##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2010
 or
 o
    
    Transition Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to  .
 Commission file number 1-11181
 IRIS INTERNATIONAL, INC.
  Delaware
    
    94-2579751(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 9158 Eton Avenue
Chatsworth, California 91311
 (818) 527-7000
 þ o
 o o
 12b-2
 Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o (Do not check if smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



IRIS INTERNATIONAL, INC.
INDEX TO FORM 10-Q
 PagePART I FINANCIAL INFORMATION
    
    
    3Item 1. Financial StatementsConsolidated Balance Sheets as of September 30, 2010 (unaudited)
and December 31, 2009
    
    
    3Consolidated Statements of Operations for the three months ended
September 30, 2010 and 2009 (unaudited)
    
    
    4Consolidated Statements of Operations for the nine months ended
September 30, 2010 and 2009 (unaudited)
    
    
    5Consolidated Statements of Cash Flows for the nine months ended
September 30, 2010 and 2009 (unaudited)
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    27PART II OTHER INFORMATION
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 6. Exhibits
    
    
    31Signatures
    
    
    33Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 IRIS INTERNATIONAL, INC.
 
 CONSOLIDATED BALANCE SHEETS
  September 30,
    
    
    December 31,2010
    
    
    2009(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    31,110
    
    
    $
    34,253Accounts receivable, net of allowance for doubtful
accounts and sales returns of $453 and $391
    
    
    18,453
    
    
    
    17,715Inventories
    
    
    12,304
    
    
    
    10,866Prepaid expenses and other current assets
    
    
    1,745
    
    
    
    1,045Investment in sales-type leases, current portion
    
    
    3,504
    
    
    
    3,397Deferred tax asset
    
    
    4,195
    
    
    
    4,238Total current assets
    
    
    71,311
    
    
    
    71,514Property and equipment, net of accumulated
depreciation of $13,602 and $11,713
    
    
    10,379
    
    
    
    9,667Goodwill
    
    
    3,802
    
    
    
    2,450Intangibles, net of accumulated amortization of $444
and $336
    
    
    6,146
    
    
    
    1,454Software development costs, net of accumulated
amortization of $4,038 and $3,566
    
    
    2,623
    
    
    
    2,534Deferred tax asset
    
    
    2,566
    
    
    
    1,898Investment in sales-type leases, non-current portion
    
    
    9,279
    
    
    
    7,441Other assets
    
    
    940
    
    
    
    832Total assets
    
    $
    107,046
    
    
    $
    97,790Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    4,912
    
    
    $
    4,479Accrued expenses
    
    
    8,697
    
    
    
    5,761Deferred service contract revenue, current portion
    
    
    3,216
    
    
    
    2,286Total current liabilities
    
    
    16,825
    
    
    
    12,526Deferred service contract revenue, non-current portion
    
    
    48
    
    
    
    42Other liabilities
    
    
    1,378
    
    
    
    Total liabilities
    
    
    18,251
    
    
    
    12,568Commitments and contingenciesStockholders equity:Common stock, $0.01 par value; authorized: 50 million
shares; issued and outstanding: 18,123,000 shares and
18,147,000 shares
    
    
    181
    
    
    
    181Preferred stock, $0.01 par value; authorized 3.0
million shares; Series A, $0.01 par value; authorized
250,000 shares; issued and outstanding: none
    
    
    
    
    
    
    Additional paid-in capital
    
    
    89,771
    
    
    
    87,692Other comprehensive income
    
    
    59
    
    
    
    560Accumulated deficit
    
    
    (1,216
    )
    
    
    (3,211
    )Total stockholders equity
    
    
    88,795
    
    
    
    85,222Total liabilities and stockholders equity
    
    $
    107,046
    
    
    $
    97,790
   3




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##### Table of Contents



IRIS INTERNATIONAL, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  For the three monthsended September 30,2010
    
    
    2009RevenuesIDD instruments
    
    $
    6,806
    
    
    $
    5,136IDD consumables and service
    
    
    15,558
    
    
    
    13,254Sample processing instruments and supplies
    
    
    3,335
    
    
    
    3,796Personalized medicine services
    
    
    27
    
    
    
    Total revenues
    
    
    25,726
    
    
    
    22,186Cost of RevenueIDD instruments
    
    
    4,447
    
    
    
    3,371IDD consumables and service
    
    
    6,425
    
    
    
    4,955Sample processing instruments and supplies
    
    
    1,521
    
    
    
    1,678Personalized medicine services
    
    
    174
    
    
    
    Total cost of revenue
    
    
    12,567
    
    
    
    10,004Gross profit
    
    
    13,159
    
    
    
    12,182Marketing and selling
    
    
    4,956
    
    
    
    3,832General and administrative
    
    
    4,202
    
    
    
    3,165Research and development, net
    
    
    3,605
    
    
    
    2,870Total operating expenses
    
    
    12,763
    
    
    
    9,867Operating income
    
    
    396
    
    
    
    2,315Other income (expense):Interest income
    
    
    328
    
    
    
    215Interest expense
    
    
    (2
    )
    
    
    (3
    )Foreign currency transaction gain (loss) and other
    
    
    856
    
    
    
    (1
    )Income before provision for income taxes
    
    
    1,578
    
    
    
    2,526Provision for income taxes
    
    
    654
    
    
    
    610Net income
    
    $
    924
    
    
    $
    1,916Other comprehensive (loss) incomeChange in cumulative translation adjustment
    
    
    (225
    )
    
    
    121Comprehensive income
    
    $
    699
    
    
    $
    2,037Net income per share  basic
    
    $
    0.05
    
    
    $
    0.11Net income per share  diluted
    
    $
    0.05
    
    
    $
    0.11Weighted average common shares outstanding  basic
    
    
    17,978
    
    
    
    17,751Weighted average common shares outstanding  diluted
    
    
    18,044
    
    
    
    17,893
   4




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##### Table of Contents



IRIS INTERNATIONAL, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  For the nine monthsended September 30,2010
    
    
    2009RevenuesIDD instruments
    
    $
    22,107
    
    
    $
    16,772IDD consumables and service
    
    
    45,274
    
    
    
    38,658Sample processing instruments and supplies
    
    
    10,986
    
    
    
    10,673Personalized medicine services
    
    
    27
    
    
    
    Total revenues
    
    
    78,394
    
    
    
    66,103Cost of RevenueIDD instruments
    
    
    14,194
    
    
    
    10,656IDD consumables and service
    
    
    18,168
    
    
    
    15,148Sample processing instruments and supplies
    
    
    4,950
    
    
    
    5,089Personalized medicine services
    
    
    174
    
    
    
    Total cost of revenue
    
    
    37,486
    
    
    
    30,893Gross profit
    
    
    40,908
    
    
    
    35,210Marketing and selling
    
    
    14,152
    
    
    
    11,664General and administrative
    
    
    12,562
    
    
    
    9,689Research and development, net
    
    
    11,138
    
    
    
    8,549Total operating expenses
    
    
    37,852
    
    
    
    29,902Operating income
    
    
    3,056
    
    
    
    5,308Other income (expense):Interest income
    
    
    844
    
    
    
    640Interest expense
    
    
    (7
    )
    
    
    (10
    )Foreign currency transaction gain and other
    
    
    183
    
    
    
    20Income before provision for income taxes
    
    
    4,076
    
    
    
    5,958Provision for income taxes
    
    
    1,486
    
    
    
    1,639Net income
    
    $
    2,590
    
    
    $
    4,319Other comprehensive (loss) incomeChange in cumulative translation adjustment
    
    
    (501
    )
    
    
    229Comprehensive income
    
    $
    2,089
    
    
    $
    4,548Net income per share  basic
    
    $
    0.14
    
    
    $
    0.24Net income per share  diluted
    
    $
    0.14
    
    
    $
    0.24Weighted average common shares outstanding  basic
    
    
    17,947
    
    
    
    17,701Weighted average common shares outstanding  diluted
    
    
    18,056
    
    
    
    17,874
   5




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##### Table of Contents



IRIS INTERNATIONAL, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  For the nine monthsended September 30,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    2,590
    
    
    $
    4,319Adjustments to reconcile net income to net cash
provided by operating activities:Loss on disposal of fixed assets
    
    
    5
    
    
    
    42Deferred taxes
    
    
    48
    
    
    
    Tax (benefit) expense from stock option exercises
    
    
    (48
    )
    
    
    609Gain on foreign currency remeasurement
    
    
    (105
    )
    
    
    Depreciation and amortization
    
    
    3,084
    
    
    
    2,606Common stock and stock-based compensation
    
    
    3,193
    
    
    
    2,780Changes in operating assets and liabilities:Accounts receivable
    
    
    (736
    )
    
    
    3,763Inventories
    
    
    (1,469
    )
    
    
    (3,417
    )Prepaid expenses and other assets
    
    
    (725
    )
    
    
    838Investment in sales-type leases
    
    
    (1,963
    )
    
    
    127Other assets
    
    
    
    
    
    
    (100
    )Accounts payable
    
    
    280
    
    
    
    (1,507
    )Accrued expenses
    
    
    1,737
    
    
    
    (832
    )Deferred service contract revenue
    
    
    845
    
    
    
    324Net cash provided by operating activities
    
    
    6,736
    
    
    
    9,552Cash flows from investing activities:Acquisition of business
    
    
    (4,630
    )
    
    
    Purchase of assets from European distributor
    
    
    (660
    )
    
    
    Acquisition of property and equipment
    
    
    (2,029
    )
    
    
    (2,259
    )Software development costs capitalized
    
    
    (554
    )
    
    
    (635
    )Sale of short-term investments in marketable securities
    
    
    
    
    
    
    2,157Net cash used in investing activities
    
    
    (7,873
    )
    
    
    (737
    )Cash flows from financing activities:Issuance of common stock and warrants for cash
    
    
    31
    
    
    
    750Repurchase of common stock
    
    
    (1,790
    )
    
    
    (2,638
    )Tax benefit (expense) from stock option exercises
    
    
    48
    
    
    
    (609
    )Net cash used in financing activities
    
    
    (1,711
    )
    
    
    (2,497
    )Net foreign currency translation adjustments
    
    
    (295
    )
    
    
    228Net (decrease) increase in cash and cash equivalents
    
    
    (3,143
    )
    
    
    6,546Cash and cash equivalents at beginning of period
    
    
    34,253
    
    
    
    24,445Cash and cash equivalents at end of period
    
    $
    31,110
    
    
    $
    30,991Supplemental schedule of non-cash investing activities:During the nine months ended September 30, 2010, the
Company
disposed of property and equipment with a cost and
accumulated depreciation of $621 and $616, respectivelyFair value of contingent consideration in connection
with business
acquisition completed in the quarter
ended September 30, 2010 was $1.2 millionSupplemental disclosure of cash flow information:Cash paid for income taxes
    
    $
    2,066
    
    
    $
    1,872Cash paid for interest
    
    $
    7
    
    
    $
    7
   6




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##### Table of Contents



IRIS INTERNATIONAL, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Company History
 ®
 2. Interim Financial Reporting
 Basis of Presentation 
  Use of Estimates 
  7




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##### Table of Contents



IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 Earnings Per Share  Earnings per share
 For the three
    
    
    For the ninemonths ended
    
    
    months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Weighted average common shares outstanding  basic
    
    
    17,978
    
    
    
    17,751
    
    
    
    17,947
    
    
    
    17,701Dilutive stock options and warrants outstanding
    
    
    66
    
    
    
    142
    
    
    
    109
    
    
    
    173Weighted average common shares outstanding 
diluted
    
    
    18,044
    
    
    
    17,893
    
    
    
    18,056
    
    
    
    17,874
 Foreign Currency Hedge
 Accounting for Derivative Instruments and Hedging Activities
  Foreign Currency Exchange Translation
  8




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##### Table of Contents



IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 Reclassifications
 Certain Risks and Uncertainties
    3. Acquisition
   
    
    to expand beyond its initial molecular pathology test menu by adding other molecular
panels, flow cytometry for the detection and monitoring of leukemia and lymphoma, (F)ISH
testing, and proprietary new tests based on the Companys NADiA technology platform;
 
    
    to have better control of all aspects of the commercial operations of the NADiA
platform, starting with NADiA ProsVue;
  9




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##### Table of Contents



IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 
    
    to enable the acceleration of the development efforts of the NADiA technology product
pipeline; and
 
    
    to enter the attractive personalized medicine market due to its significant growth
potential.
  (In thousands)Cash
    
    $
    4,630Fair value of contingent consideration
    
    
    1,210Total purchase price
    
    $
    5,840
   (In thousands)Current assets
    
    $
    74Property and equipment
    
    
    523Existing technology
    
    
    3,090CLIA License
    
    
    1,604Customer relationships
    
    
    6Non-compete agreements
    
    
    100Goodwill
    
    
    1,352Other assets
    
    
    31Current liabilities
    
    
    (316
    )Lease obligations
    
    
    (178
    )Other liabilities
    
    
    (61
    )Deferred tax liability, net
    
    
    (385
    )Total purchase price
    
    $
    5,840
    10




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##### Table of Contents



IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    25,731
    
    
    $
    22,186
    
    
    $
    78,425
    
    
    $
    66,103Net income
    
    
    587
    
    
    
    1,250
    
    
    
    930
    
    
    
    2,602Net income per basic and diluted share
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.15
 4. Inventories
  September 30,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009Finished goods
    
    $
    4,656
    
    
    $
    2,595Work-in-process
    
    
    283
    
    
    
    214Raw materials, parts and sub-assemblies
    
    
    7,365
    
    
    
    8,057Inventories
    
    $
    12,304
    
    
    $
    10,866
 5. Sales-Type Leases
  September 30,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009Total minimum lease payments
    
    $
    15,104
    
    
    $
    12,735Less: unearned income
    
    
    (2,321
    )
    
    
    (1,897
    )Net investment in sales-type leases
    
    
    12,783
    
    
    
    10,838Less: current portion
    
    
    (3,504
    )
    
    
    (3,397
    )Net investment in sales-type leases, non-current portion
    
    $
    9,279
    
    
    $
    7,441
  11




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##### Table of Contents



IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
  (In thousands)Years Ending December 31,2010 (three months remaining)
    
    $
    1,0132011
    
    
    3,3922012
    
    
    2,8522013
    
    
    2,4112014
    
    
    1,976Thereafter
    
    
    1,139$
    12,783
 6. Bank Credit Facility
   7. Income Taxes
    12




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##### Table of Contents



IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 8. Stock-Based Compensation
 Stock
Compensation
 For the three
    
    
    For the ninemonths ended
    
    
    months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Cost of sales
    
    $
    90
    
    
    $
    113
    
    
    $
    278
    
    
    $
    311Marketing and selling
    
    
    151
    
    
    
    161
    
    
    
    526
    
    
    
    451General and administrative
    
    
    533
    
    
    
    493
    
    
    
    1,764
    
    
    
    1,540Research and development
    
    
    208
    
    
    
    179
    
    
    
    625
    
    
    
    478Stock-based compensation
    
    $
    982
    
    
    $
    946
    
    
    $
    3,193
    
    
    $
    2,780
 Stock Options
   Number of Option Shares(In thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    AvailablePlan
    
    Authorized
    
    
    Exercised
    
    
    Outstanding
    
    
    for Grant1994 Plan
    
    
    700
    
    
    
    680
    
    
    
    20
    
    
    
    1998 Plan
    
    
    4,100
    
    
    
    2,717
    
    
    
    946
    
    
    
    2007 Plan
    
    
    3,300
    
    
    
    
    
    
    
    1,725
    
    
    
    9478,100
    
    
    
    3,397
    
    
    
    2,691
    
    
    
    947
  Weighted
    
    
    WeightedAverage
    
    
    AverageExercise
    
    
    Remaining
    
    
    AggregatePrice Per
    
    
    Contractual
    
    
    Intrinsic(in thousands, except for per share amounts)
    
    Shares
    
    
    Share
    
    
    Term
    
    
    ValueOutstanding at January 1, 2010
    
    
    2,205
    
    
    $
    12.97
    
    
    3.7 years
    
    $
    3,445Granted
    
    
    692
    
    
    $
    10.92Exercised
    
    
    (23
    )
    
    $
    1.44Canceled or expired
    
    
    (183
    )
    
    $
    13.31Outstanding at September 30, 2010
    
    
    2,691
    
    
    $
    12.51
    
    
    4.0 years
    
    $
    1,164Exercisable at September 30, 2010
    
    
    1,576
    
    
    $
    13.63
    
    
    2.7 years
    
    $
    1,063
  13




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##### Table of Contents



IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
   For the threemonths endedSeptember 30,2010
    
    
    2009Risk free interest rate
    
    
    1.46
    %
    
    
    2.1
    %Expected lives (years)
    
    
    4.29
    
    
    
    4.0Expected volatility
    
    
    56.1
    %
    
    
    61.6
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
   WeightedAverageGrant DateFair Value(In thousands except for fair value per share)
    
    Shares
    
    
    Per ShareUnvested options at January 1, 2010
    
    
    933
    
    
    $
    11.26Granted
    
    
    692
    
    
    $
    11.91Vested
    
    
    (403
    )
    
    $
    11.40Forfeited or expired
    
    
    (107
    )
    
    $
    7.76Unvested options at September 30, 2010
    
    
    1,115
    
    
    $
    10.93
  14




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##### Table of Contents



IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 Restricted Shares
 1 4 1 4
 Weighted AverageGrant Date Fair(in thousands, except for fair value per share)
    
    Shares
    
    
    Value Per ShareNon-vested shares at January 1, 2010
    
    
    248
    
    
    $
    11.44Granted
    
    
    171
    
    
    $
    10.94Vested
    
    
    (110
    )
    
    $
    11.59Forfeited
    
    
    (20
    )
    
    $
    11.75Non-vested shares at September 30, 2010
    
    
    289
    
    
    $
    11.07
  9. Common Stock Repurchase Plan
   10. Shareholders Rights Plan
    15




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##### Table of Contents



IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 11. Contingencies
 Litigation
  Guarantees
  12. Segments and Geographic Information
 Segment Reporting
      16




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IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
  UnallocatedSample
    
    
    Personalized
    
    
    Corporate(In thousands)
    
    IDD
    
    
    Processing
    
    
    Medicine
    
    
    Expenses
    
    
    TotalFor the three months ended
September 30, 2010Revenues
    
    $
    22,364
    
    
    $
    3,335
    
    
    $
    27
    
    
    $
    
    
    
    $
    25,726Gross profit
    
    
    11,492
    
    
    
    1,814
    
    
    
    (147
    )
    
    
    
    
    
    
    13,159Marketing and selling
    
    
    4,166
    
    
    
    338
    
    
    
    452
    
    
    
    
    
    
    
    4,956General and administrative
    
    
    1,582
    
    
    
    370
    
    
    
    657
    
    
    
    1,593
    
    
    
    4,202Research and development, net
    
    
    2,228
    
    
    
    186
    
    
    
    1,191
    
    
    
    
    
    
    
    3,605Total operating expenses
    
    
    7,976
    
    
    
    894
    
    
    
    2,300
    
    
    
    1,593
    
    
    
    12,763Operating income
    
    
    3,516
    
    
    
    920
    
    
    
    (2,447
    )
    
    
    (1,593
    )
    
    
    396Interest income
    
    
    81
    
    
    
    6
    
    
    
    
    
    
    
    241
    
    
    
    328Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Depreciation and amortization
    
    
    968
    
    
    
    43
    
    
    
    91
    
    
    
    2
    
    
    
    1,104Segment pre-tax income (loss)
    
    
    4,689
    
    
    
    900
    
    
    
    (2,783
    )
    
    
    (1,228
    )
    
    
    1,578Segment assets
    
    
    77,538
    
    
    
    12,021
    
    
    
    10,727
    
    
    
    6,760
    
    
    
    107,046Investment in long-lived assets
    
    
    25,761
    
    
    
    433
    
    
    
    10,481
    
    
    
    
    
    
    
    36,675For the three months ended
September 30, 2009Revenues
    
    $
    18,390
    
    
    $
    3,796
    
    
    $
    
    
    
    $
    
    
    
    $
    22,186Gross profit
    
    
    10,064
    
    
    
    2,118
    
    
    
    
    
    
    
    
    
    
    
    12,182Marketing and selling
    
    
    3,561
    
    
    
    271
    
    
    
    
    
    
    
    
    
    
    
    3,832General and administrative
    
    
    1,196
    
    
    
    342
    
    
    
    
    
    
    
    1,627
    
    
    
    3,165Research and development, net
    
    
    1,496
    
    
    
    239
    
    
    
    1,135
    
    
    
    
    
    
    
    2,870Total operating expenses
    
    
    6,253
    
    
    
    852
    
    
    
    1,135
    
    
    
    1,627
    
    
    
    9,867Operating income
    
    
    3,811
    
    
    
    1,266
    
    
    
    (1,135
    )
    
    
    (1,627
    )
    
    
    2,315Interest income
    
    
    9
    
    
    
    5
    
    
    
    
    
    
    
    201
    
    
    
    215Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Depreciation and amortization
    
    
    854
    
    
    
    67
    
    
    
    
    
    
    
    5
    
    
    
    926Segment pre-tax income (loss)
    
    
    3,803
    
    
    
    1,246
    
    
    
    (1,135
    )
    
    
    (1,388
    )
    
    
    2,526Segment assets
    
    
    57,574
    
    
    
    26,711
    
    
    
    4,239
    
    
    
    4,929
    
    
    
    93,453Investment in long-lived assets
    
    
    21,383
    
    
    
    387
    
    
    
    4,217
    
    
    
    
    
    
    
    25,987
  17




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##### Table of Contents



IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 UnallocatedSample
    
    
    Personalized
    
    
    Corporate(In thousands)
    
    IDD
    
    
    Processing
    
    
    Medicine
    
    
    Expenses
    
    
    TotalFor the nine months ended
September 30, 2010Revenues
    
    $
    67,381
    
    
    $
    10,986
    
    
    $
    27
    
    
    $
    
    
    
    $
    78,394Gross profit
    
    
    35,019
    
    
    
    6,036
    
    
    
    (147
    )
    
    
    
    
    
    
    40,908Marketing and selling
    
    
    12,684
    
    
    
    921
    
    
    
    547
    
    
    
    
    
    
    
    14,152General and administrative
    
    
    4,625
    
    
    
    1,132
    
    
    
    898
    
    
    
    5,907
    
    
    
    12,562Research and development, net
    
    
    6,686
    
    
    
    504
    
    
    
    3,948
    
    
    
    
    
    
    
    11,138Total operating expenses
    
    
    23,995
    
    
    
    2,557
    
    
    
    5,393
    
    
    
    5,907
    
    
    
    37,852Operating income
    
    
    11,024
    
    
    
    3,479
    
    
    
    (5,540
    )
    
    
    (5,907
    )
    
    
    3,056Interest income
    
    
    119
    
    
    
    23
    
    
    
    
    
    
    
    702
    
    
    
    844Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Depreciation and amortization
    
    
    2,716
    
    
    
    137
    
    
    
    221
    
    
    
    10
    
    
    
    3,084Segment pre-tax income (loss)
    
    
    11,204
    
    
    
    3,425
    
    
    
    (5,540
    )
    
    
    (5,013
    )
    
    
    4,076Segment assets
    
    
    77,538
    
    
    
    12,021
    
    
    
    10,727
    
    
    
    6,760
    
    
    
    107,046Investment in long-lived assets
    
    
    25,761
    
    
    
    433
    
    
    
    10,481
    
    
    
    
    
    
    
    36,675For the nine months ended
September 30, 2009Revenues
    
    $
    55,430
    
    
    $
    10,673
    
    
    $
    
    
    
    $
    
    
    
    $
    66,103Gross profit
    
    
    29,625
    
    
    
    5,585
    
    
    
    
    
    
    
    
    
    
    
    35,210Marketing and selling
    
    
    10,865
    
    
    
    799
    
    
    
    
    
    
    
    
    
    
    
    11,664General and administrative
    
    
    3,678
    
    
    
    984
    
    
    
    
    
    
    
    5,027
    
    
    
    9,689Research and development, net
    
    
    4,620
    
    
    
    681
    
    
    
    3,248
    
    
    
    
    
    
    
    8,549Total operating expenses
    
    
    19,163
    
    
    
    2,464
    
    
    
    3,248
    
    
    
    5,027
    
    
    
    29,902Operating income
    
    
    10,462
    
    
    
    3,121
    
    
    
    (3,248
    )
    
    
    (5,027
    )
    
    
    5,308Interest income
    
    
    18
    
    
    
    20
    
    
    
    
    
    
    
    602
    
    
    
    640Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (10
    )Depreciation and amortization
    
    
    2,393
    
    
    
    201
    
    
    
    
    
    
    
    12
    
    
    
    2,606Segment pre-tax income (loss)
    
    
    10,440
    
    
    
    3,076
    
    
    
    (3,248
    )
    
    
    (4,310
    )
    
    
    5,958Segment assets
    
    
    57,574
    
    
    
    26,711
    
    
    
    4,239
    
    
    
    4,929
    
    
    
    93,453Investment in long-lived assets
    
    
    21,383
    
    
    
    387
    
    
    
    4,217
    
    
    
    
    
    
    
    25,987
   13. Subsequent Events
   18




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 This report
includes “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. All
statements other than statements of historical facts are “forward-looking
statements” for purposes of these provisions, including any projections
of earnings, revenues or other financial items, any statement of the plans and
objectives of management for future operations, any statements concerning
proposed new products or strategic arrangements, any statements regarding
future economic conditions or performance, and any statement of assumptions
underlying any of the foregoing. In some cases, forward-looking statements can
be identified by the use of terminology such as “may,”
“will,” “expects,” “plans,”
“anticipates,” “estimates,” “potential,”
“intends”, or “continue” or the negative thereof or
other comparable terminology. Although we believe that the expectations
reflected in the forward-looking statements contained herein are reasonable,
there can be no assurance that such expectations or any of the forward-looking
statements will prove to be correct, and actual results could differ materially
from those projected or assumed in the forward-looking statements. Our future
financial condition and results of operations, as well as any forward-looking
statements, are subject to inherent risks and uncertainties, including but not
limited to the Risk Factors set forth under Item 1A, and for the reasons
described elsewhere in this report. All forward-looking statements and reasons
why results may differ included in this report are made as of the date hereof,
and we assume no obligation to update these forward-looking statements or
reasons why actual results might differ.
 Overview
 Segment Reporting
 ®
   19




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®
  Critical Accounting Policies
    20




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Results of Operations
  Three months ended
    
    
    
    
    
    
    Nine months endedSeptember 30,
    
    
    
    
    
    
    September 30,(in thousands)
    
    2010
    
    
    
    
    
    
    2009
    
    
    
    
    
    
    2010
    
    
    
    
    
    
    2009RevenuesIDD instruments
    
    $
    6,806
    
    
    
    27%
    
    
    $
    5,136
    
    
    
    23%
    
    
    $
    22,107
    
    
    
    28%
    
    
    $
    16,772
    
    
    
    25%IDD consumables and service
    
    
    15,558
    
    
    
    60%
    
    
    
    13,254
    
    
    
    60%
    
    
    
    45,274
    
    
    
    58%
    
    
    
    38,658
    
    
    
    59%Sample Processing instruments and supplies
    
    
    3,335
    
    
    
    13%
    
    
    
    3,796
    
    
    
    17%
    
    
    
    10,986
    
    
    
    14%
    
    
    
    10,673
    
    
    
    16%Personalized medicine
    
    
    27
    
    
    
    0%
    
    
    
    
    
    
    
    0%
    
    
    
    27
    
    
    
    0%
    
    
    
    
    
    
    
    0%Total revenues
    
    
    25,726
    
    
    
    100%
    
    
    
    22,186
    
    
    
    100%
    
    
    
    78,394
    
    
    
    100%
    
    
    
    66,103
    
    
    
    100%Gross profit (1)IDD instruments
    
    
    2,359
    
    
    
    35%
    
    
    
    1,765
    
    
    
    34%
    
    
    
    7,913
    
    
    
    36%
    
    
    
    6,116
    
    
    
    36%IDD consumables and service
    
    
    9,133
    
    
    
    59%
    
    
    
    8,299
    
    
    
    63%
    
    
    
    27,106
    
    
    
    60%
    
    
    
    23,510
    
    
    
    61%Sample Processing instruments and supplies
    
    
    1,814
    
    
    
    54%
    
    
    
    2,118
    
    
    
    56%
    
    
    
    6,036
    
    
    
    55%
    
    
    
    5,584
    
    
    
    52%Personalized medicine
    
    
    (147
    )
    
    nm
    
    
    
    
    
    
    
    0%
    
    
    
    (147
    )
    
    nm
    
    
    
    
    
    
    
    0%Gross profit
    
    
    13,159
    
    
    
    51%
    
    
    
    12,182
    
    
    
    55%
    
    
    
    40,908
    
    
    
    52%
    
    
    
    35,210
    
    
    
    53%Operating expensesMarketing and selling
    
    
    4,956
    
    
    
    19%
    
    
    
    3,832
    
    
    
    17%
    
    
    
    14,152
    
    
    
    18%
    
    
    
    11,664
    
    
    
    18%General and administrative
    
    
    4,202
    
    
    
    16%
    
    
    
    3,165
    
    
    
    14%
    
    
    
    12,562
    
    
    
    16%
    
    
    
    9,689
    
    
    
    15%Research and development, net
    
    
    3,605
    
    
    
    14%
    
    
    
    2,870
    
    
    
    13%
    
    
    
    11,138
    
    
    
    14%
    
    
    
    8,549
    
    
    
    13%Total operating expenses
    
    
    12,763
    
    
    
    50%
    
    
    
    9,867
    
    
    
    44%
    
    
    
    37,852
    
    
    
    48%
    
    
    
    29,902
    
    
    
    45%Operating income
    
    
    396
    
    
    
    2%
    
    
    
    2,315
    
    
    
    10%
    
    
    
    3,056
    
    
    
    4%
    
    
    
    5,308
    
    
    
    8%Other (expense) income
    
    
    1,182
    
    
    
    5%
    
    
    
    211
    
    
    
    1%
    
    
    
    1,020
    
    
    
    1%
    
    
    
    650
    
    
    
    1%Income before provision for income taxes
    
    
    1,578
    
    
    
    6%
    
    
    
    2,526
    
    
    
    11%
    
    
    
    4,076
    
    
    
    5%
    
    
    
    5,958
    
    
    
    9%Provision for income taxes (2)
    
    
    654
    
    
    
    41%
    
    
    
    610
    
    
    
    24%
    
    
    
    1,486
    
    
    
    36%
    
    
    
    1,639
    
    
    
    28%Net income
    
    $
    924
    
    
    
    4%
    
    
    $
    1,916
    
    
    
    9%
    
    
    $
    2,590
    
    
    
    3%
    
    
    $
    4,319
    
    
    
    7%
 (1)
    
    Gross profit margin percentages are based on the related sales of each category.(2)
    
    Income tax percentage is computed based on the relationship of income taxes to pre-tax
income. Comparison of Three Months Ended September 30, 2010 to Three Months Ended September 30, 2009
   21




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22




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##### Table of Contents



Comparison of Nine Months Ended September 30, 2010 to Nine Months Ended September 30, 2009
        23




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24




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##### Table of Contents



Liquidity and Capital Resources
   Operating Cash Flows
 Investing Activities
 Financing Activities
      25




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
 , Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses , Receivables.
  Certain Revenue Arrangements That Include
Software Elements Software
 Multiple-Deliverable Revenue Arrangements Revenue Recognition
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk
   26




---



##### Table of Contents



Foreign Currencies
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls over Financial Reporting
   27




---



##### Table of Contents



PART II: OTHER INFORMATION
 
 Item 1A. Risk Factors
  Risks Related to Our Laboratory Business
 Changes in healthcare laws, regulations or policies, or third-party payor policies could
affect coverage or reimbursement for our specialized laboratory tests and adversely affect our
financial results.
  Any changes to the current healthcare laws and regulations may necessitate a change to our
business model.
  We may incur substantial penalties including fines or possible debarment from Medicare or
Medicaid if we violate certain government payor laws and regulations.
   28




---



##### Table of Contents



Our laboratory business may be harmed if we are unable to comply with certain healthcare
related laws and regulations, including the Clinical Laboratory Improvement Act of 1967 and the
Clinical Laboratory Improvement Amendments of 1988 (collectively, CLIA).
  We face possible litigation, penalties and damage to our reputation with payors, physicians
and patients if we are unable to properly protect customer-related information.
  We face possible litigation, penalties and medical malpractice for errors in laboratory
testing results.
  The nature of the testing performed in our laboratory is complex and often depends on our
ability to obtain specialized reagents from a sole source provider. Any disruption of supply, or
discontinuance of products by a sole source may severely impact Aristas ability to provide testing
services.
  Federal, state and CLIA regulations define certain personnel standards that our laboratory
must adhere to, including education, background and experience requirements. Our ability to
attract, hire and maintain critical personnel may limit the testing our laboratory can perform.
   29




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##### Table of Contents



The laboratory industry is highly competitive and many other laboratories offer the same
testing that our laboratory offers. Our ability to discriminate our laboratory in a cluttered
marketplace
may limit our ability to attract and maintain customers and will have a material adverse
effect on our financial performance.
  We have a limited operating history in our laboratory business and have experienced operating
losses making it difficult to evaluate whether we will operate profitably.
    
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   30




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##### Table of Contents



Item 6. Exhibits
 Exhibit
    
    
    
    ReferenceNumber
    
    Description
    
    Document2.1
    
    
    Merger Agreement, dated July 26, 2010, by and among
Iris International, Inc., AlliedPath Inc., and API
Acquisition Corp. In accordance with Item
601(b)(2) of Regulation S-X, the disclosure
schedules to the Merger Agreement have not been
filed. The Merger Agreement contains a list
briefly identifying the contents of all omitted
disclosure schedules and Iris International, Inc.
hereby agrees to furnish a supplemental copy of any
omitted disclosure schedule to the Securities and
Exchange Commission upon request.
    
    
    (1
    )4.1
    
    
    Rights Agreement, dated as of September 24, 2010,
between the Registrant and Continental Stock
Transfer & Trust Company, as Rights Agent,
including the Certificate of Designation of Rights,
Preferences and Privileges of Series A Preferred
Stock, the Form of Rights Certificate, and the
Summary of Rights to Purchase Preferred Stock,
attached thereto as Exhibits A, B and C,
respectively.
    
    
    (2
    )10.1
    
    
    Employment Agreement, dated July 28, 2010, by and
between Iris International, Inc. and Vance Randal
White.
    
    
    (3
    )10.2
    
    
    Employment Agreement, dated July 28, 2010, by and
between Iris International, Inc. and Philip
Ginsburg.
    
    
    (4
    )10.3
    
    
    Change in Terms Agreement, dated August 31, 2010,
by and between IRIS International, Inc. and
California Bank & Trust.
    
    
    (5
    )10.4
    
    
    Commercial Guaranty, dated August 31, 2010, by IRIS
Molecular Diagnostics, Inc.
    
    
    (6
    )10.5
    
    
    Commercial Security Agreement, dated August 31,
2010, by and among IRIS Molecular Diagnostics,
Inc., IRIS International, Inc. and California Bank
& Trust.
    
    
    (7
    )10.6
    
    
    Third Amendment to Key Employee Agreement for Cesar
M. Garcia effective May 14, 2010 between IRIS
International, Inc. and Cesar M. Garcia.
    
    
    (8
    )10.7
    
    
    Amendment to Key Employee Agreement for Robert
Mello, effective May 14, 2010 between IRIS
International, Inc. and Robert Mello.
    
    
    (9
    )10.8
    
    
    Amendment to Key Employee Agreement for Thomas
Warekois, effective May 14, 2010 between IRIS
International, Inc. and Thomas Warekois.
    
    
    (10
    )10.9
    
    
    Amendment to Key Employee Agreement for John Yi,
effective May 14, 2010 between IRIS International,
Inc. and John Yi.
    
    
    (11
    )10.10
    
    
    Key Employee Agreement for Thomas H. Adams, PhD,
dated September 2, 2010 between IRIS International,
Inc. and Thomas H. Adams, Ph.D.
    
    
    (12
    )31.1
    
    
    Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Chief Executive
Officer
    
    
    *
  31




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##### Table of Contents



Exhibit
    
    
    
    ReferenceNumber
    
    Description
    
    Document31.2
    
    
    Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Chief Financial
Officer
    
    
    *32.1
    
    
    Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by Chief Executive
Officer
    
    
    *32.2
    
    
    Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by Chief Financial
Officer
    
    
    *
 
 *
    
    Filed herewith
    
    Consists of a management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed with the SEC on
July 30, 2010.(2)
    
    Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed with the SEC on
September 29, 2010.(3)
    
    Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the SEC on
July 30, 2010.(4)
    
    Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed with the SEC on
July 30, 2010.(5)
    
    Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the SEC on
September 2, 2010.(6)
    
    Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed with the SEC on
September 2, 2010.(7)
    
    Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed with the SEC on
September 2, 2010.(8)
    
    Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the SEC on
September 7, 2010.(9)
    
    Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed with the SEC on
September 7, 2010.(10)
    
    Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed with the SEC on
September 7, 2010.(11)
    
    Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed with the SEC on
September 7, 2010.(12)
    
    Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed with the SEC on
September 7, 2010.  32




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SIGNATURES
  Date: November 8, 2010
    IRIS INTERNATIONAL, INC.By:
    /s/ César M. GarcíaCésar M. GarcíaChairman, President and Chief
Executive OfficerBy:
    /s/ Martin S. McDermutMartin S. McDermutActing Chief Financial Officer  33