** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**Form 10-Q**

 

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**(MarkOne)**

 
| **ý******                                   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                             |
| **For the Quarter ended March 31, 2004 or** |
|                                             |
| **o**                                            | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                  to                  .**

 

**Commission File Number: 000-50677**

 

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**IMMUNICON CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    |   | **23-2269490**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification No.) |

 

**3401 Masons Mill Road, Suite 100**

**Huntingdon Valley, Pennsylvania 19006**

(Address of principal executive offices and zip code)

 

**(215) 830-0777**

(Registrant’s telephone number including area code)

 

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Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

Yes o  No  ý*

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes o  No  ý

 

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* The registrant has not been subject to the filing requirements for thepast 90 days as it commenced trading following its initial public offeringon April 16, 2004, but has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 since suchtime.

 

Include the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpossible date.

As of May 12, 2004, there were22,007,181 shares of Common Stock, $0.001 par value, outstanding.

 

 

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IMMUNICON CORPORATION

 

INDEX

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                                |   |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                                                                     |   |
| Item 1.      | Condensed Consolidated Financial Statements  (Unaudited):                                                                                                |   |
|         |                                                                                                                                                     |   |
|         | Condensed Consolidated Balance Sheets:                                                                                                                   |   |
|         | March 31, 2004 and  December 31, 2003                                                                                                          |   |
|         |                                                                                                                                                     |   |
|         | Condensed  Consolidated Statements of Operations:                                                                                                        |   |
|         | Three Months Ended  March 31, 2004 and March 31, 2003 and for the period from  August 25, 1983 (date of inception) to March 31, 2004 |   |
|         |                                                                                                                                                     |   |
|         | Condensed  Consolidated Statements of Cash Flows:                                                                                                        |   |
|         | Three Months Ended  March 31, 2004 and March 31, 2003 and for the period from  August 25, 1983 (date of inception) to March 31, 2004 |   |
|         |                                                                                                                                                     |   |
|         | Notes to Condensed Consolidated  Financial Statements                                                                                                    |   |
|         |                                                                                                                                                     |   |
| Item 2.      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                              |   |
|         |                                                                                                                                                     |   |
| Item 3.      | Quantitative and Qualitative Disclosures About  Market Risk                                                                                              |   |
|         |                                                                                                                                                     |   |
| Item 4.      | Controls and Procedures                                                                                                                                  |   |
|         |                                                                                                                                                     |   |
| **PART II.** | **OTHER INFORMATION**                                                                                                                                    |   |
|         |                                                                                                                                                     |   |
| Item 2.      | Changes in Securities and Use of  Proceeds                                                                                                               |   |
|         |                                                                                                                                                     |   |
| Item 4.      | Submission of Matters to a Vote of  Security Holders                                                                                                     |   |
|         |                                                                                                                                                     |   |
| Item 6.      | Exhibits and Reports on Form 8-K                                                                                                                         |   |

 

Immunicon is a registeredtrademark of Immunicon Corporation. The Immunicon logo is a registered stylizedtrademark of Immunicon Corporation. CellTracks EasyCount, EasyCount, CellTracksMagNest, CellPrep, CellSave, CellSpotter, CellTracks, AutoPrep and IMMC aretrademarks of Immunivest Corporation, a wholly owned subsidiary of ImmuniconCorporation. The CellTracks Analyzer logo, CellTracks AutoPrep logo, CellTracksMagNest logo, CellSave Preservative Tube logo, CellSave Tube Cap logo, andCellSpotter Analyzer logo are stylized trademarks of Immunivest Corporation.CellSearch is a registered trademark of Johnson & Johnson. All othertrademarks appearing in this filing are the property of their respectiveholders.

 

2

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**PART I****.****                                                    FINANCIALINFORMATION**

**Item 1****.****                                                        CondensedConsolidated Financial Statements**

 

**CondensedConsolidated Balance Sheets (Unaudited)  (in thousands,**except forshare and per share amounts)

 
|                                                                                                                                                                                                                       |   | **March 31,********2004** |   | **December 31,********2003** |   | **Pro  forma********stockholders’********equity at********March 31, 2004********(See note 4)** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|-----------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                       |   |                           |   |                              |   |                                                                                                     |   |
| ASSETS                                                                                                                                                                                                                     |   |                           |   |                              |   |                                                                                                     |   |
| Current Assets:                                                                                                                                                                                                            |   |                           |   |                              |   |                                                                                                     |   |
| Cash and cash equivalents                                                                                                                                                                                                  |   | $                              | 24,607 |                              | $      | 30,601                                                                                                   |   |   |   |
| Accounts receivable (See note 9)                                                                                                                                                                                           |   | 158                            |   | 30                                |   |                                                                                                     |   |
| Prepaid assets                                                                                                                                                                                                             |   | 201                            |   | 319                               |   |                                                                                                     |   |
| Loans from employees                                                                                                                                                                                                       |   | 1                              |   | 1                                 |   |                                                                                                     |   |
| Security deposit with Lender (See note 7)                                                                                                                                                                                  |   | 479                            |   | —                            |   |                                                                                                     |   |
| Other current assets (See note 9)                                                                                                                                                                                          |   | 241                            |   | 136                               |   |                                                                                                     |   |
| Total current assets                                                                                                                                                                                                       |   | 25,687                         |   | 31,087                            |   |                                                                                                     |   |
|                                                                                                                                                                                                                       |   |                           |   |                              |   |                                                                                                     |   |
| Property and equipment, net                                                                                                                                                                                                |   | 3,982                          |   | 3,561                             |   |                                                                                                     |   |
| Assets related to financing activities                                                                                                                                                                                     |   | 1,708                          |   | 674                               |   |                                                                                                     |   |
| Other assets                                                                                                                                                                                                               |   | 217                            |   | 412                               |   |                                                                                                     |   |
| Total assets                                                                                                                                                                                                               |   | $                              | 31,594 |                              | $      | 35,734                                                                                                   |   |   |   |
|                                                                                                                                                                                                                       |   |                           |   |                              |   |                                                                                                     |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                                  |   |                           |   |                              |   |                                                                                                     |   |
| Current Liabilities:                                                                                                                                                                                                       |   |                           |   |                              |   |                                                                                                     |   |
| Current portion of long-term debt                                                                                                                                                                                          |   | $                              | 3,670  |                              | $      | 3,360                                                                                                    |   |   |   |
| Accounts payable                                                                                                                                                                                                           |   | 1,770                          |   | 1,008                             |   |                                                                                                     |   |
| Accrued expenses                                                                                                                                                                                                           |   | 3,143                          |   | 2,787                             |   |                                                                                                     |   |
| Current portion of deferred revenue                                                                                                                                                                                        |   | 222                            |   | 97                                |   |                                                                                                     |   |
| Total current liabilities                                                                                                                                                                                                  |   | 8,805                          |   | 7,252                             |   |                                                                                                     |   |
|                                                                                                                                                                                                                       |   |                           |   |                              |   |                                                                                                     |   |
| Long-term debt                                                                                                                                                                                                             |   | 3,469                          |   | 3,792                             |   |                                                                                                     |   |
| Deferred revenue                                                                                                                                                                                                           |   | 359                            |   | 25                                |   |                                                                                                     |   |
|                                                                                                                                                                                                                       |   |                           |   |                              |   |                                                                                                     |   |
| Commitments and contingencies                                                                                                                                                                                              |   |                           |   |                              |   |                                                                                                     |   |
|                                                                                                                                                                                                                       |   |                           |   |                              |   |                                                                                                     |   |
| Shareholders’ equity:                                                                                                                                                                                                 |   |                           |   |                              |   |                                                                                                     |   |
| Convertible preferred stock (liquidation  value of $87,987,521  as of  March 31, 2004 and $87,755,822   as of December 31, 2003)                                                                       |   | 85,347                         |   | 85,115                            |   | $                                                                                                        | — |   |
| Common stock, $0.001 par value – 25,000,000  authorized, 498,702 and 485,820 shares issued and outstanding as of  March 31, 2004 and December 31, 2003, respectively, and 15,994,517  pro forma (unaudited) |   | 1                              |   | 1                                 |   | 16                                                                                                       |   |
| Additional paid in capital                                                                                                                                                                                                 |   | 7,258                          |   | 7,032                             |   | 92,590                                                                                                   |   |
| Deferred stock-based compensation                                                                                                                                                                                          |   | (3,652                         | )      | (3,858                            | )      | (3,652                                                                                                   | )      |
| Loan for stock options                                                                                                                                                                                                     |   | (19                            | )      | (19                               | )      | (19                                                                                                      | )      |
| Deficit accumulated during the development  stage                                                                                                                                                                          |   | (69,974                        | )      | (63,606                           | )      | (69,974                                                                                                  | )      |
| Total shareholders’ equity                                                                                                                                                                                            |   | 18,961                         |   | 24,665                            |   | $                                                                                                        | 18,961 |   |
| Total liabilities and shareholders’ equity                                                                                                                                                                            |   | $                              | 31,594 |                              | $      | 35,734                                                                                                   |   |   |   |

 

See notes to condensed consolidated unaudited financial statements.

 

3

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**CondensedConsolidated Statements of Operations(Unaudited)**

Three months endedMarch 31, 2004 and 2003, and for the period from August 25, 1983(date of inception) to March 31, 2004(in thousands, except for share and per share amounts)

 
|                                                                                                         |   | **Three Months Ended March 31,** |   | **Period  from  August 25,  1983 (date of  inception) to  March 31,  2004** |   |
|--------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------------------------------------------------------------|--------|
|                                                                                                         |   | **2004**                              |   | **2003**                                                                              |   |   |
|                                                                                                         |   |                                  |   |                                                                                  |   |   |   |
| Revenue:                                                                                                     |   |                                  |   |                                                                                  |   |   |   |
| License revenue from related party (See  note 9)                                                             |   | $                                     | 41     |                                                                                  | $      | 280 |   | $ | 4,046 |   |
| Instrument revenue from related party  (See note 9)                                                     |   | 103                                   |   | 103                                                                                   |   |   |   |
| Other revenue                                                                                                |   | 13                                    |   | 159                                                                                   |   | 3,922 |   |
| Total revenue                                                                                                |   | 157                                   |   | 439                                                                                   |   | 8,071 |   |
|                                                                                                         |   |                                  |   |                                                                                  |   |   |   |
| Expenses:                                                                                                    |   |                                  |   |                                                                                  |   |   |   |
| Research and development                                                                                     |   | 4,979                                 |   | 3,946                                                                                 |   | 59,519 |   |
| General and administrative                                                                                   |   | 1,445                                 |   | 1,003                                                                                 |   | 19,885 |   |
| Total operating expenses                                                                                     |   | 6,424                                 |   | 4,949                                                                                 |   | 79,404 |   |
| Operating loss                                                                                               |   | (6,267                                | )      | (4,510                                                                                | )      | (71,333 | ) |
| Other income from related party                                                                              |   |                                  |   |                                                                                  |   | 250 |   |
|                                                                                                         |   |                                  |   |                                                                                  |   |   |   |
| Interest income                                                                                              |   | 62                                    |   | 86                                                                                    |   |   |   |
| Interest expense                                                                                             |   | (163                                  | )      | (114                                                                                  | )      |   |   |
| Interest income (expense), net                                                                               |   | (101                                  | )      | (28                                                                                   | )      | 1,109 |   |
| Net loss attributable to common  stockholders                                                                |   | $                                     | (6,368 | )                                                                                     | $      | (4,538 | ) | $ | (69,974 | ) |
|                                                                                                         |   |                                  |   |                                                                                  |   |   |   |
| Net loss per common share-basic and diluted                                                                  |   | $                                     | (13.10 | )                                                                                     | $      | (10.29 | ) |   |   |
|                                                                                                         |   |                                  |   |                                                                                  |   |   |   |
| Weighted average common shares  outstanding-basic and diluted                                                |   | 486,240                               |   | 441,111                                                                               |   |   |   |
|                                                                                                         |   |                                  |   |                                                                                  |   |   |   |
| Pro forma net loss per common share-basic  and diluted (unaudited) (See notes 3 and 4)                       |   | $                                     | (0.40  | )                                                                                     |   |   |   |   |
|                                                                                                         |   |                                  |   |                                                                                  |   |   |   |
| Pro forma weighted average common shares  outstanding-basic and diluted (unaudited) (See notes 3 and 4) |   | 15,934,063                            |   |                                                                                  |   |   |   |

 

See notes to condensed consolidated unaudited financial statements.

 

4

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**Condensed Consolidated Statements of Cash Flows (Unaudited)**

Three months endedMarch 31, 2004 and 2003, and for the period fromAugust 25, 1983 (date of inception) to March 31, 2004(in thousands)

 
|                                                                             |   | **Three Months Ended March 31,** |   | **Period  from  August 25, 1983  (date of inception)  to March 31,  2004** |   |
|----------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------------------------------------------------------|--------|
|                                                                             |   | **2004**                              |   | **2003**                                                                             |   |   |
| Operating activities:                                                            |   |                                  |   |                                                                                 |   |   |   |
| Net loss                                                                         |   | $(6,368                               | )      | $(4,538                                                                              | )      | $(69,974 | ) |
| Adjustment to reconcile net loss to net cash used in operating  activities:      |   |                                  |   |                                                                                 |   |   |   |
| Depreciation and amortization                                                    |   | 332                                   |   | 240                                                                                  |   | 4,951 |   |
| Interest expense on warrants                                                     |   | 9                                     |   | 5                                                                                    |   | 81 |   |
| Loss on disposal of property and equipment                                       |   | —                                |   | —                                                                               |   | 4 |   |
| Compensation expense related to the issuance of stock,stock options and warrants |   | 401                                   |   | 84                                                                                   |   | 1,430 |   |
| Change in:                                                                       |   |                                  |   |                                                                                 |   |   |   |
| Accounts receivable                                                              |   | (128                                  | )      | —                                                                               |   | (127 | ) |
| Prepaid expenses and other                                                       |   | 118                                   |   | (63                                                                                  | )      | (369 | ) |
| Other assets                                                                     |   | (401                                  | )      | —                                                                               |   | (1,381 | ) |
| Accounts payable                                                                 |   | 1,134                                 |   | 204                                                                                  |   | 1,567 |   |
| Accrued expenses                                                                 |   | (476                                  | )      | (7                                                                                   | )      | 2,322 |   |
| Deferred revenue                                                                 |   | 459                                   |   | 213                                                                                  |   | 569 |   |
| Net cash used in operating activities                                            |   | (4,920                                | )      | (3,862                                                                               | )      | (60,927 | ) |
|                                                                             |   |                                  |   |                                                                                 |   |   |   |
| Investing activities:                                                            |   |                                  |   |                                                                                 |   |   |   |
| Purchase of investments                                                          |   | —                                |   | —                                                                               |   | (54,920 | ) |
| Proceeds from maturities of investments                                          |   | —                                |   | —                                                                               |   | 54,503 |   |
| Cash proceeds from disposals of property and equipment                           |   | —                                |   | —                                                                               |   | 1 |   |
| Purchases of property and equipment                                              |   | (749                                  | )      | (495                                                                                 | )      | (8,510 | ) |
| Net cash used in investing activities                                            |   | (749                                  | )      | (495                                                                                 | )      | (8,926 | ) |
|                                                                             |   |                                  |   |                                                                                 |   |   |   |
| Financing activities:                                                            |   |                                  |   |                                                                                 |   |   |   |
| Proceeds from term debt                                                          |   | 795                                   |   | —                                                                               |   | 16,393 |   |
| Proceeds from sale of preferred stock                                            |   | —                                |   | —                                                                               |   | 84,115 |   |
| Proceeds from sale of common stock                                               |   | —                                |   | —                                                                               |   | 1,666 |   |
| Proceeds from exercise of stock options                                          |   | 6                                     |   | —                                                                               |   | 338 |   |
| Proceeds from exercise of stock warrants                                         |   | 257                                   |   | —                                                                               |   | 257 |   |
| Loan issue fees                                                                  |   | —                                |   | —                                                                               |   | (55 | ) |
| Payments of IPO fees                                                             |   | (575                                  | )      | —                                                                               |   | — |   |
| Payments on term debt                                                            |   | (808                                  | )      | (714                                                                                 | )      | (8,254 | ) |
| Net cash provided by (used in) financing activities                              |   | (325                                  | )      | (714                                                                                 | )      | 94,460 |   |
| Net increase (decrease) in cash and cash equivalents                             |   | (5,994                                | )      | (5,071                                                                               | )      | 24,607 |   |
| Cash and cash equivalents, beginning of period                                   |   | 30,601                                |   | 18,470                                                                               |   | — |   |
| Cash and cash equivalents, end of period                                         |   | $24,607                               |   | $13,399                                                                              |   | $24,607 |   |
|                                                                             |   |                                  |   |                                                                                 |   |   |   |
| Supplemental cash flow information:                                              |   |                                  |   |                                                                                 |   |   |   |
| Cash paid for interest                                                           |   | $140                                  |   | $127                                                                                 |   |   |   |

 

See notes to condensed consolidated unaudited financial statements.

 

5

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**NOTES TO CONDE****NSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS**

**Three months ended March 31, 2004 and2003, and for the period from August 25, 1983 (date of inception) toMarch 31, 2004.**

 

**(1)  Background andbasis of presentation**

 

The accompanying unauditedconsolidated financial statements of Immunicon Corporation and Subsidiaries(the “Company”) have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financial informationand with the instructions to Form 10-Q and Article 10 of Regulation S-X ofthe Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion of ourmanagement, the accompanying consolidated financial statements reflect alladjustments (consisting only of normal recurring accruals) necessary to presentfairly our financial position at March 31, 2004 and results of operationsand cash flows for the three month periods ended March 31, 2004 and2003.  Certain items have beenreclassified to conform to current period presentation.

 

Certain footnote informationhas been condensed or omitted from these financial statements.  Therefore, these financial statements shouldbe read in conjunction with the consolidated financial statements and relatednotes on pages F-1 to F-33 included in the Company’s Registration Statementdated April 16, 2004 filed with the SEC (“Registration Statement”).  Results of operations for the three monthsended March 31, 2004 are not necessarily indicative of results to beexpected for the full year.

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of financial statements, and thereported amounts of expenses during the reporting period.  Actual results could differ from thoseestimates or assumptions.  The moresignificant estimates reflected in these financial statements includejudgmentally accrued expenses and the valuation of stock-based compensation.

 

The Company has generatedlimited revenues from product sales and has incurred substantial losses sinceits inception. The Company anticipates incurring additional losses over atleast the next several years and such losses may increase as the Companyexpands its research and development activities. Accordingly, the Company isconsidered to be in the development stage as of March 31, 2004 as definedin Statement of Financial Accounting Standards (“SFAS”) No. 7, *Accountingand Reporting by Development Stage Enterprises*.

 

On April 21, 2004, theCompany completed its initial public offering (“IPO”) of 6,000,000 shares ofcommon stock at $8.00 per share. The Company raised an aggregate of $48 millionbefore underwriters’ discounts and offering expenses. Net proceeds to theCompany were approximately $43 million. All of the shares were sold by theCompany.  The Company had granted theunderwriters a 30-day option to purchase up to an additional 900,000 shares ofcommon stock from the Company to cover over-allotments, if any. This option wasexercised in full on May 12, 2004 and closing occurred on May 17, 2004 with netproceeds to the Company of approximately $6.7 million. On March 9, 2004,the Company completed a 2-for-3 reverse stock split of its common stock.  All share and per share amounts included inthese unaudited consolidated financial statements have been retroactivelyadjusted for all periods presented to give effect to the reverse stock split.

 

Substantial financing will beneeded by the Company to fund its operations and to commercially develop itsproduct candidates. There is no assurance that such financing will be availablewhen needed. Operations of the Company are subject to certain additional risksand uncertainties including, among others, dependence on Veridex, LLC(“Veridex”), a Johnson & Johnson company, to market the Company’scancer diagnostic product candidates, the uncertainty of product development(including clinical trial results), regulatory clearance and approval, supplierand manufacturing dependence, competition, reimbursement availability,dependence on exclusive licenses and other relationships, uncertaintiesregarding patents and proprietary rights, dependence on key personnel and otherrisks related to governmental regulations and approvals. Management believes,however, that cash, cash equivalents and borrowing available under its line ofcredit at March 31, 2004 will be sufficient to maintain operations throughat least March 31, 2005.

 

In accordance withthe SEC’s Release No. 33-8040, *Cautionary Advice Regarding Disclosure about CriticalAccounting Policies,* we have determined the critical accountingprinciples by considering accounting policies that involve the most complex orsubjective decisions or assessments. We state these accounting policies inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and in the notes to the consolidated financial statements containedin our Registration Statement. There were no significant changes to ourcritical accounting policies during the three months ended March 31, 2004.

 

6

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**(2)****          Accounting for stock-based compensation**

 

The Company accounts for stock-basedcompensation based on the provisions of Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued toEmployees* (“APB No. 25”), which states that, for fixed plans,no compensation expense is recorded for stock options or other stock-basedawards to employees that are granted with an exercise price equal to or abovethe estimated fair value per share of the Company’s common stock on the grantdate. In the event that stock options are granted with an exercise price belowthe estimated fair value of the Company’s common stock at the grant date, thedifference between the fair value of the Company’s common stock and theexercise price of the stock option is recorded as deferred compensation.Deferred compensation is amortized to compensation expense on a straight-linebasis over the vesting period of the stock option. The Company has adopted thedisclosure requirements of SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS No. 123”) and SFASNo. 148, *Accounting for Stock BasedCompensation-Transition and Disclosure-an Amendment of FASB StatementNo. 123* (“SFAS No. 148”), which requires compensationexpense to be disclosed based on the fair value of the options granted at thedate of the grant.

 

Had compensation cost for theCompany’s stock option plan been determined based on the fair value at thegrant dates for awards under the plan consistent with the method required bySFAS No. 123, the Company would have reported the pro forma net lossamounts indicated below.

 
|                                                                                              |   | **Three  Months Ended March 31,** |   |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
| **(in thousands, except per share data)**                                                         |   | **2004**                               |   | **2003** |   |
|                                                                                              |   |                                   |   |   |   |
| Net loss, as reported                                                                             |   | $                                      | (6,368 | ) | $ | (4,538 | ) |
| Add: Stock-based compensation expense  included in reported net loss                              |   | 401                                    |   | 84 |   |
| Deduct: Total stock-based compensation  expense determined under fair value method for all awards |   | (441                                   | )      | (135 | ) |
| Pro forma net loss                                                                                |   | $                                      | (6,408 | ) | $ | (4,589 | ) |
|                                                                                              |   |                                   |   |   |   |
| Net loss per share (basic and diluted) as  reported                                               |   | $                                      | (13.10 | ) | $ | (10.29 | ) |
|                                                                                              |   |                                   |   |   |   |
| Pro forma net loss per share (basic and  diluted)                                                 |   | $                                      | (13.18 | ) | $ | (10.40 | ) |

 

The fair value of each optionis estimated on the date of grant using the Black Scholes model with thefollowing weighted average assumptions: volatility rate of 45.96% and 0% forthe periods ended March 31, 2004 and 2003, respectively; risk-freeinterest rate of 3.1% for both periods ended March 31, 2004 and 2003; anexpected life of five years; and a dividend yield of zero.

 

Stock compensation arrangementswith non-employees are accounted for in accordance with SFAS No. 123, asamended by SFAS No. 148, and EITF No. 96-18, *Accountingfor Equity Instruments That Are Issued to Other than Employees for Acquiring,or in Conjunction with Selling, Goods or Services,* using a fairvalue approach.

 

**(3)****          Net loss per share and pro forma net loss per share**

 

Basic and diluted net loss percommon share is calculated in accordance with SFAS No. 128, *Earnings Per Share* (“SFAS No. 128”)and SEC Staff Accounting Bulletin No. 98 (“SAB No. 98”). Under theprovisions of SFAS No. 128 and SAB No. 98, basic net loss per commonshare is calculated by dividing the net loss applicable to common stockholdersby the weighted-average number of unrestricted common shares outstanding duringthe period. Diluted net loss per common share is the same as basic net loss percommon share, since the effects of potentially dilutive securities areantidilutive for all periods presented. Fully diluted shares outstanding for the periods ended March 31,2004 and 2003, would have been 16,672,341 and 12,114,283, respectively.

 

7

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Thefollowing table sets forth the computation of net income (numerator) and shares(denominator) for earnings per share:

 
|                                                                                               |   | **Three  Months Ended March 31,** |   |
|----------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
| **(in thousands)**                                                                                 |   | **2004**                               |   | **2003** |   | **2004** |   |
|                                                                                               |   |                                   |   |   |   | **Pro Forma** |   |
| **Numerator:**                                                                                     |   |                                   |   |   |   |   |   |
| Net income                                                                                         |   | $                                      | (6,368 | ) | $ | (4,538 | ) | $ | (6,368 | ) |
|                                                                                               |   |                                   |   |   |   |   |   |
| **Denominator:**                                                                                   |   |                                   |   |   |   |   |   |
| Weighted average shares outstanding used  for basic income per share                               |   | 486                                    |   | 441 |   | 486 |   |
| Pro forma adjustments to reflect assumed  weighted average effect of conversion of preferred stock |   | —                                 |   | — |   | 15,448 |   |
|                                                                                               |   |                                   |   |   |   |   |   |
| Weighted average shares outstanding used  for basic income per share                               |   | 486                                    |   | 441 |   | 15,934 |   |
| Common Stock Equivalents                                                                           |   | —                                 |   | — |   | — |   |
|                                                                                               |   |                                   |   |   |   |   |   |
| Weighted average shares outstanding used  for diluted income per share                             |   | 486                                    |   | 441 |   | 15,934 |   |
|                                                                                                    |        |                                        |        |  |  |  |  |  |  |  |

 

The unaudited pro forma shares used to compute basic and diluted netloss per share includes the weighted average number of common sharesoutstanding and conversion of all outstanding shares of preferred stock into commonshares.

 

**(4)****          Pro forma stockholders’ equity**

 

On April 21,2004, the Company completed its IPO of 6,000,000 shares of common stock at$8.00 per share. The Company raised an aggregate of $48 million beforeunderwriters’ discounts and offering expenses. Net proceeds to the Company wereapproximately $43 million (See Note 12). The Company had granted the underwriters a 30-day option to purchase upto an additional 900,000 shares of common stock from the Company to coverover-allotments, if any. This option was exercised in full on May 12, 2004 andthe closing occurred on May 17, 2004 with net proceeds to the Company ofapproximately $6.7 million.  Uponcompletion of the Company’s IPO, all shares of the convertible preferred stockoutstanding at March 31, 2004 were automatically converted into 15,495,815shares of common stock.  The pro formastockholders’ equity at March 31, 2004 reflects the conversion of allpreferred stock into common stock.

 

**(5)****          Property and equipment**

 

Property and equipment consisted of the following:

 
| **(in thousands)**             |   | **March 31,  2004** |   | **December 31,  2003** |   |
|--------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                           |   |                     |   |                        |   |
| Laboratory equipment           |   | $                        | 1,419  |                        | $      | 1,387 |   |
| Office furniture and equipment |   | 825                      |   | 611                         |   |
| Leasehold improvements         |   | 3,606                    |   | 3,195                       |   |
| Manufacturing equipment        |   | 650                      |   | 632                         |   |
| Computer equipment             |   | 1,244                    |   | 1,170                       |   |
| Property and equipment, gross  |   | 7,744                    |   | 6,995                       |   |
| Less Accumulated depreciation  |   | (3,762                   | )      | (3,434                      | )      |
| Property and equipment, net    |   | $                        | 3,982  |                        | $      | 3,561 |   |

 

8

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**(6)****          Accrued expenses**

 

Accrued expenses consisted ofthe following:

 
| **(in thousands)**                |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-----------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                              |   |                     |   |                        |   |
| Salary related expense            |   | $                        | 577    |                        | $      | 546 |   |
| Clinical research and trial costs |   | 627                      |   | 607                         |   |
| Contracted research costs         |   | 133                      |   | 165                         |   |
| Deferral loan premium             |   | 160                      |   | 139                         |   |
| Accounting and legal fees         |   | 887                      |   | 664                         |   |
| Leasehold improvements            |   | 141                      |   | 40                          |   |
| Other                             |   | 618                      |   | 626                         |   |
|                              |   |                     |   |                        |   |
| Accrued expenses                  |   | $                        | 3,143  |                        | $      | 2,787 |   |

 

**(7)****         ****Debt**

 

As of March 31, 2004, theCompany had an aggregate of $7.1 million of debt outstanding under $12.0million of credit facilities with two lending institutions.

 

The carrying value of long-termdebt is as follows:

 
| **(in thousands)**                                  |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-----------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                |   |                     |   |                        |   |
| The $7.0 million credit facility                    |   | $                        | 3,364  |                        | $      | 3,939 |   |
| The $5.0 million equipment line of credit  facility |   | 3,775                    |   | 3,213                       |   |
|                                                |   | 7,139                    |   | 7,152                       |   |
| Less:   current portion of long term debt      |   | (3,670                   | )      | (3,360                      | )      |
|                                                |   |                     |   |                        |   |
| Long term debt                                      |   | $                        | 3,469  |                        | $      | 3,792 |   |

 

As of March 31, 2004 and2003, interest rates in effect for outstanding obligations under the creditfacilities ranged from 6.75% to 9.74% and 6.75% to 9.25%, respectively.

 

All the credit facilities aresubject to certain covenants, including maintaining a minimum level of earningsbefore interest, taxes, depreciation and amortization, as defined in the loanagreements, maintaining a minimum percentage of our cash available forinvesting with the lending institution and providing audited financialstatements within 120 days after the close of the fiscal year.  The Company was in compliance with itscovenants for the three months ended March 31, 2004.

 

As of March 31, 2004, thesecurity deposit balance with one of our lenders was $479,000. The full amountof the deposit was returned to the Company in May 2004 after completion of itsIPO, and as such, the balance was recorded as a current asset in the balancesheet.

 

**(8)****          Commitments and contingencies**

 

In the ordinary course of itsbusiness, the Company makes certain indemnities, commitments and guaranteesunder which it may be required to make payments in relation to certaintransactions. These include indemnities of clinical investigators, consultantsand contract research organizations involved in the development of theCompany’s clinical stage products. The duration of these indemnities, commitmentsand guarantees varies, and in certain cases, is indefinite. The majority ofthese indemnities, commitments and guarantees do not provide for any limitationof the maximum potential future payments the Company could be obligated tomake.

 

9

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The Company has not recordedany liability for these indemnities, commitments and guarantees in theaccompanying consolidated balance sheets. However, the Company accrues forlosses for any known contingent liability, including those that may arise fromindemnification provisions, when future payment is probable. No such losseshave been recorded to date.

 

In August 2000, theCompany entered into a development, license and supply agreement with OrthoClinical Diagnostics, Inc. (“Ortho”), a subsidiary of Johnson andJohnson, Inc., whereby the Company licensed certain rights to itstechnology and assumed certain development obligations for its cancerdiagnostic product candidates. In exchange Ortho agreed to market and distributethe Company’s cancer diagnostic product candidates. On November 10, 2003,the Company executed an amendment to this agreement whereby all of the rightsand responsibilities of Ortho were transferred to Veridex. In addition, theCompany and Veridex re-negotiated certain clinical development and regulatorymilestones. The agreement has a term of 20 years and may be terminatedearlier by either party under certain conditions. The Company is not aware ofany intentions by Veridex to terminate the agreement.

 

In connection with thedevelopment, license and supply agreement, Veridex made a $1.5 millionup-front, non-refundable license fee payment to the Company.  Under this agreement, Veridex is obligatedto pay us approximately 30% of their net sales from the sale of reagents, testkits, and certain other consumable products and disposable items. In addition,the Company will receive additional payments from Veridex if the Companyachieves certain development and sales milestones as defined in the DevelopmentAgreement. In March 2001, January 2003 and May 2003, Veridexmade payments of $500,000, $500,000 and $1.5 million, respectively.  These were nonrefundable payment to theCompany for the completion of certain of these milestones. The up-front licensefee and the milestone payments have been deferred and were being amortized on astraight-line basis over the estimated development period from date of receiptthrough December 31, 2003. Under the terms of the development, license andsupply agreement, the Company is required to invest in related research basedon a percentage of sales as defined in the development, license and supplyagreement.  In addition, Johnson &Johnson Development Corporation, also a wholly-owned subsidiary of Johnson andJohnson (“J&J Sub”) purchased $5 million of the Company’sSeries E Preferred Stock in 2000. In December 2001 and July 2003, J&J Sub purchased$3 million and $3.3 million of Series F Preferred Stock,respectively.

 

**(9)****         ****Related parties**

 

As of March 31, 2004,J&J Sub beneficially owned 11% of the Company’s capital stock (See note8).  During the period fromAugust 2000 until December 31, 2003, the Company received$4.0 million in license and milestone payments from Veridex, and werecognized the entire amount as license revenue from related party during thatperiod. We received an additional $500,000 in milestone receipts related toproduct development during the three month period ended March 31, 2004. Wewill recognize this receipt as revenue over the estimated life of the relatedproduct which we estimate will end on December 31, 2007. We recognized$31,000 as revenue in the three months ended March 31, 2004 and $280,000for the three months ended March 31, 2003 under this agreement.  In addition, the Company sold an instrumentsystem to Veridex in January 2004 and recognized revenue of $103,000 asinstrument revenue from related party. The Company recorded these revenues as “License revenue from relatedparty” in the consolidated statement of operations. As of March 31, 2004and 2003, the Company had a receivable from Veridex of $212,000 and $0,respectively.  These receivables arerecorded in “Accounts receivables” and “Other assets” in the consolidatedbalance sheet.

 

In August 2003, theCompany sold Series F Preferred Stock and entered into a License andSupply Agreement (“License and Supply Agreement”) with a corporation. TheCompany received $400,000 in proceeds for the combined transaction. Becauseshares of the Company’s Series F Preferred Stock were valued at $4.00 pershare in a similar transaction, the same value was applied to the shares inthis transaction. The amount above the $4.00 per share value of the shares ofthe Company’s Series F Preferred Stock was deemed attributable to theLicense and Supply Agreement and recorded as deferred license revenue. TheCompany recorded this $80,000 premium as deferred license revenue and amortizesit into income over the period of the exclusive supply arrangement with thecorporation, which is two years. As of March 31, 2004, the unamortizeddeferred license revenue related to this arrangement amounted to $55,000, andthe Company recognized revenue of $10,000 related to the arrangement andrecorded it as “License revenue from related party” in the consolidatedstatement of operations for the first quarter of 2004.

 

10

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**(10)****   Supplemental expense information**

 

The supplemental expenseinformation below provides additional information about the amounts recorded asresearch and development expenses and general and administrative expenses inthe accompanying statements of operations:

 

**Researchand development expenses**

 

Research and developmentexpenses consisted of the following: 

 
|                             |   | **Three  months ended March 31,** |   |
|----------------------------------|--------|----------------------------------------|--------|
| **(in thousands)**               |   | **2004**                               |   | **2003** |   |
|                             |   |                                   |   |   |   |
| Salaries, benefits and taxes     |   | $                                      | 2,349  |   | $ | 1,730 |   |
| Laboratory supplies and expenses |   | 1,131                                  |   | 255 |   |
| Instrument development costs     |   | 192                                    |   | 883 |   |
| Clinical trial expenses          |   | 399                                    |   | 219 |   |
| Contracted research costs        |   | 312                                    |   | 496 |   |
| All others                       |   | 596                                    |   | 363 |   |
|                             |   |                                   |   |   |   |
|                             |   | $                                      | 4,979  |   | $ | 3,946 |   |

 

**Generaland administrative expenses**

 

General and administrativeexpenses consisted of the following: 

 
|                         |   | **Three  months ended March 31,** |   |
|------------------------------|--------|----------------------------------------|--------|
| **(in thousands)**           |   | **2004**                               |   | **2003** |   |
|                         |   |                                   |   |   |   |
| Salaries, benefits and taxes |   | $                                      | 658    |   | $ | 378 |   |
| Depreciation expense         |   | 327                                    |   | 240 |   |
| Legal and professional fees  |   | 294                                    |   | 184 |   |
| All other expenses           |   | 166                                    |   | 201 |   |
|                         |   |                                   |   |   |   |
|                         |   | $                                      | 1,445  |   | $ | 1,003 |   |

 

**(11)****   Intellectual property**

 

Protection of the Company’sintellectual property is a strategic priority for the Company’s business, andthe Company relies on a combination of patent, trademark, copyright and tradesecret laws to protect its interests. The Company’s ability to protect and useits intellectual property rights in the continued development and commercializationof its technologies and products, to operate without infringing the proprietaryrights of others and to prevent others from infringing its proprietary rightsis crucial to the Company’s continued success. The Company will be able toprotect its products and technologies from unauthorized use by third partiesonly to the extent that its products and technologies are covered by valid andenforceable patents, trademarks or copyrights, or are effectively maintained astrade secrets, know-how or other proprietary information.

 

In connection with thecommercial distribution of its products, the Company also have obtainedtrademark registrations in the US for “Immunicon” and the Immunicon logo. TheCompany has filed a number of trademark registration applications inpreparation for commercial distribution activities with respect to futureproducts. Much of the proprietary software and related information utilized inthe Company’s instrument systems is protected by the Company’s copyright rightsor by such rights that the Company has licensed.

 

The Company devotes significantresources to obtaining, enforcing and defending patents and other intellectualproperty and protecting its other proprietary information.

 

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The Company has a portfolio ofissued patents and patent applications, which we believe provides patentcoverage for our proprietary technologies and products.  As of April 30, 2004, the Company’sintellectual property estate consisted of 51 issued patents, 115 pending patentapplications, six issued trademarks and 22 pending trademarks registrations.

 

**(12)****   Subsequent events**

 

On April 21, 2004, theCompany completed its IPO of 6,000,000 shares of its common stock at $8.00 pershare, for an aggregate price of $48 million. All of the shares were sold by the Company.  The Company had granted the underwriters a 30-day option topurchase up to an additional 900,000 shares of common stock from the Company tocover over-allotments, if any. This option was exercised in full on May 12,2004 and closing occurred on May 17, 2004 with net proceeds to the Company ofapproximately $6.7 million.

 

The net proceeds to the Companyof approximately $49.6 million, including the exercise of the over-allotment,will be used for product commercialization, including manufacturing, and forclinical trials, research and development, capital expenditures, workingcapital and other general corporate purposes. The Company’s shares trades on The Nasdaq National Market System under thesymbol “IMMC.” In connection with the IPO, the Company incurred costs totaling$1.7 million to date, and has included these costs on the March 31, 2004consolidated balance sheet as “Assets Related to Financing Activities.”

 

Upon the effectiveness of theregistration statement filed with the Securities and Exchange Commission onApril 15, 2004, the Company granted options to all non-officer employeesto purchase a combined total of 19,900 shares of common stock.  On this same day, the Company hired its VicePresident and Chief Counsel who was granted options to purchase 34,000 sharesof common stock.  These options wereissued with an exercise price of $8.00 per share, the fair market value on thatdate, and vest over a four year period.

 

On April 16, 2004, uponcompletion of the Company’s IPO, all shares of the convertible preferred stockoutstanding on that date were automatically converted into 15,495,815 shares ofcommon stock. 

 

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**Item2****.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

***Forward-LookingStatements***

 

*The information contained in this quarterlyreport on Form 10-Q includes “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995. These forward-lookingstatements are often preceded by words such as “hope,” “may,” “believe,”“anticipate,” “plan,” “expect,” “intend,” “assume,” “will” and similarexpressions.  The Company cautionsinvestors not to place undue reliance on the forward-looking statementscontained in this report. Forward-looking statements speak only as of the dateof this report, reflect management’s current expectations and involve certainfactors, such as risks and uncertainties, that may cause actual results to befar different from those suggested by the Company’s forward-lookingstatements.  These factors include, butare not limited to, risks associated with the Company’s dependence on Veridex;the Company’s capital and financing needs; research and development andclinical trial expenditures; commercialization of the Company’s productcandidates; the Company’s ability to use licensed products and to obtain newlicenses from third parties; the Company’s ability to manage its growth;obtaining necessary regulatory approvals; reliance on third party manufacturersand suppliers; reimbursement by third party payors to the Company’s customersfor the Company’s products; compliance with applicable manufacturing standards;the ability to earn license and milestone payments under the Company’sagreement with Veridex; retaining key management or scientific personnel;delays in the development of new products or to planned improvements to theCompany’s products; effectiveness of the Company’s products compared tocompetitors’ products; protection of the Company’s intellectual property andother proprietary rights; conflicts with the intellectual property of thirdparties; product liability lawsuits that may be brought against the Company;labor, contract or technical difficulties; and competitive pressures in theCompany’s industry.*

 

*The foregoing factors are discussed in moredetail in the section entitled “Risk Factors” contained elsewhere in thisreport and in the****Company’s filings with the Securities and ExchangeCommission. The Company does not intend to update any of these factors or topublicly announce the results of any revisions to any of these forward-lookingstatements other than as required under the federal securities laws.*

 

**OVERVIEW**

 

We are developing andcommercializing proprietary cell-based research and diagnostic products with aninitial focus on cancer. We believe that our products and underlying technologyplatforms also have applications in the development of cancer drugs and cancerresearch. Furthermore, we believe that our proprietary technologies also haveapplications in fields of medicine outside of cancer.

 

We were incorporated in 1983.Since our inception, we have focused our activities on life science researchand product development. In March 1999, we obtained $10.6 million infinancing from the sale of our convertible preferred stock. As a result, wesubstantially increased investment in our cancer-related products andtechnologies, hired additional key management team members and redefined ourbusiness strategy. Since 1999, we have devoted substantially all of our effortsto the development of our cell analysis platforms and diagnostic tools forapplication in cancer. We are a development stage company and have incurredlosses in the last five fiscal years. As of March 31, 2004, we had an accumulated deficit of$70.0 million. We expect to incur substantial losses, which may increaseover the next several years as we:

 

•                                          conductclinical trials to expand the uses of our technologies in cancers other thanmetastatic breast cancer and to earlier stages of the disease in breast andother cancers;

 

•                                          incurcosts to place our cell analysis systems with customers and to support othercommercialization activities;

 

•                                          expandand scale-up our manufacturing capability for both instruments and reagentkits; and

 

•                                          developapplications of our technologies for diseases other than cancer, such ascardiovascular and infectious diseases and for products to support drugdevelopment in cancer research.

 

We are highly dependent on ourcollaboration with Veridex. In addition, we expect to continue to generatesubstantial losses for at least the next two years. We will need to obtainadditional funding to support the activities described above.

 

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**Veridexcollaboration**

 

We expect that substantiallyall of our revenues from product sales for at least the years 2004 and 2005will be derived from our relationship with Veridex. We have a development,license and supply agreement with Veridex, which provides Veridex withexclusive worldwide rights to commercialize cell analysis products based on ourtechnologies in the field of cancer. Veridex received 510(k) clearance from the Federal Drug Administration(“FDA”) for the use of CellSearch Epithelial Cell Kit in the management ofmetastatic breast cancer on January 21, 2004. We are responsible for allcellular research and development, including the costs of clinical development.Upon any sale by Veridex of these products, including reagents, test kits,consumable products and disposable items, Veridex is obligated to pay usapproximately 30% of net sales.

 

Beginning withcommercialization of the first product under this agreement, we are obligatedto invest in certain research and development activities an amount equal to atleast 10% of Veridex’s net sales, excluding revenues from instrument sales,from these products. However, beginning with the first calendar year after theamount of these net sales exceeds $250 million, we are only required to investan amount equal to at least 8.5% of these net sales. We are also responsiblefor manufacturing reagents in bulk and delivering them to Veridex. We areresponsible for all instrument manufacturing and certain ancillary products. Webelieve that we have manufacturing capacity available at our existingfacilities to satisfy commercial demand through 2005. Veridex is responsiblefor filling and packaging costs for the reagents, as well as sales, marketing,distribution, customer and technical support and field service of our cancerproducts, including instrumentation. We have retained worldwidecommercialization rights to all non-cancer applications of our technologies.

 

The pace and outcome of bothour commercialization efforts and clinical development programs are difficultto predict. As a result, we anticipate that our quarterly results willfluctuate for the foreseeable future. In view of this variability and of ourlimited operating history, we believe that period-to-period comparisons of ouroperating results are not meaningful and you should not rely on them asindicative of our future performance.

 

**Revenues**

 

We have not generated anysignificant product revenues since our inception. We initiated sales activitiesfor instrument platforms and reagent kits for research use only (“RUO”) in thefirst quarter of 2004. Subject to the clearance of a 510(k) for the CellSearchEpithelial Cell Control submitted by Veridex in April 2004, wecurrently expect that we and Veridex will launch products for *in vitro*diagnostic (“IVD”) use in the third quarter of 2004. We designated the periodfrom August 2000 until December 31, 2003 as the initial productdevelopment period. During that period we received $4.0 million in licenseand milestone payments from Veridex, and we recognized the entire amount aslicense revenue from related party during that period. We received anadditional $500,000 in milestone receipts related to product development duringthe three month period ended March 31, 2004. We will recognize thesereceipts as revenue over the estimated life of the related product which weestimate will end on December 31, 2007. We recognized $31,000 as revenuein the three months ended March 31, 2004.

 

We earned license revenue fromVeridex for completing research and development related milestones defined inour agreement with Veridex. We can earn up to an additional $6.0 millionin license revenue from Veridex for research-related milestones. We estimatethat we will earn these license revenues from research milestones over the nextthree to five years. Therefore, we expect that the trend of license revenuewill fluctuate. Also, we expect to continue to invest significant amounts inresearch and development, particularly in clinical trials and manufacturingdevelopment, and therefore we do not believe that these expenses will fluctuatein relation to when we expect to earn the milestone revenue referenced above.

 

Under the development licenseand supply agreement with Veridex, we also can earn up to $10.0 million inrevenue for achieving defined sales targets. Our agreement with Veridexprovides for payments to us by Veridex of $2.0 million, $3.0 millionand $5.0 million in the first year that sales recognized by Veridex of theCellSearch reagent products to third parties, excluding sales of instruments,reach $250 million, $500 million and $1 billion, respectively.We do not estimate that we will reach any of these sales targets until at least2007 and therefore do not anticipate earning any sales-based milestone revenuesuntil then.

 

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**Researchand development expenses**

 

Our research and developmentexpenses consist of expenses incurred in developing reagent kits and instrumentplatforms and ancillary products, as well as the clinical research and trialcosts to test these kits and systems. These expenses consist primarily of:

 

•                                          salariesand related expenses for personnel;

 

•                                          paymentsto third parties for instrument development activities and for research relatedsupport, expenses for materials consumed in research experiments and clinicalresearch and clinical trials; and

 

•                                          feespaid to professional service providers in conjunction with independentlymonitoring our clinical trials and acquiring and evaluating data in conjunctionwith our clinical trials.

 

We are responsible for makingroyalty payments of 1% of sales of our reagents incorporating intellectualproperty licensed to us under a license agreement with the University of Texas.No royalty payments have been made to the University of Texas as ofMarch 31, 2004.

 

We expense research anddevelopment costs as incurred. We believe that significant investment inproduct development is a competitive necessity and plan to continue theseinvestments in order to realize the potential of our product candidates andproprietary technologies. We expect to continue to incur significant costs forclinical research and for trials and to make investments to improve ourinstrument platforms and reagents. From inception through March 31, 2004,we have incurred $59.5 million in total research and development expenses,the majority of which relate to our cell-based research and diagnosticproducts.

 

**Generaland administrative expenses**

 

Our general and administrativeexpenses consist primarily of salaries and other related costs for personnel inexecutive, finance, accounting, information technology, legal and humanresource functions. Other costs include facility costs not otherwise includedin research and development expense and professional fees for legal andaccounting services. From inception through March 31, 2004, we haveincurred $19.9 million in general and administrative expenses.

 

**Stock-basedcompensation expenses**

 

Stock-based compensationexpense, which is a non-cash charge, results from stock option grants toemployees at exercise prices below the fair value of the underlying commonstock resulting in our recording stock-based compensation expense associatedwith such grants.  Stock-basedcompensation expense is also recorded for stock option and warrant grants tonon-employees and for restricted stock grants provided to directors andadvisors in lieu of cash compensation. We amortize the deferred stock-basedcompensation to operating expenses over the vesting periods of the options andgrants, subject to adjustment for forfeiture during the vesting period. As ofMarch 31, 2004, we have recognized $5.1 million in deferredstock-based compensation expense and, from inception through March 31,2004, we have recognized stock-based compensation expense of $1.4 million.

 

**Interestincome and (expense)**

 

Interest income consists ofinterest earned on our cash and cash equivalents. Interest expense consists ofinterest incurred on equipment leases and on debt financings.

 

**CRITICALACCOUNTING POLICIES**

 

We prepare our consolidatedfinancial statements in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses. We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. Our critical accountingpolicies include:

 

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•                                          revenuerecognition;

 

•                                          accountingfor research and development expenses;

 

•                                          estimatingthe value of our equity instruments for use in deferred stock-basedcompensation calculations; and

 

•                                          accountingfor income taxes.

 

**Revenuerecognition**

 

In accordance with theSecurities and Exchange Commission (the “SEC”) Staff Accounting BulletinNo. 101, *Revenue Recognition inFinancial Statements,* up-front non-refundable license fees arerecorded as deferred revenue and recognized over the estimated developmentperiod. From inception through March 31, 2004, we have not generated anysignificant product revenue. Since August 2000, we have received$4.5 million in license and milestone payments from Veridex. License andmilestone payments have been deferred and amortized on a straight-line basisover the product development period as defined for each specific product.Amounts received as reimbursement for research and development expenses arerecorded as a reduction in research and development expense as the relatedcosts are incurred.

 

**Accountingfor research and development expenses**

 

Our research and developmentexpenses are primarily composed of costs associated with product development forour cancer diagnostic tests. These expenses include the development costs forinstrument platforms, clinical trial and development costs and the costsassociated with non-clinical support activities such as manufacturing processdevelopment and regulatory services. Clinical development costs representinternal costs for personnel, external costs incurred at clinical sites andcontracted payments to third party clinical research organizations to performcertain clinical trials. We have a discovery research effort, which isconducted in part on our premises by our scientists and in part throughcollaborative agreements with academic laboratories. Most of our research anddevelopment expenses are the result of the internal costs related directly toour employees. We accrue external costs for clinical trials based on theprogress of the clinical trials, including patient enrollment, progress by theenrolled patients through the trial, and contracted costs with clinicalresearch organizations and clinical sites. We record internal costs primarilyrelated to personnel in clinical development and external costs related tonon-clinical trials and basic research when incurred. Significant judgments andestimates must be made and used in determining the accrued balance in anyaccounting period. Actual costs incurred may or may not match the estimatedcosts for a given accounting period. We expect that expenses in the researchand development category will increase for the foreseeable future as we addpersonnel, expand our clinical trial activities and increase our discoveryresearch capabilities. The amount of the increase is difficult to predict dueto the uncertainty inherent in the timing of clinical trial initiations,progress in our discovery research program, the rate of patient enrollment andthe detailed design of future trials. In addition, the results from each of ourtrials will influence the number, size and duration of both planned andunplanned trials.

 

**Valuationof equity instruments**

 

We record compensation expenserelated to options issued to consultants and options issued to employees atless than the fair value. These expenses are based on the fair value of theoptions and common stock. Because there has been no public market for ourcommon stock, we have estimated the fair value of these equity instrumentsusing various valuation methods, including the minimum value and theBlack-Scholes methods.  When stockoptions are granted with an exercise price below the estimated fair value ofour common stock at the grant date, the difference between the fair value ofour common stock and the exercise price of the stock option is recorded asdeferred compensation. Deferred compensation is amortized to compensationexpense on a straight-line basis over the vesting period of the stock option.

 

**Accountingfor income taxes**

 

We must make significantmanagement judgments when determining our provision for income taxes, ourdeferred tax assets and liabilities and any valuation allowance recordedagainst our net deferred tax assets. At March 31, 2004, we recorded a fullvaluation allowance of $29.8 million against our net deferred tax assetbalance, due to uncertainties related to our deferred tax assets as a result ofour history of operating losses. The valuation allowance is based on ourestimates of taxable income by jurisdiction in which we operate and the periodover which our deferred tax assets will be recoverable. In the event thatactual results differ from these estimates or we adjust these estimates infuture periods we may need to change the valuation allowance, which couldmaterially impact our financial position and results of operations.

 

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**RESULTSOF OPERATIONS**

 

**Threemonths ended March 31, 2004 and 2003**

 

**Revenue**

 

We segregate revenue intolicense revenue received from related party and instrument revenue receivedfrom related party and other revenue. License revenue from related partydecreased by $239,000 to $41,000 for the three months ended March 31, 2004from $280,000 for the three months ended March 31, 2003. SinceAugust 2000, we have received $4.5 million in license and milestonereceipts under our agreement with Veridex, including $2.0 million inlicense and milestone receipts in 2003. License and milestone receipts have been deferred and amortized on astraight-line basis over the product development period as defined for eachspecific product. We recognized $4.0 million in license and milestone revenuein the period from August 2000 to December 31, 2003. We received anadditional $500,000 in February 2004 and recognized $31,000 as revenue inthe three months ended March 31, 2004. In August 2003, we enteredinto another license and supply agreement with a company whereby we licensed therights to certain of our technology and sold 80,000 shares of our Series FConvertible Preferred Stock to the same company at $5.00 per share. Werecognized $80,000 of the proceeds from this sale as a deferred license feepayment and are amortizing this fee over two years. We recognized $10,000 ofthis license fee in the three months ended March 31, 2004.

 

We sold an instrument system toVeridex in January 2004 and recognized revenue of $103,000 as instrumentrevenue from related party.

 

Other revenue decreased by$146,000 to $13,000 in the first three months of 2004 from $159,000 in thefirst three months of 2003. Other revenue consists principally of fundsreceived from government related grants and are expected to fluctuate from yearto year.

 

**Researchand development expenses**

 

Research and developmentexpenses increased $1.1 million, or by 26.2%, to $5.0 million in the firstthree months of 2004 from $3.9 million in the first three months of 2003.Salary and salary related costs were $2.3 million or 35.8% higher in thefirst quarter of 2004 as compared to 2003 principally due to more personnelengaged in research activities in 2004 than in 2003 as well as higherstock-based compensation expenses recognized in 2004. We hired additionalpersonnel throughout 2003 to complete the development of certain instrumentplatforms and to complete the development of our initial cancer monitoringtest. Stock-based compensation expenses were $282,000 in the first quarter of2004 versus $19,000 in the first quarter of 2003. Laboratory supplies andexpenses were $1.1 million, or $876,000 higher, in the first quarter of 2004than in 2003. The increase in costs was related principally to preparation forthe launch of our initial cancer diagnostic instrument platforms and reagentkits. We also continued to invest in the development of other applications ofour technology in areas both within and outside the field of cancerdiagnostics. Instrument development costs decreased by $691,000 to $192,000 inthe quarter ended March 31, 2004 from $883,000 in the three months endedMarch 31, 2003.

 

The principal development workon our CellTracks AutoPrep System and our associated CellSpotter Analyzer wascompleted by mid-2003 and costs associated with development of the instrumentsdeclined thereafter. We anticipate that we will continue to engage ininstrument system improvement activities in 2004 and beyond. Therefore, it islikely that instrument development costs will fluctuate in future periods.Clinical trial expenses increased in the first quarter of 2004 by $180,000 to$399,000 from $219,000 in the first

 

quarter of 2003. We completedour initial pivotal clinical trial for breast cancer monitoring in the firstquarter of 2003 and therefore our costs were higher in 2003. The majority ofeffort in this area in 2003 was related to data analysis and preparation of theassociated regulatory filing with the FDA for the breast cancer test. Weanticipate increasing our clinical trial expenditures in the remainder of 2004and beyond in order to expand the uses of our technology to other cancers andto earlier stages of the disease. Contracted research costs were $184,000 lowerin the first quarter of 2004 than in the first quarter of 2003. We employedcontracted support in 2003. We increased our efforts in this area in 2003 tohelp with certain validation activities related to preparing our manufacturingprocesses for initial product launch. A summary of the principal components ofour research and development costs for the three months ended March 31,2004 and 2003 are shown below:

 

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|                                    |   | **Three  months ended  March 31,** |   |
|-----------------------------------------|--------|-----------------------------------------|--------|
| **Research and development expenses**   |   | **2004**                                |   | **2003** |   |
|                                    |   |                                    |   |   |   |
|                                    |   | **(in  thousands)**                     |   |
|                                    |   |                                    |   |   |   |
| Salaries, benefits and taxes            |   | $                                       | 2,349  |   | $ | 1,730 |   |
| Laboratory supplies and expenses        |   | 1,131                                   |   | 255 |   |
| Instrument development costs            |   | 192                                     |   | 883 |   |
| Clinical trial expenses                 |   | 399                                     |   | 219 |   |
| Contracted research costs               |   | 312                                     |   | 496 |   |
| All others                              |   | 596                                     |   | 363 |   |
|                                    |   |                                    |   |   |   |
| Total research and development expenses |   | $                                       | 4,979  |   | $ | 3,946 |   |

 

We expect salary relatedexpenses to increase in future years as we hire additional personnel andcontinue to invest in research and clinical trial activities. We believe thatcosts related to laboratory supplies and expenses will be higher in future periodsas we develop:

 

•                                          researchand diagnostic products for cancers other than breast cancer;

 

•                                          testsdesigned to diagnose cancer earlier in the disease; and

 

•                                          otherdiagnostic tools for use in diseases such as cardiovascular and infectiousdiseases, and for use in drug development.

 

We expect instrumentdevelopment costs as a percentage of total research and developmentexpenditures generally to be lower in future years because we will havecompleted the principal development work on our platforms in 2003. We plan tocontinue to invest in instrument development to improve performance of thevarious components of the system and to increase the capabilities of the systemto process larger sample volumes.

 

We expect clinical expenses tobe higher in future years as we expand our clinical trials to investigate theeffectiveness of our cancer diagnostic products on cancers other than breastcancer and in earlier stages of the disease in breast and other cancers, and aswe develop other diagnostic tools for use in diseases such as cardiovascularand infectious diseases and for use in tools for drug development.

 

Each of our research anddevelopment programs is subject to risks and uncertainties, including therequirement to obtain regulatory approval, that are outside of our control. Asa result of these risks and uncertainties, we are unable to predict the periodin which we will achieve profitability. For example, our clinical trials may besubject to delays or rejections for a variety of reasons, such as our inabilityto obtain applicable clearances from the FDA or institutional or ethical reviewboards or to enroll patients at the rate that we expect. Moreover, the productcandidates we are developing must overcome significant technological andmarketing challenges before they can be successfully commercialized.

 

**Generaland administrative expenses**

 

General and administrativeexpenses increased by $442,000, or 44.1%, to $1.4 million in the firstquarter of 2004 from $1.0 million in 2003. Salary related costs increasedby $280,000 in the first quarter of 2004 due principally to increases inpersonnel in the second half of 2003 and the first quarter of 2004. We hiredadditional accounting and administrative personnel in order to prepare for theadditional administrative activities related to our initial public offering ofcommon stock and in preparation for the commercial launch of our initialproducts. Depreciation expense increased by $87,000 to $327,000 in the firstquarter of 2004 from $240,000 in 2003 as a result of an expansion of ourmanufacturing facility in 2003 at a cost of $1.5 million in preparationfor the commercial launch of our products.

 

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**Interestincome**

 

Interest income declined by$24,000, or 27.9% in the first quarter of 2004 to $62,000 from $86,000 in 2003.The decrease in interest income was primarily a result of a decrease in averageinvested cash balances in 2004 and a lower average interest rate on ourinvested cash balances.

 

**Interestexpense**

 

Interest expense increased by$49,000, or 43.0%, to $163,000 for the first quarter of 2004 from $114,000 for2003. The increase was due to higher average debt outstanding in 2004 versus2003 principally due to the additional $7.0 million equipment line ofcredit that we entered into in April 2003.

 

**Stock-basedcompensation expenses**

 

Stock-based compensationexpenses were $401,000 and $84,000 for the three months ended March 31,2004 and 2003, respectively. This increase was due to an increase in the numberof options granted to employees and consultants and an increase in the fairvalue of our common stock as compared to the exercise price at issuance. Werecognized these expenses as part of research and development expenses andgeneral and administrative expenses as shown below.

 
|                                               |   | **Three  months  ended  March 31,** |   |
|----------------------------------------------------|--------|------------------------------------------|--------|
| **Stock-based compensation expenses included in:** |   | **2004**                                 |   | **2003** |   |
|                                               |   | **(in  thousands)**                      |   |
|                                               |   |                                     |   |   |   |
| Research and development expenses                  |   | $                                        | 282    |   | $ | 19 |   |
| General and administrative expenses                |   | 119                                      |   | 65 |   |
|                                               |   |                                     |   |   |   |
|                                               |   | $                                        | 401    |   | $ | 84 |   |

 

**IncomeTaxes**

 

We have incurred net operatinglosses since our inception and have consequently not paid any federal, state orforeign taxes. As of March 31, 2004, we had approximately$65.8 million of net operating loss carryforwards and approximately $1.8million in research and development tax credit carryforwards available tooffset future regular and alternative taxable income. If not utilized, thesenet operating loss carryforwards and tax credits will begin to expire in 2005.If we do not achieve profitability, our net operating loss carryforwards may belost. In addition, the Internal Revenue Code places certain limitations on theannual amount of net operating loss carryforwards that can be utilized ifcertain changes in our ownership occur. We are currently not subject to theselimitations.

 

**Netloss**

 

The net loss of$6.4 million in the first quarter of 2004 was $1.8 million, or 27.3%,higher than the loss of $4.5 million in the first quarter of 2003.

 

The net loss per common shareof $13.10 in the first quarter of 2004 was $2.81 per share, or 27.3%, higherthan the loss per common share of $10.29 in the first quarter of 2003.

 

19

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**LIQUIDITY AND CAPITAL RESOURCES**

 

We are a development stage company. We have financed our operationssince inception through private equity and debt financings, license andmilestone revenues from corporate collaborations, capital equipment andleasehold financing, government grants and interest earned on cash andinvestments. Since our inception, we have generated net losses of$70.0 million from operations.

 

On April 21, 2004, the Company completed its initial publicoffering (“IPO”) of 6,000,000 shares of common stock at $8.00 per share. TheCompany raised an aggregate of $48 million before underwriters’ discounts andoffering expenses.  All of the shareswere sold by the Company.  The Companygranted the underwriters a 30-day option to purchase up to an additional900,000 shares of common stock from the Company to cover over-allotments, ifany.  This option was exercised in fullon May 12, 2004 and closing occurred on May 17, 2004 with net proceeds to theCompany of approximately $6.7 million. The net proceeds to the Company of approximately $49.6 million,including the over-allotment, will be used for product commercialization,including manufacturing, and for clinical trials, research and development,capital expenditures, and working capital and other general corporatepurposes.  The Company’s common stocktrades on The Nasdaq National Market System under the symbol “IMMC.” Inconnection with the IPO, the Company incurred costs totaling $1.7 million todate, and has included these costs on the March 31, 2004 consolidatedbalance sheet as “Assets Related to Financing Activities.”

 

Cash and short term investments decreased by $6.0 million in thethree month period ended March 31, 2004 to $24.6 million from$30.6 million as of December 31, 2003.

 

The Company had proceeds from new borrowings of $808,000 and madeprincipal payments of $795,000 in the first three months of 2004 as compared toprincipal payments of $714,000 in the prior year period.

 

Our operating activities used net cash of $4.9 million in the threemonths ended March 31, 2004, $3.9 million in 2003 and$60.9 million from inception through March 31, 2004.  During these periods, we recognizedincreases in expenses caused principally by increases in research anddevelopment and expanded clinical trials, which resulted in increasingoperating cash outflows.

 

We used cash of $749,000 in 2004 in our investing activitiesprincipally in the purchases of property and equipment. Our investingactivities used cash of $495,000 in 2003. We have used $8.9 million in investing activities from inception,almost entirely for the purchase of property and equipment.

 

Our financing activities used cash of $325,000 in the first threemonths of 2004 and $714,000 in 2003. Cash was generated in 2004 principallyfrom the exercise of stock options and warrants. We borrowed $795,000 under ourequipment lines of credit and made principal payments of $808,000 on ouroutstanding debt.  In the first threemonths of 2004, we also paid approximately $575,000 of our fees associated withour IPO.

 

Frominception to March 31, 2004 we raised $1.7 million from the sale ofour common stock, including $1.5 million in 1984 from the sale of 10,000shares of our common stock to three investors, and $85.1 million, net ofissuance costs of $2.1 million, from the sale of our preferred stock.

 

Since March 1999, we also borrowed $16.4 million throughequipment lines of credit and received $4.5 million in milestone receiptsfrom Veridex. Our liquidity requirements are primarily the result of researchand development expenditures, capital equipment expenditures and payments onoutstanding indebtedness. Sales of our common and preferred stock prior to theIPO were as follows:

 

20

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| **Summary of initial sale of common  stock and all sales  of convertible preferred stock** |   | **Year(s)** |   | **Number of  shares** |   | **Price  per share** |   | **Net  proceeds** |       | **Equivalent  common shares** |       |
|--------------------------------------------------------------------------------------------|--------|-------------|--------|-----------------------|--------|----------------------|--------|-------------------|------------|-------------------------------|------------|
|                                                                                       |   |        |   |                  |   |                 |   |              |       |                          |       |
| Initial sale of common stock                                                               |   | 1984        |   | 10,000                |   | $                    | 150.00 |              | $          | 1,500,000                     |       | 10,000 |   |
|                                                                                       |   |        |   |                  |   |                 |   |              |       |                          |       |
| **Convertible  preferred stock**                                                           |   |        |   |                  |   |                 |   |              |       |                          |       |
| Series A                                                                                   |   | 1988        |   | 36,350                |   | 10.00                |   | 363,500           |       | 669,343                       |       |
| Series B                                                                                   |   | 1989        |   | 30,000                |   | 10.00                |   | 300,000           |       | 236,952                       |       |
| Series C                                                                                   |   | 1990        |   | 30,000                |   | 10.00                |   | 300,000           |       | 296,016                       |       |
| Series D                                                                                   |   | 1999, 2004  |   | 33,971,098            |   | 0.32                 |   | 10,828,666        |       | 2,264,744                     |       |
| Series E                                                                                   |   | 2000        |   | 4,588,612             |   | 4.74                 |   | 21,612,236        |       | 3,059,083                     |       |
| Series F                                                                                   |   | 2001, 2003  |   | 13,454,500            |   | 4.00                 |   | 51,942,414        |       | 8,969,677                     |       |
|                                                                                       |   |        |   |                  |   |                 |   |              |       |                          |       |
|                                                                                       |   |        |   |                  |   |                 |   | $                 | 85,346,816 |                          | 15,495,815 |   |
|                                                                                            |        |             |        |                       |        |                      |        |                   |            |                               |            |  |  |

 

As of March 31, 2004, the Company did not have any off balancesheet financing arrangements.

 

The following table summarizes our contractual obligations as well asrelated interest charges on lines of credit at March 31, 2004 and theeffects such obligations are expected to have on our liquidity and cash flowsin future periods.

 
|                                |   | **Payments  due in** |   |
|-------------------------------------|--------|----------------------|--------|
| **Contractual obligations**         |   | **Total**            |   | **2004** |   | **2005 and  2006** |   | **2007 and  2008** |   | **After  2008** |   |
|                                |   | **(in  thousands)**  |   |
|                                |   |                 |   |   |   |   |   |   |   |   |   |
| Lines of credit                     |   | $                    | 8,112  |   | $ | 3,093 |   | $ | 4,718 |   | $ | 301 |   | $ | — |   |
| Operating leases                    |   | 4,890                |   | 537 |   | 1,482 |   | 1,507 |   | 1,364 |   |
| Open purchase order commitments (1) |   | 3,934                |   | 3,934 |   | — |   | — |   | — |   |
|                                |   |                 |   |   |   |   |   |   |   |   |   |
| Total contractual obligations       |   | $                    | 16,936 |   | $ | 7,564 |   | $ | 6,200 |   | $ | 1,808 |   | $ | 1,364 |   |

 

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(1)                                  The amounts includedin open purchase order commitments are subject to performance under thepurchase order by the supplier of the goods or services and do not become ourobligation until such performance is rendered. The amount shown is principally for the purchase of materials for ourinstrument platforms, which we anticipate will be sold by us to customers.

 

We also have contingent obligations for research and development andclinical trial expenditures under our development, license and supply agreementwith Veridex.  In particular we must paythe first $5.0 million in clinical trial costs for the first cellularanalysis product for general population screening for a major cancer, andVeridex is responsible for the next $5.0 million of such clinical trialcosts. We have agreed to negotiate in good faith for the allocation of costs inexcess of $10.0 million. As of March 31, 2004 we have not incurredany costs related to clinical trials for a product for general populationscreening, and we do not anticipate spending any funds on clinical trialstoward such a product through 2004.

 

In addition, if we achieve certain levels of sales of our reagents wemay receive up to an additional $10.0 million in milestone payments fromVeridex although we do not expect to receive any milestone payments related tosales goals until at least 2007.

 

Our agreement with Veridex provides for a total of up to$10.5 million in non-refundable license and milestone payments related toresearch and development activities including up to $1.5 million for theinitial license and up to $9.0 million related to the completion ofcertain instrument and clinical trial milestones. We have received$4.5 million of these milestone payments to date. We expect to earn theremaining $6.0 million over the next three to five years.

 

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The following table summarizes certain information pertaining to thesepotential future milestone payments.

 
| **Milestone**                                                    |   | **Payment  criteria** |                                                                                                                                                                                                                            | **Target  date** |     | **Amount  ($)** |                        |
|------------------------------------------------------------------|--------|-----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------|----------|-----------------|-----------------------------|
|                                                             |   |                  |                                                                                                                                                                                                                            |             |     |            |                        |
| Commercial  readiness for breast cancer therapy monitoring       |   | •                | Steering  committee approves product release for sale of an FDA-approved breast cancer  therapy monitoring system                                                                                                               |             | None     |            | 1,500,000  (see note below) |   |
| Metastatic  colorectal or prostate cancer monitoring             |   | •                | First  patient enrolled in clinical trial                                                                                                                                                                                       |             | 6/30/04  |            | 500,000                     |   |
|                                                             |   | •                | Steering  committee approves regulatory submission                                                                                                                                                                              |             | 11/30/05 |            | 500,000                     |   |
| Prostate cancer                                                  |   | •                | Feasibility  of large blood volume method demonstrated and product concept proposed                                                                                                                                             |             | 9/30/04  |            | 300,000                     |   |
|                                                             |   | •                | First  patient enrolled in clinical trial                                                                                                                                                                                       |             | 6/30/05  |            | 333,000                     |   |
|                                                             |   | •                | Steering  committee approves regulatory submission                                                                                                                                                                              |             | 12/31/07 |            | 500,000                     |   |
| Lung  cancer: adjuvant prognosis and recurrence monitoring       |   | •                | First  patient enrolled in clinical trial                                                                                                                                                                                       |             | 10/31/04 |            | 333,000                     |   |
|                                                             |   | •                | Steering  committee approves progress and data review for clinical trial after  significant percentage of patients properly enrolled                                                                                            |             | 3/31/06  |            | 250,000                     |   |
|                                                             |   | •                | Steering  committee approves regulatory submission                                                                                                                                                                              |             | 12/31/07 |            | 500,000                     |   |
| Colorectal  cancer: adjuvant prognosis and recurrence monitoring |   | •                | First  patient enrolled in clinical trial                                                                                                                                                                                       |             | 1/31/05  |            | 334,000                     |   |
|                                                             |   | •                | Steering  committee approves progress and data review for clinical trial after  significant percentage of patients properly enrolled                                                                                            |             | 6/30/06  |            | 250,000                     |   |
| Tumor cell profiling  reagents                                   |   | •                | Steering  committee approves regulatory submission                                                                                                                                                                              |             | 12/31/07 |            | 500,000                     |   |
|                                                             |   | •                | Steering  committee approves product development process, first product commercially  available, second product completes production readiness review, and third  product demonstrates proof of principle and acquired antibody |             | 9/30/04  |            | 200,000                     |   |
| Large volume sample  processor                                   |   | •                | Steering  committee approves commercial readiness                                                                                                                                                                               |             | 7/31/06  |            | 500,000                     |   |

 

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NOTE: $500,000 of the $1,500,000 milestone payment pertaining to breastcancer therapy monitoring was paid to us by Veridex in February 2004pursuant to Veridex’s receipt of 510(k) clearance from the FDA inJanuary 2004 for use of the CellSearch Epithelial Cell Kit. The remaining$1,000,000 would become payable upon completion of the payment criteriadiscussed above. In addition, we and Veridex agreed in November 2003 thatthere would be no target date for completion of this milestone and that in lieuof a target date, Veridex would only be obligated to pay us 30.5% of net salesfor cell analysis products related to this milestone for the term of thisagreement, instead of 31% of net sales for such products.

 

We do not currently expect that any of the specific milestone paymentsdiscussed above will be materially delayed beyond their applicable targetdates. However, because these milestone payments are related to the successfulcompletion of the payment criteria summarized above, including completion ofclinical trials, development activities and receipt of regulatory clearances,we may be unable to successfully complete the payment criteria in a timelymanner, if at all. Veridex is responsible under the development, license andsupply agreement for obtaining all regulatory clearances for indicationsrelated to the CellSearch kit, in consultation with us, for these cell analysisproducts in the field of cancer.  Also,we and Veridex will continue to evaluate our development program in cancer,particularly clinical development and may negotiate changes to milestones thathave not yet been achieved, although we do not expect that the aggregate amountof the milestones will change.

 

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If we do not successfully complete the payment criteria for a givenfuture milestone, we will not receive the applicable milestone payment. If wedo not successfully complete the payment criteria by the target date for agiven milestone, we will continue to be entitled to receive the milestonepayment in the future upon successful completion of the criteria. However, Veridex’sobligation to pay us a percentage of the net sales for the cell analysisproduct to which the milestone relates would be reduced by 0.5% for theten-year period beginning with the shipment for commercial sale of the firstproduct resulting from this agreement. In no event, however, would reductionsdue to missed target dates reduce our proportionate percentage share of netsales that we would otherwise be entitled to receive from Veridex for sales ofall cell analysis products by Veridex under this agreement by more than 0.5% inthe aggregate.

 

We have also established a sales agency arrangement with Veridex withrespect to our sample preparation and cell analysis systems, such as theCellTracks AutoPrep System and CellSpotter Analyzer. Under this arrangement,Veridex is our exclusive sales, invoicing and collecting agent and exclusiveinstrument and technical service provider for these systems in the field ofcancer. Veridex is responsible for all expenses for marketing, sales andtraining, and we are responsible for all software development and validation aswell as quality control and quality assurance. We are responsible for shippingsystems pursuant to purchase orders received by Veridex. We are obligated topay Veridex a commission on each sale or lease of these sample preparation andcell analysis systems of up to 15% of the invoice price, subject to a minimumgross profit margin received by us on each system of 27.5%. Some customers mayenter into a reagent rental agreement with Veridex, whereby the reagent pricealso carries an amortized cost of the instrument, based on an agreed testvolume. In these cases, Veridex will pay us a percentage of the fully loadedcost of the instrument when it is placed in the account. We are responsible forthe costs associated with the one-year warranty period. Veridex has the optionunder the agreement to convert the sales agency relationship to a soledistributorship arrangement upon 12-months’ written notice.  However, we do not anticipate earningsignificant gross margins or incurring significant losses on the sale, lease orrental of our CellTracks AutoPrep System or our CellSpotter Analyzer. Weanticipate that the majority of our future gross margins and future profitsderived under our agreement with Veridex will result from the sales of reagentsand disposables.

 

Under this distributor arrangement, we would be required to supplyVeridex based on the forecasts provided to us by Veridex and the actual ordersfor these systems placed with us by Veridex. The allocation of costs andexpenses between us and Veridex would remain substantially the same and wewould remain responsible for the costs associated with the one-year warrantyperiod. In addition, instead of Veridex receiving up to a 15% commission after deductingthe 27.5% gross profit margin on each sale or lease, these systems would besold to Veridex at a transfer price that provides a 27.5% gross profit marginto us, and Veridex would retain the proceeds from their sales of these systems,but would be required to remit to us any proceeds from their sales to theextent that the proceeds of such sales, after deducting 15%, exceed thetransfer price for these systems.

 

Following commercialization, if we and Veridex are able to generateproduct sales under our development, license and supply agreement, we arerequired to invest an amount ranging from between 8.5% and 10% of total netproduct sales by Veridex, excluding revenue from cell analysis system sales, inresearch and development activities for cancer-related cell analysis products.These research and development activities may consist of any activities, suchas product improvements, product line extensions and clinical trials, conductedto achieve the milestones described above, to advance the development programdesigned by the steering committee for this agreement, or to enhance thecancer-related cell analysis products or sample preparation and cell analysissystems based on our technologies.

 

Based on our operating plans, net proceeds from our IPO, available cashand additional equipment credit lines will be sufficient to finance operationsand capital expenditures for at least 18 months from the date of this Form10-Q. Our future capital requirements include, but are not limited to,supporting our research and development efforts and our clinical trials,although we are not obligated to meet any absolute minimum dollar spendingrequirements under our current operating agreements. Our future capitalrequirements will depend on many factors, including the scope and progress madein our research and development activities, our clinical trials and capitalrequirements related to our commercialization efforts. We had$24.6 million in cash on hand as of March 31, 2004 and we do notcurrently have access to any unused lines of credit or other committed sourcesof financing. We plan to use the proceeds from the IPO and our cash on hand tocontinue to develop our cancer diagnostic products beyond breast cancer toother types of solid tissue cancers as well as to explore the uses of ourtechnology in earlier stages of the cancer disease process. Also we plan toexplore development of uses for our technology outside of cancer such as incardiovascular disease. We plan to use the proceeds from the IPO, anticipated fundsgenerated from the sales of our products as well as additional equity ordebt-related offerings to finance our future development efforts. We may not besuccessful in generating sufficient product sales or raising sufficient fundsfrom the sale of equity or debt securities to support the research anddevelopment expenses necessary to expand the uses of the technology into othercancers and in non-cancer diseases. In addition, if we are unsuccessful in ourproduct development efforts, additional financing may not be available insufficient amounts or on terms acceptable to us, if at all. If we are unable toobtain additional financing, we may elect to reduce the scope of, delay oreliminate some or all of our planned research, development and commercializationactivities, which could harm our financial condition and operating results. 

 

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**FACTORS THAT MAYAFFECT FUTURE RESULTS**

 

*In addition to otherinformation contained herein you should carefully consider the followingfactors in evaluating our company. Any of the following factors couldmaterially and adversely affect our business, financial position and results ofoperations.*

 

**RISKS RELATING TO OUR BUSINESS**

 

**We have a history of operating losses, expectto continue to incur substantial losses, and might never achieve or maintainprofitability.**

 

We are a development stage company with limited operating history. Wehave incurred significant net losses since we began operations in 1983.  As of March 31, 2004, we had a deficitaccumulated during our development stage of $70.0 million.  For the three month periods endedMarch 31, 2004 and March 31, 2003 we had net losses of $6.4 millionand $4.5 million, respectively. These losses have resulted principally from costs incurred in ourresearch and development programs and from our general and administrativeexpenses. Because our operating expenses are likely to increase significantlyin the near term, we will need to generate significant additional revenue to achieveprofitability. We do not expect to have any significant operating revenue fromthe sales of our products until at least the second half of 2004. Even after webegin selling our products, we expect our losses to continue to increase as aresult of ongoing research and development and clinical trial expenses, as wellas increased manufacturing, sales and marketing expenses. These losses, amongother things, have had and will continue to have an adverse effect on ourworking capital, total assets and stockholders’ equity. Because of the numerousrisks and uncertainties associated with our product development efforts, we areunable to predict when we will become profitable, and we may never becomeprofitable. Even if we do achieve profitability, we may not be able to sustainor increase profitability on a quarterly or annual basis. If we are unable toachieve and then maintain profitability, the market value of our common stockwill decline.

 

**If our relationship with Veridex isterminated, we may be unable to commercialize effectively certain of ourproducts based on our technologies in the field of cancer.**

 

We entered into a development, license and supply agreement withVeridex, under which we granted to Veridex a worldwide exclusive license in thefield of cancer to commercialize cell analysis products based on ourtechnologies. We also appointed Veridex as our exclusive sales, invoicing andcollection agent for our cell analysis instrumentation in cancer. Prior toshipment for commercial sale of the first product resulting from thisagreement, Veridex may terminate this agreement with or without reason byproviding us with 180 days’ prior written notice. Thereafter, Veridex mayterminate this agreement with or without reason at any time by providing us with24 months’ prior written notice. Veridex also may terminate this agreementif we are in material breach or are acquired by a competitor in the IVD field.In addition, while we have granted Veridex the exclusive right to market,distribute and conduct field, technical, customer service and certainmanufacturing finishing operations for these products, this agreement providesthat Veridex has very limited obligations to perform these functions. Forexample, the agreement does not require Veridex to meet any minimum levels withrespect to sales, marketing personnel or other marketing expenditures. IfVeridex were to terminate, fail to meet its obligations under this agreement orfail to deploy adequate resources to commercialize products under this agreement:

 

•                                          wewould incur significant delays and expense in the commercialization of theseproducts;

 

•                                          wemight be unable to enter into a similar agreement with another company withsimilar resources to commercialize these products and perform these functions onacceptable terms, if at all; and

 

•                                          wemight be unable to commercialize these products or perform these functionssuccessfully ourselves.

 

Any of these outcomes could result in delays in our ability to generaterevenues from the sales of these products, an increase in our expenses and aresulting adverse impact on our operations and financial results, and the valueof our common stock would likely decline.

 

Following commercialization, if we and Veridex are able to generateproduct sales under our agreement, we are required to invest an amount rangingfrom between 8.5% and 10% of total net product sales by Veridex, excludingrevenue from cell analysis system sales, in research and development forcancer-related cell analysis products.

 

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**If our products and Veridex’s products do notachieve market acceptance, we will be unable to generate significant revenuesfrom them.**

 

The future commercial success of our products and of Veridex’s productsbased on our technologies will depend primarily on:

 

•                                          convincingresearch, reference and clinical laboratories to conduct validation studiesusing these products and to offer these products as research tools forscientists and clinical investigators and as diagnostic products to physicians,laboratory professionals and other medical practitioners; and

 

•                                          convincingphysicians, laboratory professionals and other medical practitioners to ordertests for their patients involving our technologies.

 

To accomplish this, we and Veridex will need to convince oncologists,primary care physicians, surgeons, laboratory professionals and other membersof the medical and biotechnology communities of the benefits of these productsthrough published papers, presentations at scientific conferences andadditional clinical trials. If we and Veridex are not successful in theseefforts, the market acceptance for these products could be limited.Additionally, if ongoing or future clinical trials result in unfavorable orinconsistent results, these products may not achieve market acceptance. Otherfactors that might influence market acceptance of these products include thefollowing:

 

•                                          evidenceof clinical utility;

 

•                                          abilityto obtain sufficient third-party coverage or reimbursement;

 

•                                          convenienceand ease of administration;

 

•                                          availabilityof alternative and competing diagnostic products;

 

•                                          cost-effectiveness;

 

•                                          effectivenessof marketing, distribution and pricing strategy; and

 

•                                          publicityconcerning these products or competitive products.

 

If these products are unable to gain broad market acceptance, ourbusiness will suffer.

 

**If we or Veridex are not able to obtain allof the regulatory approvals and clearances required to commercialize ourproducts, our business would be significantly harmed.**

 

The products based on our technologies are generally regulated asmedical devices by the FDA and comparable agencies of other countries. Inparticular, FDA regulations govern, among other things, the activities that weand Veridex perform, including product development, product testing, productlabeling, product storage, pre-market clearance or PMA approval, manufacturing,advertising, promotion, product sales, reporting of certain product failuresand distribution.

 

Most of the products that we plan to develop and commercialize in theUS will require either pre-market notification, or 510(k) clearance, or PMAapproval from the FDA prior to marketing. The 510(k) clearance process usuallytakes from two to twelve months from submission, but can take longer. The PMAprocess is much more costly, lengthy, uncertain and generally takes from one totwo years or longer from submission. We do not know whether we or Veridex willbe able to obtain the clearances or approvals required to commercialize theseproducts. Prior to commercialization of our products for IVD use, we will needto obtain 510(k) clearance from the FDA for the CellSearch Epithelial CellControl, which consists of two levels of controls required to be run daily toensure our integrated system is operating property. Veridex submitted the510(k) for these controls in April 2004.

 

All of the products that we or Veridex intend to submit for FDAclearance or approval will be subject to substantial restrictions, including,among other things, restrictions on the indications for which we and Veridexmay market these products, which could result in lower revenues. The marketingclaims we and Veridex will be permitted to make in labeling or advertisingregarding our cancer diagnostic products, if cleared or approved by the FDA,will be limited to those specified in any clearance or approval. We expect that

 

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initially many of these products will be limited to RUO. In addition,both we and Veridex are subject to inspection and marketing surveillance by theFDA to determine our compliance with regulatory requirements. If the FDA findsthat we or Veridex have failed to comply with these requirements, it caninstitute a wide variety of enforcement actions, ranging from a public warningletter to more severe sanctions, including:

 

•                                          fines,injunctions and civil penalties;

 

•                                          recallor seizure of our products or Veridex’s products;

 

•                                          operatingrestrictions, partial suspension or total shutdown of production;

 

•                                          denialof requests for 510(k) clearances or pre-market approvals of productcandidates;

 

•                                          withdrawalof 510(k) clearances or pre-market approvals already granted;

 

•                                          disgorgementof profits; and

 

•                                          criminalprosecution.

 

Any of these enforcement actions could affect our ability or Veridex’sability to commercially distribute our products in the US and may also harm ourability to conduct the clinical trials necessary to support the marketing,clearance or approval of these products.

 

**If the third-party manufacturers we rely oneither refuse or are unable to successfully manufacture certain of ourproducts, we may be unable to commercialize these products.**

 

We have limited commercial manufacturing experience and capabilities.We currently assemble, test and release the CellSpotter and CellTracks AutoPrepSystem, as well as bulk reagents and other associated products used with theCellTracks AutoPrep System, at our facility located in Huntingdon Valley,Pennsylvania. We currently have adequate manufacturing capacity to meetanticipated demand for 2004 and 2005. However, in order to meet anticipateddemand thereafter, we will have to expand our manufacturing processes andfacilities or increase our reliance on third-party manufacturers. Under ouragreement with Veridex, we might be required to establish a secondmanufacturing facility or qualify a contract manufacturer in the future. Wemight encounter difficulties in expanding our manufacturing processes andfacilities or in expanding our relationships with third-party manufacturers andmight be unsuccessful in overcoming these difficulties. In that event, ourability to meet product demand could be impaired or delayed.

 

We face additional risks inherent in operating a single manufacturingfacility for those products we manufacture ourselves. We do not havealternative production plans in place or alternative facilities available atthis time. If there are unforeseen shutdowns to our facility, we will be unableto satisfy customer orders on a timely basis with respect to these products. Werely currently and intend to continue to rely significantly in the future onthird-party manufacturers to produce many of our products. For example, we aredependent on a small, private, contract design, engineering and manufacturingcompany, Astro Instrumentation, LLC, or Astro, for our CellTracks AutoPrepSystem. If Astro loses key personnel or encounters financial or otherdifficulties, they may be unable to continue to manufacture this system andprovide ongoing design and engineering support for commercialization and futureenhancements of this system, and we may have difficulty replacing them. Inaddition, we currently use a third-party manufacturer for our CellSavePreservative Tube. We are dependent on these third-party manufacturers toperform their obligations in a timely and effective manner and in compliancewith FDA and other regulatory requirements. If these third-party manufacturersfail to perform their obligations,  ourcompetitive position and ability to generate revenue could be adverselyaffected in a number of ways, including:

 

•                                          wemight not be able to initiate or continue clinical trials on products that areunder development;

 

•                                          wemight be delayed in submitting applications for regulatory approvals and clearancesfor products; and

 

•                                          wemight not be able to meet commercial demands for any approved or clearedproducts.

 

Any failures in manufacturing these products may also result in abreach of our agreement with Veridex.

 

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**If third-party payors do not reimbursecustomers for our products and Veridex’s products, they might not be used orpurchased, which would adversely affect our revenues.**

 

The majority of the sales of our products and Veridex’s products basedon our technologies in the US and other markets will depend, in large part, onthe availability of adequate reimbursement to users of these products fromgovernment insurance plans, including Medicare and Medicaid in the US, managedcare organizations, private insurance plans and other third-party payors.Because these products have not yet been commercially introduced, third-partypayors have no history of reimbursing for the cost of these products.Third-party payors are often reluctant to reimburse healthcare providers forthe use of medical diagnostic products incorporating new technology. Inaddition, third-party payors are increasingly limiting reimbursement coveragefor medical diagnostic products and, in many instances, are exerting pressureon medical products suppliers to reduce their prices. Consequently, third-partyreimbursement might not be consistently available or adequate to cover the costof our products. This could limit our ability or Veridex’s ability tocommercialize and sell these products or cause the prices of these products tobe reduced, which would adversely affect our operating results.

 

Because each third-party payor individually approves reimbursement,obtaining these approvals is a time-consuming and costly process that will requireus and Veridex to provide scientific and clinical support for the use of eachof these products to each third-party payor separately with no assurance thatapproval will be obtained. This process could delay the market acceptance ofnew products and could have a negative effect on our revenues and operatingresults.

 

**If we or any of our third-party manufacturersdo not maintain high standards of manufacturing in accordance with QualitySystem Regulations, our ability to develop, and Veridex’s and our ability tocommercialize our products, could be delayed or curtailed.**

 

We and any third-party manufacturers that we currently rely on or willrely on in the future, including those we rely on to produce our CellTracksAutoPrep System and CellSave Preservative Tube, must continuously adhere to thecurrent good manufacturing practices, or cGMP, set forth in the FDA’s QualitySystem Regulations, or QSR, and enforced by the FDA through its facilitiesinspection program. In complying with QSR, we and any of our third-partymanufacturers must expend significant time, money and effort in design anddevelopment, testing, production, record-keeping and quality control to assurethat our products meet applicable specifications and other regulatoryrequirements. The failure to comply with these specifications and otherrequirements could result in an FDA enforcement action, including the seizureof products and shutting down production. We or any of these third-partymanufacturers also may be subject to comparable or more stringent regulationsof foreign regulatory authorities. In addition, we and Veridex will need tocomplete validation of some of the manufacturing processes for the products weplan to launch for IVD use in the third quarter of 2004 and would be unable tolaunch these products until this validation is completed. If we or any of ourthird-party manufacturers fail to comply with these regulations, we might besubject to regulatory action, which could delay or curtail our ability todevelop, and Veridex’s and our ability to commercialize, products based on ourtechnologies.

 

**If we fail to obtain necessary funds for ouroperations, we will be unable to continue to develop and commercialize newproducts and technologies.**

 

We expect capital outlays and operating expenditures to increase overthe next several years as we expand our infrastructure, commercialization,manufacturing, clinical trials and research and development activities.Specifically, we will need to raise additional capital to, among other things:

 

•                                          sustaincommercialization with Veridex of our initial products;

 

•                                          pursueregulatory approvals and clearances;

 

•                                          expandour technologies into other areas of cancer and medicine;

 

•                                          expandour research and development activities;

 

•                                          acquireor license technologies;

 

•                                          fundour clinical trial activities;

 

•                                          expandour manufacturing activities; and

 

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•                                          financecapital expenditures and our general and administrative expenses.

 

To date, we have raised capital through private equity, public equityand debt financings, license and milestone revenues from corporatecollaborations, capital equipment and leasehold financing, government grantsand interest earned on cash and investments. We believe the net proceeds of theIPO, together with our cash, cash equivalents and investments, will besufficient to meet our operating and capital requirements for at least the next18 months. However, our present and future funding requirements willdepend on many factors, including, among other things:

 

•                                          thelevel of research and development investment required to maintain and improveour technology position;

 

•                                          costsof filing, prosecuting, defending and enforcing patent claims and otherintellectual property rights;

 

•                                          ourneed or decision to acquire or license complementary technologies or acquirecomplementary businesses;

 

•                                          changesin product development plans needed to address any difficulties inmanufacturing or commercialization;

 

•                                          competingtechnological and market developments; and

 

•                                          changesin regulatory policies or laws that affect our operations.

 

We do not know whether additional financing will be available oncommercially acceptable terms when needed. If adequate funds are not availableor are not available on commercially acceptable terms, our ability to fund ouroperations, develop products or technologies or otherwise respond tocompetitive pressures could be significantly delayed or limited, and we mightneed to downsize or halt our operations.

 

If we raise additional funds by issuing equity securities, furtherdilution to our stockholders could result, and new investors could have rightssuperior to those of holders of the shares issued in the IPO. Any equitysecurities issued also may provide for rights, preferences or privileges seniorto those of holders of our common stock. If we raise additional funds byissuing debt securities, these debt securities would have rights, preferencesand privileges senior to those of holders of our common stock, and the terms ofthe debt securities issued could impose significant restrictions on ouroperations. If we raise additional funds through collaborations and licensingarrangements, we might be required to relinquish significant rights to ourtechnologies or products, or grant licenses on terms that are not favorable tous. If adequate funds are not available, we may have to delay or may be unableto continue to develop our products.

 

**If the third parties we intend to contractwith for clinical trials do not perform in an acceptable manner, or if wesuffer setbacks in these clinical trials, our business may suffer.**

 

We do not have the ability to independently conduct the clinical trialsrequired to obtain regulatory clearances for our products. We intend to rely onthird-party expert clinical investigators and clinical research organizationsto perform these functions. If we cannot locate and enter into favorableagreements with acceptable third parties, or if these third parties do notsuccessfully carry out their contractual obligations, meet expected deadlinesor follow regulatory requirements, including clinical laboratory, manufacturingand good clinical practice guidelines, then we may be the subject of anenforcement action by the FDA or some other regulatory body, and may be unableto obtain clearances for our products or to commercialize them on a timelybasis, if at all.

 

The completion of clinical trials of our products may be delayed bymany other factors, including the rate of enrollment of patients. Neither wenor any third-party clinical investigators and clinical research organizationscan control the rate of patient enrollment, and this rate might not beconsistent with our expectations or sufficient to enable clinical trials of ourproducts to be completed in a timely manner or to be completed at all. Inaddition, regulatory authorities might not permit us to undertake additionalclinical trials for one or more of these products. If we suffer any significantdelays in, setbacks or negative results in or termination of, clinical trialsfor our products, we may be unable to generate product sales from theseproducts in the future.

 

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**If we lose key management or scientificpersonnel, scientific collaborators or other advisors, our business wouldsuffer.**

 

Our success depends, in large part, on the efforts and abilities ofEdward L. Erickson, who is our Chairman, President and Chief Executive Officer,Leon W.M.M. Terstappen, who is our Senior Vice President of Research andDevelopment and Chief Scientific Officer, and James G. Murphy, who is ourSenior Vice President of Finance and Administration and Chief FinancialOfficer, as well as the other members of our senior management and ourscientific and technical personnel. Given that the pool of individuals withrelevant experience in biotechnology and diagnostic products in particular islimited, it would be costly and time-consuming to replace any of our seniormanagement or scientific personnel. Although we maintain key-person lifeinsurance on Mr. Erickson and Dr. Terstappen, we do not maintainkey-person life insurance on any of our other officers, employees orconsultants. We also depend on our scientific collaborators and other advisors,particularly with respect to our research and development efforts. If we losethe services of one or more of our key officers, employees or consultants, orare unable to retain the services of our scientific collaborators and otheradvisors, our research and development and product development efforts could bedelayed or curtailed.

 

**If Veridex and the other third parties weintend to rely on to perform marketing, sales and distribution services for ourproducts do not successfully perform these services, our business will be harmed.**

 

We have limited marketing, sales and distribution experience andcapabilities. In order to commercialize any of our products, we must eitherinternally develop sales, marketing and distribution capabilities or makearrangements with third parties to perform these services. We intend to relyfor the foreseeable future on sales, marketing and distribution arrangementswith third parties for the commercialization of our products. Specifically, wewill rely on Veridex for the commercialization of the initial cancer diagnosticproducts based on our technologies. We may be unable to enter into sales,marketing and distribution agreements with third parties on acceptable terms,if at all. Also, the sales, marketing, and distribution efforts of these thirdparties might not be successful. Any sales through these third parties might beless profitable to us than direct sales.

 

If we decide to perform any sales, marketing and distribution functionsourselves, we might face a number of risks, including:

 

•                                          ourability to attract and build the significant and skilled marketing staff orsales force necessary to commercialize and gain market acceptance for ourproducts;

 

•                                          theamount of time and cost of establishing a marketing staff or sales force mightnot be justifiable by the revenues generated by any particular product; and

 

•                                          thefailure of our direct sales and marketing personnel to initiate and executesuccessful commercialization activities.

 

**If the limited number of suppliers we rely onfail to supply the raw materials we use in the manufacturing of our reagentproducts, we might be unable to satisfy product demand, which would negativelyimpact our business.**

 

Several raw materials used in the manufacturing of our reagent productsused in several of our platforms and instruments currently are available onlyfrom a limited number of suppliers. We acquire all of these raw materials on apurchase-order basis, which means that the supplier is not required to supplyus with specified quantities of these raw materials over a certain period oftime or to set aside part of its inventory for our forecasted requirements.Additionally, for certain of these raw materials, we have not arranged foralternative suppliers, and it might be difficult to find alternative suppliersin a timely manner and on terms acceptable to us. Consequently, as we begin ourcommercialization efforts, if we do not forecast properly, or if our suppliersare unable or unwilling to supply us in sufficient quantities or oncommercially acceptable terms, we might not have access to sufficientquantities of these raw materials on a timely basis and might not be able tosatisfy product demand.

 

In addition, if any of these components and raw materials are no longeravailable in the marketplace, we will be forced to further develop ourtechnologies to incorporate alternate components and to do so in compliancewith QSR. If we incorporate new components or raw materials into our productswe might need to seek and obtain additional approvals or clearances from theFDA or foreign regulatory agencies, which could delay the commercialization ofthese products.

 

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**If our competitors develop and markettechnologies or research and diagnostic products faster than we or Veridex door if those products are more effective than our products, our commercialopportunities will be reduced or eliminated.**

 

The extent to which any of our technologies and products achieve marketacceptance will depend on many competitive factors, many of which are beyondour control. Competition in the pharmaceutical and biotechnology industries,and the medical devices and diagnostic products segments in particular, isintense and has been accentuated by the rapid pace of technological development.Our competitors include large diagnostics and life sciences companies. Most ofthese entities have substantially greater research and development capabilitiesand financial, scientific, manufacturing, marketing, sales and serviceresources than we do. Some of them also have more experience than we do inresearch and development, clinical trials, regulatory matters, manufacturing,marketing and sales. These organizations also compete with us to:

 

•                                          pursueacquisitions, joint ventures or other collaborations;

 

•                                          licenseproprietary technologies that are competitive with our technologies;

 

•                                          attractfunding; and

 

•                                          attractand hire scientific talent.

 

If we or Veridex cannot successfully compete with new or existingproducts or technologies, sales of our products will suffer and we may neverachieve profitability. Because of their greater experience with commercializingtheir technologies and larger research and development capabilities, ourcompetitors might succeed in developing and commercializing technologies orproducts earlier and obtaining regulatory approvals and clearances from the FDAmore rapidly than Veridex or us. Our competitors also might develop moreeffective technologies or products that are more predictive, more highlyautomated or more cost-effective, which may render our technologies or productsobsolete or non-competitive.

 

**If we experience delays in the development ofnew products or delays in planned improvements to our products, our commercialopportunities will be reduced.**

 

To improve our competitive position, we believe that we will need todevelop new products as well as improve our existing instruments, reagents andancillary products. Improvements in automation and throughput (the number oftests that can be performed in a specified period of time) of our products willbe important to the competitive position of our products as we market to abroader, perhaps less technically proficient, group of customers. Our abilityto develop new products and make improvements in our products may facedifficult technological challenges leading to development delays. For example,we are experiencing delays in connection with the development of our CellTracksAnalyzer cell analysis instrument for use in cancer diagnostic testing. Thesedelays are the result of technical problems associated with reliability of thesystem to detect cancer cells. In response, we are implementing enhancements to

 

our CellSpotter Analyzer, such as adding the ability to detect andevaluate cellular markers using analyte specific reagents, or ASRs. We are alsocontinuing to develop our CellTracks Analyzer because we believe that some ofthe planned features, such as the ability to quantify cellular markers usingASRs, may be required to address future potential research and clinicalapplications and to remain competitive. If we are unable to successfullycomplete development of new products or if we are unable to successfullycomplete the planned enhancements to our products, in each case withoutsignificant delays, our future competitive position may be adversely affected.

 

**If product liability lawsuits aresuccessfully brought against us, we might incur substantial liabilities andcould be required to limit the commercialization of our products.**

 

Our business exposes us to potential product liability risks that areinherent in the testing, manufacturing, marketing and sale of diagnosticproducts. We might be unable to avoid product liability claims. Productliability insurance generally is expensive for our industry. If we are unableto maintain sufficient insurance coverage on reasonable terms or to otherwiseprotect against potential product liability claims, we may be unable tocommercialize our products. A successful product liability claim broughtagainst us in excess of any insurance coverage we have at that time could causeus to incur substantial liabilities and our business to fail.

 

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**If we use biological and hazardous materialsin a manner that causes injury, we could be liable for damages.**

 

Our research and development activities sometimes involve thecontrolled use of potentially harmful biological materials, hazardousmaterials, chemicals and various radioactive compounds. We cannot completelyeliminate the risk of accidental contamination or injury to third parties fromthe use, storage, handling or disposal of these materials. In the event ofcontamination or injury, we could be held liable for any resulting damages, andany liability could exceed our resources or any applicable insurance coveragewe may have. Additionally, we are subject on an ongoing basis to federal, stateand local laws and regulations governing the use, storage, handling anddisposal of these materials and specified waste products. The cost ofcompliance with these laws and regulations might be significant and couldnegatively affect our profitability.

 

**If we are unable to manage growth inconnection with our transition from an early-stage development company to acompany that commercializes research and diagnostic products, our operationswill suffer.**

 

We will need to add a significant number of new personnel and expandour capabilities in order to successfully pursue our commercialization strategyfor our initial IVD products as well as our research and development efforts.Certain aspects of our operations must be scaled up, for example, to increasethe batch sizes of antibodies and other bulk components that we will need toprovide for use in the test kits manufactured by Veridex and the number ofinstrument systems we can manufacture per quarter. Organizational growth andscale-up of operations could strain our existing managerial, operational,financial and other resources. If we fail to manage this growth effectively, wemay not be able to achieve our research and development and commercializationgoals.

 

**RISKS RELATED TO OUR INTELLECTUAL PROPERTY**

 

**If we are unable to protect our proprietaryrights, we may not be able to compete effectively.**

 

We have obtained patents in the US and in foreign countries relating tomany of the technologies that are the basis of our products, such as the basictechnologies relating to the separation and isolation of cells for thedetection of cancer and the various aspects of the reagents, methods and instrumentplatforms that we plan to commercialize. In addition, we maintain tradesecrets, especially where we believe patent protection is not appropriate orobtainable, on various aspects of our technologies and that we do not wish tobecome publicly known. However, obtaining, defending and enforcing our patentsand other intellectual property rights involve complex legal and factualquestions. For example, many of our key patents relating to our basictechnologies for the separation and isolation of cells for the detection ofcancer contain claims covering our processes for manufacturing and using ourmagnetic separation particles, or ferrofluids. If a competitor were to practiceor use these processes without our knowledge or consent, these patents may be particularlydifficult to defend or enforce because it may not be apparent from examinationof the competitor’s products that the competitor is using our patentedprocesses. In particular, if we were not able successfully to defend or enforceour patents that cover our ferrofluids, which are utilized as a key componentof our CellTracks AutoPrep System, competitors could more easily producesystems that might be able to perform separation of Circulating Tumor Cells(“CTCs”) from blood samples in a manner substantially equivalent to ourCellTracks AutoPrep System without compensating us, resulting in substantialdamage to our business.

 

Because the issuance of a patent is not conclusive of its validity orenforceability and can be challenged, we do not know how much protection, ifany, our patents will provide to us if we attempt to enforce them or if otherschallenge their validity or enforceability in court. For example, if ourpatents relating to the separation of CTCs from blood samples were challengedand invalidated, we would not be able to prevent others from utilizing thesekey aspects of our technologies, which would substantially harm our business.Moreover, our patent applications may not result in issued patents, and even ifissued, our patents may not contain claims that are sufficiently broad toprevent others from practicing our technologies or developing competingproducts. Accordingly, we cannot assure you that we will be able to obtain,defend or enforce our patent rights covering our technologies in the US or inforeign countries. In addition, if others discover or misappropriate thetechnologies that we have chosen to maintain as trade secrets, we may not beable to effectively maintain our technologies as unpatented trade secrets.Although we have taken measures to protect our unpatented trade secrets andother non-public information such as know-how, including the use ofconfidentiality and invention assignment agreements with our employees,consultants and some of our contractors, it is possible that these persons mayunintentionally or willingly breach the agreements or that our competitors mayindependently develop or otherwise discover our trade secrets and know-how.

 

A challenge to one or more of our pending patent applications, orissued patents, may result in limiting the coverage of our patents so that acompetitor can effectively avoid our patent claims. In addition, competitorsmay avoid our patents by using technologies that perform substantially as ourtechnologies, but avoid infringing our patent claims. For example, if acompetitor were to use a cell separation technology that performs as well, ornearly as well, as our patented ferrofluids, the competitor may be able tomarket

 

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products that may be functionally equivalent and perform as well ornearly as well as our products, thereby diminishing the competitive advantageafforded by our issued patents.

 

Although we may initiate litigation to stop the infringement of ourpatent claims or to attempt to force an unauthorized user of our patentedinventions or trade secrets to compensate us for the infringement orunauthorized use, patent and trade secret litigation is complex and oftendifficult and expensive, and would consume the time of our management and othersignificant resources. If the outcome of litigation is adverse to us, thirdparties may be able to use our technologies without payments to us. Moreover,some of our competitors may be better able to sustain the costs of litigationbecause they have substantially greater resources. Because of these factorsrelating to litigation, we may be unable effectively to preventmisappropriation of our patent and other proprietary rights.

 

**If the use of our technologies conflicts withthe intellectual property rights of third-parties, we may incur substantialliabilities and we may be unable to commercialize products based on thesetechnologies in a profitable manner, if at all.**

 

Our competitors or others may have or acquire patent rights that theycould enforce against us. If they do so, we may be required to alter ourtechnologies, pay licensing fees or cease activities. If our technologiesconflict with patent rights of others, third parties could bring legal actionagainst us or our licensees, suppliers, customers or collaborators, claimingdamages and seeking to enjoin manufacturing and marketing of the affectedproducts. If these legal actions are successful, in addition to any potentialliability for damages, we might have to obtain a license in order to continueto manufacture or market the affected products. A required license under therelated patent may not be available on acceptable terms, if at all.

 

We may be unaware of issued patents that our technologies infringe.Because patent applications can take many years to issue, there may becurrently pending applications, unknown to us, that may later result in issuedpatents upon which our technologies may infringe. There could also be existingpatents of which we are unaware upon which our technologies may infringe. Inaddition, if third parties file patent applications or obtain patents claimingtechnology also claimed by us in pending applications, we may have toparticipate in interference proceedings in the US Patent and Trademark Officeto determine priority of invention. If third parties file oppositions inforeign countries, we may also have to participate in opposition proceedings inforeign tribunals to defend the patentability of the filed foreign patentapplications. We may also have to participate in interference proceedingsinvolving our issued patents or our pending applications.

 

If a third party claims that we infringe upon its proprietary rights,any of the following may occur:

 

•                                          wemay become involved in time-consuming and expensive litigation, even if theclaim is without merit;

 

•                                          wemay become liable for substantial damages for past infringement if a courtdecides that our technologies infringe upon a competitor’s patent;

 

•                                          acourt may prohibit us from selling or licensing our product without a licensefrom the patent holder, which may not be available on commercially acceptableterms, if at all, or which may require us to pay substantial royalties or grantcross licenses to our patents; and

 

•                                          wemay have to redesign our product so that it does not infringe upon others’patent rights, which may not be possible or could require substantial funds ortime.

 

If any of these events occurs, our business will suffer and the marketprice of our common stock will likely decline.

 

**Our rights to use technologies licensed to usby third parties are not within our control, and we may not be able toimplement our products without these technologies.**

 

We have licensed patents and other rights that are necessary tocommercialize our products. Our business will significantly suffer if theselicenses terminate, if the licensors fail to abide by the terms of the licenseor fail to prevent infringement by third parties or if the licensed patents orother rights are found to be invalid.

 

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We have exclusively in-licensed significant intellectual property,including patents and know-how, related to our cell analysis instrumentationand cell isolation and enrichment products. In April 1997 we entered intoa license agreement with the University of Twente, or Twente, under which wewere granted exclusive rights to technology developed at Twente relating tooptical analysis of particles similar to cells and cell particles. Thistechnology and the underlying patents and know-how contribute significantly toour CellTracks Analyzer. This agreement will terminate upon the later ofApril 2007 or the expiration date of the last to expire of the patentslicensed under this agreement. In addition, Twente may unilaterally terminatethis agreement if we are in material breach or if we become bankrupt orinsolvent. Twente also may unilaterally terminate the license granted underthis agreement if we do not maintain sufficient general and product liability insurancecoverage once we have begun clinical trials and commercialization of ourproducts. In addition, in June 1999, we entered into a license agreementwith the University of Texas, or Texas, under which we were granted exclusiverights to technology, including patents and know-how, which we developed incollaboration with Texas, relating to the isolation, enrichment andcharacterization of circulating epithelial cells. Epithelial cells are cellsthat cover external and internal body surfaces and give rise to the majority ofsolid tumors. This technology and the underlying patents and know-howcontribute significantly to our cell analysis products in the field of cancerdiagnostics. We are responsible for making royalty payments of 1% of our salesof reagents incorporating the intellectual property licensed to us under thisagreement. This agreement terminates when all of Texas’s rights to the licensedtechnologies expire. In addition, Texas also may unilaterally terminate thisagreement if we are in material breach or become bankrupt or insolvent. Texasalso may unilaterally terminate the license granted under this agreement, orthe exclusivity of such license, in any national political jurisdiction if wefail to provide written evidence satisfactory to Texas, within 90 days ofreceiving written notice from Texas that it intends to terminate this license,that we or our sublicensees have commercialized or are actively attempting tocommercialize a licensed invention in these jurisdictions. In addition, in July 2002,we entered into a license agreement with Streck Laboratories, Inc., or Streck.Under this agreement, Streck granted to us a non-exclusive, worldwide,royalty-bearing license to practice certain of Streck’s cell preservativetechnology, including patents and know-how, for the research, development,manufacture and sale of our CellSave Preservative Tube to test for the presenceof epithelial cells or CTCs in a sample of fluid from a patient. This agreementwill terminate upon the expiration date of the last to expire of the patentslicensed under this agreement. In addition, either party also may terminatethis agreement if the other party is in material breach or becomes involved infinancial difficulties, including bankruptcy and insolvency.

 

If we violate the terms of our licenses, or otherwise lose our rightsto these patents or patent applications, we may be unable to continuedevelopment of our products. Our licensors or others may dispute the scope ofour rights under any of these licenses. Additionally, the licensors under theselicenses might breach the terms of their respective agreements or fail toprevent infringement of the licensed patents by third parties. Loss of any ofthese licenses for any reason could materially harm our financial condition andoperating results.

 

**If we cannot obtain additional licenses tointellectual property owned by third parties that we desire to incorporate intonew products we plan to develop, we may not be able to develop or commercializethese future products.**

 

We are developing products designed to identify and characterizeadditional types of cells other than CTCs and epithelial cells, such asendothelial cells. We also plan to develop cell profile products using reagentsthat are fluorescently tagged antibodies designed to characterize target cells,which are classified by the FDA as analyte-specific reagents, or ASRs. ASRs canbe used in research as an aid in evaluating new therapies in clinical trials,and we plan to develop a family of ASRs for profiling of each rare cell type ofinterest. However, many, if not all, of the target-specific and other reagents,including antibodies, that we ultimately may use in the development andcommercialization of these future cell profile products and in our future productsfor identifying additional types of cells may be protected by patent and otherintellectual property rights owned by third parties. If we are unable to obtainrights to use this third party intellectual property under commerciallyreasonable terms, or at all, we may be unable to develop these products, andthis could harm our ability to expand our commercial products offerings and togenerate additional revenue from these products. 

 

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**Item 3****.  Quantitativeand Qualitative Disclosures About Market Risk**

### ** **

We do not believe that we have material exposure to interest rate,foreign currency exchange rate or other relevant market risks.  We do not use derivative financialinstruments in our investment portfolio and have no foreign exchange contracts.Our financial instruments consist of cash, cash equivalents, short-terminvestments, accounts payable and long-term obligations. We considerinvestments that, when purchased, have a remaining maturity of 90 days orless to be cash equivalents. We invest in marketable securities in accordancewith our investment policy. The primary objectives of our investment policy areto preserve principal, maintain proper liquidity to meet operating needs andmaximize yields. Our investment policy specifies credit quality standards forour investments.

 

**Item 4****.  Controls and Procedures**

 

*Evaluation of disclosure controls and procedures*.  Based on their evaluation of the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934 (the “Exchange Act”)) as ofMarch 31, 2004, the Company’s president, chief executive officer(principal executive officer) and chief financial officer (principal financialofficer) have concluded that the Company’s disclosure controls and proceduresare designed to ensure that information required to be disclosed by the Companyin the reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms and are operating in an effective manner.

 

*Changes in internal controls. *Therehave not been any changes in the Company’s internal controls over financialreporting during the quarter ended March 31, 2004 that materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.

 

**PART II****.****                                                OTHERINFORMATION**

 

**Item 2. Chang****es in Securities and Use of Proceeds**

 

On April 21, 2004, weclosed the sale of 6,000,000 shares of our common stock in our IPO. Theregistration statement on Form S-1 (File No. 333-110996), we filed toregister our common stock in the offering was declared effective by the SEC onApril 15, 2004. Our IPO commenced as of April 16, 2004 and did notterminate before any securities were sold. The offering has been completed andall shares were sold at an initial price per share of $8.00. The aggregatepurchase price of the offering amount registered was $48 million.  The Company had granted the underwriters a 30-dayoption to purchase up to an additional 900,000 shares of common stock from theCompany to cover over-allotments, if any. This option was exercised in full onMay 12, 2004 and closing occurred on May 17, 2004 with net proceeds to theCompany of approximately $6.7 million.

 

The managing underwritersfor the offering were UBS Securities LLC, SG Cowen Securities Corporation, LeggMason Wood Walker, Inc. and Adams, Harkness & Hill, Inc. We incurredexpenses in connection with the offering of $5.6 million, which consistedof direct payments of: (i) $1.6 million in legal, accounting andprinting fees; (ii) $3.9 million in underwriters’discounts, fees andcommissions; and (iii) $100,000 in miscellaneous expenses. No payments forsuch expenses were made directly or indirectly to: (i) any of ourdirectors, officers or their associates; (ii) any person(s) owning 10% ormore of any class of our equity securities; or (iii) any of ouraffiliates.

 

After deducting expenses ofthe offering and over-allotment, we received net offering proceeds ofapproximately $49.6 million.  Theproceeds have been invested into short-term investment-grade securities andmoney market accounts.

 

None of the net proceedswere directly or indirectly paid to: (i) any of our directors, officers ortheir associates; (ii) any person(s) owning 10% or more of any class ofour equity securities; or (iii) any of our affiliates.

 

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**Item 4.****          ****Submiss****ion of Matters to a Vote of Security Holders**

 

At theCompany’s annual meeting of stockholders held on March 2, 2004, the stockholders of the Company approvedamendments to the Company’s amended and restated certificate of incorporation,the amended and restated Equity Compensation Plan and 2004 Employee StockPurchase Plan, and elected ten directors to the Company’s board of directors.

 

The vote approving the amendment to the Company’sSecond amended and restated Certificate of Incorporation and a 2-for-3 reversestock split was 21,296,195 shares for and 9,169 shares abstaining.  The vote approving the amendment to theamended and restated Equity Compensation Plan was 21,291,403 shares for, 13,960shares against and no shares abstaining. The vote approving the amendment to the 2004 Employee Stock PurchasePlan was 21,291,403 shares for, 13,960 shares against and no sharesabstaining.  The vote approving theCompany’s Third Amended and Restated Certificate of Incorporation was21,304,363 shares for and 1,000 shares abstaining.

 

The stockholders elected all the Company’s nomineesfor director.

 

1.   Election of Directors:

 
|                      |   | **Shares For** |   | **Shares Withheld** |   | **Abstained** |
|---------------------------|--------|----------------|--------|---------------------|--------|---------------|
| Edward L. Erickson        |   | 21,305,363     |   | —              |   | —        |
| Jonathan Cool             |   | 21,305,363     |   | —              |   | —        |
| J. William Freytag, Ph.D. |   | 21,305,363     |   | —              |   | —        |
| Brian J. Geiger           |   | 21,305,363     |   | —              |   | —        |
| Ann Hanham, Ph.D.         |   | 21,305,363     |   | —              |   | —        |
| Zola P. Horovitz, Ph.D.   |   | 21,305,363     |   | —              |   | —        |
| Allen J. Lauer            |   | 21,305,363     |   | —              |   | —        |
| Marc Ostro, Ph.D.         |   | 21,305,363     |   | —              |   | —        |
| Seth A. Rudnick, M.D.     |   | 21,305,363     |   | —              |   | —        |
| Elizabeth E. Tallet       |   | 21,305,363     |   | —              |   | —        |

 

**Item 6.****           Exhi****bits andReports on Form 8-K**

 

(a)          Reports on Form 8-K:

 

None

 

(b)         The following is a list of exhibits filed as part of theForm 10-Q:

 

31.1                           Certification of ChiefExecutive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                           Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

32.1                           Certification of ChiefExecutive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2                           Certification of ChiefFinancial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

 

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 theundersigned thereunto duly authorized.

 
|   |         | IMMUNICON CORPORATION                              |
|--------|--------------|----------------------------------------------------|
|   |         |                                               |   |
|   |         |                                               |   |
| Date:  | May 21, 2004 | By:                                                |   /s/ Edward L. Erickson |   |
|   |         | Edward L. Erickson                                 |
|   |         | Chairman of the Board, President and               |
|   |         | Chief Executive Officer                            |
|   |         |                                               |   |
|   |         |                                               |   |
| Date:  | May 21, 2004 | By:                                                |   /s/ James G. Murphy |   |
|   |         | James G. Murphy                                    |
|   |         | Senior Vice President, Finance and Administration, |
|   |         | Chief Financial Officer                            |
|   |         | (Principal financial and accounting officer)       |
|        |              |                                                    |  |  |  |

 

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EXHIBIT INDEX

 
| **Number** |   | **Description**                                                                                                                                           |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1       |   | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                 |
| 31.2       |   | Certification of Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                 |
| 32.1       |   | Certification of Edward L. Erickson pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
| 32.2       |   | Certification of James G. Murphy pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.    |

 

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