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EXHIBIT 99
ADDITIONAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS
The Company's Annual Report on Form 10-K for the year ended December
31, 1997 (the "Annual Report") contains 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 the 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 which are inherently subject to uncertainties
and other factors which could cause the actual results to differ materially from
the forward-looking statement. Some of these uncertainties and other factors are
discussed in the Annual Report. See "Management Discussion and Analysis of
Financial Condition and Results of Operations--Forward Looking Statements." In
this Exhibit 99, the Company has attempted to identify additional uncertainties
and other factors which may affect its forward-looking statements.
Stockholders should understand that the uncertainties and other factors
identified in the Annual Report and this Exhibit 99 do not constitute a
comprehensive list of all the uncertainties and other factors which may affect
forward-looking statements. The Company has merely attempted to identity those
uncertainties and other factors which, in its view at the present time, have the
highest likelihood of significantly affecting its forward- looking statements.
In addition, the Company does not undertake any obligation to update or revise
any forward- looking statements or the list of uncertainties and other factors
which could affect such statements.
This Exhibit 99 supersedes in its entirety Exhibit 99 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and Exhibit 99
to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997. Capitalized terms not otherwise defined below have been defined in the
Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
The Company has received a commitment from a financial institution for
a new loan facility (the "New Facility") to refinance its existing bank loans
which mature on April 15, 1998. As a result, the Company believes that it will
have sufficient liquidity and capital resources to fund normal operations and
pay principal and interest on outstanding debt obligations for the next year.
The commitment is subject to completion of definitive loan documentation and the
satisfaction of certain other customary closing conditions. The failure to
satisfy these conditions and consummate the New Facility would have a material
adverse effect on the Company's liquidity and capital resources.
The Company also plans to pursue equity financing to reduce
indebtedness and fund its long-term business strategy. The failure to secure
equity financing could have a material adverse effect on the Company's long-term
business strategy. In addition, any equity financing could result in dilution to
holders of Common Stock.
RECENT LOSSES
The Company incurred net losses of approximately $7.4 million and
$503,000 for the fiscal years ended December 31, 1996 and 1997, respectively.
While the majority of the losses are attributable to unusual charges such as
deferred offering costs, litigation expenses, restructuring charges and merger
related expenses, the Company attributes a significant portion of the losses to
substantial increases during 1996 in expenditures for research and development,
sales and marketing and general administration. In response, the Company
implemented a restructuring during the fourth quarter of 1996 which
significantly reduced operating expenses. However, there can be no assurance
that the Company can restore annual profitability.
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ARBITRATION
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.
DEPENDENCE ON INSTRUMENT SALES
The Company derives most of its revenues from the sale of two,
high-priced instruments - The Yellow IRIS urinalysis workstation and the
PowerGene genetic analyzer. These instruments have list prices ranging from
$20,000 to $195,000 depending on the model and configuration, and relatively
modest declines in unit sales or gross margins for either product line could
have a material adverse effect on the Company's revenues and profits.
COMPETITION
There are numerous companies engaged in active research and development
programs within and outside of the clinical laboratory imaging systems field
that have considerable experience in areas of interest to the Company. The
Company cannot determine if other firms are currently engaged in potentially
competitive research, and these firms could develop and introduce products
comparable or superior to the products sold by Company.
RELIANCE ON SINGLE SOURCE SUPPLIERS
Certain key components of the Company's instruments are manufactured
according to the Company's specifications or are available only from single
suppliers. Some of these suppliers have notified the Company that they have
discontinued, or will soon discontinue, production of key components. Although,
in the past, the Company has successfully transitioned to new components to
replace discontinued components, there can be no assurance that the Company can
successfully transition to satisfactory replacement components or that the
Company will have access to adequate supplies of discontinued components on
satisfactory terms during the transition period. The Company's inability to
transition successfully to replacement components or to secure adequate supplies
of discontinued components on satisfactory terms could have a material adverse
effect on the Company.
OPTION TO ACQUIRE POLY U/A SYSTEMS, INC.
In September 1995, the Company entered into a research and development
contract with Poly U/A Systems, nc. ("Poly"), a Company-sponsored research and
development entity, for development of several new products to enhance automated
urinalysis ( the "Poly Products"). The Company has an option to acquire all of
the common stock of Poly for an aggregate price of $5.1 million payable, at the
Company's discretion, in cash or shares of the Company's 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 would impact future earnings. For the portion of the
net cost of the acquisition, if any, allocated in in-process research and
development, the Company would record a nonrecurring, non-cash (if purchased
with Common Stock) charge against then current earnings. In June 1995, the
Company exercised a similar option to acquire LDA Systems, Inc. ("LDA"), another
Company- sponsored research and development entity, in exchange for Common
Stock. At that time, it incurred a non-cash charge of $2.9 million against
earnings in 1995 for the acquisition of in-process research and development
related to The White IRIS leukocyte differential analyzer.
The Company has not reached a decision to exercise its option to
acquire Poly and is under no obligation to do so. However, the Company will
periodically review the merits of acquiring Poly and may elect to exercise the
option in the future based on factors that are subject to change. These factors
include (i) the progress of research and development of the Poly Products, (ii)
the Company's assessment of the commercial feasibility of the Poly Products,
(iii) the cost to acquire Poly, and (iv) the market price of the Common Stock at
the time the Company considers exercising the option.
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DEPENDENCE ON KEY PERSONNEL
The Company's success depends in significant part upon the continued
service of certain key personnel, and its continuing ability to attract,
assimilate and retain such personnel. Competition for such personnel is intense
and there can be no assurance that the Company can retain its key personnel or
that it can attract, assimilate or retain other highly qualified personnel in
the future. While the Company generally enters into agreements with its
employees regarding patents, confidentiality and related maters, the Company
does not have employment agreements with most of its key employees. The Company
does not maintain life insurance policies on such employees. The loss of key
personnel, especially without advance notice, or the inability to hire or retain
qualified personnel could have a material adverse effect on the Company.
DEPENDENCE ON COMPUTER PLATFORM
The Company currently uses the Power Macintosh computer, manufactured
by Apple Computer, as the platform for its PowerGene product line. During 1997,
Apple Computer released Mac OS 8, a new version of their Mac OS operating
system, which has now been adopted on the PowerGene product line. Apple
Computer, which had suffered significant losses in the recent past, also
returned to profitability following the release of Mac OS 8 and the introduction
of a new line of Power Macintosh computers based on the PowerPC 750
microprocessor. Nevertheless, there can be no assurance that future events will
not cause delays in the development and/or timely supply of any new product
based on this platform, and such delays could affect sales of the PowerGene
product line.
DIFFICULTIES ASSOCIATED WITH INTRODUCTION OF FUTURE PRODUCTS
The commercial success of the Company's future products and systems
depends upon their acceptance by the medical community. Capital-intensive
laboratory instruments such as The White IRIS and the Company's other future
products can significantly reduce labor costs, improve precision and offer other
distinctive benefits. However, often there is resistance to products, which
require significant capital expenditures or which eliminate jobs through
automation.
There can be no assurance that the Company's new products and systems
will achieve significant market acceptance in the future or that sales of such
future products and systems will grow at the rates expected by management.
Furthermore, new product introductions or product enhancements by the Company's
competitors or the use of other technologies could cause a decline in sales or
gross margins on sales or loss of market acceptance of the Company's systems.
INTELLECTUAL PROPERTY RIGHTS
The Company's commercial success depends in part on its ability to
protect and maintain its proprietary technology. The Company has received
patents with respect to certain of its technologies. Receipt of such patents may
not insulate the Company from damaging competition. The validity and breadth of
claims in clinical laboratory instrumentation patents involve complex legal and
factual questions and, therefore, are highly uncertain. There can be no
assurance that the claims allowed under patents held by the Company or under
patents based on pending or future patent applications by the Company will be
sufficiently broad to protect what the Company believes to be its proprietary
rights, that issued patents will not be circumvented by competitors, or that the
rights granted under such patents will provide competitive advantages to the
Company. There also can be no assurance that other parties will not take, or
threaten to take, legal action against the Company, alleging infringement of
such parties' patents by current and proposed products of the Company or that
any of the Company's patents, or patents in which it has licensed rights, will
be held valid and enforceable if subsequently challenged.
The Company also has trade secrets and unpatented technology and
proprietary knowledge related to the sale, promotion, operation, development and
manufacturing of its products. While the Company generally enters into
confidentiality agreements with its employees and consultants, there can be no
assurance that the Company's trade secrets or proprietary technology will not
become known or be independently developed by competitors in such a manner that
the Company has no practical recourse. Nor can there be any assurance that
others will not develop or acquire equivalent expertise or develop products that
render the Company's current or future products noncompetitive or obsolete.
The Company also claims copyrights in its software and the ways in
which it assembles and displays images and certain trademark rights in the
United States and other foreign countries. There can be no assurance that
copyright and trademark protection can be obtained, or if obtained, can or will
be enforced or will provide significant commercial advantage to the Company.
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Litigation regarding patent and other intellectual property rights,
whether with or without merit, could be time-consuming and expensive and could
divert the Company's technical and management personnel. There can be no
assurance that the Company's litigation expenses will not increase in the
future. Any change in the Company's ability to protect and maintain its
proprietary rights could have a material adverse effect on the Company.
TECHNOLOGICAL CHANGE
The market for the Company's systems is characterized by rapid
technological advances, changes in customer requirements, and frequent new
product introductions and enhancements. The Company's future success depends
upon its ability to enhance its current product lines, to introduce new products
that keep pace with technological developments and to respond to evolving
customer requirements. Any failure by the Company to anticipate or respond
adequately to technological developments by its competitors or to changes in
customer requirements, or significant delays in product introduction, could
result in a loss of competitiveness and revenues.
There can be no assurance that the Company will be successful in developing and
marketing new products or product enhancements on a timely or cost-effective
basis, and such failure could have a material adverse effect on the Company.
GOVERNMENT REGULATION
Most of the Company's products are subject to stringent government
regulation in the United States and other countries. 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, or criminal prosecution, any of which could
have a material adverse effect on the Company. Furthermore, changes 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.
ACQUISITIONS AND EXPANSION
As part of the Company's strategy to enhance and maintain its
competitive position, the Company may from time to time consider potential
acquisitions of complementary products, technologies and other businesses. The
Company has completed a number of acquisitions in the past three years. The
evaluation, negotiation and integration of acquisitions may consume significant
time and resources of the Company. There can be no assurance that acquisitions
will not have a material adverse effect upon the Company due to, among other
things, operational disruptions, integration issues, unexpected expenses and
accounting charges associated with such acquisitions.
HEALTHCARE REFORM POLICIES
In recent years, an increasing number of legislative proposals have
been introduced or proposed in Congress and in ome 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.
CERTAIN ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Certificate of Incorporation and Bylaws of
the Company and the Delaware General Corporation Law (the "DGCL") could,
together or separately, discourage potential acquisition proposals, delay or
prevent a change in control of the Company and limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.
These provisions provide, among other things, for a classified Board of
Directors, for the issuance, without further stockholder approval, of preferred
stock with rights and privileges which could be senior to the Common Stock, and
for limitations on the right of stockholders to call a special meeting of
stockholders and to take action without a meeting. The Company also is subject
to Section 203 of the DGCL which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder.
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PRODUCT LIABILITY
The Company's products are used to gather information for medical
decisions and diagnosis. Accordingly, the manufacture and sale of the Company's
products entails an inherent risk of product liability arising from an
inaccurate, or allegedly inaccurate, test result. The Company has product
liability insurance coverage of $1.0 million per incident and $2.0 million in
assurance that the Company in the event of a product liability claim. There has
not been any indication that the Company's insurance carrier will not renew the
Company's product liability insurance at or near current premiums; however,
there can be no assurance that the Company will be able to renew product
liability insurance in the future at acceptable premiums. In addition, any
failure to comply with the FDA's Good Manufacturing Practices regulations could
have a material adverse effect on the ability of the Company to defend against
product liability lawsuits.
CURRENCY FLUCTUATIONS
The Company acquired a foreign subsidiary in the PSI Acquisition that
conducts business in various foreign currencies. Consequently, fluctuations in
exchange rates will affect the Company's future consolidated operating results
and such fluctuations could have an adverse effect on the Company. The impact of
future fluctuations in exchange rates cannot be predicted with any measure of
accuracy and will depend on the percentage of sales generated internationally.
The Company currently does not hedge the risks associated with fluctuations in
exchange rates, and continues to be subject to such risks. In the future, the
Company may undertake such transactions. If any hedging techniques are
implemented by the Company, there can be no assurance that such techniques can
be successful in eliminating or reducing the effects of currency fluctuations.