 million and related primarily to the write-off of
deferred public offering costs ($686,000), litigation expense ($617,000),
restructuring charges ($298,000) and merger related expenses ($244,000).
Acquisition of in-process research and development charges for the year
ended December 31, 1996 amounted to $7.3 million. No similar charge occurred in
1997.
The net result of the above described charges was an increase in
operating income in fiscal 1997 to $284,000 as compared to an operating loss of
$10.4 million in the prior year. Excluding the effects of the unusual charges
and acquisition of in-process research and development, operating income would
have been $1.6 million in the current year, compared to an operating loss of
$1.1 million in the previous year.
Interest income decreased to $57,000 for the year ended December 31,
1997 from $222,000 for the prior year, primarily as the result of decreased
amounts of invested cash in 1997.
Interest expense increased to $1.2 million for the year ended December
31, 1997 from $681,000 for the prior year due to the indebtedness incurred to
finance the PSI Acquisition and increased interest rates on bank debt.
Other income increased primarily due to the receipt of government grant
funds for reimbursement of expenses incurred in prior periods.
The income tax benefit for the year ended December 31, 1997 was
$293,000, as compared to an income tax benefit of $3.5 million for 1996. The
income tax benefit for the year ended December 31, 1997 differs from the federal
statutory rate due to state, local and foreign income taxes and permanent
differences between income reported for the financial statement and income tax
purposes.
The staff of the Securities and Exchange Commission recently announced
a new position on accounting for convertible preferred stock which is
potentially convertible at a discount to the market price of the common stock,
even if the potential for a discount is only a possibility. The staff has taken
the position that, solely for purposes of calculating earnings per share, the
potential discount is an imputed dividend to the preferred stockholders which
reduces the amount of income available to common stockholders. As a result of
the staff's new accounting position, the issuance of the Series A Preferred
Stock resulted in a one-time reduction in earnings attributable to common
shareholders of $450,000 or $0.08 per share in the first quarter of 1997. The
staff's position is limited to the calculation of earnings per share and did not
have any effect on the Company's net income or cash flow. See "Liquidity and
Capital Resources."
The above factors contributed to a net loss of $503,000. However, due
to the imputed dividend discussed above, the loss per common share based upon
the net loss attributable to common stockholders of $953,000 amounted to $0.16
per share for the year ended December 31, 1997 as compared to a net loss of $7.4
million or
17
$1.21 per share for the year ended December 31, 1996. Excluding the effect of
unusual charges, adjustment to the deferred tax valuation allowance and charges
for the acquisition of in-process research and development from the PSI
Acquisition, the Company would have had net loss attributable to common
stockholders of $108,000 or $0.02 per share for the year ended December 31,
1997, as compared to a net loss of $1.5 million, or $0.24 per share, for the
year ended December 31, 1996.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31,
1995
Net sales for the year ended December 31, 1996 increased to $20.6
million from $14.5 million, an increase of $6.1 million or 42% over the prior
year. Sales of IVD imaging systems increased to $6.4 million from $4.2 million,
an increase of $2.2 million or 50% over the prior year. The increase was due
primarily to the addition of the PowerGene family of genetic analyzers to the
Company's product line in August 1996 as a result of the PSI Acquisition.
Sales of IVD imaging system supplies and service increased to $9.1
million from $6.7 million, an increase of $2.4 million or 35% over the prior
year, due to the larger installed base of IVD imaging systems and the conversion
of The Yellow IRIS installed base to the new CHEMSTRIP/IRIStrip urine test
strips marketed exclusively by the Company. Sales of small instruments and
supplies increased to $5.1 million from $3.4 million, an increase of $1.7
million or 48%, over the prior year. The increase reflects generally higher
sales levels of the StatSpin products, as well as the addition of the CenSlide
product line in March 1996.
Cost of goods for IVD imaging systems increased as a percentage of
sales of IVD imaging systems to 51% for the year ended December 31, 1996 from
48% for the prior year due primarily to the addition of the Model 900UDx to the
product line and amortization of increased fixed costs for IVD imaging systems.
These factors were partially offset by the addition of the higher-margin
PowerGene family of genetic analyzers to the Company's product line in August
1996. Cost of goods for IVD imaging system supplies and service increased as a
percentage of sales of such products to 56% for the year ended December 31, 1996
from 47% for the prior year primarily due to relatively lower gross margins on
sales of CHEMSTRIP/IRIStrip urine test strips which accounted for a greater
proportion of sales of system supplies, as well as a decline in gross margins on
service of IVD imaging systems. Cost of goods for small instruments and supplies
decreased as a percentage of sales of small instruments and supplies to 53% for
the year ended December 31, 1996 from 57% for the prior year due to an overall
change in product mix toward higher gross margin items. The net result of these
changes was a decrease in aggregate gross margin to 46% for the year ended
December 31, 1996 from 51% for the prior year.
Marketing and selling expenses increased to $4.6 million for the year
ended December 31, 1996 from $2.9 million, an increase of $1.7 million or 61%
over the prior period, and increased as a percentage of net sales to 22% from
20%, due to the addition of the sales force from the PSI Acquisition and
increased spending on promotions, telemarketing and customer support.
General and administrative expenses increased to $3.3 million for the
year ended December 31, 1996 from $2.0 million, an increase of $1.3 million or
60% over the prior year, and increased as a percentage of net sales from 14% to
16%.
Net research and development expenses increased to $2.0 million for the
year ended December 31, 1996 from $1.2 million, an increase of $758,000 or 62%
over the prior year, and increased as a percentage of net sales to 10% from 8%.
Reimbursements under joint development programs increased to $1.8 million from
$843,000. Total product technology expenditures increased to $4.3 million from
$2.4 million, an increase of $1.9 million or 84% over the prior year, due
primarily to work on the Model 900UDx and The White IRIS, as well as the
addition of research and development staff from the PSI Acquisition.
Amortization of intangible assets for the year ended December 31, 1996
increased to $794,000 from $127,000, an increase of $667,000 or 524% over the
prior year, primarily as a result of the acquisition of intangible assets in the
PSI Acquisition, as further described below.
The results of operations for the year ended December 31, 1996 include
certain unusual charges to earnings of $2.0 million primarily for the write-off
of deferred offering costs ($686,000), litigation expenses ($617,000),
restructuring charges ($298,000) and merger related expenses ($244,000).
Acquisition of in-process research and development for the year ended
December 31, 1996 reflects the PSI Acquisition which resulted in a non-recurring
charge of $7.3 million. Acquisition of in-process research and development for
the year ended December 31, 1995 reflects the acquisition of LDA Systems, Inc.
(a Company- sponsored research and development company) which resulted in a
non-recurring, non-cash charge of $2.9 million. The FDA cleared The White IRIS,
acquired from LDA, in May 1996, but its commercial release has been delayed by
other priorities. See "--Liquidity and Capital Resources." See
"Business--Research and Development."
18
Interest income decreased to $222,000 for the year ended December 31,
1996 from $310,000 for the comparable period, primarily as the result of
decreased amounts of invested cash during 1996.
Interest expense increased to $681,000 for the year ended December 31,
1996 from $43,000 for the comparable period due to the indebtedness incurred to
finance the PSI Acquisition.
The income tax benefit for the year ended December 31, 1996 was $3.5
million as compared to an income tax benefit of $3.6 million for 1995. The
Company recognized a deferred tax benefit of $3.6 million in 1995 due to a
significant reduction in the Company's deferred tax asset valuation allowance.
This reduction in the valuation allowance resulted principally from the
Company's assessment of the reliability of its net operating loss carryforwards
based on recent operating history. At December 31, 1996, the Company increased
the valuation allowance by $437,000 based on an assessment of operating results
and other factors. Although realization is not assured, management believes it
is more likely than not that the remaining net deferred tax asset will be
realized. The amount of the deferred tax assets considered realizable, however,
could be reduced in the future if estimates of taxable income during the
carryforward period decrease.
The above factors contributed to a net loss of $7.4 million, or $1.21
per share, for the year ended December 31, 1996 as compared to net income of
$2.1 million, or $0.34 per diluted share, for the year ended December 31, 1995.
Excluding the charges for the acquisition of in-process research and development
from the PSI Acquisition, adjustment to the deferred tax valuation allowance and
the $2.0 million of unusual charges discussed above, the Company would have had
a net loss of approximately $1.5 million, or $0.24 per share, for the year ended
December 31, 1996. Excluding the charges for the acquisition of in-process
research and development from LDA Systems, Inc. and the recognition of the tax
benefit due to the reduction in the deferred tax asset valuation allowance, the
Company would have had net income of approximately $1.4 million, or $0.22 per
share, for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments decreased to $1.5
million at December 31, 1997 from $4.3 million at December 31, 1996. The
decrease is primarily attributable to principal payments on bank debt, an
installment payment for the repurchase of common stock and pay down of accounts
payable. Inventory levels at December 31, 1997 decreased to $3.7 million from
$4.8 million at December 31, 1996. This decrease is primarily due to the
implementation of an inventory reduction program. Total accounts receivable
increased to $5.3 million at December, 1997 from $5.2 million at December 31,
1996 primarily the result of improved collection efforts offset by the effect of
increased sales.
Accounts payable decreased to $2.6 million at December 31, 1997 from
$4.6 million at December 31, 1996, primarily due to the application of the net
proceeds from the sale of the Series A Preferred Stock in late December 1996
(discussed below) and the use of previously invested cash. Cash provided by
operations totaled $2.0 million for the year ended December 31, 1997, as
compared to cash provided by operations totaling $181,000 for the year ended
December 31, 1996.
In the year ended December 31, 1997, the Company expended $950,000 for
capital equipment and $535,000 for capitalized software development. The Company
expended $1.2 million for capital equipment and $577,000 for capitalized
software development in the prior year. The Company does not presently have any
material commitments for capital expenditures.
During the year ended December 31, 1997, the Company generated cash of
$853,000 from stock sales to employees under the Company's stock option and
purchase plans and to warrantholders who exercised in connection with the
exchange offer. See "Market for Registrant's Common Stock and Related
Stockholder Matters."
The Company acquired PSI in July 1996 for $16.1 million and financed
the purchase price with (i) a $7.0 million subordinated note issued to the
seller, (ii) a $7.8 million term loan (the "Term Loan") from City National Bank
and (iii) $1.3 million drawn under a new $1.5 million revolving line of credit
(the "Credit Facility") from City National Bank. On December 31, 1997, the
outstanding principal balance of the Term Loan was $3.4 million. The Term Loan
is collateralized by a first priority lien on all the assets of the Company and
bears interest monthly at the bank's prime rate (8.5% on December 31, 1997) plus
2.0%. The Company is required to pay $100,000 of principal each month, and the
balance is due April 15, 1998. The Company may prepay the Term Loan at any time
without premium or penalty. The outstanding principal balance on the Credit
Facility was $350,000 on December 31, 1997. Under the terms of the Credit
Facility, the Company can borrow and reborrow up to a maximum principal amount
of $1.5 million at a variable interest rate equal to the bank's prime rate plus
2.0%. The Credit Facility, collateralized by a first priority lien on all
assets, matures April 15, 1998.
19
On March 30, 1998, the Company received a commitment for a new loan
facility (the "New Facility") from a financial institution to refinance the Term
Loan and Credit Facility. The commitment is subject to completion of definitive
loan documentation and other customary closing conditions. Management believes
that such conditions will be satisfactorily met. The New Facility will provide
for a maximum line of credit of $7.0 million, comprised of a term loan of up to
$3.6 million and revolving line of credit of up to $4.0 million based on a
percentage of eligible accounts receivable. The Company expects to have
approximately $1.7 million available under the revolving line of credit at
inception. The term loan will bear interest at the lender's prime rate (8.5%
on March 30, 1998) plus 3.0% and is payable in 36 equal monthly installments.
The revolving credit line will bear interest at the lender's prime rate plus
1.0%. Interest will be charged on a minimum loan balance of $3.0 million.
Borrowings will be collateralized by a first priority lien on all assets of the
Company. The New Facility will mature in 2001.
The new Facility will contain financial covenants based on tangible net
worth, interest coverage and various operating ratios. It will also restrict
purchases of fixed assets and prohibit the payment of cash dividends. The
Company will pay an initial commitment fee of 0.75% of the total facility, an
unused line fee of 0.375% per annum on the unused portion of the total facility
and certain other administrative fees. The New Facility will be subject to
prepayment penalties of 3.0%, 2.0% and 1.0% of the maximum credit line in the
first, second and third years, respectively.
During 1997, the Company issued two 8.0% promissory notes in the
aggregate amount of approximately $1.0 million due in equal installments in 1998
and 1999 for amounts due relating to the repurchase of common stock from an
affiliate of Boehringer Mannheim Corporation, a former joint venture partner.
Also, the Company issued 75,376 shares of Common Stock and a five-year warrant
to purchase 10,000 shares of Common Stock at $4.3125 in satisfaction of accounts
payable totaling $284,000. In connection with the April 1997 bank loan renewal,
the Company issued three-year warrants to purchase 100,000 shares of Common
Stock at prices ranging from $3.875 to $4.375 per share.
Upon consummation of the New Facility, the Company believes that its
current cash on hand, together with cash generated by operations and cash
available under the New Facility, will be sufficient to fund normal operations
and pay principal and interest on outstanding debt obligations for the next
twelve months. The failure to consummate the New Facility would have a material
adverse effect on the Company and its liquidity.
The Company also plans to pursue equity financing to reduce
indebtedness and to fund its long-term business strategy. While the FDA cleared
The White IRIS leukocyte differential analyzer in May 1996, its commercial
release has been delayed by other priorities such as the introduction of the
UF-100 urine sediment analyzer now underway. See "Business--Research and
Development--Developing the White IRIS" and "-- Products--Other Systems." The
Company anticipates that commercial release of The White IRIS may depend upon
the availability of sufficient funds and that it may be subject to additional
delays if such funds are unavailable.
In September 1995, the Company and Poly entered into a research and
development agreement to develop the Poly Products using the Company's
technology. See "Business - Research and Development." The Company is funding
the first $15,000 per month (up to a maximum of $500,000 of which $80,000
remains outstanding) of the cost of the project, and Poly is reimbursing the
Company for the excess. The Company has an option to acquire all of the common
stock of Poly for an aggregate price of $5.1 million, payable in cash or shares
of Common Stock. If the Company elects to exercise its option, the portion of
the net cost of the acquisition allocated to completed products would be
capitalized and its subsequent amortization may impact future earnings to the
extent profits from products acquired do not cover these costs. For the portion
of the net cost of the acquisition, if any, allocated to in-process research and
development, the Company would record a nonrecurring, noncash (if purchased with
Common Stock) charge against then current earnings.
In December 1996, the Company sold 3,000 shares of Series A Convertible
Preferred Stock ("Preferred Stock") and a warrant to purchase 84,270 shares of
Common Stock to the Thermo Amex Convertible Growth Fund I, L.P. for $3.0
million. The warrant is exercisable at $3.56 per share until December 31, 2001.
Each share of Preferred Stock is convertible into a number of shares of Common
Stock equal to (i) its $1,000 liquidation value divided by (ii) a variable
conversion price. The conversion price equals the lower of (a) $3.56 per share
or (b) 85% of the average closing bid price of the Common Stock for the five
consecutive trading days preceding the conversion (but in no event less than
$1.50). Assuming a conversion price of $3.56 per share, the Preferred Stock is
convertible into approximately 843,000 shares of Common Stock. Any unconverted
shares of Preferred Stock will automatically be converted into Common Stock on
December 31, 1999. The Preferred Stock is non-voting, is not entitled to any
preferred dividends and is not subject to any mandatory or optional redemption
provisions. The Company may not pay cash dividends on the Common Stock or
repurchase any shares of the Common Stock without the written consent of the
holder of the Preferred Stock.
20
The Company has conducted a review of its IVD imaging products and
internal computer systems to identify those areas that require Year 2000
compliance. Year 2000 compliance refers to the inability of certain computer
systems to recognize dates commencing on January 1, 2000. The Company currently
believes that by modifying existing software and converting to new software for
certain tasks, Year 2000 compliance will not pose significant marketing or
operational problems and is not anticipated to be material to its future
financial position or results of operations.
INFLATION
The Company does not foresee any material impact on its operations from
inflation.
HEALTHCARE REFORM POLICIES
In recent years, an increasing number of legislative proposals have
been introduced or proposed in Congress and in some state legislatures that
would effect major changes in the healthcare system, nationally, at the state
level or both. Future legislation, regulation or payment policies of Medicare,
Medicaid, private health insurance plans, health maintenance organizations and
other third-party payors could adversely affect the demand for the Company's
current or future products and its ability to sell its products on a profitable
basis. Moreover, healthcare legislation is an area of extensive and dynamic
change, and the Company cannot predict future legislative changes in the
healthcare field or their impact on its business.
RECENTLY-ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards are described in Note 2 in the
consolidated financial statements.
FORWARD-LOOKING STATEMENTS
The foregoing discussion, as well as the other sections of this Annual
Report on Form 10-K, contain various forward-looking statements, which reflect
the Company's current views with respect to future events and financial results
and are subject to the safe harbor created by that Private Securities Litigation
Reform Act of 1995. These forward-looking statements include, but are not
limited to, the Company's views with respect to future financial results,
financing sources, capital requirements, market growth, new product
introductions and the like, and are generally identified by phrases such as
"anticipates," "believes," "estimates," "expects," "intends," "plans" and words
of similar import. The Company reminds stockholders that forward-looking
statements are merely predictions and therefore inherently subject to
uncertainties and other factors which could cause the actual results to differ
materially from the forward-looking statement. These uncertainties and other
factors include, among other things, (i) the ability of the Company to
consummate the New Facility by April 18, 1998, the maturity date of the Term
Loan and Credit Facility with City National Bank, (ii) the ability of the
Company to secure additional financing to repay the remaining principal balance
of its long-term debt and to fund its long-term business strategy, (iii)
unexpected technical and marketing difficulties inherent in the introduction of
sophisticated, capital-intensive new medical instruments such as The White IRIS
and other planned instrument introductions, (iv) the potential need for changes
in the Company's long-term strategy in response to future developments, (v)
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 the Company's products, (vi) rapid technological change in the
microelectronics and software industries, (vii) increasing competition from
imaging and non-imaging based in-vitro diagnostic products and (viii)
difficulties in assimilating acquired companies and product lines such as PSI.
The Company has attempted to identify additional significant
uncertainties and other factors affecting forward-looking statements in Exhibit
99 to this Form 10-K ("Additional Information Regarding Forward-Looking
Statements"). The Company will provide copies of Exhibit 99 to registered
stockholders free of charge upon receipt of a written request submitted to the
Company's Controller at 9162 Eton Avenue, Chatsworth, California 91311.
Stockholders may also obtain copies of Exhibit 99 for a nominal charge from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its Regional Office at 5757 Wilshire
Boulevard, Los Angeles, California 90036. Exhibit 99 is also available through
the SEC's World Wide Web site located at http://www.sec.gov.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are listed in the Index to Financial
Statements in Part IV, Item 14(a)1.
21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from "Directors and Executive Officers" in
the Proxy Statement to be filed with the Securities and Exchange Commission for
the 1998 Annual Meeting of IRIS Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from "Executive Compensation" in the Proxy
Statement to be filed with the Securities and Exchange Commission for the 1998
Annual Meeting of IRIS Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement to be filed with the
Securities and Exchange Commission for the 1998 Annual Meeting of IRIS
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from "Certain Relationships and Related
Transactions" in the Proxy Statement to be filed with the Securities and
Exchange Commission for the 1998 Annual Meeting of IRIS Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. Index to Financial Statements Page
----
Report of Independent Public Accountants. 25
Consolidated Balance Sheets at December 31, 1997 and 1996. 26
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996, and 1995. 27
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995. 28
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995. 31
Notes to Consolidated Financial Statements. 32
2. Financial Statement Schedules Covered by the Foregoing Report of
Independent Public Accountants.
Schedule II-Valuation and Qualifying Accounts *
* Omitted in copy distributed to stockholders in connection with the
1998 Annual Meeting of Stockholders.
Other financial statement schedules have been omitted since they are
not required, are not applicable, or the required information is shown in the
Financial Statements or Related Notes.
3. Exhibits
No. Description
--- -----------
3.1(a) -- Certificate of Incorporation, as amended (1)
3.1(b) -- Certificate of Designations of Series A Convertible Preferred Stock (2)
3.2 -- Restated Bylaws (3)
4.1 -- Specimen of Common Stock Certificate (4)
4.1 -- Certificate of Designations of Series A Convertible Preferred Stock (2)
10.1 -- Lease of the Company's headquarters facility, as amended (5)
10.2(a) -- 1982 Stock Option Plans and form of Stock Option Agreement (6)
10.2(b) -- 1983 and 1986 Stock Option Plans, and forms of Stock Option Agreements for each Plan (7)
10.2(c) -- Amended and Restated 1986 Stock Option Plan (8)
10.2(d) -- 1994 Stock Option Plan and forms of Stock Option Agreements (9)
22
10.2(e) -- Certificate of Officer With Respect to Amendment of 1994 Stock Option Plan (10)
10.2(f) -- Key Employee Stock Purchase Plan (11)
10.2(g) -- 1997 Stock Option Plan and form of Stock Option Agreement (18)
10.3(a) -- Various Agreements with TOA Medical Electronics Company, Ltd. (12)
10.3(b) -- Patent License Agreement dated April 1, 1997 between the Company and TOA Medical
Electronics Company, Ltd.*
10.3(c) -- Termination, Release and Reassignment of Security Interest dated October 30, 1997
executed by TOA Medical Electronics Company, Ltd. in favor of the Company *
10.4(a) -- Agreement for a Strategic Alliance in Urinalysis dated January 7, 1994 between the Company
and Boehringer Mannheim Corporation (13)
10.4(b) -- Research and Development and Distribution Agreement dated February 6, 1995 by and
among the Company, LDA Systems, Inc. and Corange International Limited (13)
10.4(c) -- Amendment to Distribution Agreements (14)
10.5 -- Warrant Certificate dated March 20, 1995 issued to Biovation, Inc. (13)
10.6(a) -- Technology License Agreement dated as of September 29, 1995
between the Company and Poly U/A Systems, Inc. (15)
10.6(b) -- Research and Development Agreement dated as of September 29, 1995 between the
Company and Poly U/A Systems, Inc. (15)
10.6(c) -- $100 Class "A" Note dated September 29, 1995 issued by Poly U/A Systems, Inc. in favor of
the Company (15)
10.6(d) -- Certificate of Incorporation of Poly U/A Systems, Inc. (See Article FOUR regarding the IRIS
Option) (15)
10.6(e) -- Form of Series D Warrant *
10.6(f) -- Form of Series E Warrant *
10.6(g) -- Form of Series F Warrant *
10.7(a) -- Agreement and Plan of Merger dated January 31, 1996 between the Company and StatSpin,
Inc. (16)
10.7(b) -- Registration Rights Agreement dated January 31, 1996 between the Company and StatSpin
Stockholders (16)
10.7(c) -- Employment Agreement dated January 30, 1996 with Thomas F. Kelley (16)
10.7(d) -- Letter Agreement dated October 4, 1997 amending Employment
Agreement of Thomas F. Kelley *
10.8(a) -- Asset Purchase Agreement dated as of July 15, 1996 by and among the Company, Digital
Imaging Technologies, Inc., Perceptive Scientific Instruments, Inc. and Perceptive Scientific
Technologies, Inc. (17)
10.8(b) -- Registration Rights and Standstill Agreement dated July 31, 1996 between the Company and
Digital Imaging Technologies, Inc. (10)
10.8(c) -- Warrant Certificate dated July 31, 1996 issued to Digital Imaging Technologies, Inc. (10)
10.8(d) -- Stockholder Guaranty Agreement dated July 31, 1996 between Edward Randall, III and PSII
Acquisition Corp., a wholly-owned subsidiary of the Company (now known as Perceptive
Scientific Instruments, Inc.) (10)
10.8(e) -- Non-Competition Agreement dated as of July 15, 1996 between Edward Randall, III and PSII
Acquisition Corp., a wholly-owned subsidiary of the Company (now known as Perceptive
Scientific Instruments, Inc.) (10)
10.8(f) -- Technology License Agreement dated July 31, 1996 between Perceptive Scientific Imaging
Systems, Inc. and PSII Acquisition Corp., a wholly-owned subsidiary of the Company (now
known as Perceptive Scientific Instruments, Inc.) (10)
10.9 -- $7,000,000 Subordinated Note dated July 29, 1996 issued by the Company in favor of Digital
Imaging Technologies, Inc. (10)
10.10(a) -- $1,500,000 Promissory Note dated July 29, 1996 (Revolving Credit Facility) (10)
10.10(b) -- Change in Terms Agreement dated as of January 3, 1997 (Revolving Credit Facility) (19)
10.10(c) -- Supplemental Terms Letter dated July 29, 1996 (Revolving Credit Facility) (10)
10.10(d) -- Supplemental Terms Letter dated as of January 3, 1997 (Revolving Credit Facility) (19)
10.10(e) -- $4,900,000 Amended and Restated Promissory Note dated as of January 3, 1997 (Term
Loan) (19)
10.10(f) -- Supplemental Terms Letter dated as of January 3, 1997 (Term Loan) (19)
10.10(g) -- Waiver of Default dated as of January 3, 1997 (19)
10.10(h) -- Warrant to Purchase Common Stock dated March 15, 1997 issued to City National Bank (19)
10.10(i) -- Commercial Security Agreement dated July 29, 1996 (10)
10.10(j) -- Commercial Pledge Agreement dated July 29, 1996 (10)
10.10(k) -- Various Additional Security Agreements dated as of January 3, 1997 (19)
10.10(l) -- Warrant to Purchase Common Stock dated June 1, 1997 issued to City National Bank *
10.10(m) -- Warrant to Purchase Common Stock dated July 1, 1997 issued to City National Bank *
23
10.11(a) -- Securities Purchase Agreement dated December 31, 1996 by and between the Company and
Thermo Amex Convertible Growth Fund I, L.P. (2)
10.11(b) -- Common Stock Purchase Warrant dated December 31, 1996 issued to Thermo Amex
Convertible Growth Fund I, L.P. (2)
10.11(c) -- Registration Rights Agreement dated December 31, 1996 by and between the Company and
Thermo Amex Convertible Growth Fund I, L.P. (2)
10.12 Commitment Letter of Foothill Capital Corporation dated March 30, 1998*
24 -- Consent of Coopers & Lybrand L.L.P. *
27.1 -- Financial Data Schedule (1997) *
27.2 -- Financial Data Schedule (Quarter 1997)
27.3 -- Financial Data Schedule (1995 and 1996)*
99 -- Additional Information Regarding Forward Looking Statements *
- -------------------
* Omitted in copy distributed to stockholders in connection with the 1998
Annual Meeting of Stockholders.
Exhibits followed by a number in parenthesis are incorporated by
reference to the similarly numbered Company document cited below:
(1) Current Report on Form 8-K dated August 13, 1987 and its Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993.
(2) Current Report on Form 8-K dated January 15, 1997.
(3) Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(4) Registration Statement on Form S-3, as filed with the Securities and
Exchange Commission on March 27, 1996 (File No. 333-002001).
(5) Annual Report on Form 10-K for the year ended December 31, 1989, its
quarterly report on Form 10-Q for the quarter ended September 30, 1993
and its Annual Report on Form 10-K for the year ended December 31,
1994.
(6) Registration Statement on Form S-2, as filed with the Securities and
Exchange Commission on September 4, 1985 (File No. 2-99240).
(7) Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission on May 10, 1982 (File No. 2-77496).
(8) Annual Report on Form 10-K for the year ended December 31, 1992.
(9) Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission on August 8, 1994 (File No. 33-82560).
(10) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (11)
Registration Statement on Form S-8 filed January 3, 1997.
(12) Current Report on Form 8-K dated July 15, 1988 and its quarterly report
on Form 10-Q for the quarter ended June 30, 1995.
(13) Annual Report on Form 10-K for the year ended December 31, 1994.
(14) Report on Form 10-Q for the quarter ended September 30, 1996.
(15) Report on Form 10-Q for the quarter ended September 31, 1995.
(16) Report on Form 10-K for the year ended December 31, 1995.
(17) Current on Form 8-K filed July 17, 1996.
(18) Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission on July 16, 1997 (File No. 333-31393).
(19) Annual Report on Form 10-K for the year ended December 31, 1996.
(b) Reports on Form 8-K
None
(c) See (a)(3) above.
(d) See (a)(1) and (2) above.
24
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in
Chatsworth, California, on March 30, 1998.
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
By:/s/ Fred H. Deindoerfer
------------------------------------------
Fred H. Deindoerfer, Chairman of the Board
of Directors, President,
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Fred H. Deindoerfer
- -------------------------------- Chairman of the Board of Directors, March 30, 1998
Fred H. Deindoerfer President, and Chief Executive Officer
/s/ Martin S. McDermut
- ------------------------------ Vice President Finance and March 30, 1998
Martin S. McDermut Administration, Secretary,
and Chief Financial Officer,
/s/ Donald E. Horacek
- ------------------------------
Donald E. Horacek Assistant Secretary, Controller, and March 30, 1998
Principal Accounting Officer
/s/ John A. O'Malley Director March 30, 1998
- ---------------------------------
John A. O'Malley
/s/ Steven M. Besbeck Director March 30, 1998
- -----------------------------------
Steven M. Besbeck
/s/ Thomas F. Kelley Director March 30, 1998
- -------------------------------------
Thomas F. Kelley
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of International Remote Imaging
Systems, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of International Remote Imaging Systems, Inc. and its
subsidiaries, as listed in the index on page 21 of this Form 10-K. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
International Remote Imaging Systems, Inc. and its subsidiaries at December 31,
1997 and 1996, and the consolidated results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
March 20, 1998, except for Note 8 as to which the date is March 30, 1998.
26
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
At December 31,
-----------------------------------
1996 1997
-----------------------------------
Current assets:
Cash and cash equivalents $3,602,535 $1,470,861
Short-term investments 667,589 25,000
Accounts receivable, net of allowance for doubtful
accounts of $274,766 in 1996 and $267,579 in 1997 5,207,933 5,319,539
Inventories 4,838,206 3,739,483
Prepaid expenses and other current assets 163,465 259,822
Deferred tax asset 936,500 993,950
------------ -----------
Total current assets 15,416,228 11,808,655
Property and equipment, at cost, net of accumulated depreciation 1,947,713 1,847,746
Purchased intangibles 10,324,760 8,597,601
Software development costs, net of accumulated amortization of
$847,880 in 1996 and $1,223,601 in 1997 920,972 1,080,106
Deferred tax asset 7,276,250 7,621,800
Other assets 1,974,322 1,778,669
----------- -----------
Total assets