ChromaVision Medical Systems, Inc.

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

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

As of October 29, 2003 there were 38,377,443 shares outstanding of the Issuer’s Common Stock, $.01 par value.


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PART I	FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002		3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002		4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3	Quantitative and Qualitative Disclosures About Market Risk		16
Item 4	Controls and Procedures		16
PART II	OTHER INFORMATION
Item 6	Exhibits and Reports on Form 8-K		17
SIGNATURES			18

Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(Unaudited)


			September 30,			December 31,
			2003			2002

Assets
Current assets:
	Cash and cash equivalents		$	2,697		$	2,810
	Accounts receivable, net			2,610			2,355
	Other			215			162

Total current assets				5,522			5,327
	Property and equipment, net			5,605			4,761
	Other			1,037			765

Total assets			$	12,164		$	10,853

Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable		$	390		$	751
	Accrued payroll			732			863
	Accrued liabilities			1,094			1,079
	Current maturities of long-term debt			1,264			—

Total current liabilities				3,480			2,693

Long-term debt				1,986			—
Commitments and contingencies
Stockholders’ equity:
		Series C convertible preferred stock, $.01 par value, authorized 200,000 shares, none issued and outstanding		—			—
		Common stock $.01 par value, authorized 50,000,000 shares, issued and outstanding 38,377,443 shares in 2003 and 32,846,085 in 2002		384			328
		Additional paid-in capital		91,921			85,915
		Accumulated deficit		(84,545	)		(78,017	)
		Unamoritized deferred compensation		(957	)		—
		Accumulated other comprehensive loss		(105	)		(66	)

		Total stockholders’ equity		6,698			8,160

Total liabilities and stockholders’ equity			$	12,164		$	10,853

Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(Unaudited)


			Three Months Ended						Nine months Ended
			September 30,						September 30,

			2003			2002			2003			2002

Revenue:
	Fee per use		$	2,827		$	2,345		$	8,130		$	6,210
	System sales			252			264			656			383

		Total revenue		3,079			2,609			8,786			6,593
Cost of revenue				970			757			2,687			2,024

		Gross profit		2,109			1,852			6,099			4,569

Operating expenses:
	Selling, general and administrative			3,115			2,606			8,981			8,042
	Research and development			1,171			1,252			3,636			3,822

		Total operating expenses		4,286			3,858			12,617			11,864

		Loss from operations		(2,177	)		(2,006	)		(6,518	)		(7,295	)

Total other income (expense)				(15	)		25			(10	)		61

	Loss before income taxes			(2,192	)		(1,981	)		(6,528	)		(7,234	)
Income taxes				—			—			—			—

Net loss				(2,192	)		(1,981	)		(6,528	)		(7,234	)
Accretion of and dividends on redeemable, convertible preferred stock				—			(2,998	)		—			(4,368	)

Net loss attributable to common stock			$	(2,192	)	$	(4,979	)	$	(6,528	)	$	(11,602	)

Basic and diluted net loss per common share			$	(.06	)	$	(.18	)	$	(.18	)	$	(.45	)

Weighted average number of common shares outstanding				37,820,840			28,044,761			37,094,625			25,625,538

Condensed Consolidated Statements of Cash Flows
(in thousands, except share and per share amounts)
(Unaudited)


			Nine months Ended
			September 30,

			2003			2002

Cash flows from operating activities:
Net loss			$	(6,528	)	$	(7,234	)
Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization		2,020			1,979
		Non-cash compensation charges		136			—
	Changes in operating assets and liabilities:
		Accounts receivable, net		(255	)		(432	)
		Other assets		(325	)		(294	)
		Accounts payable		(361	)		(162	)
		Accrued payroll		(131	)		92
		Investment banking fee payable		—			(1,000	)
		Accrued liabilities		15			(329	)

		Net cash used in operating activities		(5,429	)		(7,380	)

Cash flows from investing activities:
		Additions to property and equipment		(2,845	)		(1,415	)
		Other		(19	)		(53	)

		Net cash used in investing activities		(2,864	)		(1,468	)

Cash flows from financing activities:
Proceeds from exercise of stock options and issuance of stock under employee stock purchase plan				—			101
Issuance of common stock				5,000			7,000
Borrowings on revolving credit facility				250			—
Borrowings on long-term debt				3,000			—
Offering costs				(31	)		(881	)

		Net cash provided by financing activities		8,219			6,220

Effect of exchange rate changes on cash and cash equivalents				(39	)		9

		Net decrease in cash and cash equivalents		(113	)		(2,619	)
Cash and cash equivalents beginning of period				2,810			7,401

Cash and cash equivalents end of period			$	2,697		$	4,782

Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Issuance of common stock in lieu of cash for preferred stock dividend payable			$	—		$	591
Accretion of preferred stock dividend			$	—		$	307
Accretion of preferred stock			$	—		$	4,060
Issuance of restricted common stock			$	1,087		$	—

Notes to Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
(Unaudited)

These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2002 annual report filed on Form 10-K with the Securities and Exchange Commission.

The accompanying unaudited condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. All such adjustments, except as indicated in Note 3 to the Notes to the Condensed Consolidated Financial Statements, are of a normal, recurring nature. Certain amounts have been reclassified to conform to the current period presentation. The results of our operations for any interim period are not necessarily indicative of the results to be obtained for a full fiscal year.

Basic and diluted loss per common share is calculated by dividing net loss by the weighted average common shares outstanding during the year. Stock options and warrants to purchase 4,407,162, and 4,423,575 shares of common stock with a weighted average option price of $3.85 and $4.66 were outstanding at September 30, 2003 and 2002, respectively. These stock options and warrants outstanding were not included in the computation of diluted earnings per share because the Company incurred a loss in all periods presented, and hence the impact would be anti-dilutive.

The Company has reclassified prior year customer service costs into cost of revenue to conform to the current year presentation. The effect of the reclassification has no impact upon net income and no impact upon earnings per share.

The financial position and results of operations of our foreign subsidiaries are generally determined using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each quarter-end. Income statement accounts are translated at the average rate of exchange prevailing during the period.

The Company operates primarily in one business segment engaged in the development, manufacture and marketing of an automated cellular imaging system which is designed to assist physicians in making critical medical decisions.


			Three Months Ended						Nine months Ended
			September 30,						September 30,

			2003			2002			2003			2002

Net sales
	United States		$	3,074		$	2,498		$	8,760		$	6,336
	Europe^(a)			5			111			26			257

		Total net sales	$	3,079		$	2,609		$	8,786		$	6,593

Operating loss
	United States		$	(2,026	)	$	(1,877	)	$	(6,113	)	$	(6,980	)
	Europe^(a)			(151	)		(129	)		(405	)		(315	)

		Total operating loss	$	(2,177	)	$	(2,006	)	$	(6,518	)	$	(7,295	)

Identifiable assets			September 30,			December 31,
				2003			2002

	United States		$	12,093		$	10,689
	Europe^(a)			71			164

		Total assets	$	12,164		$	10,853

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Issue 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of Issue 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003 but do not supersede existing authoritative guidance, including SOP 97-2. The adoption of Issue 00-21 did not have an impact on the Company’s financial statements.

The Company adopted the initial recognition and measurement provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN No. 45”), on January 1, 2003, which apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Company adopted the disclosure provisions of FIN No. 45 during the quarter ended March 31, 2003. In the ordinary course of business, the Company is not subject to potential obligations under guarantees that fall within the scope of FIN No. 45 except for standard indemnification and warranty provisions that are contained within many of its customer product and service agreements which give rise only to the disclosure requirements prescribed by FIN No. 45. In addition, under previously existing accounting principles generally accepted in the United States of America, the Company continues to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred and will recognize any such losses under the guarantees and indemnification agreements and provisions when those losses are estimable.

Indemnification and warranty provisions contained within the Company’s customer product and service agreements are generally consistent with those prevalent in the Company’s industry. The duration of the Company’s service warranties generally does not exceed one year following completion of its services. The Company has not incurred significant obligations under customer indemnification or warranty provisions and does not expect to incur significant obligations in the future. Accordingly, the Company does not maintain accruals for such potential indemnification obligations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” Interpretation No. 46 clarifies the application of Accounting Research Bulletin No. 51 and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. This Interpretation is applicable to the Company in the quarter ending December 31, 2003, for interests acquired in variable interest entities prior to February 1, 2003. This Interpretation requires variable interest entities to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties or the equity investors lack specified characteristics. The adoption of this Interpretation will not have a material impact on the Company’s financial statements.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather that at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal activities. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have an impact on the Company’s financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and did not have an impact on the Company’s financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments as a liability (or as an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the Company’s financial statements.

On July 10, 2001, we obtained $12.5 million in additional funding ($11.3 million net of transaction expenses) through a private placement of our Series D Redeemable Convertible Preferred Stock (“Series D Preferred Stock”) and warrants to seven institutional investors. The investors included Safeguard Scientifics, Inc. (“Safeguard”), currently the largest beneficial owner of our Common Stock.

On June 13, 2002 we signed a number of separate agreements pursuant to which Safeguard agreed to:

•

purchase an aggregate of 4,416,404 shares of our Common Stock for $7 million, or $1.585 per share;

•

acquire 10,730 of the 12,500 outstanding shares of our Series D 5% Cumulative Convertible Preferred Stock from six institutional investors; and

•

guarantee up to $3 million in additional debt financing for our company (see Note 9 of Notes to the Condensed Consolidated Financial Statements).

Of the 4,416,404 shares of Common Stock to be purchased, 4,053,641 were purchased on June 13, 2002 and 100 were purchased on July 11, 2002 for an aggregate of $6.4 million. The remaining 1,270 shares of Series D Preferred Stock that were outstanding and held by parties other than Safeguard were converted in separate transactions into

On August 28, 2002, after receiving stockholder approval at a special meeting, we completed the sale of the balance of the $7 million of Common Stock ($6.1 million net of transaction expenses) and the conversion and retirement of all of the outstanding shares of the Series D Preferred Stock. Safeguard purchased the remaining 362,663 shares of Common Stock and converted the 10,730 shares of Series D Preferred Stock, acquired by it as well as the additional 500 shares it already owned, into 7,142,280 shares of Common Stock. Pursuant to the June 13, 2002 agreements, we reduced the exercise price of the warrants to purchase 524,750 shares of our Common Stock held by six institutional holders of the Series D Preferred Stock (excluding Safeguard) from $6.86 to $2 per share. The exercise price of a similar warrant held by Safeguard to purchase 21,865 shares was reduced to $4.0019 per share in accordance with the terms of the warrant.

We have also issued to Safeguard a warrant to purchase up to 975,000 additional shares of our Common Stock in the event any presently outstanding options or warrants to purchase our Common Stock are exercised. The exercise price payable by Safeguard under the warrant would equal the exercise price of the existing options or warrants being exercised. We have also entered into a right of first refusal and entered into certain other agreements intended to protect Safeguard against dilution from future issuances of our Common Stock.

Prior to our entering into these transactions with Safeguard, Safeguard and its affiliates owned beneficially 6,556,672 shares of our Common Stock, or approximately 32% of the number of shares beneficially owned (calculated in accordance with a rule of the Securities and Exchange Commission). As a result of the transaction and an unrelated acquisition of additional shares by Safeguard, it owned beneficially 18,529,556 shares of our Common Stock or approximately 56% of the number of shares outstanding. This gave Safeguard the power to elect all of the directors of our Company. We have also given Safeguard contractual rights enabling it to exercise significant control over our Company.

In 2001, the Company allocated a portion of the proceeds received for the Series D Preferred Stock to the value of the warrants issued and to the value of the conversion feature. These amounts, plus the issuance costs of the transaction resulted in a discount of the carrying value of the Series D Preferred Stock. The discount was being accreted (amortized) as a charge to net income available to Common Stockholders over the three-year period prior to the scheduled mandatory redemption of the Preferred Stock on July 10, 2004.

As a result of the conversion of the Series D Preferred Stock, the unamortized balance of the discount on the Series D Preferred Stock of approximately $2.7 million was written off as a charge to net income available to Common Stockholders. For the three and nine months ended September 30, 2002, the total charge to net income available to Common Stockholders was $3.0 million and $4.4 million, respectively. No such charge was incurred for the comparable periods in 2003 due to the conversion of all of the outstanding shares of Series D Preferred Stock in August 2002.

On February 26, 2003 the Company issued 4,646,408 shares of Common Stock for an aggregate cash purchase price of $5 million ($1.0761 per share) in a private placement to Safeguard. As a result of the transaction, Safeguard’s percentage of beneficial ownership increased from 56% to 62%. ChromaVision and Safeguard also entered into an agreement giving Safeguard certain rights to have the purchased shares registered under the Securities Act of 1933.

On September 1, 2003 the Company issued 816,950 shares of restricted stock to employees with a value on the date of grant of $1,021,188 ($1.25 per share), which was recorded as deferred compensation. This restricted stock vests over a two-year period. Compensation expense is recognized on a straight-line basis over the vesting period and is reduced to the extent that a participant forfeits shares of restricted stock received prior to vesting. The deferred compensation charge is unaffected by future changes in the price of the common stock.

Total compensation expense for restricted stock issuances was $64,000 and $136,000 for the three and nine month periods ended September 30, 2003. Unamoritzed compensation expense related to restricted stock at September 30, 2003 is $957,000. Safeguard did not exercise its anti-dilution rights in conjunction with the restricted stock grant. As a result, Safeguard’s beneficial ownership decreased from 62% to 60%.

On February 24, 2003 the Company entered into a $3 million revolving credit agreement with the Technology and Life Sciences Division of Comerica Bank-California (NYSE:CMA). The borrowings under the line of credit will be used for working capital purposes and will bear interest at Comerica’s prime rate (4% at 9/30/03) plus one-half percent. The agreement also includes a one-time facility fee of $15,000, a fee of .25% on the unused balance of the line of credit, various restrictive covenants and requirements to maintain certain financial ratios. Borrowings under the line of credit are guaranteed by Safeguard in exchange for a one-time fee of $15,000 and an amount equal to 4.5% per annum of the daily-

weighted average principal balance outstanding under the line of credit. The agreement expires February 2004. We are in discussions to extend this line of credit for an additional year, and Safeguard has already committed to extend its guarantee for the second year. Safeguard would receive commercially reasonable compensation for providing the credit enhancement. During the third quarter of 2003 $250,000 was drawn on the line of credit. The Company failed to satisfy certain financial covenants under the loan agreement as of the end of August 2003, and in October 2003 the lender waived these failures to satisfy the covenants and agreed to modify the covenants.

In August 2003, the Company entered into an agreement for an equipment financing line from General Electric Capital Corporation (NYSE: GE). The equipment financing line provides for $3 million in immediate financing resources and an additional $2 million as ChromaVision achieves certain system placement objectives. The loan principal amortizes ratably over the 33 month term. The borrowings under the equipment financing agreement are being used for working capital purposes and bear interest at 600 basis points over the three-year treasury constant maturities rate (2.16% at 9/19/03 or time of borrowing). The agreement provides for various restrictive covenants, maintenance of certain financial ratios and a collateral monitoring fee of $5,000 per year. The agreement also includes a provision whereby a material adverse change to the Company’s financial condition could be considered an event of default. In September 2003 the Company borrowed $3 million at an interest rate of 8.16%. Borrowings under the equipment financing agreement are secured by substantially all of the assets of the Company. The covenants in the equipment financing agreement incorporate some of the restrictive covenants and certain other requirements of the Comerica revolving credit agreement including any subsequent amendments granted by Comerica with respect to the incorporated covenants.

The Company applies APB No. 25 and related interpretations in accounting for stock option plans. Had compensation cost been recognized consistent with SFAS No. 123, our consolidated net loss and loss per share would have been increased to the pro forma amounts indicated below:


	Three Months Ended September 30,						Nine months Ended September 30,

	2003			2002			2003			2002

Consolidated net loss attributable to common stock:
As reported	$	(2,192	)	$	(4,979	)	$	(6,528	)	$	(11,602	)
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards		(342	)		(627	)		(1,120	)		(2,022	)
Pro forma	$	(2,534	)	$	(5,606	)	$	(7,648	)	$	(13,624	)
Loss per share — Basic and Diluted:
As reported	$	(.06	)	$	(.18	)	$	(.18	)	$	(.45	)
Pro forma	$	(.07	)	$	(.20	)	$	(.21	)	$	(.53	)

The following assumptions were used by us to determine the fair value of stock options granted using the Black-Scholes option-pricing model:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(000’s included)

Statements in this report describing our plans, goals, strategies, intentions, expectations and anticipated events are forward-looking statements. Important factors which could cause actual results to differ materially from those described in such forward-looking statements include the following: commercialization of our products is dependent on acceptance by the medical community and receipt of satisfactory reimbursement from third-party payers; any future success depends upon our ability to expand and maintain a successful sales and marketing organization; we may require additional financing for our business, and it is uncertain whether the financing will be available on favorable terms or at all; we may encounter unanticipated expenses, liabilities or other adverse events affecting cash flow; our ability to develop new applications depends on successful collaboration with third parties that we do not control; proper utilization of our system is dependent upon the quality of third party stains and reagents; we must successfully compete with other technologies and with emerging competitors in cell imaging; an inadequate supply of biological samples could delay completion of clinical trials for new applications for our Automated Cellular Imaging System (“ACIS”); the clinical trials could fail to demonstrate the efficacy of the ACIS for new applications; new applications may not be successfully developed; the ability to commercialize new applications may be dependent on obtaining appropriate U.S. Food and Drug Administration (the “FDA”) and foreign regulatory approvals and clearances, which may not be obtained when anticipated or at all; our competitive position is dependent upon our ability to protect our patents and proprietary rights; manufacture of the ACIS is subject to FDA regulation and our ability to implement our strategy of providing decentralized ACIS analysis capabilities over the internet is dependent upon successful development of the related imaging technology and obtaining any required regulatory approvals. Recent experience with respect to ACIS placements, new contracts for placements, revenues and results of operations may not be indicative of future results for the reasons set forth above.

Our mission is to improve the quality and reduce the cost of patient care, and speed drug discovery. We develop, manufacture and market a versatile automated digital microscope system with the ability to detect, count and classify cells based on color, size and shape to assist pathologists in making critical medical decisions that can affect patient treatment.

The ACIS® (Automated Cellular Imaging System) combines an automated microscope with computer-based color imaging technology originally developed for the U.S. government’s “Star Wars” program. The FDA-cleared ACIS device is currently being used by pathologists and researchers to analyze specimens placed on slides and stained with color-producing, commercially available reagents. The system’s ability to overcome the limitations of the human eye (even when aided by a microscope) dramatically improves the observer’s ability to analyze cells and tissue. Peer-reviewed clinical data and publications have demonstrated that the ACIS digital microscope and proprietary software can considerably improve accuracy and consistency over other methods of laboratory testing. ChromaVision brings standardization, accuracy and reproducibility to anatomic pathology, an area of the laboratory focused on esoteric tests, which have traditionally been analyzed manually. In a multi-pathologist clinical study, observers improved their rates of correlation with an independent standard from a range of 42 to 92% scoring manually to 91 to 95% using ACIS. Even the most accurate pathologist scoring manually was able to achieve improved accuracy using ACIS.

Safeguard Scientifics, Inc., a Pennsylvania corporation whose shares are listed on the New York Stock Exchange, owns beneficially approximately 60% of the outstanding shares of our Common Stock. We refer to Safeguard Scientifics, Inc. and its wholly-owned subsidiaries as “Safeguard”. As a result of this stock ownership, Safeguard has the ability to elect all of our directors, and it also has significant contractual rights to control our business. See Note 8 of Notes to Condensed Consolidated Financial Statements.

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods presented. Therefore, on an ongoing basis, we evaluate our estimates, including those provisions for bad debts and reserves for ACIS in progress.

For estimated bad debts, we review on an individual account basis the age of the receivable, all circumstances surrounding the transaction that gave rise to the receivable and whether the customer continues to have the financial resources to pay the receivable as of the balance sheet date and prior to the issuance of the financial statements for the related period. For ACIS in progress, the respective reserve is based upon the expected future use of the ACIS components based upon proposed design changes, high value components that may be discontinued in the near future and whether there are any lower of cost or market considerations. For other obligations, where judgment is required, we review the circumstances surrounding the obligation and evaluate the facts and circumstances to determine an appropriate level of accrual for each obligation.

We place most of our instruments with users on a “fee-per-use” basis. We obtain the billing information via modem, which accesses the ACIS database. Revenue is recognized based on the greater of actual usage fees or the minimum monthly rental fee. Under this pricing model, we own most of the ACIS instruments that are engaged in service and, accordingly, all related depreciation and maintenance and service costs are expensed as incurred. For those instruments that are sold, we recognize and defer revenue using the residual method pursuant to the requirements of Statement of Position No. 97-2, “Software Revenue Recognition” (SOP 97-2), as amended by Statement of Position No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Arrangements.” At the outset of the arrangement with the customer, we defer revenue for the fair value of its undelivered elements (e.g., maintenance) and recognize revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (e.g., software license) when the basic criteria in SOP 97-2 have been met. Maintenance revenue is recognized ratably over the term of the maintenance contract, typically 12 months. Revenue on product sales is recognized upon acceptance by the customer subsequent to a testing and evaluation period.

Some instruments are placed through distributors in Europe. The distributors’ commissions are paid based on a percentage of fees paid for use of the system as the fees accrue or as the sales take place. No sales through distributors took place during the nine months ended 2003 or the comparable period in 2002.

Three and Nine months Ended September 30, 2003 Compared with Three and Nine months Ended September 30, 2002

Fee-per-use Revenue. Revenue for the three and nine months ended September 30, 2003 increased approximately $482,000 or 21% and approximately $1,920,000 million or 31% over the comparable periods in 2002 due primarily to an increase in ACIS placements. The number of systems in the field generating fee-per-use charges increased from 192 to 255 from September 30, 2002 to 2003. The average monthly revenue for ACIS placements and remote viewing stations was approximately $4,750 and $2,320, respectively, for the three months ended September 30, 2003 as compared to $5,420 and $2,370 for the comparable period in 2002. Our business plan focuses on placing the ACIS under a lease arrangement in which the customer is charged based on the number of tests performed, subject to a minimum monthly payment. The decline in the average monthly revenue is primarily due to pricing concessions offered to our customers and a decline in the monthly minimum. Also impacting fee-per-use revenue is an increase in the reserve for sales returns. The reserve for sales returns for the three and nine months ended September 30, 2003 increased by $130,000 and $480,000, respectively over the comparable periods in 2002 due, in part, to the recent reduction in the amount of reimbursement paid by Medicare to our customers. We anticipate that the number of system placements and average monthly system revenue will be negatively impacted due to the Medicare reimbursement issue. (see discussion following under “Uncertainties to Future Operations”).

System Sales. Revenue for the three months ended September 30, 2003 approximated the comparable period in 2002. One new system and one refurbished system were sold during the three months ended September 30, 2003 and during the comparable period in 2002. System sales contributed 8% of total revenue for 2003 as compared to 10% for the comparable period in 2002. Revenue from system sales can fluctuate significantly principally due to the infrequent and limited number of system sales. Occasional sales of the ACIS system are made typically to research institutions.

Revenue for the nine months ended September 30, 2003 from system sales increased approximately $273,000 or 71% over the comparable period in 2002 due to three new and one refurbished system sold during the nine months ended 2003, as compared to one new and three refurbished systems for the comparable period in 2002. System sales contributed 7% of total revenue for 2003 as compared to 6% for the comparable period in 2002.

Cost of revenue and gross margin percentage. Cost of revenue for the three and nine months ended September 30, 2003 increased approximately $213,000 or 28% and $663,000 or 33% over comparable periods in 2002 due primarily to the increase in system placements. In 2003 we reclassified customer service costs to costs of sale rather than development cost, as in prior periods. This change was made in order to better match these costs with related sales activity. The effect of this reclassification is approximately $329,000 and $249,000 for the three months ended September 30, 2003 and 2002, respectively; and $946,000 and $732,000 for the nine months ended September 30, 2003 and 2002, respectively. Using this approach for service costs, gross margin for the three and nine months ended September 30, 2003 was 69% as compared to 71% and 69%, respectively, for the comparable periods in 2002. Cost of revenue primarily consists of cost for manufacturing the ACIS, which includes the cost for direct material, labor costs and manufacturing overhead. For fee-per-use revenue the cost of the ACIS is depreciated over a three-year time period, and for a system sale the entire cost of the ACIS system is recognized at the time of sale. Impacting the gross margin during 2003 was a decline in the average monthly revenue for our unit placements and an increase in the reserve for sales allowances as mentioned previously.

Selling, general and administrative expenses. Expenses for the three and nine months ended September 30, 2003 increased approximately $509,000 or 20% and $939,000 or 12%, respectively, over the comparable periods in 2002. The increase for the three month period is primarily due to a charge of $550,000 related to a third quarter workforce reduction involving 16 positions including the resignation of the Company’s Chief Executive Officer and Vice President of Sales and Marketing. We estimate selling, general and administrative expenses to decline by approximately $500,000 for the fourth quarter due to this workforce reduction and to favorably affect operating costs into 2004. The increase for the nine month period includes the charge for the workforce reduction, the charge for senior management recruiting and relocation and an increase in costs for tradeshow and advertising expenditures.

Research and development expenses. Expenses for the three and nine months ended September 30, 2003 decreased approximately $81,000 or 6% and approximately $186,000 or 5% over the comparable periods in 2002. The decrease for both periods is due primarily to a reduction in some facilities costs offset by an increase during the nine month period of expenses incurred related to the funding of a clinical trial outcomes study.

Other income (expense). For the three and nine months ended September 30, 2003 interest income decreased $28,000 and $37,000, respectively, from the comparable periods in 2002 due primarily to a decrease in our cash balance for 2003. The decline in the cash balance is a result of funding operations. Interest expense for the same comparable periods increased $19,000 and $34,000, respectively, due primarily to a $3 million funding from our equipment financing line and a $250,000 draw on our line of credit during September 2003.

Preferred stock accretion and dividends. Our net loss attributable to Common Stock for the three and nine months ended September 30, 2002 included a charge of approximately $2,998,000 and $4,368,000, which consisted of a charge for the accretion of and dividends on the Series D Preferred Stock. No such charge was incurred for the comparable periods in 2003 due to the conversion of all of the outstanding shares of Series D Preferred Stock in August 2002 which eliminated charges for accretion of, and dividends, on the Series D Preferred Stock in subsequent periods. See Note 8 of the Notes to the Condensed Consolidated Financial Statements.

The year 2000 was our first full year of commercial activity during which we focused primarily on marketing and sales of the ACIS system as our menu of capabilities performed with the ACIS expanded and gained commercial acceptance. Although we have experienced consistent and ongoing revenue growth, we still face significant uncertainties, including those discussed below under “Liquidity and Capital Resources,” which include our ability to achieve market acceptance of the ACIS and to ensure satisfactory reimbursement by Medicare and other third party insurance carriers under new billing codes which have been established for image analysis based testing and which will become effective on January 1, 2004.

Laboratory services provided for patients with the assistance of ACIS technology are eligible for third party reimbursement using medical billing codes which apply to image analysis-based testing. These billing codes are known as Healthcare Common Procedure Coding System (HCPCS) codes, which include the Common Procedural Terminology, or CPT, codes as the means by which Medicare and private insurers identify medical services that are provided to patients in the United States. CPT codes are established by an independent editorial panel convened by the American Medical Association (AMA). The reimbursement amounts, or relative values, associated with the CPT codes are established by the Centers for Medicare and Medicaid Services (CMS), under a process that involves recommendations from an independent

Relative Value Update Committee also convened by the AMA, with advice from professional societies representing the various medical specialties.

Effective April 1, 2003, the CMS instituted a new National Correct Coding Initiative (NCCI) edit. The NCCI edit significantly reduced from April 1, 2003 to December 31, 2003 the amount of reimbursement previously paid by Medicare for services involving automated image analysis by limiting the codes that would be accepted for reimbursement for ACIS-based services. The CMS edit applied directly only to Medicare patients. We estimate that 25 to 35 percent of ACIS-based services are performed for Medicare beneficiaries. We believe that, before the edit, the majority of our customers were being reimbursed approximately $200 per test. Under the new interim edit (effective until December 31, 2003) customers are being reimbursed about $85 per test for Medicare patients. During this time, the edit has been adopted to a limited degree by other payers.

A new CPT code has been established that CMS has indicated should be used for image analysis. The new CPT code goes into effect on January 1, 2004. We estimate that under the new code the total Medicare reimbursement for ACIS-based procedures performed in physician offices or independent laboratories will be no less than $132 per test, reflecting a technical component of approximately $80 and a professional component of approximately $52. The technical component involves preparation of the patient sample and running the test on the ACIS, while the professional component involves the physician’s reading and evaluation of the test results. The amount of Medicare reimbursement may actually be slightly higher than the $132 per test if Congress mandates a general update of Medicare reimbursement amounts for 2004. The actual amount will also vary based upon a practice cost index for each state and may be higher or lower than the amounts indicated above in particular cases.

The adoption of a new CPT code appropriate for image analysis reflects the expanding role of image analysis in pathology and the need for appropriate reimbursement to enable use of this technology by healthcare providers to benefit patients. Potentially, the new CPT code could help to streamline reimbursement for ACIS users by allowing them to code more specifically for image analysis-based services in claims billed to third party payers. The 2004 valuations of the new code are considered interim valuations and are open for comment to influence further adjustments in 2005. ChromaVision will continue working with relevant medical societies and other appropriate constituents to obtain appropriate reimbursement amounts by all payers for providers of image analysis based services. The goal is to have the amount paid by Medicare and other payors for image analysis based services accurately reflect the technology costs, the benefit that image analysis brings to patients, and its positive impact on healthcare economics.

The reduction of reimbursement resulting from the NCCI edit and the 2004 interim valuations for ACIS-based procedures will not only reduce revenue for current ACIS customers, but also may result in returns or cancellations by current customers and may also negatively impact future placements of ACIS. ChromaVision is in the process of determining the ultimate impact of this code on our customers and our business.

Due to the change in reimbursement effective January 1, 2004, the Company’s sales representatives will focus a majority of their efforts, during the fourth quarter of 2003, on renegotiating many of the Company’s fee-per-use contracts. As a result, we anticipate a reduction in system placements and fee-per-use revenue in the near term.

We also face uncertainties with respect to our ability to complete development of additional tests for the ACIS. In order to mitigate the risk that any one test will not be successfully developed, we maintain a pipeline of tests in a prioritized queue so that if any one test is not successfully developed, or market feedback suggests that a test should be given a lower priority, we can align development efforts according to priority. In addition, the ACIS system is dependent upon the laboratory producing a quality stained slide for image analysis. Reagent and or stain quality issues by stain manufacturers may impact the rate at which the ACIS technology is adopted or new applications are added to existing placements. Other uncertainties affecting our business include our ability to maintain and develop our relationship with additional remote imaging laboratories and thereby reduce our concentration of risk with our primary imaging provider, to collaborate successfully with other companies, universities and research centers to develop, initiate and complete clinical trials of new applications for the ACIS and obtain governmental approvals for the applications. Lack of success in any of these efforts could have a material adverse effect on the future results of our operation and our ability to generate sufficient cash flow to fund operations.

At September 30, 2003 we had approximately $6.7 million in stockholders’ equity. In order for our Common Stock to continue to trade on the NASDAQ National Market, we would have to achieve and maintain a stockholders’ equity of at least $10 million. Therefore, in July 2003 we applied for listing on the NASDAQ SmallCap Market and in August 2003 received approval from NASDAQ to make the transition from the National Market listing.

At September 30, 2003 we had approximately $2.7 million of cash and cash equivalents, $2.75 million available under our line of credit, and $2.0 of long-term debt. Cash used in operating activities was $5.4 million in 2003 due primarily to our net loss of $6.5 million. Cash used in investing activities of $2.9 million consisted of capital expenditures related primarily to the manufacture of the ACIS systems placed with customers. The rate of capital expenditures for the remainder of 2003 is expected to decline due to the reduction in new system placements related to the amount of Medicare reimbursement for ACIS testing as discussed previously. As a result, we have significantly reduced current purchase order commitments related to the manufacture of the ACIS for placement with customers to approximately $117,000 as compared to $465,000 in the previous quarter. Our business plan anticipates placing these instruments with users and charging a “fee-per-use” for each time the instrument is used to perform a test. The manufacture of these instruments will require a significant outlay of cash for which revenues will be recognized over the lease term. We intend to fund these expenditures with our current cash resources and with the remaining amount available under the $3.0 million revolving line of credit.

Cash provided from financing activities of $8.2 million was due to the completion of the sale of $5 million of our Common Stock to Safeguard in February 2003 and to $3.2 million of debt financing. In the stock transaction we issued 4,646,408 shares of our Common Stock for $1.0761 per share in a private placement to Safeguard. As a result of the transaction, Safeguard’s percentage of beneficial ownership increased from 56% to 62% but has since been reduced to 60% as a result of the issuance of restricted stock to key employees. See Note 8 of Notes to Condensed Consolidated Financial Statements.

In February 2003 we entered into a $3 million revolving credit agreement with the Technology and Life Sciences Division of Comerica Bank-California (NYSE:CMA). The borrowings under the line of credit will be used for working capital purposes and will bear interest at Comerica’s prime rate (4% at 9/30/03) plus one-half percent. The agreement also includes a one-time facility fee of $15,000, a fee of .25% on the unused balance of the line of credit, various restrictive covenants and requirements to maintain certain financial ratios. Borrowings under the line of credit are guaranteed by Safeguard in exchange for a one-time fee of $15,000 and an amount equal to 4.5% per annum of the daily-weighted average principal balance outstanding under the line of credit. The agreement expires February 2004. We are in discussions to extend this line of credit for an additional year and Safeguard has already committed to extend its guarantee for the second year. Safeguard would receive commercially reasonable compensation for providing the credit enhancement. The Company failed to satisfy certain financial covenants under the loan agreement as of the end of August 2003, and in October 2003 the lender waived these failures to satisfy the covenants and agreed to modify the covenants. The Company was in compliance with the revised covenants at September 30, 2003.

In August 2003 we entered into a $3 million equipment financing agreement with GE Capital. The loan principal amortizes ratably over a 33 month term. The borrowings under the equipment financing agreement are being used for working capital purposes and bear interest at 600 basis points over the three year treasury constant maturities rates (2.16% at 9/19/03 or time of borrowing). The agreement also provides for an incremental $2,000,000 available upon reaching certain system placement objectives, various restrictive covenants, maintenance of certain financial ratios and a collateral monitoring fee of $5,000 per year. In September 2003, the entire $3 million available under the financing agreement was borrowed with an interest rate of 8.16%. Borrowings under the equipment financing agreement are secured by substantially all of the Company’s assets. The equipment financing agreement incorporates some of the restrictive covenants and certain other requirements of the Comerica revolving credit agreement, including any subsequent amendments granted by Comerica with respect to the incorporated covenants. The agreement also includes a provision whereby a material adverse change to the Company’s financial condition could be considered an event of default. The Company believes however, that based on current operations, committed borrowings, and Safeguard support it will remain in compliance with its debt covenants over the next twelve months and that it is not probable that GE will exercise the material adverse change clause as an event of default.

Existing cash resources and the remaining balance of the $3 million revolving line of credit may not be sufficient to satisfy our cash needs during the next twelve months. Our losses from operations will continue during the near term, but we expect our operating losses to decrease primarily due to a third quarter reduction in our workforce, which we estimate will reduce overall operating costs for the fourth quarter by $700,000 and is expected to favorably affect operating costs into 2004. To support any such future cash needs, we intend to consider additional debt or equity financing. If we are unable to obtain sufficient additional funds, we will have to delay, scale back or eliminate some or all of our development activities, clinical studies and/or regulatory activities.

We currently lease our corporate headquarters and manufacturing facility under an operating lease arrangement. The lease expired in February 2003 and we exercised our option to extend the lease one year. We anticipate exercising our option to extend the lease an additional year before the current February 2004 expiration date. Our purchase obligations represent commitments primarily for the purchase of materials for the manufacture of our ACIS.

We have no off-balance sheet arrangements that provide financing, liquidity or market or credit risk support or involve leasing, hedging or research and development services for our business or other similar arrangements that may expose us to liability that is not expressly reflected in the financial statements, except for facilities and automobile operating leases.

At September 30, 2003, we did not have any relationships with unconsolidated entities or financial partnerships, often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such we are not subject to any material financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Several new accounting standards have been issued that were adopted by the Company in the third quarter of 2003. None of these standards had a material impact on the Company’s financial position, results of operations, or liquidity. See Note 7 of Notes to the Condensed Consolidated Financial Statements.

The Company is exposed to interest rate risk primarily through its equipment financing agreement and its revolving credit agreement. The Company utilizes these financing sources for its working capital and other borrowing needs. If the Company’s effective interest rate were to increase by 100 basis points (1.00%), ChromaVision’s annual financing expense would increase by approximately $30,000 based on the $3 million balance borrowed during September 2003 under the equipment financing agreement. Currently, the Company does not have any significant financial investments for trading or other speculative purposes or to manage interest rate exposure.

Changes in foreign exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect our consolidated sales and gross margins as expressed in U.S. dollars. To date, we have not entered into any foreign exchange contracts to hedge our exposure to foreign exchange rate fluctuations. However, as our international operations grow, we may enter into such arrangements in the future. Effective January 1, 2002, our foreign sales were denominated in Euros. Foreign currency-denominated sales have not been significant.

The Company’s principal executive officer and its principal financial officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) have concluded that the Company’s disclosure controls and procedures were effective, as of the end of the quarter ended September 30, 2003, to provide reasonable assurance that material information relating to our Company (including our consolidated subsidiaries) required to be disclosed in the periodic reports we file or submit pursuant to the Exchange Act is recorded, processed, summarized and reported within the time specified in the rules and forms of the Securities and Exchange Commission, including the reporting of such information to our principal executive officer, principal financial officer and other members of our management as appropriate to allow timely decisions regarding required disclosure. As a result of the resignation of Carl W. Apfelbach effective September 1, 2003, the Company does not presently have a Chief Executive Officer, but Michael G. Schneider, the Chief Operating Officer, is performing similar functions on an interim basis.

There were no changes in the Company’s internal controls over financial reporting (as that term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


		(a) Exhibits

3.1		Certificate of Incorporation of the Company (as amended)(a)
3.4		By-laws of the Company, as amended (a)
10.1		Master Security Agreement dated July 15, 2003 between the Company and GE Capital Corp. (b)
10.2		Amendment to Master Security Agreement dated July 31, 2003 between the Company and GE Capital Corp. (b)
10.3		Assignment Agreement with Recourse dated September 26, 2003 between the Company and GE Capital Corp. (b)
10.4		First Amendment to Loan and Security Agreement dated October 21, 2003 between the Company and Comerica Bank. (b)
10.5		Promissory Note dated September 24, 2003 between the Company and GE Capital Corp. (b)
31		Certifications pursuant to Exchange Act Rule 13-14(a) or Rule 15d-14(a). (b)
32		Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b)

		(b) Reports or Form 8-K

		On August 20, 2003, we filed a Current Report on Form 8-K to report, under Item 12 , a change in organizational structure.

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


3.1		Certificate of Incorporation of the Company (as amended)(a)
3.4		By-laws of the Company, as amended (a)
10.1		Master Security Agreement dated July 15, 2003 between the Company and GE Capital Corp. (b)
10.2		Amendment to Master Security Agreement dated July 31, 2003 between the Company and GE Capital Corp. (b)
10.3		Assignment Agreement with Recourse dated September 26, 2003 between the Company and GE Capital Corp. (b)
10.4		First Amendment to Loan and Security Agreement dated October 21, 2003 between the Company and Comerica Bank. (b)
10.5		Promissory Note dated September 24, 2003 between the Company and GE Capital Corp(b)
31		Certifications pursuant to Exchange Act Rule 13-14(a) or Rule 15d-14(a). (b)
32		Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b)

		(b) Reports or Form 8-K

		On August 20, 2003, we filed a Current Report on Form 8-K to report, under Item 12 , a change in organizational structure.

EX-10.1 3 a94510exv10w1.txt EXHIBIT 10.1 EXHIBIT 10.1 THIS SAMPLE DOES NOT CONSTITUTE AN OFFER TO PROVIDE FINANCING ON THE TERMS CONTAINED HEREIN. ANY FINANCING SHALL BE SUBJECT TO THE NEGOTIATION OF DEFINITIVE DOCUMENTATION, THE TERMS OF WHICH MAY DIFFER MATERIALLY FROM THE TERMS CONTAINED IN THIS SAMPLE. MASTER SECURITY AGREEMENT dated as of July 15, 2003 ("AGREEMENT") THIS AGREEMENT is between GENERAL ELECTRIC CAPITAL CORPORATION (together with its successors and assigns, if any, "SECURED PARTY") and SAMPLE ("DEBTOR"). Secured Party has an office at 401 Merritt 7 Suite 23, Norwalk, CT 06851-1177. Debtor is a Corporation organized and existing under the laws of the state of Delaware ("the State"). Debtor's mailing address and chief place of business is 33171 Paseo Cervesa, San Juan Capistrano,CA 92675. 1. CREATION OF SECURITY INTEREST. Debtor grants to Secured Party, its successors and assigns, a security interest in and against all property listed on any collateral schedule now or in the future annexed to or made a part of this Agreement ("COLLATERAL SCHEDULE"), and in and against all additions, attachments, accessories and accessions to such property, all substitutions, replacements or exchanges therefor, and all insurance and/or other proceeds thereof (all such property is individually and collectively called the "COLLATERAL"). This security interest is given to secure the payment and performance of all debts, obligations and liabilities of any kind whatsoever of Debtor to Secured Party, now existing or arising in the future, including but not limited to the payment and performance of certain Promissory Notes from time to time identified on any Collateral Schedule (collectively "NOTES" and each a "Note"), and any renewals, extensions and modifications of such debts, obligations and liabilities (such Notes, debts, obligations and liabilities are called the "INDEBTEDNESS"). 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR. Debtor represents, warrants and covenants as of the date of this Agreement and as of the date of each Collateral Schedule that: (a) Debtor's exact legal name is as set forth in the preamble of this Agreement and Debtor is, and will remain, duly organized, existing and in good standing under the laws of the State set forth in the preamble of this Agreement, has its chief executive offices at the location specified in the preamble, and is, and will remain, duly qualified and licensed in every jurisdiction wherever necessary to carry on its business and operations; (b) Debtor has adequate power and capacity to enter into, and to perform its obligations under this Agreement, each Note and any other documents evidencing, or given in connection with, any of the Indebtedness (all of the foregoing are called the "DEBT DOCUMENTS"); (c) This Agreement and the other Debt Documents have been duly authorized, executed and delivered by Debtor and constitute legal, valid and binding agreements enforceable in accordance with their terms, except to the extent that the enforcement of remedies may be limited under applicable bankruptcy and insolvency laws; (d) No approval, consent or withholding of objections is required from any governmental authority or instrumentality with respect to the entry into, or performance by Debtor of any of the Debt Documents, except any already obtained; (e) The entry into, and performance by, Debtor of the Debt Documents will not (i) violate any of the organizational documents of Debtor or any judgment, order, law or regulation applicable to Debtor, or (ii) result in any breach of or constitute a default under any contract to which Debtor is a party, or result in the creation of any lien, claim or encumbrance on any of Debtor's property (except for liens in favor of Secured Party) pursuant to any indenture, mortgage, deed of trust, bank loan, credit agreement, or other agreement or instrument to which Debtor is a party; (f) There are no suits or proceedings pending in court or before any commission, board or other administrative agency against or affecting Debtor which could, in the aggregate, have a material adverse effect on Debtor, its business or operations, or its ability to perform its obligations under the Debt Documents, nor does Debtor have reason to believe that any such suits or proceedings are threatened; (g) All financial statements delivered to Secured Party in connection with the Indebtedness have been prepared in accordance with generally accepted accounting principles, and since the date of the most recent financial statement, there has been no material adverse change in Debtors financial condition; (h) The Collateral is not, and will not be, used by Debtor for personal, family or household purposes; (i) The Collateral is, and will remain, in good condition and repair and Debtor will not be negligent in its care and use; (j) Debtor is, and will remain, the sole and lawful owner, and in possession of, the Collateral, and has the sole right and lawful authority to grant the security interest described in this Agreement; (k) The Collateral is, and will remain, free and clear of all liens, claims and encumbrances of any kind whatsoever, except for (i) liens in favor of Secured Party, (ii) liens for taxes not yet due or for taxes being contested in good faith and which do not involve, in the judgment of Secured Party, any risk of the sale, forfeiture or loss of any of the Collateral, and (iii) inchoate materialmen's, mechanic's, repairmen's and similar liens arising by operation of law in the normal course of business for amounts which are not delinquent (all of such liens are called "PERMITTED LIENS"); and (l) Debtor is and will remain in full compliance with all laws and regulations applicable to it including, without limitation, (i) ensuring that no person who owns a controlling interest in or otherwise controls Debtor is or shall be (Y) listed on the Specially Designated Nationals and Blocked Person List maintained by the Office of Foreign Assets Control ("OFAC"), Department of the Treasury, and/or any other similar lists maintained by OFAC pursuant to any authorizing statute, Executive Order or regulation or (Z) a person designated under Section 1(b), (c) or (d) of Executive Order No. 13224 (September 23, 2001), any related enabling legislation or any other similar Executive Orders, and (ii) compliance with all applicable Bank Secrecy Act ("BSA") laws, regulations and government guidance on BSA compliance and on the prevention and detection of money laundering violations. 3. COLLATERAL. (a) Until the declaration of any default, Debtor shall remain in possession of the Collateral; except that Secured Party shall have the right to possess (i) any chattel paper or instrument that constitutes a part of the Collateral, and (ii) any other Collateral in which Secured Party's security interest may be perfected only by possession. Secured Party may inspect any of the Collateral during normal business hours after giving Debtor reasonable prior notice. If Secured Party asks, Debtor will promptly notify Secured Party in writing of the location of any Collateral. (b) Debtor shall (i) use the Collateral only in its trade or business, (ii) maintain all of the Collateral in good operating order and repair, normal wear and tear excepted, (iii) use and maintain the Collateral only in compliance with manufacturers recommendations and all applicable laws, and (iv) keep all of the Collateral free and clear of all liens, claims and encumbrances (except for Permitted Liens). (c) Secured Party does not authorize and Debtor agrees it shall not (i) part with possession of any of the Collateral (except to Secured Party or for maintenance and repair), (ii) remove any of the Collateral from the continental United States, or (iii) sell, rent, lease, mortgage, license, grant a security interest in or otherwise transfer or encumber (except for Permitted Liens) any of the Collateral. (d) Debtor shall pay promptly when due all taxes, license fees, assessments and public and private charges levied or assessed on any of the Collateral, on its use, or on this Agreement or any of the other Debt Documents. At its option, Secured Party may discharge taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral and may pay for the maintenance, insurance and preservation of the Collateral and effect compliance with the terms of this Agreement or any of the other Debt Documents. Debtor agrees to reimburse Secured Party, on demand, all costs and expenses incurred by Secured Party in connection with such payment or performance and agrees that such reimbursement obligation shall constitute Indebtedness. (e) Debtor shall, at all times, keep accurate and complete records of the Collateral, and Secured Party shall have the right to inspect and make copies of all of Debtor's books and records relating to the Collateral during normal business hours, after giving Debtor reasonable prior notice. (f) Debtor agrees and acknowledges that any third person who may at any time possess all or any portion of the Collateral shall be deemed to hold, and shall hold, the Collateral as the agent of, and as pledge holder for, Secured Party. Secured Party may at any time give notice to any third person described in the preceding sentence that such third person is holding the Collateral as the agent of, and as pledge holder for, the Secured Party. 4. INSURANCE. (a) Debtor shall at all times bear the entire risk of any loss, theft, damage to, or destruction of, any of the Collateral from any cause whatsoever. (b) Debtor agrees to keep the Collateral insured against loss or damage by fire and extended coverage perils, theft, burglary, and for any or all Collateral which are vehicles, for risk of loss by collision, and if requested by Secured Party, against such other risks as Secured Party may reasonably require. The insurance coverage shall be in an amount no less than the full replacement value of the Collateral, and deductible amounts, insurers and policies shall be acceptable to Secured Party. Debtor shall deliver to Secured Party policies or certificates of insurance evidencing such coverage. Each policy shall name Secured Party as a loss payee, shall provide for coverage to Secured Party regardless of the breach by Debtor of any warranty or representation made therein, shall not be subject to co-insurance, and shall provide that coverage may not be canceled or altered by the insurer except upon thirty (30) days prior written notice to Secured Party. Debtor appoints Secured Party as its attorney-in-fact to make proof of loss, claim for insurance and adjustments with insurers, and to receive payment of and execute or endorse all documents, checks or drafts in connection with insurance payments. Secured Party shall not act as Debtor's attorney-in-fact unless Debtor is in default. Proceeds of insurance shall be applied, at the option of Secured Party, to repair or replace the Collateral or to reduce any of the Indebtedness. 5. REPORTS. (a) Debtor shall promptly notify Secured Party of (i) any change in the name of Debtor, (ii) any change in the state of its incorporation or registration, (iii) any relocation of its chief executive offices, (iv) any relocation of any of the Collateral, (v) any of the Collateral being lost, stolen, missing, destroyed, materially damaged or worn out, or (vi) any lien, claim or encumbrance other than Permitted Liens attaching to or being made against any of the Collateral. (b) Debtor will deliver to Secured Party Debtor's complete financial statements, certified by a recognized firm of certified public accountants, within ninety (90) days of the close of each fiscal year of Debtor. If Secured Party requests, Debtor will deliver to Secured Party copies of Debtor's quarterly financial reports certified by Debtor's chief financial officer, within ninety (90) days after the close of each of Debtor's fiscal quarter. Debtor will deliver to Secured Party copies of all Forms 10-K and 10-Q, if any, within 30 days after the dates on which they are filed with the Securities and Exchange Commission. 6. FURTHER ASSURANCES. (a) Debtor shall, upon request of Secured Party, furnish to Secured Party such further information, execute and deliver to Secured Party such documents and instruments (including, without limitation, Uniform Commercial Code financing statements) and shall do such other acts and things as Secured Party may at any time reasonably request relating to the perfection or protection of the security interest created by this Agreement or for the purpose of carrying out the intent of this Agreement. Without limiting the foregoing, Debtor shall cooperate and do all acts deemed necessary or advisable by Secured Party to continue in Secured Party a perfected first security interest in the Collateral, and shall obtain and furnish to Secured Party any subordinations, releases, landlord waivers, lessor waivers, mortgagee waivers, or control agreements, and similar documents as may be from time to time requested by, and in form and substance satisfactory to, Secured Party. (b) Debtor authorizes Secured Party to file a financing statement and amendments thereto describing the Collateral and containing any other information required by the applicable Uniform Commercial Code. Debtor irrevocably grants to Secured Party the power to sign Debtor's name and generally to act on behalf of Debtor to execute and file applications for title, transfers of title, financing statements, notices of lien and other documents pertaining to any or all of the Collateral; this power is coupled with Secured Party's interest in the Collateral. Debtor shall, if any certificate of title be required or permitted by law for any of the Collateral, obtain and promptly deliver to Secured Party such certificate showing the lien of this Agreement with respect to the Collateral. Debtor ratifies its prior authorization for Secured Party to file financing statements and amendments thereto describing the Collateral and containing any other information required by the Uniform Commercial Code if filed prior to the date hereof. (c) Debtor shall indemnify and defend the Secured Party, its successors and assigns, and their respective directors, officers and employees, from and against all claims, actions and suits (including, without limitation, related attorneys' fees) of any kind whatsoever arising, directly or indirectly, in connection with any of the Collateral. 7. DEFAULT AND REMEDIES. (a) Debtor shall be in default under this Agreement and each of the other Debt Documents if: (i) Debtor breaches its obligation to pay when due any installment or other amount due or coming due under any of the Debt Documents; (ii) Debtor, without the prior written consent of Secured Party, attempts to or does sell, rent, lease, license, mortgage, grant a security interest in, or otherwise transfer or encumber (except for Permitted Liens) any of the Collateral; (iii) Debtor breaches any of its insurance obligations under Section 4; (iv) Debtor breaches any of its other obligations under any of the Debt Documents and fails to cure that breach within thirty (30) days after written notice from Secured Party; (v) Any warranty, representation or statement made by Debtor in any of the Debt Documents or otherwise in connection with any of the Indebtedness shall be false or misleading in any material respect; (vi) Any of the Collateral is subjected to attachment, execution, levy, seizure or confiscation in any legal proceeding or otherwise, or if any legal or administrative proceeding is commenced against Debtor or any of the Collateral, which in the good faith judgment of Secured Party subjects any of the Collateral to a material risk of attachment, execution, levy, seizure or confiscation and no bond is posted or protective order obtained to negate such risk; (vii) Debtor breaches or is in default under any other agreement between Debtor and Secured Party; (viii) Debtor or any guarantor or other obligor for any of the Indebtedness (collectively "GUARANTOR") dissolves, terminates its existence, becomes insolvent or ceases to do business as a going concern; (ix) If Debtor or any Guarantor is a natural person, Debtor or any such Guarantor dies or becomes incompetent; (x) A receiver is appointed for all or of any part of the property of Debtor or any Guarantor, or Debtor or any Guarantor makes any assignment for the benefit of creditors; (xi) Debtor or any Guarantor files a petition under any bankruptcy, insolvency or similar law, or any such petition is filed against Debtor or any Guarantor and is not dismissed within forty-five (45) days; (xii) Debtor's improper filing of an amendment or termination statement relating to a filed financing statement describing the Collateral; or (xiii) At any time during the term of this Agreement the ownership of Debtor or _________________________ ("GUARANTOR") changes such that _________________________ does not own more than 50% of the outstanding shares or other ownership interest of Debtor or Guarantor, as the case may be, without the prior written consent of Secured Party. (b) If Debtor is in default, the Secured Party, at its option, may declare any or all of the Indebtedness to be immediately due and payable, without demand or notice to Debtor or any Guarantor. The accelerated obligations and liabilities shall bear interest (both before and after any judgment) until paid in full at the lower of eighteen percent (18%) per annum or the maximum rate not prohibited by applicable law. (c) After default, Secured Party shall have all of the rights and remedies of a Secured Party under the Uniform Commercial Code, and under any other applicable law. Without limiting the foregoing, Secured Party shall have the right to (i) notify any account debtor of Debtor or any obligor on any instrument which constitutes part of the Collateral to make payment to the Secured Party, (ii) with or without legal process, enter any premises where the Collateral may be and take possession of and remove the Collateral from the premises or store it on the premises, (iii) sell the Collateral at public or private sale, in whole or in part, and have the right to bid and purchase at said sale, or (iv) lease or otherwise dispose of all or part of the Collateral, applying proceeds from such disposition to the obligations then in default. If requested by Secured Party, Debtor shall promptly assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties. Secured Party may also render any or all of the Collateral unusable at the Debtor's premises and may dispose of such Collateral on such premises without liability for rent or costs. Any notice that Secured Party is required to give to Debtor under the Uniform Commercial Code of the time and place of any public sale or the time after which any private sale or other intended disposition of the Collateral is to be made shall be deemed to constitute reasonable notice if such notice is given to the last known address of Debtor at least five (5) days prior to such action. (d) Proceeds from any sale or lease or other disposition shall be applied: first, to all costs of repossession, storage, and disposition including without limitation attorneys', appraisers', and auctioneers' fees; second, to discharge the obligations then in default; third, to discharge any other Indebtedness of Debtor to Secured Party, whether as obligor, endorser, guarantor, surety or indemnitor; fourth, to expenses incurred in paying or settling liens and claims against the Collateral; and lastly, to Debtor, if there exists any surplus. Debtor shall remain fully liable for any deficiency. (e) Debtor agrees to pay all reasonable attorneys' fees and other costs incurred by Secured Party in connection with the enforcement, assertion, defense or preservation of Secured Party's rights and remedies under this Agreement, or if prohibited by law, such lesser sum as may be permitted. Debtor further agrees that such fees and costs shall constitute Indebtedness. (f) Secured Party's rights and remedies under this Agreement or otherwise arising are cumulative and may be exercised singularly or concurrently. Neither the failure nor any delay on the part of the Secured Party to exercise any right, power or privilege under this Agreement shall operate as a waiver, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise of that or any other right, power or privilege. SECURED PARTY SHALL NOT BE DEEMED TO HAVE WAIVED ANY OF ITS RIGHTS UNDER THIS AGREEMENT OR UNDER ANY OTHER AGREEMENT, INSTRUMENT OR PAPER SIGNED BY DEBTOR UNLESS SUCH WAIVER IS EXPRESSED IN WRITING AND SIGNED BY SECURED PARTY. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. (g) DEBTOR AND SECURED PARTY UNCONDITIONALLY WAIVE THEIR RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE OTHER DEBT DOCUMENTS, ANY OF THE INDEBTEDNESS SECURED HEREBY, ANY DEALINGS BETWEEN DEBTOR AND SECURED PARTY RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN DEBTOR AND SECURED PARTY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT. THIS WAIVER IS IRREVOCABLE. THIS WAIVER MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING. THE WAIVER ALSO SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, ANY OTHER DEBT DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 8. MISCELLANEOUS. (a) This Agreement, any Note and/or any of the other Debt Documents may be assigned, in whole or in part, by Secured Party without notice to Debtor, and Debtor agrees not to assert against any such assignee, or assignee's assigns, any defense, set-off, recoupment claim or counterclaim which Debtor has or may at any time have against Secured Party for any reason whatsoever. Debtor agrees that if Debtor receives written notice of an assignment from Secured Party, Debtor will pay all amounts payable under any assigned Debt Documents to such assignee or as instructed by Secured Party. Debtor also agrees to confirm in writing receipt of the notice of assignment as may be reasonably requested by Secured Party or assignee. (b) All notices to be given in connection with this Agreement shall be in writing, shall be addressed to the parties at their respective addresses set forth in this Agreement (unless and until a different address may be specified in a written notice to the other party), and shall be deemed given (i) on the date of receipt if delivered in hand or by facsimile transmission, (ii) on the next business day after being sent by express mail, and (iii) on the fourth business day after being sent by regular, registered or certified mail. As used herein, the term "business day" shall mean and include any day other than Saturdays, Sundays, or other days on which commercial banks in New York, New York are required or authorized to be closed. (c) Secured Party may correct patent errors and fill in all blanks in this Agreement or in any Collateral Schedule consistent with the agreement of the parties. (d) Time is of the essence of this Agreement. This Agreement shall be binding, jointly and severally, upon all parties described as the "Debtor" and their respective heirs, executors, representatives, successors and assigns, and shall inure to the benefit of Secured Party, its successors and assigns. (e) This Agreement and its Collateral Schedules constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior understandings (whether written, verbal or implied) with respect to such subject matter. THIS AGREEMENT AND ITS COLLATERAL SCHEDULES SHALL NOT BE CHANGED OR TERMINATED ORALLY OR BY COURSE OF CONDUCT, BUT ONLY BY A WRITING SIGNED BY BOTH PARTIES. Section headings contained in this Agreement have been included for convenience only, and shall not affect the construction or interpretation of this Agreement. (f) This Agreement shall continue in full force and effect until all of the Indebtedness has been indefeasibly paid in full to Secured Party or its assignee. The surrender, upon payment or otherwise, of any Note or any of the other documents evidencing any of the Indebtedness shall not affect the right of Secured Party to retain the Collateral for such other Indebtedness as may then exist or as it may be reasonably contemplated will exist in the future. This Agreement shall automatically be reinstated if Secured Party is ever required to return or restore the payment of all or any portion of the Indebtedness (all as though such payment had never been made). (g) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CONNECTICUT (WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, REGARDLESS OF THE LOCATION OF THE EQUIPMENT. IN WITNESS WHEREOF, Debtor and Secured Party, intending to be legally bound hereby, have duly executed this Agreement in one or more counterparts, each of which shall be deemed to be an original, as of the day and year first aforesaid. SECURED PARTY: DEBTOR: GENERAL ELECTRIC CAPITAL CORPORATION SAMPLE By: /s/ JOHN EDEL By: /s/ STEPHEN T. D. DIXON Name: John Edel Name: Stephen T. D. Dixon Title: Senior Vice President Title: Executive V.P. and C.F.O. FINANCIAL COVENANTS ADDENDUM NO. 1 TO MASTER SECURITY AGREEMENT DATED AS OF JULY 15, 2003 THIS ADDENDUM (this "ADDENDUM") amends and supplements the above referenced agreement (the "AGREEMENT"), between GENERAL ELECTRIC CAPITAL CORPORATION (together with its successors and assigns, if any, "SECURED PARTY") and CHROMAVISION MEDICAL SYSTEMS, INC. ("DEBTOR") and is hereby incorporated into the Agreement as though fully set forth therein. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Note and Security Agreement. The Agreement is hereby amended by adding the following: FINANCIAL COVENANTS. (a) Debtor shall comply with the following: -Maintain a minimum receivable balance (less 90+ days delinquent accounts) of $750,000 applicable to a funding amount of not more than $3,000,000. Immediately after the funding of a Note that brings total Notes to more than $3,000,000, and which shall not take place until Debtor has a minimum 350 ACIS and ACCESS units in-service and a receivable balance of not less than $1,250,000, excluding accounts delinquent more than 90 days. Debtor must maintain a minimum receivable balance of $1,250,000 thereafter. If this covenant is violated it will be considered an event of default under the Debt Documents and Debtor will be required to pay down Notes due to Secured Party based upon the remaining expected cash flows from the underlying remaining customer contracts, which amount will be determined by Secured Party in its reasonable sole discretion. -Maintain a Tangible Net Worth of not less than $6,500,000. through February 28, 2004, except that should the Technology and Life Science Division of Comerica Bank - California change its identical covenant, and upon written notification from Debtor, Secured Party will alter its covenant to mirror the change. -Maintain a Quick Ratio of at least 1:1 through February 28, 2004, except that should the Technology and Life Science Division of Comerica Bank - California change its identical covenant, and upon written notification from Debtor, Secured Party will alter its covenant to mirror the change. "Tangible Net Worth" is defined as (i) Debtor's net worth plus (ii) all indebtedness of Debtor which is subordinated to Debtor's indebtedness under the Contract pursuant to a subordination agreement in form satisfactory to Secured Party less (iii) all of the following: Debtor's patents, licenses, goodwill, subscription lists, organization expenses, moneys due from affiliates (including officers, directors and shareholders), all intangible assets and any assets resulting from a revaluation. "Quick Ratio" is defined as the total of Debtor's unrestricted cash and equivalents and receivable balances, less balances of more than ninety (90) days divided by the total of current liabilities. (b) COMPLIANCE REPORTS. Debtor's Authorized Representative shall certify that Debtor is in compliance with the requirements of subsection (a) above. Such notification and certification shall be provided within ninety (90) days after the end of each fiscal quarter (the "COMPLIANCE DATE"), reflecting such information as of the end of such fiscal quarter. If Debtor fails timely to provide such notification and compliance certificates, within fifteen (15) days after the Compliance Date, such failure shall automatically be deemed a default under the Agreement without notice or other act by Secured Party. The reports required under this section are in addition to and not a substitute for the reports required under the REPORTS Section of the Agreement. Except as expressly modified hereby, all terms and provisions of the Note and Security Agreement shall remain in full force and effect. This Addendum is not binding nor effective with respect to the Note and Security Agreement until executed on behalf of Secured Party and Debtor by authorized representatives of Secured Party and Debtor. IN WITNESS WHEREOF, Debtor and Secured Party have caused this Addendum to be executed by their duly authorized representatives as of the date first above written. SECURED PARTY: DEBTOR: GENERAL ELECTRIC CAPITAL CORPORATION CHROMAVISION MEDICAL SYSTEMS, INC. By: /s/ JOHN EDEL By: /s/ STEPHEN T.D. DIXON _________________________________ ______________________________ Name: John Edel Name: Stephen T.D. Dixon _________________________________ ______________________________ Title: Senior Vice President Title: Exec VP and CFO _________________________________ ______________________________ ATTEST By: ______________________________ Name: ______________________________ ADDITIONAL COLLATERAL RIDER PART OF MASTER SECURITY AGREEMENT DATED AS OF JULY 15, 2003 (THE "CONTRACT") BETWEEN GENERAL ELECTRIC CAPITAL CORPORATION (THE "SECURED PARTY") AND CHROMAVISION MEDICAL SYSTEMS, INC. ("DEBTOR"). As security for the full and faithful performance by the Debtor of all of the terms and conditions upon the Debtor's part to be performed under the Contract and any other obligation of the Debtor to the Secured Party now or hereafter in existence, the Debtor does hereby grant to the Secured Party a security interest in the property listed below (all hereinafter collectively called the "ADDITIONAL COLLATERAL"): All of Debtor's Personal Property and Fixtures now owned or hereafter acquired and wherever located including but not limited to the following: 1. All Machinery, Equipment, Furniture and Fixtures, now owned or hereafter acquired and wherever located, complete with any and all attachments, accessions, additions, replacements, improvements, modifications and substitutions thereto and therefor and all proceeds including insurance proceeds and products thereof and therefrom. 2. All Accounts, Accounts Receivable, customer rental streams under Debtor's customer contracts, Contract Rights, Instruments, General Intangibles and Chattel Paper, now owned or hereafter acquired and wherever located, and all proceeds thereof and therefrom, excluding all intellectual property rights now owned, licensed by Debtor or hereafter owned or licensed by Debtor. 3. All Inventory and any other goods, merchandise or other personal property held by Debtor for sale or lease and all raw materials, work or goods in process or materials or supplies of every nature used, consumed or to be consumed in Debtor's business, all of the foregoing now owned or hereafter acquired and wherever located, and all proceeds, including insurance proceeds and products of any of the foregoing. In the event of a default by the Debtor with respect to any of the conditions, terms, covenants and provisions under the Contract or other agreement, Secured Party shall have the rights and remedies of a secured party under the Uniform Commercial Code with respect to the Additional Collateral. The Debtor shall have the same obligations with respect to the Additional Collateral as it has under the Contract with respect to the Collateral financed. This Agreement shall run to the benefit of the Secured Party's successors and assigns. Dated: 8/11/03 GENERAL ELECTRIC CAPITAL CHROMAVISION MEDICAL CORPORATION SYSTEMS, INC. BY: /s/ JOHN EDEL BY: /s/ STEPHEN T.D. DIXON TITLE: SVP TITLE: EVP and CFO EX-10.2 4 a94510exv10w2.txt EXHIBIT 10.2 EXHIBIT 10.2 AMENDMENT THIS AMENDMENT is made as of the 31st day of July, 2003, between General Electric Capital Corporation ("Secured Party") and ChromaVision Medical Systems, Inc. ("Debtor") in connection with that certain Master Security Agreement, dated as of July 15, 2003 ("Agreement"). The terms of this Amendment are hereby incorporated into the Agreement as though fully set forth therein. Section references below refer to the section numbers of the Agreement. The Agreement is hereby amended as follows: 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR. Subsection (m) is hereby added to and made a part of the Agreement and reads as follows: "(m) Debtor's Intellectual Property, as defined in Section 7 below, is and will remain free and clear of all liens, claims and encumbrances of any kind whatsoever, except for Permitted Liens as defined in subsection (k) of this Section." 3. COLLATERAL. Subsection (a) is hereby replaced with the following: "(a) Except for the leasing, sale and placement of equipment to Debtor's customers in the Ordinary Course of Business and until the declaration of any default, Debtor shall remain in possession of the Collateral; except that Secured Party shall have the right to possess (i) any chattel paper or instrument that constitutes a part of the Collateral, and (ii) any other Collateral in which Secured Party's security interest may be perfected only by possession. Secured Party may inspect any of the Collateral during normal business hours after giving Debtor reasonable prior notice. If Secured Party asks, Debtor will promptly notify Secured Party in writing of the location of any Collateral. Ordinary Course of Business is defined as the Debtor's business of leasing certain proprietary medical devices for testing purposes to qualified third party users, such as pathology laboratories, hospitals, clinics, research facilities and companies involved in the discovery and development of therapeutic applications for diseases; the sale, from time to time, of individual units of inventory, whether new or coming off lease; and the sale or placement, from time to time, of inventory units, whether in whole or part, with research facilities and biotechnology companies considered key to promoting the benefits and reputation of the Debtor's products and intellectual property; except that such sales and placements shall not be of such extent as to materially erode Secured Party's overall collateral base." Subsection (c) is hereby replaced with the following: "(c) Except for the leasing, sale and placement of equipment to Debtor's customers in the Ordinary Course of Business, Secured Party does not authorize and Debtor agrees it shall not (i) part with possession of any of the Collateral (except to Secured Party or for maintenance and repair), (ii) remove any of the Collateral from the continental United States, or (iii) sell, rent, lease, mortgage, license, grant a security interest in or otherwise transfer or encumber (except for Permitted Liens) any of the Collateral." Subsection (g) is hereby added to and made a part of the Agreement and reads as follows: "(g) Debtor agrees to comply with Secured Party's request for collateral monitoring of customer contracts in addition to contract audits. Debtor agrees to pay to Secured Party the collateral monitoring fees of $5,000. for year one, $5,000 for year two and $6,250. for year three with such payment made in advance at the appropriate anniversary date of the first funding. In addition, Debtor agrees to pay Secured Party an audit fee of $500. per person, per day for auditing of the Debtor's contracts, receivables, and inventory." 5. REPORTS. Subsection (b) is hereby replaced with the following: "(b) Debtor will deliver to Secured Party financial statements and reports as follows. - quarterly unaudited statements and annual audited statements, certified by a recognized firm of certified public accountants, within 15 days after the statements are provided to the Securities and Exchange Commission ("SEC"). All such statements are to be prepared using generally accepted accounting principles ("GAAP") and, if Debtor is a publicly held company, are to be in compliance with SEC requirements. - Monthly aging of receivable balances, by in-service contract, within 15 days of month end. - Monthly report on location of ACIS and ACCESS units within 15 days of month end. - Monthly listing of cancelled contracts by name, location and reason within 15 days of month end. All reports will be blanket certified on a monthly basis by Debtor's Chief Financial Officer." 7. DEFAULT AND REMEDIES. Subsection (a) is hereby replaced with the following: "(a) Debtor shall be in default under this Agreement and each of the other Debt Documents if: (i) Debtor breaches its obligation to pay when due any installment or other amount due or coming due under any of the Debt Documents and fails to cure the breach within ten (10) days; (ii) Except for the leasing, sale and placement of equipment to Debtor's customers in the Ordinary Course of Business, Debtor, without the prior written consent of Secured Party, attempts to or does sell, rent, lease, license, mortgage, grant a security interest in, or otherwise transfer or encumber (except for Permitted Liens) any of the Collateral; (iii) Debtor breaches any of its insurance obligations under Section 4, and fails to cure any breach within thirty (30) days after written notification of same from an insurer; (iv) Debtor breaches any of its other obligations under any of the Debt Documents and fails to cure that breach within thirty (30) days after written notice from Secured Party; (v) Any warranty, representation or statement made by Debtor in any of the Debt Documents or otherwise in connection with any of the Indebtedness shall be false or misleading in any material respect; (vi) Any of the Collateral is subjected to attachment, execution, levy, seizure or confiscation in any legal proceeding or otherwise, or if any legal or administrative proceeding is commenced against Debtor or any of the Collateral, which in the good faith judgment of Secured Party subjects any of the Collateral to a material risk of attachment, execution, levy, seizure or confiscation and no bond is posted or protective order obtained to negate such risk; (vii) Debtor breaches or is in default under any other agreement between Debtor and Secured Party, and fails to cure the breach within thirty (30) days of its occurrence; (viii) Debtor dissolves, terminates its existence, becomes insolvent or ceases to do business as a going concern; (ix) A receiver is appointed for all or of any part of the property of Debtor, or Debtor makes any assignment for the benefit of creditors; (x) Debtor files a petition under any bankruptcy, insolvency or similar law, or any such petition is filed against Debtor and is not dismissed within forty-five (45) days; (xi) Debtor's improper filing of an amendment or termination statement relating to a filed financing statement describing the Collateral; (xii) Debtor defaults under any other material obligation for (A) borrowed money, (B) the deferred purchase price of property or (C) payments due under any lease agreement; (xiii) At any time during the term of this Agreement Debtor sells more than 50% of its interest in the company to another corporation or business or all or substantially all of its assets without Secured Party's prior written consent; (xiv) There is a material adverse change in the Debtor's financial condition; (xv) Debtor or other obligor for any of the Indebtedness sells, transfers, assigns, mortgages, pledges, leases, grants a security interest in or encumbers any or all of Debtor's Intellectual Property now existing or hereafter acquired. Intellectual Property shall consist of but not be limited to any and all owned or licensed patents, trademarks and copyrights. For purposes of this paragraph xv, licenses or sublicenses by the Debtor of its Intellectual Property as part of a research and development or similar arrangement shall be excluded. Debtor shall provide Lessor with a listing of licenses and sublicenses granted to third parties within fifteen (15) days of receipt of written request; (xvi) Debtor fails to comply with any of the financial covenants set forth in that certain Financial Covenants Addendum No. 1 to the Agreement; or (xvii) Debtor changes the terms of the lockbox agreement with Comerica Bank - California or moves the lockbox account without Secured Party's prior written consent, which consent will not be unreasonably withheld." Subsection (b) is hereby replaced with the following: "(b) If Debtor is in default, the Secured Party, at its option, may declare any or all of the Indebtedness to be immediately due and payable, without demand or notice to Debtor. The accelerated obligations and liabilities shall bear interest (both before and after any judgment) until paid in full at the lower of eighteen percent (18%) per annum or the maximum rate not prohibited by applicable law." Subsection (h) is hereby added to and made a part of the Agreement and reads as follows: "(h) In the event a default has occurred under subsection (a)(xvi) above, Secured Party shall be entitled to receive the proceeds associated with a sale of the Intellectual Property up to the balance of the Indebtedness and prior to the payment of any other creditor or party." TERMS USED, BUT NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN TO THEM IN THE AGREEMENT. EXCEPT AS EXPRESSLY AMENDED HEREBY, THE AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT. IF THERE IS ANY CONFLICT BETWEEN THE PROVISIONS OF THE AGREEMENT AND THIS AMENDMENT, THEN THIS AMENDMENT SHALL CONTROL. IN WITNESS WHEREOF, the parties hereto have executed this Amendment simultaneously with the Agreement by signature of their respective authorized representative set forth below. GENERAL ELECTRIC CAPITAL CORPORATION CHROMAVISION MEDICAL SYSTEMS, INC. By: /s/ JOHN EDEL By: /s/ STEPHEN T.D. DIXON Name: John Edel Name: Stephen T.D. Dixon Title: SVP Title: EVP and CFO EX-10.3 5 a94510exv10w3.txt EXHIBIT 10.3 EXHIBIT 10.3 ASSIGNMENT AGREEMENT WITH RECOURSE INSTRUMENTS (Check Appropriate) Dated: SEPTEMBER 26, 2003 [X] VARIOUS CUSTOMER AGREEMENTS AS LISTED Customer: CHROMAVISION MEDICAL IN THE ATTACHED EXHIBIT A. Address: 33171 PASEO CERVEZA City: SAN JUAN CAPISTRANO State: CA FOR VALUE RECEIVED, undersigned (hereafter called "ASSIGNOR") hereby sells, assigns and transfers to GENERAL ELECTRIC CAPITAL CORPORATION ("ASSIGNEE"), its successors and assigns, all of Assignor's right, title and interest in and to the above-described contract(s) and all related guaranties, documents and other instruments ("ACCOUNT DOCUMENTS"), together with all property described therein ("ACCOUNT PROPERTY") and all rights and remedies thereunder (such rights and remedies, together with the Account Documents and Account Property, collectively the "ACCOUNT"). To induce Assignee to purchase the Account, Assignor represents and warrants to Assignee that: (i) the Account is genuine and represents a valid obligation of any borrower, buyer, lessee, guarantor or other party named in any of the Account Documents (each an "ACCOUNT PARTY"); (ii) each Account Party is bona fide and in good standing; (iii) Assignor has agreed to allow a representative of Assignee to stamp the Account Documents now existing or hereafter acquired and any amendments thereto with an interest statement to perfect Assignee's security interest; (iv) copies of the Account Documents delivered by Assignor to Assignee correctly reflect the entire agreement between Assignor and each Account Party with respect to the Account; (v) all names, addresses, amounts, dates, signatures and other statements and facts contained in the Account Documents are genuine, true and correct; (vi) no rental, installment or other amount on the Account that has a due date after the date of this Assignment has prepaid to Assignor; (vii) each Account Document has been duly authorized, executed and delivered by each Account Party thereto and represents the legal, valid and binding obligation of such Account Party, enforceable under all applicable laws against such Account Party in accordance with its terms, except to the extent that enforcement of remedies may be limited by applicable bankruptcy, insolvency or similar laws; (viii) the Account is not in default nor is it subject to any defense, setoff, recoupment, deduction or counterclaim; (ix) there are no claims pending or threatened by any Account Party against Assignor in connection with the Account or otherwise; (x) any down payment or advance rental that may be required on the Account Property has been fully paid in cash and no part thereof has been loaned, directly or indirectly, by Assignor; (xi) all Account Property is in good and working condition and has been delivered to, and unconditionally and irrevocably accepted by, the Account Party; (xii) the Account Documents evidence a valid reservation of title to, or first lien on, the Account Property that is effective against all persons; (xiv) Assignor has properly and timely filed or recorded any Account Documents or instruments as may be required under all applicable filing and recording statutes, and has obtained all necessary subordinations, releases and/or waivers, to ensure that Assignor's lien or other interest in the Account Property is and will be superior to that of all other persons; and (xiii) Assignor has the right to assign the Account to Assignee and this Assignment conveys to Assignee good and valid title, at law and in equity, to the Account, free and clear of all liens, claims and encumbrances of any kind or nature whatsoever. In the event of breach of any of the foregoing representations or warranties, or if any installment or rental on the Account becomes due and remains unpaid for more than sixty (60) days, or if any Account Party otherwise fails to perform in accordance with the Account Documents, or if any Account Party or Assignor becomes insolvent, makes an assignment for the benefit of creditors, or files, or has filed against it, any petition for a receiver or in bankruptcy, then in any of such events Assignor will be deemed in default under the provisions and restrictions of the Master Security Agreement dated as of July 15, 2003. If Assignor fails to pay any amount that may come due to Assignee hereunder on its due date, then (i) interest shall accrue thereon from the due date until paid in full at a rate equal to the lesser of eighteen percent (18%) per annum or the maximum rate not prohibited by law, and (ii) Assignor shall reimburse Assignee upon demand for any and all collection costs (including, without limitation, reasonable attorneys' fees). Assignor agrees that Assignee may audit its books and records upon any default by Assignor. THIS ASSIGNMENT CONSTITUTES A SALE OF 100% OWNERSHIP INTEREST IN THE ACCOUNT AND SHALL IN NO WAY BE CONSTRUED AS AN EXTENSION OF CREDIT BY ASSIGNEE TO ASSIGNOR. Assignor authorizes Assignee to collect any and all rentals, installments and/or other sums on the Account and to take any other action with respect to the Account which Assignor might otherwise take. Assignor agrees that Assignee may sign and endorse Assignor's name upon any remittances received from any Account Party on the Account or any notices of assignment of the Account. Assignee may, without notice to Assignor and without affecting Assignor's liability hereunder, enter into any settlement, extension, forbearance or other variation in terms in connection with the Account, or discharge or release the obligations of any Account Party or any other persons, by operation of law or otherwise. Assignor shall not make any collections or repossessions on the Account, nor accept returns or make substitutions for Account Property, except with Assignee's prior written consent. Assignor waives and releases any right, title or interest that it may have (whether pursuant to a "cross-collateralization" provision or otherwise) in and to any of the Account Property. Assignor agrees to take such further action and to execute such further documents which may be reasonably necessary or appropriate to give effect to the transactions contemplated by this Assignment. ASSIGNOR HEREBY UNCONDITIONALLY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THE ACCOUNT OR THIS ASSIGNMENT, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN ASSIGNOR AND ASSIGNEE RELATING TO THE SUBJECT MATTER HEREOF OR THEREOF, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN ASSIGNOR AND ASSIGNEE. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THE ACCOUNT, THIS ASSIGNMENT, OR ANY RELATED DOCUMENTS. IN THE EVENT OF LITIGATION, THIS ASSIGNMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. This Assignment incorporates all terms and conditions relating to purchase of the Account by Assignee and may not be modified except by duly executed written agreement. Assignor waives notices of Acceptance. Assignor waives any failure or delay by Assignee in enforcing any right hereunder. This Assignment and the provisions contained herein relate only to the Account identified above and shall in no way affect, modify, or supersede any other written agreements between Assignor and Assignee. ASSIGNOR: CHROMAVISION MEDICAL SYSTEMS, INC. By: /s/ STEPHEN T.D. DIXON Title: EVP and CFO EX-10.4 6 a94510exv10w4.txt EXHIBIT 10.4 EXHIBIT 10.4 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT This First Amendment to Loan and Security Agreement is entered into as of October 21, 2003 (the "Amendment"), by and between COMERICA BANK, successor by merger to Comerica Bank-California ("Bank") and CHROMAVISION MEDICAL SYSTEMS, INC. ("Borrower"). RECITALS Borrower and Bank are parties to that certain Loan and Security Agreement dated as of February 13, 2003, as amended from time to time (the "Loan Agreement"). The parties desire to amend the Loan Agreement in accordance with the terms of this Amendment. NOW, THEREFORE, the parties agree as follows: 1. Bank hereby waives Borrower's compliance with Sections 6.7 and 6.8 of the Loan Agreement, as in effect prior to the date of this Amendment, for the period ending August 31, 2003, only. 2. Section 6.7 of the Loan Agreement hereby is amended and restated in its entirety to read as follows: "6.7 [Intentionally Omitted.] 3. Section 6.8 of the Loan Agreement hereby is amended and restated in its entirety to read as follows: "6.9 Tangible Net Worth. Beginning with the month ended August 31, 2003, Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth of not less than Two Million Dollars ($2,000,000)." 4. Exhibit C to the Loan Agreement hereby is amended and replaced with Exhibit C attached hereto. 5. Unless otherwise defined, all capitalized terms in this Amendment shall be as defined in the Loan Agreement, as applicable. Except as amended, the Loan Agreement remains in full force and effect. 6. Borrower represents and warrants that the representations and warranties contained in the Loan Agreement are true and correct as of the date of this Amendment (provided, however, that those representations and warranties expressly referring to another date shall be true and correct in all material respects as of such date), and that no Event of Default has occurred and is continuing. 7. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 8. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Amendment, duly executed by Borrower; (b) a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) an amendment fee in the amount of $5,000, which shall be due and payable and nonrefundable on the date hereof, and which may be debited from any of Borrower's accounts; -1- (d) an amount equal to all Bank Expenses incurred to date in connection with the Loan Agreement, to the extent not previously received by Bank, which may be debited from any of Borrower's accounts; and (e) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written. COMERICA BANK successor by merger to Comerica Bank-California By: /s/ DEREK HOYT ----------------------------------------- Name: Derek Hoyt ----------------------------------------- Title: Asst Vice President ----------------------------------------- CHROMAVISION MEDICAL SYSTEMS, INC. By: /s/ STEPHEN T. D. DIXON ----------------------------------------- Name: Stephen T. D. Dixon ----------------------------------------- Title: EVP and CFO ----------------------------------------- -2- EXHIBIT C COMPLIANCE CERTIFICATE TO: COMERICA BANK-CALIFORNIA FROM: CHROMAVISION MEDICAL SYSTEMS, INC. The undersigned authorized officer of CHROMAVISION MEDICAL SYSTEMS, INC. hereby certifies that in accordance with the terms and conditions of the Loan Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending 9/30/03 with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.

COMMENTS REGARDING EXCEPTIONS: See Attached. Sincerely, /s/ STEPHEN T. D. DIXON - --------------------------------------------- SIGNATURE EVP and CFO - --------------------------------------------- TITLE - --------------------------------------------- DATE BANK USE ONLY Received by: --------------------------------- AUTHORIZED SIGNER Date: --------------------------------- Verified: --------------------------------- AUTHORIZED SIGNER Date: --------------------------------- Compliance Status Yes No 3 CORPORATE RESOLUTIONS TO BORROW BORROWER: CHROMAVISION MEDICAL SYSTEMS, INC. I, the undersigned Secretary or Assistant Secretary of CHROMAVISION MEDICAL SYSTEMS, INC. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Delaware. I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Certificate of Incorporation, as amended, and the Restated Bylaws of the Corporation, each of which is in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and held, at which a quorum was present and voting (or by other duly authorized corporate action in lieu of a meeting), the following resolutions were adopted. BE IT RESOLVED, that any two (2) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below:

acting for and on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: BORROW MONEY. To borrow from time to time from Comerica Bank-California ("Bank"), on such terms as may be agreed upon between the officers, employees, or agents of the Corporation and Bank, such sum or sums of money as in their judgment should be borrowed, without limitation. EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank that certain Loan Agreement dated as of February 13, 2003 as amended by that certain First Amendment to Loan and Security Agreement dated as of October 21, 2003 (the "Loan Agreement") and any other agreement entered into between Corporation and Bank in connection with the Loan Agreement, including any amendments, all as amended or extended from time to time (collectively, with the Loan Agreement, the "Loan Documents"), and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for the Loan Documents, or any portion thereof. NEGOTIATE ITEMS . To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any 1 and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on October __, 2003 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED AND ATTESTED BY: X --------------------------------------- 2 AFFIRMATION OF GUARANTY This AFFIRMATION OF GUARANTY is made as of October 21, 2003, by the undersigned (each, a "Guarantor" and collectively, the "Guarantors") for the benefit of Comerica Bank ("Bank"). RECITALS Bank and CHROMAVISION MEDICAL SYSTEMS, INC. ("Borrower") are parties to that certain Loan and Security Agreement dated as of February 13, 2003, as amended from time to time (collectively, the "Loan Agreement"). Each Guarantor executed for the benefit of Bank an Unconditional Guaranty dated as of even date with the Loan Agreement (the "Guaranty"), guarantying all amounts owing by Borrower to Bank. Borrower and Bank propose to enter into an Amendment to Loan and Security Agreement of even date herewith (the "Amendment"), which provides that Bank will, under certain circumstances, amends the Loan Agreement by, among other things, waiving and resetting certain financial covenants. Bank has agreed to enter into the Amendment provided, among other things, that each Guarantor consents to the entry by Borrower into the Amendment and related documents and agrees that the Guaranty will remain effective. AGREEMENT NOW, THEREFORE, each Guarantor agrees as follows: 1. Guarantor consents to the execution, delivery and performance by Borrower of the Amendment and the documents and instruments executed in connection therewith, as well as all other amendments and modifications to the Loan Agreement. 2. The Guaranty is and shall remain in full force and effect with respect to all of Borrower's Obligations (as defined in the Loan Agreement) as modified by the Amendment and otherwise. Guarantor confirms that Guarantor has no defenses against its obligations under the Guaranty. 3. Guarantor represents and warrants that the Representations and Warranties contained in the Guaranty are true and correct as of the date of this Affirmation. Unless otherwise defined, all capitalized terms in this Affirmation shall be as defined in the Guaranty. IN WITNESS WHEREOF, the undersigned Guarantor has executed this Affirmation of Guaranty as of the first date above written. SAFEGUARD SCIENTIFICS (DELAWARE), INC. By: -------------------------------- Title: -------------------------------- SAFEGUARD SCIENTIFICS (DELAWARE), INC. By: -------------------------------- Title: -------------------------------- 3 EX-10.5 7 a94510exv10w5.txt EXHIBIT 10.5 EXHIBIT 10.5 PROMISSORY NOTE Sept. 24, 2003 ------------------ (Date) FOR VALUE RECEIVED, CHROMAVISION MEDICAL SYSTEMS, INC. a corporation located at the address stated below ("MAKER") promises, jointly and severally if more than one, to pay to the order of GENERAL ELECTRIC CAPITAL CORPORATION or any subsequent holder hereof (each, a "PAYEE") at its office located at 401 MERRITT 7 SUITE 23, NORWALK, CT 06851-1177 or at such other place as Payee or the holder hereof may designate, the principal sum of THREE MILLION--00/00 DOLLARS ($3,000,000.00), with interest on the unpaid principal balance, from the date hereof through and including the dates of payment, at a fixed interest rate of Eight and Sixteen Hundredths percent (8.16%) per annum, to be paid in lawful money of the United States, in Thirty Three (33) consecutive monthly installments of principal and interest as follows:

each ("Periodic Installment") and a final installment which shall be in the amount of the total outstanding principal and interest. The first Periodic Installment shall be due and payable on Nov. 1, 2003 and the following Periodic Installments and the final installment shall be due and payable on the same day of each succeeding month (each, a "Payment Date"). Such installments have been calculated on the basis of a 360 day year of twelve 30-day months. Each payment may, at the option of the Payee, be calculated and applied on an assumption that such payment would be made on its due date. The acceptance by Payee of any payment which is less than payment in full of all amounts due and owing at such time shall not constitute a waiver of Payee's right to receive payment in full at such time or at any prior or subsequent time. The Maker hereby expressly authorizes the Payee to insert the date value is actually given in the blank space on the face hereof and on all related documents pertaining hereto. This Note may be secured by a security agreement, chattel mortgage, pledge agreement or like instrument (each of which is hereinafter called a "SECURITY AGREEMENT"). Time is the essence hereof. If any installment or any other sum due under this Note or any Security Agreement is not received within ten (10) days after its due date, the Maker agrees to pay, in addition to the amount of each such installment or other sum, a late payment charge of five percent (5%) of the amount of said installment or other sum, but not exceeding any lawful maximum. If (i) Maker fails to make payment of any amount due hereunder within ten (10) days after the same becomes due and payable; or (ii) Maker is in default under, or fails to perform under any term or condition contained in any Security Agreement, then the entire principal sum remaining unpaid, together with all accrued interest thereon and any other sum payable under this Note or any Security Agreement, at the election of Payee, shall immediately become due and payable, with interest thereon at the lesser of eighteen percent (18%) per annum or the highest rate not prohibited by applicable law from the date of such accelerated maturity until paid (both before and after any judgment). The Maker may prepay in full, but not in part, its entire indebtedness hereunder upon payment of the entire indebtedness plus an additional sum as a premium equal to the following percentages of the remaining principal balance for the indicated period: Prior to the first annual anniversary date of this Note: five percent (5%) Thereafter and prior to the second annual anniversary date of this Note: three percent (3%) Thereafter and prior to the third annual anniversary date of this Note: One percent (1%) and zero percent (0%) thereafter, plus all other sums due hereunder or under any Security Agreement. It is the intention of the parties hereto to comply with the applicable usury laws; accordingly, it is agreed that, notwithstanding any provision to the contrary in this Note or any Security Agreement, in no event shall this Note or any Security Agreement require the payment or permit the collection of interest in excess of the maximum amount permitted by applicable law. If any such excess interest is contracted for, charged or received under this Note or any Security Agreement, or if all of the principal balance shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received under this Note or any Security Agreement on the principal balance shall exceed the maximum amount of interest permitted by applicable law, then in such event (a) the provisions of this paragraph shall govern and control, (b) neither Maker nor any other person or entity now or hereafter liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by applicable law, (c) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal balance or refunded to Maker, at the option of the Payee, and (d) the effective rate of interest shall be automatically reduced to the maximum lawful contract rate allowed under applicable law as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under this Note or any Security Agreement which are made for the purpose of determining whether such rate exceeds the maximum lawful contract rate, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the indebtedness evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise by Payee in connection with such indebtedness; provided, however, that if any applicable state law is amended or the law of the United States of America preempts any applicable state law, so that it becomes lawful for the Payee to receive a greater interest per annum rate than is presently allowed, the Maker agrees that, on the effective date of such amendment or preemption, as the case may be, the lawful maximum hereunder shall be increased to the maximum interest per annum rate allowed by the amended state law or the law of the United States of America. The Maker and all sureties, endorsers, guarantors or any others (each such person, other than the Maker, an "OBLIGOR") who may at any time become liable for the payment hereof jointly and severally consent hereby to any and all extensions of time, renewals, waivers or modifications of, and all substitutions or releases of, security or of any party primarily or secondarily liable on this Note or any Security Agreement or any term and provision of either, which may be made, granted or consented to by Payee, and agree that suit may be brought and maintained against any one or more of them, at the election of Payee without joinder of any other as a party thereto, and that Payee shall not be required first to foreclose, proceed against, or exhaust any security hereof in order to enforce payment of this Note. The Maker and each Obligor hereby waives presentment, demand for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, and all other notices in connection herewith, as well as filing of suit (if permitted by law) and diligence in collecting this Note or enforcing any of the security hereof, and agrees to pay (if permitted by law) all expenses incurred in collection, including Payee's actual attorneys' fees. Maker and each Obligor agrees that fees not in excess of twenty percent (20%) of the amount then due shall be deemed reasonable. THE MAKER HEREBY UNCONDITIONALLY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS NOTE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN MAKER AND PAYEE RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN MAKER AND PAYEE. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.) THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THE NOTE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. IN THE EVENT OF LITIGATION, THIS NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. This Note and any Security Agreement constitute the entire agreement of the Maker and Payee with respect to the subject matter hereof and supercedes all prior understandings, agreements and representations, express or implied. No variation or modification of this Note, or any waiver of any of its provisions or conditions, shall be valid unless in writing and signed by an authorized representative of Maker and Payee. Any such waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. Any provision in this Note or any Security Agreement which is in conflict with any statute, law or applicable rule shall be deemed omitted, modified or altered to conform thereto. CHROMAVISION MEDICAL SYSTEMS, INC. By: /s/ Stephen Dixon - ------------------------------------ --------------------------------- (Witness) Name: Stephen Dixon - ------------------------------------ ------------------------------- (Print name) Title: EUP-CFO - ------------------------------------ ------------------------------ (Address) Federal Tax ID #: 752649072 ------------------- Address: 33171 Paseo Cerveza, San Juan Capistrano, Orange County, CA 92675 EX-31 8 a94510exv31.txt EXHIBIT 31 EXHIBIT 31 CERTIFICATIONS PURSUANT TO EXCHANGE ACT RULE 13-14(A) OR RULE 15D-14(A) I, Michael G Schneider, the principal executive officer of ChromaVision Medical Systems, Inc., certify that: 1. I have reviewed this report on Form 10-Q of ChromaVision Medical Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date November 14, 2003 /s/ Michael G. Schneider - ------------------------ Michael G. Schneider Executive Vice President and Chief Operating Officer I, Stephen T.D. Dixon, principal financial officer, of ChromaVision Medical Systems, Inc., certify that: 1. I have reviewed this report on Form 10-Q of ChromaVision Medical Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: (a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date November 14, 2003 /s/ Stephen T.D. Dixon - ---------------------- Stephen T.D. Dixon Executive Vice President and Chief Financial Officer EX-32 9 a94510exv32.txt EXHIBIT 32 EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Each of the undersigned hereby certifies, in his capacity as an officer of ChromaVision Medical Systems, Inc. (the "Company"), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge: - the Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and - the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Dated: November 14, 2003 /s/ Michael G. Schneider - ------------------------ Michael G. Schneider Executive Vice President and Chief Operating Officer /s/ Stephen T.D. Dixon - ---------------------- Stephen T.D. Dixon, Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----


Mark One

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For The Quarterly Period Ended September 30, 2003

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the Transition Period from to


DELAWARE		75-2649072
(State or other jurisdiction of incorporation or		(IRS Employer Identification Number)
organization)

33171 PASEO CERVEZA
SAN JUAN CAPISTRANO, CA		92675
(Address of principal executive offices)		(Zip code)


	2003			2002

Dividend yield		0.0	%		0.0	%
Volatility		97.47	%		101.96	%
Average expected option life	4 years			4 years
Risk-free interest rate		2.45	%		2.27	%

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PART I
	Item 1
		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Operations
		Condensed Consolidated Statements of Cash Flows
		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
	Item 6- Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 31
EXHIBIT 32

(a)		Filed on April 30, 1997 as an exhibit to the Company’s Registration Statement on Form S-1 (No. 333-26129) and incorporated by reference.

(b)		Filed herewith.


	CHROMAVISION MEDICAL SYSTEMS, INC


DATE: November 14, 2003	BY:	/s/ Michael G. Schneider
		Michael G. Schneider Executive Vice President and Chief Operating Officer

DATE: November 14, 2003	BY:	/s/ Stephen T.D. Dixon
		Stephen T.D. Dixon Executive Vice President and Chief Financial Officer