-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MBKPOKk6+FXdi68SUsFFg932Gr6R8hDFxVA0PS/dohhWRxk9ph0mNFTia+NnwJ75 ddccsLnxcY3njCifYQ/kBg== 0000950148-98-001997.txt : 19980817 0000950148-98-001997.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950148-98-001997 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCUMED INTERNATIONAL INC CENTRAL INDEX KEY: 0000888335 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 364054899 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20652 FILM NUMBER: 98688039 BUSINESS ADDRESS: STREET 1: 900 N FRANKLIN ST STREET 2: STE 401 CITY: CHICAGO STATE: IL ZIP: 60610 BUSINESS PHONE: 3126429200 MAIL ADDRESS: STREET 1: 920 N FRANKLIN STREET STREET 2: SUITE 402 CITY: CHICAGO STATE: IL ZIP: 60610 FORMER COMPANY: FORMER CONFORMED NAME: ALAMAR BIOSCIENCES INC DATE OF NAME CHANGE: 19950504 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1998. OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____. Commission file number: 0-20652 ACCUMED INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 36-4054899 --------------------------------- ------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 900 N. Franklin St., Suite 401, Chicago, IL 60610 ------------------------------------------------- (Address of principal executive offices) (312) 642-9200 --------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The registrant had 5,485,453 shares of common stock outstanding as of August 11, 1998. 2 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES INDEX
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 ......... 1 Condensed Consolidated Statements of Operations - Three Months and Six Months Ended June 30, 1998 and 1997 ............. 2 Condensed Consolidated Statements of Cash Flow - Six Months Ended June 30, 1998 and 1997 ..... 3 Notes to Consolidated Financial Statements ...... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......... 8 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Securityholders ...... 12 Item 6. Exhibits and Reports on Form 8-K ........................ 12 SIGNATURES ........................................................ 14
3 PART I - FINANCIAL INFORMATION ACCUMED INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED AUDITED --------------------- --------------------- ASSETS June 30, 1998 Dec. 31, 1997 --------------------- --------------------- CURRENT ASSETS Cash and cash equivalents $ 1,531,202 $ 469,639 Accounts receivable, net 4,016,010 4,664,152 Prepaid expenses and deposits 569,113 183,817 Production inventory 4,579,241 3,464,190 --------------------- -------------------- TOTAL CURRENT ASSETS 10,695,566 8,781,798 --------------------- --------------------- FIXED ASSETS, NET 4,100,503 5,178,528 --------------------- --------------------- Notes receivable 164,199 164,199 Deferred financing costs 226,524 640,224 Purchased technology 5,381,823 4,950,753 Other assets 756,193 833,215 --------------------- --------------------- $ 21,324,808 $ 20,548,717 ===================== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 2,774,505 $ 3,590,022 Payroll and related accruals 236,400 458,794 Accrued interest 203,344 441,100 Other current liabilities 675,300 660,842 Notes payable 1,382,202 1,888,273 Long term debt, current portion 766,800 700,000 --------------------- --------------------- TOTAL CURRENT LIABILITIES 6,038,551 7,739,031 --------------------- --------------------- Warranty reserves, non-current 430,626 467,299 Long term debt 6,533,980 11,454,755 Minority interest - 154,560 --------------------- --------------------- 6,964,606 12,076,614 --------------------- --------------------- STOCKHOLDERS' EQUITY Preferred stock, series A convertible 4,329,466 - Common stock, $0.01 par value 52,500 227,289 Additional paid-in capital 59,545,414 51,953,823 Accumulated other comprehensive income 20,774 22,586 Accumulated deficit (55,409,766) (51,253,889) Treasury stock (216,737) (216,737) --------------------- --------------------- TOTAL STOCKHOLDERS' EQUITY 8,321,651 733,072 --------------------- --------------------- $ 21,324,808 $ 20,548,717 ===================== =====================
See accompanying notes to condensed consolidated financial statements. - 1 - 4 ACCUMED INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30, ---------------------------------------- --------------------------------------- 1998 1997 1998 1997 ----------------- ------------------- ------------------ ----------------- SALES $ 10,533,683 $ 9,243,302 $ 4,848,494 $ 6,193,888 COST OF SALES (6,040,635) (5,573,855) (2,902,889) (4,082,255) ----------------- ------------------- ------------------ ----------------- Gross profit (loss) 4,493,048 3,669,447 1,945,605 2,111,633 ----------------- ------------------- ------------------ ----------------- OPERATING EXPENSES: General and administrative 3,261,226 4,446,983 1,525,313 2,586,988 Research and development 1,854,496 2,299,275 815,044 1,145,491 Goodwill writeoff - 3,582,068 - - Sales and marketing 1,688,017 2,090,423 767,205 1,115,206 ----------------- ------------------- ------------------ ----------------- TOTAL OPERATING EXPENSES 6,803,739 12,418,749 3,107,562 4,847,685 ----------------- ------------------- ------------------ ----------------- OPERATING INCOME (LOSS) (2,310,691) (8,749,302) (1,161,957) (2,736,052) ----------------- ------------------- ------------------ ----------------- OTHER INCOME (EXPENSE): Interest expense (924,609) (2,488,042) (360,743) (2,288,144) Other income (expense) 247,503 239,952 161,393 190,151 ----------------- ------------------- ------------------ ----------------- TOTAL OTHER INCOME (EXPENSE) (677,106) (2,248,090) (199,350) (2,097,993) ----------------- ------------------- ------------------ ----------------- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (2,987,797) (10,997,392) (1,361,307) (4,834,045) INCOME TAX EXPENSE - - - - ----------------- ------------------- ------------------ ----------------- LOSS BEFORE EXTRAORDINARY ITEM (2,987,797) (10,997,392) (1,361,307) (4,834,045) EXTRAORDINARY ITEM - DEBT EXTINGUISHMENT LOSS (1,168,080) - - - ----------------- ------------------- ------------------ ----------------- NET LOSS $ (4,155,877) $ (10,997,392) $ (1,361,307) $ (4,834,045) ================= =================== ================== ================= BASIC LOSS PER SHARE BEFORE EXTRAORDINARY ITEM $ (0.64) $ (3.09) $ (0.25) $ (1.38) EXTRAORDINARY LOSS FROM DEBT EXTINGUISHMENT (0.25) - - - ----------------- ------------------- ------------------ ----------------- BASIC NET LOSS PER SHARE $ (0.89) $ (3.09) $ (0.25) $ (1.38) ================= =================== ================== ================= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,678,434 3,553,962 5,416,970 3,499,843 ================= =================== ================== =================
See accompanying notes to condensed consolidated financial statements. - 2 - 5 ACCUMED INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE SIX MONTHS ENDED JUNE 30,
UNAUDITED ----------------------------------------- 1998 1997 -------------------- ------------------- OPERATING ACTIVITIES: Net income (loss) $ (4,155,877) $ (10,997,392) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,537,779 1,235,592 Write-off of debt discount - 1,926,840 Debt extinguishment loss 1,168,080 - Write-off of impaired goodwill - 3,582,068 Minority interest (191,560) (187,216) Non-cash gain on settlement - (22,272) Changes in assets and liabilities: Decrease (Increase) in accounts receivable 331,710 (939,273) Decrease (Increase) in prepaid expenses and deposits (385,296) (327,189) Decrease (Increase) in production inventory (798,619) (556,818) Decrease (Increase) in other assets 55,652 150,988 Decrease (Increase) in deferred financing costs - (784,625) Increase (Decrease) in accounts payable (909,517) 1,846,948 Increase (Decrease) in other current liabilities (116,662) 239,367 Increase (Decrease) in warranty reserves (36,673) (341,807) -------------------- ------------------- CASH USED IN OPERATING ACTIVITIES (3,500,983) (5,174,789) -------------------- ------------------- INVESTING ACTIVITIES: Purchase of fixed assets (76,254) (624,926) Purchase of Oncometrics stock (528,000) - Acquisition of business, net - (6,000,000) -------------------- ------------------- CASH USED IN INVESTMENT ACTIVITIES (604,254) (6,624,926) -------------------- ------------------- FINANCING ACTIVITIES: Proceeds from issuances of common stock, net 4,854,046 261,028 Notes receivable (issued) collected - (55,767) Payment of capital lease obligation - (32,870) Proceeds from issuance of notes payable 1,362,550 10,015,000 Proceeds from bridge loan - 6,000,000 Payment of notes payable and bridge loan (1,049,796) (6,188,455) -------------------- ------------------- CASH PROVIDED BY FINANCING ACTIVITIES 5,166,800 9,998,936 -------------------- ------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,061,563 (1,800,779) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 469,639 2,801,359 -------------------- ------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,531,202 $ 1,000,580 ==================== ===================
See accompanying notes to condensed consolidated financial statements. - 3 - 6 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Preparation of Interim Financial Statements In the opinion of the management of AccuMed International, Inc. and Subsidiaries ("the Company"), the accompanying unaudited condensed consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of June 30, 1998, and the results of operations for the three months and six months ended June 30, 1998 and 1997 and cash flows for the six months ended June 30, 1998 and 1997. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the Company's audited consolidated financial statements and notes for the fiscal year ended December 31, 1997. 2. Basis of Presentation The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances, transactions and stockholdings have been eliminated. In June 1998, the Company entered into a letter of intent to sell the Company's microbiology division under a plan approved by the Company's Board of Directors. Such sale is subject to stockholder approval and certain other approvals and other conditions to closing. The Company will present the operating results of the microbiology division as a discontinued operation after the proposed sale is approved by the stockholders. During the quarter ended March 31, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements, and requires a total for comprehensive income to be provided in condensed financial statements of interim periods. Comprehensive income includes all changes in stockholders' equity during the period except those resulting from investments by owners and distributions to owners. Comprehensive loss consisted of the following:
6 Months Ended June 30, 3 Months ended June 30, ----------------------------------- ----------------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net loss $ (4,155,877) $(10,997,392) $ (1,361,307) $ (4,834,045) Other comprehensive income (loss): Foreign currency translation adjustments (1,812) -- (1,812) 19,150 ------------ ------------ ------------ ------------ Comprehensive loss $ (4,157,689) $(10,997,392) $ (1,363,119) $ (4,814,895) ------------ ------------ ------------ ------------
-4- 7 3. Reverse Stock Split On May 19, 1998, the stockholders and the Board of Directors approved a one-for-six reverse stock split, which was effected by amendment to the Certificate of Incorporation effective as of May 21, 1998. The reverse split effected all outstanding common shares and all stock options, warrants, convertible notes, convertible preferred stock and other commitments payable in shares of the Company's common stock. All references to per share information in the condensed consolidated financial statements and footnotes have been adjusted to reflect the stock split on a retroactive basis. 4. Inventories
Inventories are summarized as follows: June 30, December 31, 1998 1997 ------------- ------------- Raw material and packaging $ 1,660,708 $ 999,561 Finished good and work in process 2,918,533 2,464,629 ------------- ------------- Total inventories $ 4,579,241 $ 3,464,190 ------------- -------------
5. Debt Conversion On February 23, 1998, the Company exchanged $5,275,000 in principal amount of its Convertible Notes plus accrued interest thereon of $329,030 for 1,245,340 shares of Series A Convertible Preferred Stock (the "Preferred Stock") and 5-year warrants to purchase 207,557 shares of Common Stock at an exercise price of $6.75 per share. The Preferred Stock is convertible into 830,227 shares of Common Stock at a conversion price of $6.75 per share. The Company has registered the resale of the shares of Common Stock underlying the Preferred Stock and Warrants with the Securities and Exchange Commission during 1998. Related to the debt conversion, the Company incurred an extraordinary loss of $1,168,080, including stock, warrants and fees paid to the placement agent, warrants issued as an inducement to the converting noteholders, accounting fees, and the write-off of a proportional amount of deferred financing costs associated with the issuance of the convertible notes. The placement agent received fees of $175,000, 8,334 shares of Common Stock valued at $40,000, 7-year warrants to purchase 58,334 shares of Common Stock at $6.75 per share valued at $84,000, and repricing of previously issued 4-year warrants to purchase 33,334 shares of Common Stock at an exercise price of $18.75 per share to $6.75 per share, valued at $26,000. The converting noteholders received 5-year warrants to purchase 207,557 shares of Common Stock at an exercise price of $6.75 per share, valued at $37,380. The Company utilized the Black-Scholes pricing model to determine the fair value of warrants issued. The following assumptions were incorporated into the model: risk-free rate - 6%, expected volatility - 20%, and expected dividend - - zero. The risk-free rate is determined based on the interest rate of U.S. government treasury obligations with a maturity date -5- 8 comparable to the life of the warrant issued. Other assumptions, relating to warrant life, strike price and stock price, are determined at the date the warrant was issued. 6. Private Placement During March 1998, the Company consummated a private placement of 1,447,778 shares of Common Stock and 7-year warrants to purchase an aggregate of 1,447,778 shares of Common Stock at an exercise price of $4.50 per share for gross proceeds of $6,515,000, including $1,000,000 in notes payable converted into Common Stock, and net proceeds of $5,864,000 after payment of fees, commissions and expenses related thereto. Such securities were sold in units (the "Units"), each Unit consisting of 22,223 shares of Common Stock, and seven-year warrants to purchase 22,223 shares of Common Stock at an exercise price of $4.50 per share (the "Unit Warrants"). The Company has registered the resale of the outstanding Common Stock and the Common Stock underlying the Unit Warrants with the Securities and Exchange Commission. If the Common Stock is delisted from The Nasdaq Stock Market at any time on or prior to December 31, 1998, original purchasers of the Units will be entitled to receive, at their option, in exchange for the Units, units (the "Alternate Units"), each Alternate Unit consisting of (i) shares of Series B Convertible Preferred Stock, par value $0.01 per share of the Company (the "Series B Preferred"), having an aggregate stated value of $100,000 (the "Series B Stated Value"), convertible into shares of Common Stock at an initial conversion price of $4.50 per share (the "Series B Conversion Price"), and (ii) warrants (the "Alternate Warrants") exercisable to purchase the number of shares of Common Stock issuable upon exercise of the Unit Warrants at the same initial Unit Warrant exercise price. The Series B Preferred, if issued, will be immediately convertible at the option of the holder into shares of Common Stock at the Series B Conversion Price. 7. Acquisition On June 29, 1998, the Company acquired the remaining 33% of the outstanding capital stock of Oncometrics Imaging Corp. ("Oncometrics") it did not already own. The Company paid $342,000 in cash and $342,000 in a convertible 18-month note bearing interest at a rate of 2% over the Canadian prime rate in exchange for the stock and a loan payoff to the seller of $154,000. The note is convertible, in whole or in part, into Common Stock of the Company at a price of $1.79 per share. The acquisition was accounted for using the purchase method of accounting with the purchase price allocated to the net assets acquired based on their estimated fair values at the date of acquisition. The excess purchase price consists of $700,000 of purchased technology recorded on the condensed consolidated balance sheet in the current quarter. The operating results of Oncometrics have been included in the statement of operations from the date of acquisition. -6- 9 Oncometrics was formed in 1995 and is currently developing an automated instrument, using the Company's AcCell(TM) workstation, designed to be used in the detection, diagnosis and prognosis of early-stage cancer by measuring the DNA in cells on microscope slides. Prototypes of the instrument are currently being tested with scientists at cancer research and patient care institutions. 8. Supplemental Disclosures of Cash Flow Information
6 Months ended June 30, ------------------------------- 1998 1997 ------------- ------------- OPERATING ACTIVITIES Interest paid $ 730,335 $ 153,898
The Company extinguished debt with a carrying value of $4,818,800 through the issuance of preferred stock and warrants with a fair value of $5,986,880 including transaction fees, resulting in an extraordinary loss of $1,168,000. The Company satisfied its obligation under a $1,000,000 note payable through the issuance of 222,223 shares of common stock. -7- 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is engaged in the development and marketing of cost effective screening instruments and systems for clinical diagnostic laboratories, hospitals and others. The Company markets products in two business segments: 1) Cytopathology - systems made up of multiple instruments networked via proprietary software that support the review and analysis of Pap smears, and 2) Microbiology - proprietary disposable products and automated instruments used to identify infectious organisms and determine susceptibility to antimicrobial agents. OVERVIEW The Company's primary focus is on the development and marketing of computer-aided diagnostic imaging systems for the cytopathology laboratory marketplace. The Company's integrated systems use reliable, accurate and innovative products and methods to provide laboratories with comprehensive solutions that improve efficiency and reduce costs while achieving significant improvements in disease detection. On March 5, 1998, the Company announced that the Board of Directors has authorized management to seek buyers for those aspects of the Company's business that do not contribute to the development and marketing of an integrated product line of imaging-based cytopathology systems and testing procedures. The Company has entered into a letter of intent to sell the microbiology division under a plan subject to shareholder approval and other approvals and conditions to closing. The Board and management believe that the Company's future depends on the success of the cytopathology product line and directly related technology. The divestiture would allow the Company to commit resources to support and market the cytopathology product line. On January 20, 1998, the Board voted not to complete the equity carve-out of the research and development portion of its cytopathology business as previously announced. On May 19, 1998, the stockholders and the Board of Directors approved a one-for-six reverse stock split, which was effected by amendment to the Certificate of Incorporation effective as of May 21, 1998. The reverse split effected all outstanding common shares and all stock options, warrants, convertible notes, convertible preferred stock and other commitments payable in shares of the Company's common stock. All references to per share information in this discussion of financial condition and results of operations have been adjusted to reflect the stock split on a retroactive basis. RESULTS OF OPERATIONS Sales revenues for the quarter ended June 30, 1998 decreased 22% to $4,848,000 compared to $6,194,000 for the quarter ended June 30, 1997. This decrease is due to a $807,000 decrease in the microbiology division, and a $538,000 decrease in the cytopathology division as compared to the same quarter of 1997. -8- 11 Cost of sales decreased from $4,082,000 in the second quarter of 1997 to $2,903,000 in the second quarter of 1998, reflecting the decreased sales volume in the microbiology division, and $150,000 of non-capitalizable manufacturing expenses related to the cytopathology division. General and administrative expenses decreased 41%, declining from $2,587,000 in the second quarter of 1997 to $1,525,000 in the comparable 1998 quarter. This reflects a reduction in staffing and professional fees in 1998, along with an absence of costs associated with consolidation of operations in the microbiology product line during 1997. Research and development expenses decreased 29% from $1,145,000 in the second quarter of 1997 to $815,000 in the second quarter of 1998 due primarily to decreased spending in the microbiology area. Sales and marketing expenses decreased 31% from $1,115,000 in the second quarter of 1997 to $767,000 in the second quarter of 1998 due to decreased marketing efforts for the cytopathology product line. Interest expense of $2,288,000 in the second quarter of 1997 reflected amounts accrued on the Convertible Notes issued in March 1997 and a write-off of $1,900,000 related to the "in the money" conversion feature of these notes. This write-off was recorded in the second quarter of 1997 because this was the period in which the notes became convertible. The interest expense for the second quarter of 1998 of $361,000 reflected interest on the Company's equipment loan, revolving line of credit, and Convertible Notes, including non-cash amortization of deferred financing costs. Net loss decreased from $4,834,000 for the second quarter of 1997 to $1,361,000 for the second quarter of 1998, due to a decrease in gross margins of $166,000 offset by a decrease in operating expenses of $1,740,000. Also, the 1997 quarter included a non-cash interest charge of $1,900,000 relating to the "in the money" conversion feature discussed above. Net loss per share for the quarter ended June 30, 1998 was $0.25 compared to a net loss per share of $1.38 for the quarter ending June 30, 1997. Weighted average shares outstanding for the second quarter 1998 and 1997 were 5,417,000 and 3,500,000, respectively. For the six month period ended June 30, 1998, the Company incurred a $1,168,000 extraordinary loss related to the conversion of par value $5,275,000 of Convertible Notes and $329,030 in accrued interest thereon into 1,245,340 shares of Series A Convertible Preferred Stock. Of the total expense, $193,000 represented cash fees and expenses. Net loss decreased from $10,997,000 for the six month period ended June 30, 1997 to $4,156,000 for the comparable 1998 period. The reduced loss is due to a decrease in operational expenses and interest expense totaling $7,186,000, increased gross margins of $824,000, and an extraordinary loss of in 1998 of $1,168,000. -9- 12 The net loss per share for the first six months of 1998 was $0.89 compared to $3.09 for the 1997 period. The loss per share for the current six-month period was about $0.29 per share less due to the increase in the weighted average shares outstanding for 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash requirements are for research and development expenses, including salaries, material and consulting support, to develop and market new cytopathology products. The Company intends to continue expending substantial funds for research and product development, direct marketing efforts, reduction of accounts payable and other working capital and general corporate purposes. The Company believes that current cash balances and internally generated funds, including the potential sale of the Company's microbiology product lines, will be sufficient to finance the Company's projected operations through at least the next 12 months. The Company has been substantially dependent on the private placements of its debt and equity securities and the proceeds of its public offerings of securities to fund its cash requirements. From the initial public offering in October 1992 through June 30, 1998, the Company has raised approximately $49,000,000 in aggregate net proceeds from public offerings and private placements of securities. The Company's most recent private placement, closed in March 1998, raised cash proceeds of $5,515,000 and net cash proceeds of $4,864,000 after payment of fees and commissions. It resulted from the issuance of 1,447,778 shares of common stock and seven-year warrants to purchase 1,447,778 shares of Common Stock at an exercise price of $6.75 per share. During the first six months of 1998, the Company also received an aggregate of $48,000 upon the exercise of certain stock options and warrants. In February 1998, the Company exchanged $5,275,000 in principal amount of its Convertible Notes plus accrued interest thereon of $329,000 for 1,245,340 shares of Series A Convertible Preferred Stock (convertible into 830,227 shares of Common Stock at a conversion price of $6.75 per share) and five-year warrants exercisable to purchase 207,557 shares of Common Stock at $6.75 per share. As a result of this exchange, the Company's net tangible assets increased by about $4,700,000 and its interest expense will be reduced by about $1,294,000 through March 2000. The balance of $3,225,000 of the Convertible Notes remains outstanding and unaffected by this exchange. On June 29, 1998, the Company acquired the remaining one-third of the outstanding stock of Oncometrics Imaging Corp. ("Oncometrics") that it did not already own. The Company paid $342,000 in cash and $342,000 in a convertible 18-month note bearing interest at a rate of 2% over the Canadian prime rate in exchange for the stock and a loan payoff to the seller of $154,000. The note is convertible, in whole or in part, into Common Stock of the Company at a price of $1.79 per share. -10- 13 Oncometrics is developing a proprietary high resolution image cytometer that uses an AcCell(TM) workstation, a high-resolution digital camera and proprietary image processing and analysis software to analyze cell images from a microscope slide that has been stained using Oncometrics' proprietary staining method. Prototypes of the Oncometrics instrument have been developed that are capable of detecting and measuring small variations in cell nucleus DNA. The feasibility of the technology as it applies to the detection of early cancer in lung sputum has been demonstrated, which assists the cytotechnologist in detecting lung cancer in an early more curable stage of development. The Company believes that this technology may be potentially applied to other types of cancer, such as cervical cancer. The Company's long term debt consists principally of: 1) $3,100,000 of unsecured 12 % Convertible Notes, net of a discount of $125,000 due March, 2000, and 2) a $3,633,000 secured note payable, net of a discount of $145,000, payable in 48 equal monthly installments of principal and interest of $113,400 through September 2001, with a balloon payment of $675,000 due October 31, 2001. This loan bears interest at a rate of 14.5% per annum. The Company has a one-year revolving credit facility under which the Company may borrow up to $4,000,000 based on the amount of eligible trade receivables. The credit line under this arrangement was $1,488,000 based on borrowing base calculations at June 30, 1998, of which $100,000 was unused. The interest rate on the credit line is the higher of the highest prime rate plus 2.5% or 9% (11% at June 30, 1998). The Company currently has no commitments with respect to sources of additional financing. The failure of the Company to obtain adequate additional financing may require the Company to delay, curtail or scale back some or all of its studies and regulatory activities and, potentially, to cease its operations. Any additional equity financing may involve substantial dilution to the Company's then-existing stockholders. The Company's future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of manufacturing capacity, the costs, timing and success of the Company's product development efforts, the costs and timing of acceptance of the Company's products, competing technological and market developments, the progress of commercialization efforts of the Company and its distributors, the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent claims and other intellectual property rights, developments related to regulatory and third-party reimbursement matters, and other factors. If additional financing is needed, the Company may seek to raise additional funds through public or private financings, collaborative relationships or other arrangements. -11- 14 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. A combined Annual and Special Meeting of Stockholders was held on May 19, 1998. At such meeting the following maters were approved. The persons named below were elected to serve one-year terms as directors:
Voting Results (No. of Pre-Split Shares) ------------- ---------- Director For Against Withheld - ---------------- ------------- ------------- ---------- Mark Banister 18,744,931 -0- 32,700 Harold Blue 18,748,127 -0- 29,504 Donald Gaines 18,750,627 -0- 27,004 Jack Halperin 18,769,531 -0- 8,100 Paul Lavallee 18,765,031 -0- 12,600 Robert Priddy 18,767,131 -0- 10,500 Leonard Schiller 18,746,227 -0- 31,404
Stockholders approved a proposal to amend the Company's Certificate of Incorporation to increase the authorized Common Stock from 50,000,000 shares to 100,000,000 shares. The vote was as follows: 20,617,852 for, 1,012,095 against, 54,426 abstain and zero broker non-votes. The Board of Directors abandoned this proposal in favor of the reverse stock split described below. Stockholders approved a proposal to amend the Company's Certificate of Incorporation to effect a one-for-six reverse stock split on the outstanding shares of Common Stock. The vote was as follows: 20,840,050 for, 784,473 against, 59,850 abstain and zero broker non-votes. Stockholders approved a proposal to adopt the Company's 1997 Stock Option Plan that provides for the grant to employees, directors and consultants of the Company of options to purchase up to 1,350,000 (pre-split) shares of Common Stock. The vote was as follows: 20,509,605 for, 1,025,854 against, 148,914 abstain and zero broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The following exhibits are filed herewith: -12- 15 3.1 Certificate of Amendment to Certificate of Incorporation effecting a reverse stock split (incorporated by reference to the Company's Registration Statement on Form S-3 (Regis. No. 333-56393)) filed with the Securities and Exchange Commission on June 9, 1998. 10.1 Agreement between the Company and Paul F. Lavallee and Gypsy Hill L.L.C. effective January 29, 1998. 27.1 Financial Data Schedule (b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by the Company with the Securities and Exchange Commission during the quarter ended June 30,1998. -13- 16 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. ACCUMED INTERNATIONAL, INC. /s/ Leonard R. Prange ------------------------------------ Leonard R. Prange Chief Financial Officer and . Chief Operating Officer Date: August 14, 1998 -14- 17 Index to Exhibits Exhibit No. Description of Exhibit ----------- ---------------------- 3.1 Certificate of Amendment to Certificate of Incorporation effecting a reverse stock split (incorporated by reference to the Company's Registration Statement on Form S-3 (Regis. No. 333-56393)) filed with the Securities and Exchange Commission on June 9, 1998. 10.1 Agreement between the Company and Paul F. Lavallee and Gypsy Hill L.L.C. effective January 29, 1998. 27.1 Financial Data Schedule EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 AGREEMENT Between Paul F. Lavallee and Gypsy Hill, L.L.C. and AccuMed International, Inc. This Agreement (the "Agreement") is made this 13th day of April 1998, by and between AccuMed International, Inc., a Delaware corporation (the "Corporation"), and Paul F. Lavallee and Gypsy Hill L.L.C., a South Dakota Limited Liability Company (the "Executive"). WHEREAS, Executive has served as President and CEO, of Corporation since January 29, 1998 (the "Effective Date") and; WHEREAS , Corporation desires to formalize Executive's duties, responsibilities and position and Executive is willing to accept such duties, responsibilities and position, and this Agreement contains the parties' entire agreement and understanding as to the matters contemplated herein, and supersedes any and all prior oral or written agreements. WHEREAS, Corporation desires to retain Executive and Executive is willing to accept such assignment, all upon the terms and conditions hereinafter set forth.NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the parties hereto agree as follows: 1. ASSIGNMENT AND DUTIES. Corporation hereby retains Executive and Executive accepts assignment with Corporation as Chairman & CEO reporting to the Board of Directors of the Corporation, and Executive shall perform those duties as usual and customary as a Chairman & CEO (i.e., to include but not be limited to General Management, Financial and Administrative duties). Executive shall perform such other or additional duties as shall be required of Executive from time to time by the Board of Directors and consistent with his position. 2. COMPENSATION AND BENEFITS. During the term of this Agreement, Corporation shall pay Executive the following compensation: a. ANNUAL PAYMENT Executive shall receive an annual payment for services rendered which shall be no less than $225,000.00 payable semi-monthly in accordance with Corporation's regular payroll procedures. Executive shall also receive annual performance and compensation reviews which will be conducted by the Board of Directors, or its designee. b. BONUS Executive shall be eligible to receive annual bonuses which shall be up to thirty percent (30%) of Executive's annual payment, based upon performance of mutually agreed upon goals/objectives. The bonus year shall be the calendar year. The Board of Directors, at its sole and absolute discretion may pay Executive a bonus in excess of thirty percent (30%) of his annual payment. 2 c. STOCK OPTIONS On January 30, 1998 the Board of Directors granted to Executive 1,500,000 Shares of the Corporation's Common Stock at a price of $.75 per share. (i) Vesting will occur as follows: 500,000 Shares vested immediately and 500,000 Shares will vest each year thereafter on the anniversary date of the grant for the next two (2) years. In the event the control of the Company changes, the entire 1,500,000 Shares shall become immediately vested. (ii) From time to time Stock Options may be granted by the Compensation Committee of the Board of Directors on behalf of the full Board to provide an appropriate long term incentive opportunity and/or to recognize Executive's contributions to the Company. d. BENEFITS The Executive shall be eligible for such Corporation benefits as exist for senior executives of Corporation and subject to the terms and conditions of third party policies. Should Executive not be eligible to receive any of the Corporation's benefits or should any carrier decline to cover Executive, Corporation will use commercially reasonable efforts to obtain, pay for and retain a comparable replacement policy on an individual basis. (i) At Corporation's expense: Medical Insurance for Executive and Dependents with $20,000 Life/AD&D for Executive, fully paid by Corporation. (ii) At Executive's expense: (1) Excess Life and AD&D Benefit 1 1/2times annual payment (less $20,000) up to $150,000 cap (2) Short Term Disability $500/wk benefit for 26 weeks (3) Long Term Disability 60% of annual payment (maximum of $6000/mo. cap) to age 65 (4) Dental Insurance for Executive and Dependents c. EXPENSES Reimbursement of normal business expenses with submission of expense reports and receipts. The Company will reimburse reasonable travel and living expenses incurred in commuting between Chicago and Executive's home in South Dakota. d. OTHER COMPENSATION Nothing herein shall preclude Executive from receiving any additional compensation or from participating in the present or future life, major medical, hospitalization, profit sharing, pension or retirement, sickness or disability or other plan for the benefit of the executives of Corporation. In each case, Executive will participate to the extent and in the manner approved or determined by the Board of Directors or otherwise determined. 3. EXTENT OF SERVICES. Executive shall devote his entire attention and energy to the business and affairs of Corporation on a full-time basis. 2 3 4. TERM. The term of this Agreement shall be evergreen, commencing January 29, 1998, subject to the following: a. ILLNESS OR DISABILITY If Executive is absent from assignment by reason of illness or other incapacity for more than 180 consecutive days', Corporation may, after such 180 days, but only if Executive has not returned to assignment with Corporation, terminate Executive's assignment by furnishing him with at least 30 days written notice of such intention to termination. Corporation shall be obligated to pay Executive's payment to the date of termination, less that amount equal to the weekly Short Term Disability Benefit, which date shall be for all purposes of this Agreement, the date of termination of his assignment. b. DEATH. If Executive shall die, thereupon his assignment shall terminate, and Corporation shall be only obligated to pay Executive's payment for six (6) months after Executive's death. c. TERMINATION BY CORPORATION. Upon written notice, Corporation may terminate this Agreement at any time: (i) For Cause. As used herein, "Cause" is defined to mean (1) any act of fraud, misappropriation, embezzlement, or like act of dishonesty; (2) conviction of a felony; (3) other behavior which adversely reflects on the reputation of Corporation; or (4) material failure to perform the services and duties described herein, (5) material violation of any other provisions set forth herein, or material breach of any fiduciary duty to Corporation, if the material failure, violation, or breach unreasonably continues after written notice thereof is given to the Executive by the Corporation and further provided that Executive is given a fair and reasonable opportunity to cure. (ii) Without Cause. If Corporation shall terminate Executive's assignment without Cause, Corporation shall pay Executive's annual payment up to the date of the delivery of such notice of termination, which date shall be for all purposes of this Agreement, the date of termination of his assignment. If the Executive is to be terminated without cause, he shall be given twelve (12) months notice in writing by Corporation. d. TERMINATION BY EXECUTIVE. Executive may terminate this Agreement for any reason after providing one (1) month of written notice. If Corporation is in breach of this Agreement, Executive may, in addition and without prejudice to any other remedies for a breach hereof, terminate this Agreement, after providing written notice to the Corporation and providing Corporation with a reasonable opportunity to cure. If the Corporation thereafter fails to cure, all of Executive's further obligations hereunder shall terminate, except for the requirements of Sections 8 and 10 hereof. 5. SEVERANCE. a. If Corporation terminates this Agreement without Cause, in addition to the notice requirement provided in Section 4(c)(ii) above, Corporation will pay Executive his then current annual payment, concurrent with the notice period, as a lump sum, or for twelve (12) months, semi-monthly, in accordance with Corporation's regular payroll procedures; or some other payment terms not to exceed the annual payment amount; any of the preceeding payment arrangements per choice of the executive. 3 4 6. VACATION. Executive will be immediately eligible for four weeks of vacation per calendar year. 7. RESTRICTIVE COVENANT. Executive shall not in any manner engage in any business directly competitive with Corporation, for a period of one year from the date of the termination of this Agreement under the following circumstances: a. If this Agreement is terminated for "Cause" by the Corporation, pursuant to Section 4(c)(i) above; or b. If this Agreement is terminated by Executive, pursuant to Section 4(d) above, for reasons other than a breach by Corporation. In the event that Executive engages in any business directly competitive with the Corporation, Executive surrenders his right to the continuation of his severance payments under Section 5 above. If a lump sum payment or an amount the pro rata share due Executive, from the time of termination to the time of his employment with the direct competitor, is made to Executive, Executive will refund the overage to the Corporation. 8. CONFIDENTIAL INFORMATION AND DISCOVERIES. Executive agrees that all information of a technical or business nature such as know-how, trade secrets, secret business information, plans, data, processes, techniques, customer information, inventions, discoveries, formulae, patterns, devices, etc. (the "Confidential Information"), acquired by Executive in the course of his assignment under this Agreement, is a valuable business property right of the Corporation. Executive agrees that such Confidential Information, whether in written, verbal or model form, shall not be disclosed to anyone outside the of Corporation without the express written authorization of Corporation, unless said individual is subject to the Corporation's non-disclosure agreement or other appropriate contractual arrangement. This disclosure restriction shall be limited to (a) disclosures for use in any market in which the Corporation may then be doing business or may have taken any steps toward entering, and (b) for that period of time until the Confidential Information is generally available to the trade. Any and all improvements, inventions, discoveries, formulae or processes in any way related to Corporation's business which Executive may conceive or make during his regular working hours or otherwise shall be the sole and exclusive property of Corporation and Executive will disclose the same to Corporation and will, whenever requested by Corporation to do so (either during the term of this Agreement or thereafter), execute and assign any and all applications, assignments and/or other instruments and do all things which Corporation may deem necessary or appropriate in order to apply for, obtain, maintain, enforce and defend patents, copyrights, trademarks or other forms or protection, or in order to assign and convey or otherwise make available to Corporation the sole and exclusive right, title and interest in and to said improvements, inventions, discoveries, formulae, processes, applications or patents. After the termination of this Agreement, Corporation will compensate Executive for his time and effort to comply with the terms of this paragraph 8 and the Executive may not decline to comply with any reasonable request. No provision in this Agreement is intended to require assignment of any of Executive's rights in an invention if no equipment, supplies, facilities, or trade secret information of Corporation was used, and the invention was developed entirely on Executive's own time; and the invention does not relate to the 4 5 business of Corporation or to Corporation's actual or demonstrably anticipated research or development; and does not result from any work performed by Executive for Corporation. 9. ENFORCEMENT. Both parties recognize that the services to be rendered under this Agreement by Executive are special, unique and of extraordinary character and that in the event of the breach by Executive of any of the terms and conditions of this Agreement to be performed by Executive, then Corporation shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to obtain damages for any breach hereof, or to enforce the specific performance hereof by Executive or to enjoin Executive from performing acts prohibited above during the period herein covered, but nothing herein contained shall be construed to prevent such other remedy in the courts as Corporation may elect to invoke. 10. RETURN OF DOCUMENTS. Upon the termination of this Agreement for any reason, Executive shall forthwith return and deliver to Corporation and shall not retain any original or copies of any books, papers, price lists or customer contacts, bids or customer lists, files, books of account, notebooks and other documents and data relating to the performance of services rendered by Executive hereunder, which were provided to or made available to Executive by Corporation, all of which materials are hereby agreed to be the property of Corporation. 11. MISCELLANEOUS. a. NOTICES Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered or certified mail to Executive or Corporation at the address set forth below their signatures at the end of this Agreement or to such other address as they shall notify each other in writing. b. ASSIGNMENT This Agreement shall be binding upon and inure to the benefit of Corporation and its successors and assigns and Executive and his personal representatives, heirs, legatees and beneficiaries, but shall not be assignable by Executive. c. APPLICABLE LAW This Agreement shall be deemed to have been made in South Dakota, regardless of the order in which the signatures of the parties shall be affixed hereto, and shall be interpreted, and the rights and liabilities of the parties determined, in accordance with the laws of the State of South Dakota. As part of the consideration for the execution of this Agreement, it is hereby agreed that all actions or proceedings arising directly or indirectly from this Agreement shall be litigated only in the courts of the State of South Dakota or United States courts located therein, and all parties to this Agreement hereby consent to the jurisdiction of any local, state or federal court located within the State of South Dakota. d. HEADINGS Sections headings and numbers herein are included for convenience of reference only and this Agreement is not to be construed with reference thereto. If there be any conflict between such numbers and headings and the text hereof, the text shall control. e. SEVERABILITY If for any reason any portion of this Agreement shall be held invalid or unenforceable, it is agreed that the same shall not affect the validity or enforceability of the remainder hereof. 5 6 f. ENTIRE AGREEMENT This Agreement, and its attachments, contains the entire agreement of the parties with respect to its subject matter and supersedes all previous agreements between the parties pertaining to the subject. No officer, executive or representative of Corporation has any authority to make any representation or promise in connection with this Agreement or the subject matter hereof that is not contained herein, and Corporation represents and warrants he has not executed this Agreement in reliance upon any such representation or promise. No modification of this Agreement shall be valid unless made in writing and signed by the parties hereto. g. WAIVER OF BREACH The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. h. COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one agreement. IN WITNESS WHEREOF, The parties have caused this Agreement to be duly executed on the date first above written. Designee of Board of Directors for: EXECUTIVE: ACCUMED INTERNATIONAL, INC. By: \S\ J. DONALD GAINES By: \S\ PAUL F. LAVALLEE -------------------------------- ------------------------------- Paul F. Lavallee Member, Board of Directors Chairman & CEO Address: 900 N. Franklin, Suite 401 33 Third St. S.E. Chicago, IL 60610 Huron, SD 57350 6 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1,531 0 4,016 0 4,579 10,696 4,101 0 21,325 6,039 6,534 0 4,329 59,598 (55,605) 21,325 10,534 10,534 6,041 6,041 6,804 0 925 (2,988) 0 (2,988) 0 (1,168) 0 (4,156) (0.89) (0.89)
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