1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File No.
March 31, 2001 No. 1-9767
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-2579751
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9162 Eton Avenue, Chatsworth CA. 91311
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (818) 709-1244
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
------ -----
The registrant had 9,967,689 shares of common stock outstanding as of
April 30, 2001.
2
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
INDEX TO FORM 10-Q
Three Months Ended March 31, 2001
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets........................................2
Consolidated Statements of Operations..............................3
Consolidated Statements of Cash Flows..............................5
Consolidated Statements of Comprehensive Income (Loss).............7
Notes to Consolidated Financial Statements.........................8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations..................12
Item 3 - Quantitative and Qualitative Disclosure
About Market Risk..............................................16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................16
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits........................................................17
(b) Reports on Form 8-K.............................................17
SIGNATURE....................................................................17
1
3
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
At December 31, At March 31,
2000 2001
------------------------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 3,661,310 $ 3,067,842
Accounts receivable, net of allowance for doubtful
accounts of $334,696 in 2000 and $276,330 in 2001 5,446,466 5,587,293
Inventories 5,184,272 5,563,990
Prepaid expenses and other current assets 507,604 538,274
Investments available for sale 1,396,970 793,864
Deferred tax asset 983,812 1,225,055
------------ ------------
Total current assets 17,180,434 16,776,318
Property and equipment, at cost, net of accumulated depreciation
of $4,061,861 in 2000 and $4,196,834 in 2001 1,344,418 1,395,908
Purchased intangibles, net of accumulated amortization
of $159,505 in 2000 and $168,178 in 2001 223,603 214,930
Software development costs, net of accumulated amortization of
$1,375,569 in 2000 and $1,414,558 in 2001 435,517 536,864
Deferred tax asset 8,348,179 8,113,336
Other assets 755,388 740,233
------------ ------------
Total assets $ 28,287,539 $ 27,777,589
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 648,972 $ 496,211
Current portion of long-term debt 1,972,333 1,714,080
Accounts payable 2,676,398 3,111,714
Accrued expenses 2,683,274 1,893,591
Deferred income - service contracts and other 727,158 873,808
------------ ------------
Total current liabilities 8,708,135 8,089,404
Long term debt 5,527,667 5,111,152
Deferred income - service contracts and other 432,459 390,277
------------ ------------
Total liabilities 14,668,261 13,590,833
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; Authorized: 3,000,000 shares;
Callable Series B shares issued and outstanding:
2000 - 204,000 ($612,000 liquidation preference)
2001 - 204,000 ($612,000 liquidation preference) 2,040 2,040
Common stock, $.01 par value; Authorized: 15,600,000 shares
Shares issued and outstanding: 2000 - 9,868,855 and
2001 - 9,965,189 98,687 99,650
Additional paid-in capital 40,444,269 40,944,091
Unearned compensation (205,091) (137,201)
Unrealized gains (losses) on investments 289,028 (72,835)
Accumulated deficit (27,009,655) (26,648,989)
------------ ------------
Total shareholders' equity 13,619,278 14,186,756
------------ ------------
Total liabilities and shareholders' equity $ 28,287,539 $ 27,777,589
============ ============
- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
2
4
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the three months ended March 31,
------------------------------------
2000 2001
---- ----
Sales of IVD systems $ 1,513,725 $ 1,670,794
Sales of IVD supplies and services 3,519,569 3,868,857
Sales of small instruments and supplies 1,342,829 1,682,163
Royalties and licensing revenues 377,015 56,010
------------ ------------
Net revenues 6,753,138 7,277,824
------------ ------------
Cost of goods - IVD systems 1,004,140 1,225,391
Cost of goods - IVD supplies and services 1,513,307 1,342,225
Cost of goods - small instruments and supplies 698,759 818,729
------------ ------------
Cost of goods sold 3,216,206 3,386,345
------------ ------------
Gross margin 3,536,932 3,891,479
Marketing and selling 831,663 985,899
General and administrative 1,021,541 1,039,313
Research and development, net 423,719 1,053,883
Amortization of intangibles 36,949 35,817
------------ ------------
Total operating expenses 2,313,872 3,114,912
Operating income 1,223,060 776,567
Other income (expense):
Interest income 33,257 51,990
Interest expense (241,751) (228,637)
Other income 679 1,190
------------ ------------
Income from continuing operations before provision
for income taxes 1,015,245 601,110
Provision for income taxes 377,935 240,444
------------ ------------
Income from continuing operations 637,310 360,666
Loss from operations of discontinued segment, net of tax
benefit of $61,015 (286,385) --
------------ ------------
Net income $ 350,925 $ 360,666
============ ============
3
5
Income (loss) per share - basic:
Income from continuing operations $ 0.07 $ 0.04
Loss from operations of discontinued segment (0.03) --
------------ ------------
Income per share attributable to common shareholders - basic $ 0.04 $ 0.04
============ ============
Income (loss) per share - diluted:
Income from continuing operations $ 0.06 $ 0.03
Loss from operations of discontinued segment (0.03) --
------------ ------------
Income per share attributable to common shareholders - diluted $ 0.03 $ 0.03
============ ============
Weighted average number of common shares outstanding - basic 9,378,013 9,800,064
Weighted average number of common and common equivalent
shares outstanding - diluted 10,211,384 10,557,108
- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
6
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended March 31,
------------------------------------
2000 2001
---- ----
Cash flow from operating activities:
Net income $ 350,925 $ 360,666
Adjustments to reconcile net income to net cash provided by
operations:
Loss from discontinued operations 286,385 --
Deferred tax benefit 279,203 234,843
Depreciation and amortization 176,305 238,799
Common stock and stock option compensation amortization 36,398 67,890
Gain on disposal of equipment (1,677) --
Changes in assets and liabilities:
Accounts receivable - trade and other 1,279,568 (178,866)
Service contracts, net 222,424 142,507
Inventories (264,376) (379,718)
Prepaid expenses and other current assets 47,673 (30,670)
Other assets (67,960) (23,263)
Accounts payable (32,804) 435,316
Accrued expenses (1,282) (781,037)
----------- -----------
Net cash provided by continuing operations 2,310,782 86,467
Net cash used by discontinued operations (76,576) --
----------- -----------
Net cash provided by operating activities 2,234,206 86,467
----------- -----------
Cash flow from investing activities:
Acquisition of property and equipment (81,311) (204,209)
Software development costs (15,288) (140,336)
Investing activities of discontinued operations (56,721) --
----------- -----------
Net cash used by investing activities (153,320) (344,545)
----------- -----------
Cash flow from financing activities:
Borrowings under credit facility 700,000 8,050,000
Repayments of credit facility (1,355,036) (8,202,761)
Repayment of notes payable (303,450) (308,646)
Issuance of common stock and warrant for cash 41,016 126,017
----------- -----------
Net cash used by financing activities (917,470) (335,390)
----------- -----------
Effect of foreign currency fluctuation on cash and cash equivalents 1,194 --
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,164,610 (593,468)
Cash and cash equivalents at beginning of period 2,034,593 3,661,310
Less end of period cash and cash equivalents of discontinued operations 375,861 --
----------- -----------
Cash and cash equivalents at end of period $ 2,823,342 $ 3,067,842
=========== ===========
5
7
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock in exchange for services 77,500 --
Addition to capital lease obligation 33,840 --
Issuance of warrants in connection with debt financing -- 374,768
Supplemental disclosure of cash flow information:
Cash paid for interest 218,539 223,988
Cash paid for income taxes -- 14,592
- ----------------------
The accompanying notes are an integral part of these consolidated financial
statements.
6
8
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
For the three months ended March 31,
------------------------------------
2000 2001
---- ----
Net income $350,925 $ 360,666
Unrealized losses on investments, net of taxes -- (361,863)
Foreign currency translation adjustment 1,766 --
-------- ---------
Comprehensive income (loss) $352,691 $ (1,197)
======== =========
- ------------------
The accompanying notes are an integral part of these consolidated financial
statements.
7
9
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY.
International Remote Imaging Systems, Inc. was incorporated in California in
1979 and reincorporated during 1987 in Delaware. International Remote Imaging
Systems, Inc. and its subsidiaries (collectively "IRIS" or the "Company")
designs, develops, manufactures and markets in vitro diagnostic ("IVD")
equipment, including IVD imaging systems based on patented and proprietary
automated intelligent microscopy ("AIM") technology, and special purpose
centrifuges and other small instruments for automating microscopic procedures
performed in clinical laboratories. The Company also provides ongoing service
and supplies to support the equipment sold.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Basis of Presentation of Unaudited Interim Financial Statements:
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of the Company as of March 31, 2001 and
2000 and the results of its operations for the three month periods then ended.
These financial statements should be read in conjunction with the financial
statements and notes included in the Company's latest annual report on Form
10-K. Interim results are not necessarily indicative of results for a full year.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the
reporting periods. The significant estimates in the preparation of the
consolidated financial statements relate to the assessment of the carrying value
of accounts receivables, inventories, purchased intangibles, estimated
provisions for warranty costs and deferred tax assets. Actual results could
differ from those estimates.
Principles of Consolidation:
The consolidated financial statements include the accounts of International
Remote Imaging Systems, Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
Reclassifications:
Certain reclassifications have been made to the 2000 financial statements to
conform to the 2001 presentation.
3. COMPREHENSIVE INCOME.
The Company's components of comprehensive income are net income, unrealized
gains (losses) on investments and foreign currency translation adjustments. No
tax effect has been allocated to the foreign currency translation adjustment for
the periods presented. Income tax effect allocated to the unrealized losses on
available for sale securities for the three months ended March 31, 2001 was a
benefit of $241,242.
The following is a reconciliation of accumulated other comprehensive income
balance for the three months ended March 31, 2001:
Beginning balance $ 289,028
Current period change (361,863)
---------
Ending balance $ (72,835)
=========
4. INVENTORIES.
Inventories are carried at the lower of cost or market on a first-in
first-out basis and consist of the following:
8
10
At December 31, 2000 At March 31, 2001
-------------------- -----------------
Finished goods $1,715,881 $1,545,842
Work-in-process 216,050 1,265,183
Raw materials, parts and sub-assemblies 3,252,341 2,752,965
---------- ----------
$5,184,272 $5,563,990
========== ==========
5. SHORT-TERM BORROWINGS AND NOTES PAYABLE.
At March 31, 2001, the outstanding amounts under the Company's credit
facility consists of $200,000 outstanding under a $3.6 million term loan and
$496,211 outstanding under a $4.0 million revolving line of credit. Borrowings
under the line of credit are limited to a percentage of eligible accounts
receivable. The Company had approximately $1.0 million available under the line
of credit at March 31, 2001. The term loan bears interest at the lender's prime
rate (8.0% on March 31, 2001) plus 3.0% and is payable in monthly installments
of $100,000. The revolving credit line bears interest at the lender's prime rate
plus 1.0%. The credit facility is subject to minimum interest charges,
prepayment penalties and customary fees, is collateralized by a first priority
lien on all assets of the Company and matures in May 2001. It also contains
financial covenants based primarily on tangible net worth and cash flows and
imposes restrictions on acquisition, capital expenditures and cash dividends.
The outstanding principal balance on the Subordinated Note was $7.0 million
on March 31, 2001. The Subordinated Note bears interest at a fixed rate of 8.5%
per annum, payable in quarterly installments. The entire principal is due on or
before July 31, 2001. The Company may prepay the Subordinated Note at any time
without premium or penalty. Upon the issuance by the Company of equity
securities generating net proceeds in excess of $14.5 million, the Company must
apply fifty percent of the excess to the prepayment of the Subordinated Note.
The payment of principal and interest on the Subordinated Note is subordinated
in right of payment, to the extent and in the manner provided therein, to the
prior payment in full of the credit facility.
On March 15, 2001, the Company completed a refinancing of the $7.0 million
note, with $3.5 million payable on or before June 29, 2001 and the remainder
payable in 36 monthly installments of approximately $97,000 commencing in
September 2001. In connection with the refinancing of the $7.0 million note, the
Company agreed to cancel and reissue warrants to purchase 853,040 shares of
common stock. As a result of the cancellation and reissuance, the warrant life
was extended from July 31, 2001 to July 31, 2004 and the exercise price was
reduced from $3.56 per share to $1.90 per share commencing July 31, 2001. The
Company has accounted for the reissuance of the warrants in accordance with
Accounting Principles Board Opinion No. 14 "Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants" and recorded as a discount to the note
an amount of $374,768, representing the relative fair value of the warrants
based on the Black-Scholes option-pricing model. The Company will record the
discount as additional interest expense over the remaining period of the note,
using the interest method.
The Company also renewed its existing credit facility with Foothill Capital
that was due to mature in May 2001. Under the revised credit facility, Foothill
will loan the Company $3.0 million in May 2001. The loan is repayable in 36
monthly installments of approximately $83,000 commencing June 2001. After
considering the effects of the $3.0 million proceeds from Foothill and the
repayment of $3.5 million of the subordinated note in June 2001, the maturity of
the Company's long term debt obligations, excluding the discount, are $1,714,080
within one year and $5,485,920 thereafter.
6. CAPITAL STOCK.
Stock Issuances:
During the three months ended March 31, 2001, the Company cancelled options
to purchase 12,666 shares of common stock. Options for 96,334 shares of common
stock were exercised during the period. At March 31, 2001, options to purchase
1,893,884 shares of common stock were issued and outstanding under the Company's
stock options plans. The outstanding options expire by the end of 2010. The
exercise price for these options ranges from $0.69 to $4.38 per share. At March
31, 2001, there were 315,810 shares of common stock available for the granting
of future options under the Company's stock option plans.
9
11
Warrants
As of March 31, 2001, the following warrants to purchase shares of common
stock were outstanding and exercisable:
Number of Shares Per Share Price Expiration Date
---------------- --------------- ---------------
298,633 4.00 April 3, 2001
875,000 3.56 July 31, 2001
84,270 3.56 December 31, 2001
100,000 1.50 February 10, 2002
10,000 4.31 May 15, 2002
306,000 2.00 August 6, 2002
297,000 1.00 August 6, 2002
50,000 2.13 October 31, 2005
7. INCOME TAXES.
The income tax provision from continuing operations for the three-month
period ended March 31, 2001 was $240,444 as compared to $377,935 for the
comparable period last year. The income tax provision differs from the federal
statutory rate due primarily to state income taxes and permanent differences
between income reported for financial statement and income tax purposes.
Realization of deferred tax assets associated with NOL and credit
carryforwards is dependent upon generating sufficient taxable income prior to
their expiration. Management believes that there is a risk that certain of these
NOL and credit carryforwards may expire unused and accordingly, has established
a valuation reserve against them. Although realization is not assured for the
remaining deferred tax assets, management believes it is more likely than not
that they will be realized through future taxable income or alternative tax
strategies. However, the net deferred tax assets could be reduced in the near
term if management's estimates of taxable income during the carryforward period
are significantly reduced or alternative tax strategies are not available. The
Company will continue to review its valuation allowances and make adjustments,
if necessary. Also, although a valuation allowance has been provided against a
portion of its NOL's, should the Company undergo an ownership change as defined
in Section 382 of the Internal Revenue Code, the Company's tax NOL generated
prior to the ownership change would be subject to an annual limitation. If this
occurred a further adjustment of the valuation allowance would be necessary.
8. EARNINGS PER SHARE (EPS).
The computation of per share amounts for the three months ended March 31,
2001 is based on the average number of common shares outstanding for the period.
Options and warrants to purchase 1,669,903 and 3,444,368 shares of common stock
outstanding during the three months ended March 31, 2001 and three months ended
March 31, 2000, respectively, were not considered in the computation of diluted
EPS because their inclusion would have been antidilutive.
The following is a reconciliation of shares used in computing basic and
diluted earnings per share amounts for the three months ended March 31, 2000 and
2001.
2000 2001
---- ----
Weighted average number of shares - basic 9,378,013 9,800,064
Effects of Dilutive Securities
Options 374,794 303,765
Warrants 155,841 147,279
Preferred Stock 302,736 306,000
---------- ----------
Weighted average number of shares - diluted 10,211,384 10,557,108
========== ==========
9. DISCONTINUED OPERATIONS.
In March, 2000, the Board of Directors approved a plan of disposal for its
wholly-owned subsidiary, Perceptive Scientific Instruments, LLC, the Company's
genetic analysis business segment. The Company completed the sale of
substantially all of the U.S. operations of this business to Applied Imaging
Corporation (Nasdaq: AICX) on
10
12
July 6, 2000. The purchase price consisted of 385,371 shares of Applied Imaging
common stock, the assumption of certain liabilities and potential cash payments
based on future performance of Applied Imaging's business. To date, the Company
has not received any contingent purchase consideration. The Company was unable
to sell the international operations of this business and placed Perceptive
Scientific International Limited (a wholly-owned subsidiary of Perceptive
Scientific Instruments, LLC) into a voluntary liquidation under United Kingdom
law on June 6, 2000.
The operating results of the discontinued operations for the three months
ended March 31, 2000 are summarized as follows:
Revenues $ 784,735
Loss from discontinued operations, net of tax (286,385)
10. SEGMENT AND GEOGRAPHIC INFORMATION.
The Company's continuing operations are organized on the basis of products
and related services and under FAS 131 operates in two segments: (1) urinalysis
and (2) small laboratory devices.
The urinalysis segment designs, develops, manufactures and markets IVD
imaging systems based on patented and proprietary AIM technology for automating
microscopic procedures for urinalysis. In December 1997, this segment also began
distributing the UF-100 urine cell analyzer in the United States under an
existing agreement with its manufacturer. The segment also provides ongoing
sales of supplies and service necessary for the operation of installed
urinalysis workstations. In the United States, these products are sold through a
direct sales force. Internationally, these products are sold through
distributors.
The small laboratory devices segment designs, develops, manufactures and
markets a variety of benchtop centrifuges, small instruments and supplies. These
products are used primarily for manual specimen preparation and dedicated
applications in coagulation, cytology, hematology and urinalysis. These products
are sold worldwide through distributors.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies" included in the Company's
report on Form 10-K for the year ended December 31, 2000. The Company evaluates
the performance of its segments and allocates resources to them based on
earnings before income taxes, excluding corporate charges ("Segment Profit").
The tables below present information about reported segments for the three
month periods ended March 31, 2001 and 2000:
Three Months Ended March 31, 2001:
Small Unallocated
Laboratory Corporate
Urinalysis Devices Expenses Total
----------- ----------- ----------- -----------
Revenues $ 5,595,661 $ 1,682,163 -- $ 7,277,824
Interest income $ 51,990 -- -- $ 51,990
Interest expense $ 1,956 -- $ 226,681 $ 228,637
Depreciation and amortization $ 215,649 $ 31,214 $ 59,826 $ 306,689
Segment profit (loss) $ 936,906 $ 477,104 $ (812,900) $ 601,110
Segment assets $16,062,436 $ 2,376,762 $ 9,338,391 $27,777,589
Investment in long-lived assets $ 321,518 $ 23,027 -- $ 344,545
11
13
Three Months Ended March 31, 2000:
Small Unallocated
Laboratory Corporate
Urinalysis Devices Expenses Total
------------ ------------ ------------ ------------
Revenues $ 5,410,309 $ 1,342,829 -- $ 6,753,138
Interest income $ 33,257 -- -- $ 33,257
Interest expense $ 955 -- $ 240,796 $ 241,751
Depreciation and amortization $ 163,290 $ 28,743 $ 20,670 $ 212,703
Segment profit (loss) $ 1,498,698 $ 321,472 $ (804,925) $ 1,015,245
Segment assets $ 11,024,665 $ 2,026,018 $ 11,078,040 $ 24,128,723
Investment in long-lived assets $ 88,699 $ 7,900 -- $ 96,599
Long-lived assets for continuing operations were all located in the United
States and totaled $2,758,926 at December 31, 2000 and $2,887,935 at March 31,
2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We generate revenues primarily from sales of our urinalysis workstation,
an in vitro diagnostic, or IVD, imaging system based on our patented and
proprietary AIM technology, and the related supplies and service required to
operate this workstation. We also earn revenues from sales of ancillary lines of
small laboratory instruments and supplies.
Because of the nature of our business, we make significant investments in
research and development for new products and enhancements to existing products.
We fund our research and development primarily from internal sources, but we
also receive partial funding from time to time under grants from the National
Institutes of Health and joint development projects with third parties.
The following table summarizes total product technology expenditures for
the periods indicated:
Three Months Ended March 31,
----------------------------
2000 2001
---- ----
Research and development expense, net......................... $424,000 $1,054,000
Capitalized software development costs........................ 15,000 140,000
Reimbursed costs for research and development grants and
contracts..................................................... 189,000 282,000
-------- ----------
Total product technology expenditures.................. $628,000 $1,476,000
======== ==========
We sold Perceptive Scientific Instruments, our genetic analysis business,
on July 6, 2000 as part of a plan to refocus on our core business. We have
treated this business as a discontinued operation for accounting purposes, and
we have removed it from most of the discussion and financial information in this
Quarterly Report. For a further discussion of the sale of this business, please
see the discussion below in this section entitled "Discontinued Business
Operations" on page 15 of this Quarterly Report.
12
14
RESULTS OF OPERATIONS
COMPARISON OF QUARTER ENDED MARCH 31, 2001 TO QUARTER ENDED MARCH 31, 2000
Net revenues for the quarter ended March 31, 2001 increased to $7.3
million from $6.8 million, an increase of $525,000, or 8% over the same period
last year. Sales of IVD imaging systems increased to $1.7 million from $1.5
million, an increase of $157,000 or 10% from the same period last year. The
increase is due primarily to higher sales to domestic hospitals, partially
offset by decreased sales to international distributors. Sales of IVD imaging
system supplies and services increased to $3.9 million from $3.5 million, an
increase of $349,000 or 10% over the same period last year, primarily due to the
larger installed base of urinalysis workstations. Sales of small instruments and
supplies increased to $1.7 million from $1.3 million, an increase of $339,000,
or 25%. The increase is due primarily to increased sales of small instruments.
Royalties and licensing revenues decreased to $56,000 from $377,000 in the
comparable period from the prior year. The decrease was due to the fact that the
year ago period contained a nonrecurring $300,000 license fee in connection with
expanded licensing of several existing patents.
Revenues from the urinalysis segment totaled $5.6 million in the current
period as compared to $5.4 million in the comparable period last year, an
increase of $185,000 or 3%. This growth is due to increased sales of our
urinalysis workstations and increased sales of related system supplies and
services to the growing installed base. Revenues from the small laboratory
devices segment increased to $1.7 million in the current period, as compared to
$1.3 million in the comparable period from last year, an increase of $339,000.
This growth is due primarily to increased sales of small instruments.
Cost of goods for IVD systems as a percentage of sales of IVD imaging
systems totaled 73% in the current period as compared to 66% in the comparable
period from last year. The increase is primarily attributable to changes in the
mix of products sold from one period to the other, as well as increased
manufacturing overhead associated with improved inventory control processes.
Cost of goods for IVD imaging system supplies and services as a percentage of
sales of such products decreased to 35% for the current period as compared to
43% for the same period last year. This decrease is due primarily to
efficiencies derived from improved manufacturing processes. Cost of goods for
small instruments and supplies as a percentage of sales of small instruments and
supplies totaled 49% for the current period, as compared to 52% in the first
quarter of last year. This decrease is primarily due to manufacturing
efficiencies from increased production volume. The aggregate gross margin
totaled 53% for the quarter ended March 31, 2001 as compared to 52% in the
comparable period of the prior year.
Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 46%, as compared to 47% in the first quarter of last year. This decrease
is primarily due to improvements in the manufacturing process, as well as the
impact on revenues of the license fee in the year ago period. Cost of goods for
small laboratory devices as a percentage of revenues totaled 49% in the current
period, as compared to 52% in the first quarter of the prior year. This decrease
is primarily due to manufacturing efficiencies from increased production volume.
Marketing and selling expenses totaled $986,000, compared to $832,000 for
the comparable period of last year, an increase of $154,000, or 19%, due
primarily to increased promotional activities associated with our urinalysis
workstation. Marketing and selling expenses as a percentage of net revenues
increased to 14% in the quarter ended March 31, 2001 as compared to 12% in the
same period last year.
General and administrative expenses were $1.0 million, which was
comparable to the prior year. General and administrative expenses for the period
as a percentage of net revenue was 14% as compared to 15% in the same period in
the prior year.
Net research and development expenses increased to $1.1 million for the
quarter ended March 31, 2001, as compared to $424,000 in the first quarter of
last year, an increase of $630,000 or 149%. Net research and development
expenses as a percentage of revenues increased to 14% in the quarter ended March
31, 2001 from 6% in the comparable period of the prior year. Total product
technology expenditures, including capitalized software development costs and
reimbursed costs under research and development grants and contracts, increased
to $1.5 million from $628,000, an increase of $848,000 or 135% as compared to
the same period of the prior year. The increase in total product technology
expenditures is due to increased spending under a major
13
15
project begun in 1999 to improve our urinalysis workstation product line. We
believe that this project is important to maintaining our competitive position
in the urinalysis market and that our failure to complete this project on
schedule could have a material and adverse effect on our business. We expect our
net research and development expenses will continue at current levels during
2001.
Amortization of intangible assets reflects the amortization of acquired
intangible assets and patents. Amortization of intangible assets for the quarter
ended March 31, 2001 decreased slightly to $36,000 from $37,000 in the
comparable period in the prior year.
Operating income for the quarter ended March 31, 2001 decreased to
$777,000 as compared to an operating income of $1.2 million in the comparable
quarter of the prior year, principally as a result of increased research and
development costs.
Interest expense decreased to $229,000 in the quarter ended March 31, 2001
from $242,000 in the comparable quarter of the prior year due to decreased
interest rates on the credit facility and reduced indebtedness.
For the quarter ended March 31, 2001, urinalysis segment profits decreased
to $937,000 from $1.5 million in the comparable quarter of the prior year. This
decrease is attributable to higher operating costs, particularly research and
development, partially offset by higher revenue. Segment profits for the small
laboratory devices segment totaled $477,000, as compared to $321,000 in the
comparable quarter of the prior year. The increase results from increased
product sales and reduced costs in that segment. Unallocated corporate expenses
totaled $813,000 in the current period as compared to $805,000 in the same
period last year.
The income tax provision for the quarter ended March 31, 2001 totaled
$240,000, as compared to $378,000 in the quarter ended March 31, 2000. The
decrease reflects the decreased taxable income experienced by the Company in
2001.
Income from continuing operations decreased to $361,000, or $0.03 per
diluted share, for the quarter ended March 31, 2001, as compared to $637,000, or
$0.06 per diluted share, for the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $3.1 million at March 31, 2001 from
$3.7 million at December 31, 2000. The decrease is due to the fact that the
amount of cash used by investing and financing activities exceeded the cash
provided by operations. Cash provided by operations for the quarter ended March
31, 2001 decreased to $86,000 from $2.2 million for the comparable period last
year. This decrease is primarily due to the payment of bonuses accrued in 2000
under the Company's bonus plan, increased expenditures for research and
development and increased levels of accounts receivable.
Cash used by investing activities totaled $345,000 for the quarter ended
March 31, 2001, as compared to $153,000 in the same quarter last year. The
increase is primarily due to the increase in expenditures for property and
equipment as part of the Company's efforts to upgrade its facilities, as well as
increased software development costs under the Company's research and
development program.
We have a credit facility with Foothill Capital Corporation, a Wells Fargo
company, that consists of a $3.6 million term loan and a $4.0 million revolving
line of credit. Borrowings under the revolving line of credit are limited to a
percentage of eligible accounts receivable. The term loan bears interest at the
lender's prime rate (8.0% on March 31, 2001) plus 3.0%, and is payable in 36
equal monthly installments. The revolving line of credit bears interest at the
lender's prime rate plus 1.0%. The credit facility is subject to minimum
interest charges, prepayment penalties and customary fees, is collateralized by
a first priority lien on all the assets of the Company. The credit facility was
scheduled to terminate in May 2001, but has been renewed as discussed below. It
also contains financial covenants based primarily on tangible net worth and cash
flow and imposes restrictions on acquisitions, capital expenditures and cash
dividends.
14
16
We began a major project in 1999 to improve our urinalysis workstation
product line. As a result, we expect continuing high levels of research and
development expenditures in 2001. We plan to fund this project with cash from
operations.
Net cash used by financing activities totaled $335,000 and consisted
primarily of principal payments made on the term loan and revolving line of
credit described above, partially offset by funds received from the exercise of
stock options. As of March 31, 2001, we owed $200,000 on the term loan and
$496,000 on the revolving line of credit and were eligible to borrow an
additional $1.0 million under the revolving credit line. The current balance of
the term loan will be paid off by May 2001, but (as discussed below) we are
borrowing an additional $3.0 million under the term loan portion of the credit
facility to refinance a subordinated note.
In March 2001, we refinanced a $7.0 million subordinated note due July 31,
2001. We refinanced the subordinated note with the combination of (1) a new $3.0
million term loan from Foothill Capital, (2) a new $3.5 million subordinated
note issued to the existing note holder and (3) $500,000 from our cash reserves.
The new term loan and new subordinated note will both amortize over three years.
In connection with the refinancing, we issued a new 3-year warrant to the note
holder to purchase 853,040 shares of common stock at $1.90 per share, the
closing price of the common stock on the date of the refinancing. The new
warrant replaces an old warrant expiring July 2001 for the same number of
shares.
We reduced our outstanding debt by $453,000 in the first quarter of 2001
and, after considering the effect of the refinancing discussed above, we have
scheduled principal payments totaling $1.7 million during the next twelve
months. These payments include the effects of the funding of the new term loan
in May and the subsequent payment of those funds against the old subordinated
note under the terms of the refinancing. We believe that our current cash on
hand, together with cash generated from operations and cash available under the
credit facility, will be sufficient to fund normal operations and pay principal
and interest on outstanding debt obligations for at least a year.
DISCONTINUED BUSINESS OPERATIONS
We sold Perceptive Scientific Instruments, our genetic analysis business,
in July 2000. Its principal product was the PowerGene family of genetic
analyzers - IVD imaging systems for karyotyping, DNA probe analysis and
comparative genomic hybridization. We sold the assets of the U.S. operations to
Applied Imaging Corporation (Nasdaq: AICX) for 385,371 shares of Applied Imaging
common stock, the assumption of certain liabilities and contingent cash payments
tied to the future performance of Applied Imaging's business. We retained the
Houston-based research group, including its federally funded research grants,
and changed the name of the group to Advanced Digital Imaging Research. We were
unable to sell the international operations and placed Perceptive Scientific
International Limited (a wholly-owned subsidiary of Perceptive Scientific
Instruments) into a voluntary liquidation under United Kingdom law. We have
classified Perceptive Scientific Instruments as a discontinued operation for
accounting purposes and have removed it from most of the discussion and
financial information in this Quarterly Report and our other reports filed with
the Securities and Exchange Commission after July 2000.
SHAREHOLDER RIGHTS PLAN
We have a shareholders rights plan. The rights are not presently
exercisable. They become exercisable only if a person or group acquires 20% or
more of our common stock, or announces a tender offer for 20% or more of our
common stock, without board approval. If the rights are triggered, all common
stockholders (except the hostile party) will be entitled to purchase shares of
common stock (or the economic equivalent in preferred stock) at a price based on
a substantial discount from the market price of the common stock. The Board of
Directors may terminate the plan at any time or redeem the rights prior to their
becoming exercisable. The rights expire on December 22, 2009.
INFLATION
We do not foresee any material impact on our operations from inflation.
15
17
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 our current or future
products and our ability to sell our products on a profitable basis. Moreover,
healthcare legislation is an area of extensive and dynamic change, and we cannot
predict future legislative changes in the healthcare field or their impact on
our business.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
which reflect our current views about future events and financial results. We
have made these statements in reliance on the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Forward-looking statements include our
views on future financial results, financing sources, product development,
capital requirements, market growth and the like, and are generally identified
by phrases such as "anticipates," "believes," "estimates," "expects," "intends,"
"plans" and similar words. Forward-looking statements are merely predictions and
therefore 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,
- unexpected technical and marketing difficulties inherent in major
product development efforts such as our current project to improve
our urinalysis workstation product line,
- the potential need for changes in our long-term strategy in
response to future developments,
- future advances in diagnostic testing methods and procedures, as
well as potential changes in government regulations and healthcare
policies, both of which could adversely affect the economics of
the diagnostic testing procedures automated by our products,
- rapid technological change in the microelectronics and software
industries, and o increasing competition from imaging and
non-imaging based in-vitro diagnostic products.
We have attempted to identify additional significant uncertainties and
other factors affecting forward-looking statements in Exhibit 99 to our 2000
Annual Report on Form 10-K. Stockholders should understand that the
uncertainties and other factors identified in this Quarterly Report and in
Exhibit 99 to the Annual Report are not a comprehensive list of all the
uncertainties and other factors which may affect forward-looking statements. We
do not undertake any obligation to update or revise any forward-looking
statements or the list of uncertainties and other factors which could affect
those statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There was no material change in the Company's exposure to market risk on
March 31, 2001 as compared to its market risk exposure on December 31, 2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk" in our Annual Report on Form 10-K for the year ended
December 31, 2000.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not presently involved in any litigation.
16
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Reference
Number Description Document
- ------ ----------- ---------
3.1(a) Certificate of Incorporation, as amended (1)
3.1(b) Certificate of Designations of Series A Convertible Preferred Stock (2)
3.1(c) Certificate of Designations of Series B Callable Preferred Stock (3)
3.1(d) Certificate of Designations, Preferences and Rights of Series C Preferred Stock (4)
3.2 Restated Bylaws (5)
4.1 Specimen of Common Stock Certificate (6)
4.2 Certificate of Designations of Series A Convertible Preferred Stock (2)
4.3 Certificate of Designations of Series B Callable Preferred Stock (3)
4.4 Certificate of Designations, Preferences and Rights of Series C Preferred Stock (4)
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 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 June 30, 1999.
(4) Current Report on Form 8-K dated January 26, 2000.
(5) Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(6) Registration Statement on Form S-3, as filed with the Securities and
Exchange Commission on March 27, 1996 (File No. 333-002001).
(b) Reports on Form 8-K
The Company filed one Current Report on Form 8-K during the quarter ended
March 31, 2001. On March 19, 2001, the Company filed a Form 8-K announcing the
renewal of its credit facility and refinancing of its subordinated debt.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 10, 2001 INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
By: /s/ Donald E. Horacek
--------------------------------------
Donald E. Horacek
Controller and Secretary
[Authorized Signatory and
Principal Accounting Officer]
17
19
EXHIBIT INDEX
Exhibit Reference
Number Description Document
- ------ ----------- ---------
3.1(a) Certificate of Incorporation, as amended (1)
3.1(b) Certificate of Designations of Series A Convertible Preferred Stock (2)
3.1(c) Certificate of Designations of Series B Callable Preferred Stock (3)
3.1(d) Certificate of Designations, Preferences and Rights of Series C Preferred Stock (4)
3.2 Restated Bylaws (5)
4.1 Specimen of Common Stock Certificate (6)
4.2 Certificate of Designations of Series A Convertible Preferred Stock (2)
4.3 Certificate of Designations of Series B Callable Preferred Stock (3)
4.4 Certificate of Designations, Preferences and Rights of Series C Preferred Stock (4)
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 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 June 30, 1999.
(4) Current Report on Form 8-K dated January 26, 2000.
(5) Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(6) Registration Statement on Form S-3, as filed with the Securities and
Exchange Commission on March 27, 1996 (File No. 333-002001).