-----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, NrnUDXPgefg63ho1TDzCFNe3MexgNqBOzCzydu7yetM2SyKJwRBOPcTF8hAtxZVV B5Hre9EyXhITDsHuoWr7bw== 0000950148-00-000719.txt : 20000417 0000950148-00-000719.hdr.sgml : 20000417 ACCESSION NUMBER: 0000950148-00-000719 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 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-K SEC ACT: SEC FILE NUMBER: 000-20652 FILM NUMBER: 601227 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-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-20652 AccuMed International, Inc. --------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 36-4054899 - ---------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 920 N. Franklin Street, Suite 402, Chicago, IL 60610 ---------------------------------------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number: (312) 642-9200 -------------- Securities registered under Section 12(b) of the Exchange Act: None ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.01 per share (Title of Class) Indicate by checkmark whether the registrant (1) 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 [ ] Indicate by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the common stock held by non-affiliates of the registrant on April 11, 2000 was: $7,411,119. Number of shares of common stock outstanding on April 11, 2000: 5,673,149. The information required by Part III, Items 10, 11, 12 and 13 are incorporated by reference to the definitive proxy statement dealing with the election of directors to be filed within 120 days of the last fiscal year end. 2 ITEM 1 OF THIS FORM 10-K ENTITLED "BUSINESS" AND ITEM 7 OF THIS FORM 10-K ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27a OF THE SECURITIES ACT OF 1933 AND SECTION 21e OF THE SECURITIES EXCHANGE ACT OF 1934. FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS. PART I ITEM 1. BUSINESS (a) General Development of Business AccuMed International, Inc. is a Delaware corporation. AccuMed's predecessor was incorporated in California in June 1988 under the name Alamar Biosciences, Inc. and was engaged in developing, manufacturing and marketing microbiology products. AccuMed has a wholly owned subsidiary, Oncometrics Imaging Corp., a company continuing under the laws of the Yukon Territory, Canada. Oncometrics was formed in 1995 to complete the development of an automated instrument designed to be used in the detection, diagnosis and prognosis of early-stage lung cancer by measuring the DNA in the nuclei of cells on microscope slides. AccuMed acquired a two-thirds interest in Oncometrics in 1996. In 1998, we acquired the final one-third interest in Oncometrics. On January 29, 1999, AccuMed sold substantially all of the assets and certain liabilities related to our microbiology business, including Alamar, Sensititre and the ESP product line. AccuMed received gross proceeds of $ 15,150,000 in cash at the closing. The proceeds were used to retire $8,498,000 in debt, and the balance was retained for general corporate and working capital purposes. AccuMed and Ventana Medical Systems, Inc. entered into a License and Development Agreement dated March 24, 2000. Under this license agreement Ventana has paid AccuMed an initial license fee, a prepayment on royalties and a partial payment for certain development obligations that AccuMed will perform. AccuMed has granted Ventana license to use AccuMed's core technology, including patents, in the field of surgical pathology, which involves analyzing tissue samples ordered by physicians to be taken from surgical patients to determine the presence or absence of disease. This license agreement has an initial three-year term which will be extended for additional three-year terms unless either party gives the other notice of non-renewal within 180 days prior to the end of the current term. On March 29, 2000, AccuMed and BCAM International, Inc. entered into a Patent and Technology License and Registration Rights Agreement. Through this agreement, we have licensed to BCAM our core technology for use in a specific field. BCAM has paid AccuMed an initial licensing fee and is required to pay AccuMed additional licensing fees and royalties in the future. 2 3 (b) Financial Information About Industry Segments AccuMed's operations were in two laboratory market segments: (1) Cytopathology - systems made up of multiple instruments networked via proprietary software that support the review and analysis of Pap smears and other microscope slide-based cellular preparations, and (2) Microbiology - proprietary disposable products and automated instruments used to identify infectious microorganisms and determine susceptibility to antimicrobial agents. On January 29, 1999, AccuMed sold substantially all assets and certain liabilities of our former microbiology business. Accordingly, this division is reported as a discontinued operation in the accompanying financial statements. (c) Narrative Description of Business GENERAL AccuMed designs, builds and supplies two product lines. We build these product lines with either our own microscopes or with commercially available microscopes which we modify. The first product line consists of "AcCells(TM)" computer-aided microscopes, which help medical experts to examine and diagnose specimens of human cells. These products include: - - robotic slide-feeding systems to load and unload slides from the microscope, - - bar-code readers to ensure proper identification of samples being analyzed, - - electro-mechanical scanning stages, that part of the AcCell microscope that allows the AcCell computer to move and focus the slide more accurately than a human can, - - automatic physical dotters to mark the locations of cells of interest, and - - Data Management System software to enable the medical experts to review the relevant medical histories and report the results of their examination or diagnosis directly into a medical record-keeping system without human transcription or repeat entries. The second product line consists of "AcCell-Savant(R)." The AcCell-Savant includes all the AcCell components described above, as well as an electronic imaging system and our image analysis software. The electronic imaging system consists of a camera, electronics, optics and software which together produce digital images of specimens on the microscope slide. The image analysis software measures properties of the specimen from the digital images. These AcCell-Savant(R) measurements are objective, as opposed to the subjective analyses of specimens by human visual examination. Medical experts can examine and diagnose human medical specimens more easily and accurately using our products. For example, a clinical 3 4 laboratory can eliminate paper requisitions and paper medical reports by using AcCells which include our Data Management System. Laboratories that use paper requisitions and medical reports risk misdiagnosing specimens because of transcription and other clerical errors. Laboratory staff using our electronic Data Management System do not need to reenter data manually, thus saving time and reducing the risk of clerical error which can lead to misdiagnoses. Research scientists use the AcCell-Savant(R) research system, which we began marketing in 1999, to measure cellular DNA and other properties of medical specimens. We have sold modest numbers of the AcCell-Savant(R) research system to academic and medical research laboratories. These laboratories use our AcCell-Savant research system to more easily and accurately conduct experiments for a wide range of research applications in biology and pathology. Under FDA regulations, we are permitted to sell the AcCell-Savant(R) research system for these uses. The research and academic market is a small market compared to the commercial, clinical laboratory market which processes and diagnosis human medical specimens for patient care. Research scientists use the AcCell-Savant(R) research system in the following manner. In a lung cancer experiment, patients provide sputum specimens. Laboratory technicians prepare these specimens on microscope slides with a bar code label identifying the patient. The scientist inserts these slides into the AcCell-Savant(R) research system. The robotic slide-feeding system loads the slide into the microscope. The bar code reader identifies the patient and specimen information and stores this information in the computer. Digital images are produced using the electronic imaging system and scanning stage which moves the slide under the microscope. The image analysis software measures DNA and other properties of the cells in the digital images. The research scientist uses the statistical image analysis software to analyze these measurements objectively. Scientists use these statistical analyses to determine the presence and severity of lung cancer. AcCell-Savant(R) research systems record the digital images, measurements of cellular properties and statistical information in computer files which are the records of the scientist's experiment. The AcCell-Savant(R) then unloads the microscope slide. In addition to research applications, we believe we can adapt the AcCell-Savant(R) for many clinical, commercial laboratory applications, like early cancer detection. We are adapting the AcCell-Savant(R) for early lung cancer detection and several other clinical applications. In our attempt to enter the clinical laboratory market, we are pursuing partnerships with other technology and product/service distribution companies. We are exploring arrangements with partners to combine AcCell-Savant(R) and/or AcCell technology with the partner's intellectual property. In these arrangements, we would sell our products for use in combination with the partner's intellectual property and products. For example, on March 27, 2000 AccuMed announced that it signed a multi-year agreement with Ventana Medical Systems, Inc. (Nasdaq: VMSI) to provide an Automated Cellular Image Analysis System to assist pathologists in analyzing cancer and infectious diseases. The system will be used to quantitate immunohistochemistry (IHC) and in-situ hybridization (ISH) stained samples. The combination of AccuMed's automated and quantitative imaging systems technology and Ventana's sales and marketing strengths to surgical pathology laboratories, will enable both companies to participate in the 4 5 potentially attractive market for quantitative IHC and ISH image analysis. Built from AccuMed's core technology and products, Ventana expects to launch the sale of its first IHC products built upon custom-modified AcCell automated imaging platforms and imaging software in late 2000. That product will aid pathologists who evaluate breast cancer specimens, including the use of Ventana's stain for measuring Her-2/neu receptor overexpression. Physicians order tests to measure Her-2/neu receptor levels in tissue samples from cancer patients to decide whether breast cancer patients with metastatic disease will respond to Genentech's anti-cancer drug, Herceptin. Furthermore, AccuMed's automated and quantitative imaging instruments, software, systems, and supplies are not only well suited for tests on tissue samples from patients with cancer, but they are also ideal analytical instrument platforms for numerous clinical applications in early disease detection and medical follow-up. On March 29, 2000, AccuMed signed a multi-year agreement with BCAM International, Inc. (Nasdaq: BCAM) to license its core technology in computer-aided microscopy, quantitative microscopy, and image cytometry and histometry in the field of morphological, cytochemical, cytogenetic, and quantitative sputum cytology, including without limitation DNA, malignancy-associated changes, and any other genetic or molecular diagnostic analyses for early lung cancer detection, screening, diagnosis, prognosis, and patient monitoring. Through this agreement, which provides BCAM with access to contract research and development services and manufactured products from AccuMed, BCAM can build an early lung cancer detection and diagnostic business using unique and patented cytopathology and molecular pathology-related technology from AccuMed. These deals were possible because of the generic and proprietary advanced imaging systems that have been designed and built by AccuMed. These deals are also commercially viable today because of the recent advances in cellular genetics and molecular pathology including, in particular, the initial and encouraging results stemming from human genomics research and development projects. We are at the forefront of significant changes in disease management. Molecular diagnostics and quantitative analyses of molecular profiles resulting from gene expression will be used to optimize therapeutic choices that ultimately improve patient outcomes. AccuMed's instrument and system platforms are well-suited for numerous emerging tests for a wide variety of diseases including cancer (e.g., breast, prostate, colon, lung, bladder, lymphoma, and leukemia). We need FDA clearance to market the AcCell-Savant in the United States for clinical as opposed to research uses. We are gearing our research and development efforts toward developing the lung detection product which, through a license can be used in clinical trials in 2001. AccuMed has generated limited revenues from the sale of our products to our original target market, clinical laboratories that examine or diagnose medical specimens including Pap smears. Currently, we do not actively market the AcCell as a stand-alone product. 5 6 We believe that AccuMed is the only company competing in the computer-aided cytology screening cytodiagnostic market with a modular, expandable product, (our AcCell) that allows customers to upgrade to more fully automated versions and with a product line that support both gynecological and non-gynecological specimen analysis using both conventional Pap smears as well as liquid-based preparations. Given the present healthcare and regulatory environment, we believe our products will be more readily accepted than higher priced, non-modular, non-interactive products that attempt to eliminate human experts from the diagnostic process, and that are restricted to the analysis of cervical Pap tests only. Certain developments in the diagnostic markets we serve have created growth opportunities. Cost containment pressures and demand for preventative, early detection and diagnosis, and therapeutic monitoring medical technology are likely to create demand for labor-saving laboratory products that improve the quality and efficiency of laboratory-based patient specimen interpretations and diagnoses. AccuMed's goal is to develop cost-effective, accurate, sensitive, easy-to-use, and innovative cytopathology products that improve patient outcomes and healthcare provider performance, with competitive advantages in the markets in which it operates. AccuMed's growth and profitability will depend, to a great extent, upon its ability to complete development of and successfully introduce new products through distribution channels of strategic partners. To achieve this, AccuMed will need to continue research and development activities and obtain regulatory approval or cooperate with strategic partners in their efforts to obtain regulatory approval for such products with the U.S. Food and Drug Administration. EARLY LUNG CANCER SCREENING AccuMed has also developed and assembled technologies and systems that could lead to a much more effective, sensitive, reliable, and commercially viable early lung cancer testing program to identify individuals with early more curable lung cancer. Lung cancer is a major cause of cancer-related deaths for both men and women, accounting for more than one-third of all cancer-related deaths and costs the U.S. healthcare system more than $50 billion in direct medical expenses annually. Last year in the United States approximately 180,000 patients were diagnosed with lung cancer. Most of the patients who will die from this disease will lose their battle approximately within the first two years. Worldwide estimates indicate that there are in excess of 900,000 new lung cancer cases annually, and that the number of new cases expected to double within five years. Currently, AccuMed estimates only 7.5 million sputum cytology diagnostic tests are performed annually, two-thirds of which are used for lung cancer screening in Japan. Today, the remaining 2.5 million tests are performed primarily on symptomatic patients. However, AccuMed estimates the worldwide market for early lung cancer screening of high-risk and asymptomatic 6 7 individuals to be between 50 and 175 million tests per year, with at least 23.5 million potential tests per year in the United States. Lung cancer survival strongly depends upon early disease detection and diagnosis. However, conventional sputum cytopathology tests are not widely used because they fail to detect early curable lung cancer reliably. AccuMed believes that approximately 90% of patients who are diagnosed with Stage 0 and between 45% to 80% of patients who are diagnosed with State I lung cancer have at least a 5-year survival following their initial diagnosis. Contrasting this, the survival rate is less than 9% for patients who are diagnosed with State III or Stage IV lung cancer. Unfortunately, more than two-thirds of lung cancer patients today are diagnosed at Stage III and IV because no widespread early lung cancer-screening program has been developed similar to the gynecological Pap test worldwide screening programs that have dramatically reduced mortality from cervical cancer during the past 50 years. AccuMed believes a screening program for early lung cancer detection and diagnosis is possible. It must rely upon identifying and recruiting high-risk patient populations and/or at-risk patients into non-invasive screening programs before they become symptomatic. A screening program for these individuals has the potential to not only save lives, but also be a highly cost-effective healthcare program by significantly reducing overall healthcare costs due to earlier detection and treatment. To achieve this goal, AccuMed is developing the AcCell-Savant. The AcCell-Savant, a quantitative microscopy analytical instrument, incorporates features and benefits derived from the AccuMed proprietary AcCell(TM) workstations and TracCell(TM) slide mapping systems. It relies on several core technologies including cytochemistry, computer-aided microscopy, electronic imaging, digital image processing and analysis, and medical informatics. This cell analysis platform facilitates the direct measurement of cellular changes (e.g., "MAC" or Malignancy-Associated Changes) associated with early disease development and progression. AccuMed believes such cellular assays could be performed, with the AcCell-Savant, more sensitively, accurately, and reproducibly than is possible by the human eye-brain combination alone. The instrument's photodetectors, electro-mechanical precision, ability to focus selectively cell-by-cell and nucleus-by-nucleus on the most informative cell populations, image processing and analysis algorithms, and statistical calibration and classification methods gives the cytotechnologist, cytopathologist, and cytologist-in-general the ability to analyze multiple lung cancer markers and probes simultaneously for improved sensitivity, specificity and positive predictive value. The human-machine interface allows the human experts---the pathologists---to do the best diagnostic work possible, in suspicious cases, by considering the objective, visual and subvisual AcCell-Savant data in their patient diagnostic reports. AccuMed and the British Columbia Cancer Agency conducted a two-year field study and analysis of approximately one thousand patient cases qualified to be at high-risk for early lung cancer. Results from that study show that conventional sputum cytopathology has a reduced sensitivity for early stage lung cancer detection. Most significantly, this study also demonstrated that the AcCell-Savant approach improves, over conventional methods, the detection of the early, most curable, lung cancers by up to several-fold. Further significant performance improvements are anticipated 7 8 based upon current research and development activities in enhanced and innovative methods of specimen collection; sample deposition, fixation, and staining; panel test design with multiple probes; image analysis algorithms; and computer-aided pattern recognition and classification methods. AccuMed intends to commercialize this early lung cancer application through licensing our technology to a strategic partner. LUNG CANCER SCREENING BUSINESS DEVELOPMENT AccuMed has set the following major near-term (i.e., 2-year) milestones in this lung cancer screening business development program: (1) completion of comprehensive system requirements and specifications from specimen collection and preparation through cellular analysis, diagnosis and reporting, (2) development of the clinical instrument ("intended use" apparatus), (3) submission of appropriate supplemental patent protection, (4) completion of a pre-clinical trial (i.e., pilot run) with adequate screening test sensitivity and specificity, (5) demonstration of revenues from research instrument sales, and (6) demonstration of revenues from per-test usage fees at Alpha and Beta sites. MARKETS AND PRODUCTS AccuMed, a leader in the field of quantitative and automated microscopy, is a medical device company developing proprietary diagnostic instruments for applications to early disease prevention, detection, diagnosis, prognosis, optimized selection of therapeutic regimens and agents, and therapeutic monitoring. Quantitative and automated microscopy is a powerful research tool, which applies complex computer algorithms to measurements of nuclei, cells, and tissues on a microscopy slide to derive medically significant information. AccuMed markets its computer-aided, automated, and quantitative microscopy workstations and systems, including analytical cytology and histology instruments and supplies, through joint ventures, technology licensing agreements, and research and development contracts. As one of AccuMed's laboratory partners stated, "Through its systems, AccuMed is not only providing products, but it is redefining the process of making a diagnosis." This cell and tissue-imaging science and technology company is rapidly expanding its intellectual property portfolio and applying its proprietary technologies to the development of cost-effective, accurate, sensitive, easy-to-use, and innovative products that improve patient outcomes and healthcare provider performance. As a result of AccuMed's modular instrument platforms for cytology and histology applications, AccuMed has focused its efforts to commercialize its technology through partnerships with companies and institutions with a business focus in the following markets, among others: - Early lung cancer and other pulmonary disease detection and follow-up 8 9 - Cancer and infectious disease diagnostics - Quantitative immunohistochemistry - Cytogenetics, screening and toxicology including in-situ hybridization - Anatomic pathology and information systems - QC/QA for cytology/histology quality monitoring and reporting - Telepathology and medical image archiving/databases - Marker and probe development - Drug development for cancer patients - Linking diagnostics assays to therapeutics - Cellular imaging and analysis - Quantitative cytology and histology - Microscopy-based tests - Medical informatics B. PRODUCTS AccuMed's product development strategy has focused on taking what the human experts do best and "wrapping around them" technological solutions that make them more effective with respect to quality and cost-effectiveness. In addition, AccuMed provides instruments such as the AcCell-Savant to measure and analyze what the human eye-brain combination cannot see or perceive. AccuMed has developed the following technology and products relying upon its core technologies including computer-aided microscopy, medical informatics, optical and electronic imaging systems, quantitative microscopy, and cytometry/histometry systems. The product development strategy employed at AccuMed is a layered approach. The underlying support for the product line is the AcCell computer-aided microscope, which is primarily a quality assurance device utilizing robotic and medical informatic technologies. The TracCell layer above it provides productivity enhancements by electronically mapping slides to identify the fields-of-view with the well stained and well preserved cells for human review. The AcCell-Savant layer immediately above the TracCell layer adds quantitative microscopy that facilitates systems that measure and report the content and distribution of DNA and other cellular constituents in biosamples. Probes analyzers are yet an additional layer of technology that introduce the capability of quantitatively determining the presence of genetics markers and probes in cellular and histological samples, for example. Finally, the top layer of the technological pyramid anticipates the integration of all of these technologies with a medical informatics system to furnish complete assays from specimen processing through medical results reporting. The AcCell, TracCell and AcCell-Savant are AccuMed's original product lines (Series 2000) in computer-aided microscopy, slide mapping systems, and quantitative microscopy systems. 9 10 COMPUTER-AIDED MICROSCOPY: ACCELL CYTOPATHOLOGY WORKSTATIONS Clinical cytology laboratories, using technologists and cytopathologists to prepare, screen and diagnose specimens are facing cost-containment pressures and a need to improve quality simultaneously. These requirements are increasing the demands on laboratories and their highly skilled cytologists to both increase throughput (i.e., laborsaving products that reduce cost and increase margin per test) and decrease their false negative rate (i.e., minimize liability exposure). The AcCell workstations were developed to enable cytologists to do what they do best - interpret cytological findings - and to speed the tedious non-interpretative functions while concurrently providing improved quality control, assurance and reporting functions during the screening and diagnostic process. The resultant AcCell product line is a comprehensive family of integrated, expandable and technologically advanced products consisting of proprietary workstations that provide bar-coding for automated specimen identification, robotic slide loading to increase throughput and accuracy, support to ensure that 100% of a slide's sample deposition area is imaged during screening, XYZ electronic coordinate marking of cells and other objects-of-interest for rapid and reproducible automated relocation of selected cells of interest by pathologists during review sessions, accurate positional information that is continuously available, automated and high-accuracy physical dotting of slides, a data management system (DMS; typically interfaced to a Laboratory Information Systems (LIS)) that speeds and aids pathologists in diagnostic review sessions, automated report generation for specimen and laboratory management, and compatibility with both conventionally prepared Pap smears and liquid-based preparations. The DMS supports both gynecological and other sample processing and analysis. The primary benefits derived from the use of AcCell workstations are cost and timesavings, improved process control and quality, proactive risk management, and reported increases in the detection of abnormal cases. AcCellS are the reliable, production-oriented workhorses for all of AccuMed's products. They are optimized review stations that support the human experts by maximizing their performance and providing a means for quality assurance in cytology and histology operations. Most importantly, however, these AcCell workstations form the basic building block of semi-automated and automated systems in that they serve as (a) the core of the human expert's specimen or patient sample review station and (b) the building block for all of the analytical instruments in the other screening and diagnostic market sectors. ELECTRONIC IMAGING SYSTEMS: TRACCELL SLIDE MAPPING Another technology developed by AccuMed is computerized slide mapping. This technology, implemented in the TracCell Slide Mapping System, has been FDA-cleared for use with conventional Pap smears as well as with Cytyc ThinPrep liquid-based preparations. The TracCell stand-alone slide preprocessor produces electronic "maps" of slide-based cytological samples. These maps were designed to save slide-screening time and associated labor 10 11 costs. The basic principle of TracCell slide mapping is that cytologists do not need to screen or review microscope fields-of-view that do not contain any adequately stained, well-preserved diagnostic cells. By processing slides with a TracCell before the cytologist screens the slides at an AcCell review station, the cytologist can save time by being automatically routed past these "empty" fields-of-view. This productivity enhancement technology is also adaptable to the processing and review of tissue sections on microscope slides. An indirect benefit of the TracCell tool is that screeners can spend more time analyzing difficult-to-interpret cells or regions-of-interest without sacrificing overall productivity. The TracCell Slide Mapping System, by definition, includes an AcCell review station. AccuMed is seeking a licensee for the AcCell and TracCell products for use in the automation of conventional cytology diagnostic laboratories. Also, AccuMed is utilizing these products and technologies in more advanced clinical applications (e.g., early lung cancer detection and diagnosis; and quantitative immunohistochemistry and in-situ hybridization systems already licensed to Ventana Medical Systems, Inc.) that AccuMed intends to commercialize through several joint venture or other strategic relationships. QUANTITATIVE MICROSCOPY SYSTEMS: ACCELL-SAVANT IMAGE CYTOMETERS The AcCell-Savant/research (ACSr) instrument combines an AcCell computer-aided microscope with the Savant proprietary system of stains, protocols, imaging hardware and analytical software. This automated image cytometer generates analytical results regarding individual cells, including DNA content, optical texture and morphometric features. Statistical, graphical, and image data are displayed in a variety of formats to support cytology and histology research scientists, engineers, and clinicians. More specifically, AccuMed's MAC methods and instruments are one of AccuMed's powerful sets of automated cytophotometry tools facilitating the cytological detection and diagnosis of cancer at early, more curable stages of development. The lead research product at AccuMed, known as the AcCell-Savant, is a high-resolution image cytometer and is currently available as a research instrument - the AcCell-Savant/research (ACS/r). This analytical instrument incorporates an AcCell computer-aided microscope with the Savant system of stains, protocols, as well as proprietary imaging hardware and analytical software. The ACSr is a fully automated, high-resolution, absorbance microscopy-based cytometer that processes Thionin-Feulgen-stained cytology preparations and presents analytical results regarding the cellular DNA content of processed samples. This quantitative microscopy system includes an AcCell equipped with electronic-imaging for the evaluation of cytology samples prepared with proprietary nuclear DNA stains. Applications of this technology include measurement of cellular DNA content, chromatin distribution patterns, and nuclear areas for detection of early cancer and other diseases. - ACSr's automated operation makes it possible to measure thousands of cells per sample, thus increasing the statistical accuracy of tests. 11 12 - ACSr's proprietary high precision computer-aided microscope with robotic slide handling and bar-coded sample identification ensures the reproducibility and reliability of results. - ACSr's proprietary electronic imaging and digital image processing are capable of selecting cells of interest, distinguishing them from background debris, cell clusters and non-targeted cells. This speeds the tedious non-interpretive functions while improving quality control and assurance. - ACSr's digital image processing and proprietary statistical analyses generate not only quantitative results but graphical displays as well (e.g., two-dimensional histograms, scattergrams and cell image gallery displays). These enable the user to detect subtle changes and rare cellular events readily and reliably. - ACSr's automated cell classification capability is customizable to the user's specifications. This eliminates the time consuming and labor-intensive process of manually classifying cells and provides flexibility for user-specific requirements. A key competitive advantage of the AcCell-Savant/research is its rapid, production-oriented automation enabling it to scan and analyze thousands of cells per sample without human intervention. Rather than relying upon interactive, labor-intensive approaches with statistical samples too small for sensitive cell cycle or ploidy analyses, the AcCell-Savant approach solves these problems making speedy analyses of small or large (> 15,000 cellular events) sample sizes practical and cost-effective. In addition, this robust and unique approach enables users to select the cells of interest for analysis, free from background debris, cluster, and non-targeted cells such as non-tumor cells that could mask significant findings regarding the cells of interest to the operator. Additionally, use of the ACSr is a complementary approach to flow cytometry. The relative advantages of the image cytometry approach are that flow cytometry typically requires at least an order of magnitude more cells per analysis, the AcCell-Savant enables selectivity (ability to eliminate extraneous objects that mask results), and unlike the AcCell-Savant, flow cytometry users cannot "see & save" cells with their corresponding feature data sets. Finally, neither flow nor image cytometry can process histological sections in general, though the AcCell-Savant can process some tissue sections (e.g., muscle, heart, brain, nerve, ovary, and testicle) when the majority of their nuclei are non-overlapping. This robust and unique instrument is versatile enough to handle a variety of applications. Typical applications of the AcCell-Savant include research and applications development in the following areas: disease detection from cytology samples, Malignancy Associated Changes (MAC), DNA ploidy analyses, treatment planning and monitoring, cell cycle analyses of S-phase fractions, quality assurance via post-screening of cytology samples, infectious disease investigations, transplant rejection analyses, toxicology, chemoprevention, and general cellular research. 12 13 Features and benefits of the AcCell-Savant/research system include the following: - Fully automated and high-speed operations - Normalized DNA data with calibration - Accurate, reproducible, and high resolution - Classifiers providing high sensitivity & specificity - Tunable to a wide variety of markers and probes - Enables rapid generation of feasibility data - Speeds drug research via faster protocols - Suitable for new clinical screening assays - Compatible with production-oriented AcCell-Savant Systems MALIGNANCY ASSOCIATED CHANGES AccuMed owns multiple patents related to methods and devices for automatically detecting malignancy associated changes. Malignancy-associated changes are subtle changes known to take place in the nuclei of apparently normal cells found near cancerous or precancerous tissue. David M. Garner, Ph.D., co-inventor of the MAC patents and Senior Scientist at the British Columbia Cancer Agency (Vancouver, Canada) indicated "Malignancy-associated changes (MACs) are subtle changes that are known to take place in the nuclei of apparently normal cells found near cancer or precancerous tissue. As such, the measurement of MAC features can potentially improve specimen adequacy rates, increase the sensitivity of an early cancer detection screening test, and result in an easier-to-use, simpler, and more reliable assay. Also, MACs can be used to detect, not only lung cancer, but many other types of cancer and precancerous conditions." The AcCell-Savant products offer the unique combination of patented MAC methods and the benefits of high accuracy, sensitivity and throughput which enable research clinicians and scientists to detect and measure early subtle cellular changes in disease processes that may not be otherwise detectable by visual analyses alone. SYSTEM 3000 The next generation System 3000 products are being developed to enhance product features and benefits, and to increase market acceptance in diverse clinical applications. ACCUTECH Specifically, the AccuTech was developed by AccuMed to remove the need to use commercially available microscopes in the AcCell and related product lines. Such commercially available microscopes did not provide adequate mechanical stability, for example, to enable high-speed focusing on machines that were being designed to operate consistently during multiple shifts and for seven days per week. 13 14 Features and benefits of the AccuTech systems include the following: - High-precision computer-controlled imaging - Fixed optical system without field-operation variability - Computer-controlled illumination intensity with feedback control - High-resolution, ultra-fast computer-controlled focusing subsystem - Power objective changer with full XYZ and illumination compensation - Integral rotating filter mechanism for high-speed multi-spectral sensing - Rigid and fixed camera mounting system - Automatic re-calibration system to ensure slide-by-slide data quality ACCELL 3000 REVIEW STATION The AcCell 3000 is the human-operated cytology workstation of AccuMed's System 3000 product line. It is a fully integrated light microscopy and data management system for use in laboratories that perform slide-based microscopic examination of cellular materials. This combination microscope and computer was designed as the cytologist's and/or pathologist's flagship "workhorse" tool. Specifically, the AcCell 3000 supports needs of the gynecological and non-gynecological cytology (e.g., cervical Pap smears and liquid-based preparations (LBPs), sputum cytology, fine-needle aspirations) laboratories as well as laboratories that perform hematology, gastroenterology, urology, cytogenetic, histology and related cytological and histological interpretations for the screening, diagnosis and reporting of cell-based samples, and for professional education and training. The AcCell 3000 provides this support through a set of user-oriented hardware and software tools integrated within a compact, reliable and easy-to-use package. The AcCell 3000 microscope automates the microscopy process while improving process control. It features a highly ergonomic user interface, a multi-user relational database and an interface to laboratory information systems (LIS) to improve the speed, accuracy and reliability of the sample evaluation process while reducing the physical strain that microscopists face in a clinical production environment. The instrument is capable of supporting multilingual operations. This computer-aided microscopy workstation can be operated as a stand-alone device, in a stand-alone network of other AcCell workstations within a cytology or anatomic pathology laboratory, or as a network of AcCell workstations interfaced to an LIS through an AcCell file server. The AcCell 3000 computer-aided microscopy products can also work in conjunction with the other System 3000 products under development (e.g., AccuTech-based versions of the FDA-cleared TracCell Slide Mapping Systems and AcCell-Savant Quantitative Microscopy Systems) that offer additional information from computer-aided sample analyses through the use of both interactive and fully automated electronic imaging systems. 14 15 Features and benefits of the AcCell 3000 Review Station include the following: - Small footprint and compact - Enhanced user productivity - Optimized slide throughput - Data Management System - Customizable - User options protected - Excellent optical imaging - Coupled to Analyzer - Enables "PreView" of images of abnormal cells received from Analyzer - AccuTech inside (i.e., "Savant powered") COGNETIX ANALYZER The AccuTech microscope frame is the core module not only within the AcCell 3000 Review Station, but also in the instrument designed to handle semi-automated or full automation with the capability of operating 24 hours/day, 7 days/week. That instrument is the Cognetix Analyzer. The Cognetix Analyzer is assembled from modular components that enables it to be easily and rapidly customized to specific clinical assays based upon microscope slide-based samples. Such sample may be either cellular or histological. Feature and benefits of the Cognetix Analyzer include the following: - MAC detection and tunable to a variety of probes - Labor savings and walk-away automation - Continuous and high-speed operations - Image acquisition & sample classification software with classifiers - Sample tracking - Stable & reliable in field use with precision mechanics and focusing - Environment-tolerant - Photonic sensors - Configurable, scalable, and easy to use - Link to Review Station facilitates sending Dx images to Review Station - Built-in QC and QA - AccuTech inside (i.e., "Savant powered") 15 16 SUPPLIES Supplies for AccuMed products include calibration slides, dotter tape cartridges, and DNA stain kits (i.e., microscope slides and reagents for DNA cytophotometry using the AcCell-Savant). INTELLECTUAL PROPERTY AccuMed has a strong intellectual property patent portfolio and core expertise (i.e., scientific and technical know-how) in computer-aided (AcCell, TracCell) and quantitative (Savant) optical microscopy; automated electronic imaging and screening systems; cytochemistry and histochemistry (DNA stains); analytical instruments and algorithms for cell and tissue image analysis; methods to measure intracellular malignancy associated changes (MAC); and medical devices and diagnosis systems. APPROACH TO PROPRIETARY TECHNOLOGY AccuMed aggressively develops its patent portfolio to establish value for its investors in areas of its core technologies, such as computer-aided microscopy. Furthermore, AccuMed pursues patent protection in disabling and competitive technologies if inventions occur which can protect key markets for AccuMed. Patents, trade secrets, and copyrights are used by AccuMed to protect its proprietary technology. 3. SALES AND MARKETING Typically, AccuMed's products are not currently sold to laboratory end-users unaffiliated with AccuMed. Rather, AccuMed has four classes of customers. Quadrant I customers are beta-site customers who are used to provide marketing feedback to AccuMed regarding product design, performance and preferred enhancements. AccuMed remains confident that its core computer-aided microscope platform, the AcCell workstation, continues to provide a unique approach to improving cytology processes even in the conventional Pap test laboratories. Nevertheless, regardless of the merits of the originally targeted market, the AcCell workstation is the workhorse platform embedded in all other products by AccuMed, including the AcCell-Savant research systems, and the integral review station component of the automated early lung cancer screening systems, among others. Quandrant II customers are research and development scientists and clinicians who execute a commercialization agreement with AccuMed. Quadrant II creates a product pipeline for AccuMed through a virtual R&D organization that frees AccuMed from the direct expense of funding R&D for new applications development. This extramural R&D program is designed for leading researchers actively developing new clinical applications with commercial potential. These physicians, scientists and engineers are conducting funded research using cytometry and histometry at teaching hospitals, universities and research institutes. Benefits to participating researchers include: 16 17 - Discounted purchases of AcCell-Savant/ research and other R&D products - Royalty-based revenue stream from AccuMed commercialized products - Access to powerful and proprietary development tools - Ongoing technical support, services and updates - Access to advanced training and collaborations - Potential to participate in new product beta-tests and clinical trials - Participation in joint development projects - Expedited commercialization of new clinical assays - Support for patents and other intellectual property protection To date this AccuMed program has been successful with sites in Japan and Australia selecting AccuMed as their sole source for the commercialization of clinical tests involving cytology, histology, cytometry and histometry. Quadrant III customers are the primary business opportunity for AccuMed. This is the area in which AccuMed believes that significant and multiple business opportunities exist today, and that these opportunities are reliant upon the core existing technologies of AccuMed. The recent announcement of the R&D and analytical instrument sales agreement with Ventana Medical Systems is an excellent example of a Quadrant III opportunity. Other examples include announced or to-be-completed and announced licensing, R&D and product supply agreements in the fields of early lung cancer detection and follow-up as well as in the fields identified earlier in this Marketing and Products section. Typically, with Quadrant III customers, AccuMed seeks a combination of (a) license fees, (b) R&D contracts, (c) use-based royalty stream, (d) product supply contracts, and (e) equity participating in the Licensee's business. Quadrant IV customers are typically businesses in which AccuMed can either license its technology into a field-of-use that is remote from AccuMed's primary fields-of-interest in business development, or in which AccuMed can provide the customer with product on an OEM basis. This "technology transfer" market opportunity has already generated revenues for AccuMed in the area of point-of-care diagnostic systems. COMPETITION AccuMed believes that its cytopathology products must compete on the basis of functionality, product features and effectiveness of the product in standard medical practice, although price is also an important competitive factor. AccuMed's cytopathology products will face competition from companies that have developed or may be developing competing or alternative systems. AccuMed's existing and potential competitors possess substantially greater financial, marketing, sales, distribution and technical resources than 17 18 AccuMed, and more experience in research and development, clinical trials, regulatory matters, manufacturing and marketing. OPERATIONS AccuMed assembles and tests its cytopathology products at its Chicago facility. AccuMed purchased and modified the stage-control mouse for use with the AcCell(TM) 2000 series workstations but is currently developing a proprietary and patented stage-control mouse. Currently, AccuMed is not manufacturing product though it assembles and tests manufactured subassemblies. AccuMed anticipates future AcCell(TM) production will be done on a contract basis in the latter half of 2000, based on customer order backlog. GOVERNMENTAL REGULATION AccuMed's products and manufacturing processes are regulated by state and federal authorities, including the FDA and comparable authorities in certain states and other countries. The Federal Food, Drug and Cosmetic Act (the "FDA Act") regulations provide that many of AccuMed's products may not be shipped in interstate commerce without prior authorization from the FDA. Such authorization is based on a review by the FDA of the product's safety and efficacy as indicated for its intended uses. Medical devices may be authorized by the FDA for marketing in the United States either pursuant to a 510(k) Pre-market Notification or a Pre-marketing Approval ("PMA"). The process of obtaining FDA marketing clearance and other applicable regulatory authorities may be costly. Some FDA 510(k) Notification applications and PMA's require preliminary internal studies, field studies and/or clinical trials in addition to an FDA submission to attain market clearance (the 510(k) process or market approval (the PMA process)). A 510(k) Notification, among other things, requires an applicant to show that its products are "substantially equivalent" in terms of safety and effectiveness to an existing FDA cleared predicate product. An applicant may only market a product submitted through the 510(k) Notification at such time as the FDA issues a written clearance determining that the product has been found to be substantially equivalent. A PMA is the FDA submission process where the product must demonstrate, independently of other like devices, that it is safe and effective for its indications for intended use. A PMA must be supported by extensive data, including preclinical and clinical trial data, as well as extensive literature to prove the safety and effectiveness of the device. The approval process usually takes substantially longer. During the review period, the FDA may conduct extensive reviews of AccuMed's facilities, deliver multiple requests for additional information and clarifications and convene advisory panels to assist in its determination. FDA enforcement policy strictly prohibits the promotion of learned or approved medical devices for non-approved or "off-label" uses. In 18 19 addition, product clearances or approvals may be withdrawn for failure to comply with regulatory standards. Marketing in the United States of AccuMed's products under development may require additional FDA clearances. The FDA Act and other statutes and regulations, including various state statutes and regulations, govern the marketing, advertising and promotion of AccuMed's products. Failure to comply with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution. Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary from country to country. The time required to obtain clearance by a foreign country may be longer or shorter than that required for FDA clearance, and the requirements may differ. Export sales of certain devices that have not received FDA marketing clearance generally are subject to both FDA Certificate for Foreign Governments and, in some cases, general U.S. export regulations. In order to obtain a FDA export permit, AccuMed may be required to provide the FDA with documentation from the medical device regulatory authority of the country in which the purchaser is located. AccuMed has secured "CE" mark for the AcCell(TM) 2000 series and is seeking the mark for its proposed products. The CE mark is recognized by countries that are members of the European Free Trade Association and will be required to be affixed to all medical devices sold in the European Union. RAW MATERIALS AND COMPONENTS Certain key components and raw materials used in assembling AccuMed's products are currently provided by single-source vendors. Although AccuMed believes that alternative sources for such components and raw materials are available, any supply interruption in a single-sourced component or raw material would have a material adverse effect on AccuMed's ability to manufacture products until a new source of supply were qualified. RESEARCH AND DEVELOPMENT AccuMed's research and development efforts are focused on introducing new cytopathology products as well as enhancing its existing products to address unmet needs within the diagnostic cytopathology market. AccuMed believes that a commitment to research and development is critical to its ability to achieve its goals. During the fiscal years ended December 31, 1999, 1998, and 1997 expenditures for research and development were approximately $1,900,000, $2,600,000 and $4,000,000 respectively. 19 20 AccuMed is currently developing the following products: ACCELL/SAVANT(TM) DNA IMAGE CYTOMETER This product ("AcCell-Savant") is an automated high-resolution image cytometer (nuclear DNA analyzer) that processes Thionin-Feulgen stained cytology specimens for DNA analysis. Designed for both the research and clinical laboratory markets, this product line offers a unique combination of features and benefits including: (a) highly accurate, reliable, and reproducible system operation, (b) easy-to-use, rapid, and well documented instrument operation, (c) optimized accompanying specimen preparation/staining kits, (d) full automation---"load and walk-away" operation, (e) multi-slide cassette with random-access robotic slide handling, (f) high-resolution images with square pixels and large field-of-view, (g) stable, reliable, DNA specific Thionin-Feulgen stain, (h) suitable for many applications including ploidy, MAC, general cellular research, (i) ability to process conventional smears and monolayer preparations, (j) automated focus, (k) automated image segmentation, (l) optional automated cell/object classifier based upon user-supplied and defined training sets, (m) cell or object relocation and review capability in microscope or on monitor, (n) normalization: 1-D and 2-D histograms, (o) ability to normalize DNA histograms with internal and/or external references, (p) ability to extract measurements by cell populations or by individual cells/objects, (q) statistical analyses of measured data sets with graphical output displays, (r) display capabilities include cell image gallery displays, (s) Report generator, (t) option for networked review microscopes to increase productivity, and (u) data export routines to interface to third-party applications such as multivariate statistical analyses packages. This product focuses on the clinical research and the clinical laboratory market, for clinical applications of image cytometry technology. Benefits of this product are anticipated to be: (1) High-quality instrumentation for automated and quantitative analyses (e.g., assays that cannot be performed by human experts alone). (2) Optimized for clinical application in production laboratory settings (e.g., high-volume tests). (3) Unattended slide handling; integrated with staining and cover slipping systems; custom reports, interface with LIS. (4) Use of (e.g., integrated solutions) DNA/Fuelgen stain kits, calibration slides and clinical laboratory protocols. AccuMed estimates that there are approximately 600 images processing and analysis systems installed worldwide for research purposes and additional 600 clinical systems. Because of uncertainty of current market provider commitment, AccuMed believes there is an opportunity for a competitive image analysis system. The size of this worldwide market is estimated to be over 1200 units at a cost of $100,000 per unit. Consumables such as staining kits used in conjunction with the DNAnalyzer would represent a potentially high margin continuing revenue stream. 20 21 AccuMed believes various factors will influence market demand for this product within the domestic healthcare marketplace. The pressure for cost containment drives the need for tools that streamline aspects of the operational process. This product offers a user-friendly, general-purpose image analysis that operates on the AcCell(TM) technology platform, designed for clinical laboratory use. Also, competitive image analysis systems currently serving this market have been designed largely for the research market, but the level of customer support necessary to accommodate the clinical laboratory market is not readily available. AccuMed intends to offer strong field service and support along with this product. Lastly, the consolidation of the healthcare industry drives the need to integrate various functions within the clinical laboratory. This product is part of an integrated family of tools that support a wide variety of functions within the clinical laboratory. LUNG SPUTUM TESTING USING THE ACCELL-SAVANT AccuMed believes current screening methods for the detection of early lung cancer are impractical and ineffective, creating clear need for a simple, cost effective, and reliable test for screening high-risk populations for lung cancer. AccuMed is developing its Savant technologies to meet this need. The Savant technology is similar to the screening done for cervical cancer, where the death rate due to cervical cancer has been reduced by 5 to 10 times during the past 50 years as a results of Pap test screening. AccuMed's principal lung sputum analysis technology revolves around the use of the AcCell-Savant to screen high-risk individuals for lung cancer. The objective is to identify patients who have lung cancer at an early more curable stage. AccuMed believes that patients detected with lung cancer at an early stage have up to a six times better chance of survival. The Savant medical technologies can detect the presence of early lung cancer from sputum on a microscope slide by measuring subtle changes in the DNA of cell nuclei ("MAC's" or "malignancy associated changes"). These subtle changes are measured using: The AcCell-Savant, an automated high-resolution image cytometer; and the DNA staining kit, a quantitative and proprietary method of reagents for staining DNA. Feasibility tests have shown that this technology successfully detected early lung cancer in over 80% of the samples and has the ability to detect lung cancer up to two years before it can be detected by existing conventional sputum tests or chest x-rays. Successful commercialization of the lung sputum screening test in the United States and other countries will depend on the availability of reimbursement from third-party payors such as private insurers and managed care organizations. Because the up-front, direct costs of using AccuMed's products will result in an overall lower healthcare costs, AccuMed believes it 21 22 can convince third-party payors that the overall cost savings to the healthcare system, resulting from earlier detection for lung cancer, will more than offset the cost of AccuMed's products. AccuMed intends to focus on obtaining coverage and reimbursement from major national and regional managed care organizations and insurance carriers throughout the United States. Most third-party payor organizations independently evaluate new diagnostic procedures by reviewing the published literature and the Medicare coverage and reimbursement policy on the specific diagnostic procedure. To assist third-party payors in their respective evaluations, AccuMed intends to provide scientific and clinical data to support its claims of the safety and efficacy of AccuMed's product lines. AccuMed believes the AcCell-Savant platform can be applied effectively for tissue sites other than for lung tissue. In particular, the AcCell-Savant, with its MAC's capabilities, has the ability to not only detect early stage cervical cancer in an automated manner, but it has the potential ability to determine whether pre-cancerous cells will develop into cancer or not. INTELLECTUAL PROPERTY AccuMed relies on a combination of patents, licensing arrangements, trade names, trademarks, copyrights, trade secrets, know-how and proprietary technology as well as policies and procedures for maintaining the secrecy of trade secrets, know-how and proprietary technology in order to secure and protect its intellectual property rights. Three of AccuMed's patent applications related to AcCell(TM) technology have been granted in the United States as of the date of this report. Two additional AcCell-related patent applications have been allowed in the U.S. and several other applications remain pending (10) or are in development. AccuMed has twelve additional pending patent applications covering certain aspects of its TracCell(TM)-based cytopathology technology and products. AccuMed is also developing products (e.g., AcCell-Savant) that relies upon or utilizes the intellectual property of its wholly owed subsidiary, Oncometrics. Oncometrics has five issued patents, two allowed patents, and twelve pending patents in related technologies. Additionally, AccuMed sold six microbiology-related U.S. patents with the divestiture of that business. AccuMed is continuing to prepare additional patent applications. Since patent applications in the United States are maintained in secrecy until patents issue, and since publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, AccuMed cannot be certain that AccuMed or other relevant patent application filer was the first creator of inventions covered by pending patent applications or that such persons were the first to file patent applications for such inventions. Protections relating to portions of such technologies may be challenged or circumvented by competitors, and other portions may be in the public domain or protectable only under state trade secret laws. AccuMed owns or has guaranteed trademark applications for "SpeciFind", "TracCell", "MacCell", "AcCell-Savant", "Improving Cytology Processes", and is currently preparing and may file additional U.S. and foreign trademark applications in the future. 22 23 (e) Available Information. We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy the documents we have filed at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. Our SEC filings are also available to the public at the SEC's Internet site found at "http://www.sec.gov." You can also inspect our SEC filings at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. AccuMed's Internet website is "http://www.accumed.com". EMPLOYEES At March 27, 2000, AccuMed employed 10 full-time employees. None of AccuMed's employees are represented by a labor union. AccuMed considers its relations with its employees to be good. ITEM 2. PROPERTY AccuMed currently leases a 10,062 square foot facility at 920 North Franklin Street, Chicago, Illinois, pursuant to a lease expiring September 30, 2004. ITEM 3. LEGAL PROCEEDINGS AccuMed is not currently a party to any material litigation and is not aware of any pending or threatened litigation against AccuMed that could have a material adverse effect upon AccuMed's business, operating results or financial condition. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1999. ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the names, ages and positions of all of our executive officers. Officers are elected annually by the board of directors at the first meeting of the board following the annual meeting of stockholders. 23 24
NAME AGE POSITION Paul F. Lavallee 60 Chairman of the Board and Chief Executive Officer Norman J. Pressman, Ph.D. 52 President and Chief Scientific Officer
PAUL F. LAVALLEE. Mr. Lavallee has been a director of AccuMed since December 1995 and was elected Chairman, Chief Executive Officer and President by the Board of Directors on January 30, 1998. He relinquished the title of President in March 1999. Since January 1996, Mr. Lavallee has been a healthcare consultant to the Venture Capital industry and has served as Chairman of the Board for two start-up companies. From 1989 until December 1995, Mr. Lavallee served as Chairman, President and Chief Executive Officer of Sigmedics, Inc. Mr. Lavallee has a B.S. degree in biology from Bates College and a M.B.A. degree from the University of Chicago. NORMAN J. PRESSMAN, Ph.D. Dr. Pressman was named President in March 1999 and continues to serve as Chief Scientific Officer. In 1998, Dr. Pressman was appointed Chairman of the Board of Oncometrics Imaging, Corp., a subsidiary of AccuMed International. He served as a Senior Vice President of AccuMed and President of AccuMed's Cytopathology Division from July 1996 to May 1997 when he became Senior Vice President for Research and Development and Chief Scientific Officer. From July 1993 until joining AccuMed, Dr. Pressman was Manager of Biotechnology Development, Strategic Business Development Group of Olympus America. Between July and September 1989, Dr. Pressman was engaged in the formation of Cell Systems International, Inc., a consulting firm in biomedical specimen collection, processing and analysis, of which he served as President from September 1989 until July 1993. Dr. Pressman was the lead research scientist in the Cytometry and Histometry program of the Central Research and Development Department at E.I. du Pont de Nemours & Company from December 1986 until July 1989. From September 1976 until December 1986, he was as Assistant Professor (Pathology and Engineering) at The Johns Hopkins University School of Medicine and Head of the Quantitative Cytopathology Laboratories at The Johns Hopkins Medical Institutions. Dr. Pressman has a B.S. degree in electrical engineering from Columbia University, a M.S. degree in systems engineering and a Ph.D. in biomedical engineering from the University of Pennsylvania. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock is quoted on the Nasdaq SmallCap Market and is currently under the symbol "ACMI". The table below sets forth, for the periods indicated, the range of high and low sales prices for the common stock during the periods specified. 1998 FISCAL YEAR High Low ---- --- First Quarter 13.88 3.75 Second Quarter 8.63 1.31 Third Quarter 2.06 0.56 Fourth Quarter 2.75 0.31 24 25 1999 FISCAL YEAR High Low ---- --- First Quarter 1.91 0.59 Second Quarter 1.31 0.72 Third Quarter 1.22 0.47 Fourth Quarter 4.00 0.56 As of March 27, 2000, AccuMed had approximately 178 record holders of common stock. As of March 27, 2000, AccuMed estimates that there are approximately 3,325 beneficial holders of Common Stock, based on preliminary results of the broker search for conducted in January 2000. AccuMed has never paid dividends on its common stock and does not intend to pay cash dividends for the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA On January 29, 1999, AccuMed closed the sale of its microbiology business. Prior to December 29, 1995, AccuMed's only operations were related to the microbiology business. The income statement and balance sheet data presented below reflects the microbiology business as a discontinued operation. See Note 1 in the accompanying Financial Statements starting on page F-1.
FISCAL YEARS ENDED DECEMBER 31, (1) (IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Income Statement Data: Net sales $ 136 $ 327 $ 1,001 $ 1,412 $ -- Gross profit (loss) (1,146) (529) (556) 19 -- Operating loss (6,446) (9,796) (15,800) (13,387) -- Interest expense 501 1,411 3,569 458 -- Loss from continuing operations before income taxes (6,803) (10,360) (18,858) (10,904) -- Income taxes -- -- -- -- -- Loss from continuing operations (6,803) (10,360) (18,858) (10,904) -- Income (loss) from Discontinued Operations 8,199 3,351 1,939 (670) (3,759) Net income (loss) 1,396 (8,170) (16,919) (11,574) (3,759) Per Share Data: Basic loss from continuing operations ($ 1.24) ($ 2.04) ($ 5.13) ($ 3.85) -- Income (loss) from discontinued operations 1.49 0.66 0.53 (0.24) (3.54) Extraordinary loss -- (0.23) -- -- -- Basic net income (loss) $ 0.25 ($ 1.61) ($ 4.60) ($ 4.09) ($ 3.54)
25 26
Weighted average shares outstanding (000's) 5,491 5,080 3,675 2,829 1,063 Balance Sheet Data: Working capital (deficit) $ 39 ($ 1,393) ($ 1,600) $ 2,150 -- Total assets 7,222 13,448 16,085 13,444 1,098 Long-term debt 167 5,782 11,455 231 -- Stockholders' equity 5,668 4,223 733 10,136 1,098
(1) AccuMed changed from a September 30 fiscal year end to a December 31 fiscal year end effective in 1995. The fiscal year 1995 amounts are for the September 30 year-end. For the three months ended December 31, 1995, AccuMed's net loss was $5,742,000, or $2.94 per share. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL During 1998, AccuMed received stockholder approval to sell its microbiology business. Accordingly, the results of the microbiology business are reported as a discontinued operation in the accompanying financial statements. On January 29, 1999, AccuMed closed the sale of the microbiology business for net proceeds of $14,400,000. The following management discussion and analysis of financial condition and results of operations relate only to the cytopathology business, AccuMed's only business line. Also, AccuMed is committed to a substantial research and development program. Accordingly, AccuMed expects to incur additional operating losses over at least the next 12 months due to continued spending for product development, prototype construction and testing and regulatory activities. AccuMed anticipates it will offset some of these expenses through contract research with licenses of our intellectual property. OVERVIEW AccuMed is engaged in the marketing and development of cost effective screening instruments and systems for clinical diagnostic laboratories, hospitals and others. Our integrated systems use reliable, accurate and innovative products and methods to provide laboratories with comprehensive solutions that are intended to improve efficiency and reduce costs while achieving significant improvements in disease detection. AccuMed currently is developing cytology computer-aided image cytometry instruments and systems that support early detection and diagnosis programs for screening high-risk individuals for cellular diseases, such as lung cancer. On March 29, 2000, the Company entered into a patent and technology license agreement with BCAM International, Inc. ("BCAM"), whereby the Company agreed to license its patents and proprietary information and rights to BCAM for 26 27 certain medical applications. Under the terms of the agreement, the Company will receive guaranteed license fees over the next nine months, shares of BCAM common stock, and royalties to be received in the future on the sale of covered products by BCAM. On March 24, 2000, AccuMed entered into a license and development agreement with Ventana Medical Systems, Inc., whereby we agreed to license our patents and proprietary information and rights to Ventana for certain medical applications. Under the terms of the agreement, we have received an up-front licensing fee, advanced royalty payment and, development funds, paid immediately. Additional funds will be received over the next twelve months for contract research and purchase of AcCell Systems, and royalties to be received in the future on the sale of covered products by Ventana. On February 28, 2000, Microsulis Corporation chose not to extend the time limit to complete its intended merger with AccuMed. On November 16, 1999, we entered into a merger agreement with Microsulis, whereby Microsulis would have been merged into AccuMed. On December 29, 1995, AccuMed acquired all of the common stock of AccuMed, Inc. and its wholly owned subsidiary. Pursuant to the terms of a merger agreement, 313,652 shares of common stock and 21,158 warrants were issued to AccuMed, Inc. stockholders and warrantholders, respectively, which were contingent and subject to forfeiture if specified performance goals were not achieved by AccuMed. The contingency associated with 156,826 shares of common stock and 10,579 warrants was resolved (performance goal achieved) in March 1996 resulting in contingent consideration of $5,430,326. Such amount has been allocated to identifiable intangibles of acquired proprietary technology ($1,930,599) and in process research and development ($3,499,727). The acquired proprietary technology is being amortized over the expected period to be benefited of ten years, with the in-process research and development charged to operations during the year ended December 31, 1996. The contingency associated with the remaining 156,826 shares of common stock and 10,579 warrants was resolved (performance goal achieved) in March 1997, resulting in contingent consideration of $3,582,068. Such amount has been recorded as goodwill associated with the merger and charged off in its entirety to operations during the year ended December 31, 1997 as an impaired asset. On October 15, 1996, AccuMed acquired a two-thirds interest in Oncometrics Imaging Corp. Oncometrics was formed in 1995 to complete the development of an automated instrument designed to be used in the detection, diagnosis and prognosis of early-stage cancer by measuring the DNA in cells on microscope slides. In June 1998, AccuMed acquired the final one-third of Oncometrics stock it did not own for $685,000. 27 28 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998 REVENUES AND GROSS MARGINS AccuMed's sales revenues were $136,000 for the year ended December 31, 1999 compared to $327,000 for the year ended December 31, 1998, a decrease of $191,000. The decrease in sales reflects a decline in the number of units of AccuMed's AcCellTM products sold. Cost of sales for the year ended December 31, 1999 includes a fourth quarter non-cash charge of $1,106,000 to write-down inventories to net realizable value. In October 1998, we ceased our manufacturing operations to eliminate the associated indirect overhead costs and anticipate our future product sales will be made on a build to order or contract manufacturing basis. Cost of sales for the year ended December 31, 1998 also includes non-capitalizable overhead costs and costs associated with suspending the manufacturing operations. OPERATING EXPENSES General and administrative expenses decreased by $2,161,000, or 40.1%, from $5,308,000 in 1998 to $3,147,000 in 1999. The decrease in these expenses is a result of reduced corporate level activity, including a reduction in personnel due to the sale of the microbiology business and less administrative cost due to the consolidation of AccuMed's cytopathology operations. Research and development expenses decreased by $700,000, or 27.2%, from $2,570,000 in 1998 to $1,870,000 in 1999. The decrease in these expenses reflects a reduction in personnel and activity levels associated with our ongoing efforts to develop next generation products associated with the Savant medical technologies. Expenses in 1998 represent costs associated with the AcCell 2000 and TracCell slide mapping systems, which were completed in August 1998. Sales and marketing expenses decreased by $1,107,000, or 80.0%, from $1,389,000 in 1998 to $282,000 in 1999. This decrease is a result of a reduction in our marketing personnel beginning in October 1998. AccuMed continues to market its AcCell-Savant directly to research facilities. For the year ended December 31, 1999, an asset impairment loss of $137,000 was recorded for the write-down of certain leasehold improvements. The impairment loss is a result of our consolidation of facilities and re-negotiation of leasing arrangements in February 2000. OTHER INCOME AND EXPENSE Interest expense for the year ended December 31, 1999 was $501,000 compared to $1,411,000 for 1998. The decline in interest expense is a result of the repayment in January 1999 of AccuMed's 14.5% secured note payable and our 12.0% unsecured convertible notes with proceeds received from our sale of its microbiology division. Interest expense in 1999 also includes $370,000 28 29 from a non-cash write-off of deferred financing costs and debt discounts related to the repayment of these notes. Other income for the year ended December 31, 1999 was $145,000 compared to $848,000 for 1998. The decrease in other income is a result of a reduction in licensing fee income and a reduction in invested cash on hand, which had been available from proceeds received in a private placement in March 1998. DISCONTINUED OPERATIONS AccuMed's loss of $158,000 in 1999 and income of $3,351,000 in 1998 from discontinued operations reflects the results of operations of AccuMed's microbiology business before is sale in January 1999. In 1999, we recorded a gain of $8,199,000, net of income taxes of $140,000, on the disposal of the microbiology business. EXTRAORDINARY LOSS For the year ended December 31, 1998, AccuMed incurred a $1,168,000 extraordinary loss related to the conversion of $5,275,000 in par value of convertible notes and $329,000 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. As a result of this exchange of convertible notes for convertible preferred stock, AccuMed's net tangible assets increased by about $4,700,000 and our interest expense was reduced by about $633,000 through January 1999. At the conclusion of the sale of the microbiology business in January 1999 the remaining notes were paid off using a portion of the proceeds from that sale. YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997 REVENUES AND GROSS MARGINS Fiscal 1998 revenues reflect the initial sale of the AcCell-Savant(R) Research System for clinical DNA Analyzer to a medical research facility. The 1998 gross loss on sales reflects non-capitalizable manufacturing cost and costs associated with suspending manufacturing operations. OPERATING EXPENSES General and administrative expenses decreased $890,000 to $5,309,000 in 1998 from $6,199,000 in 1997. This decrease is due primarily to the reduction in the number of management and administrative personnel necessary to support a reduced level of activity and a reduction in professional fees. Research and development expenses decreased $1,465,000 to $2,570,000 in 1998 from $4,035,000 in 1997. The decrease is due to costs 29 30 associated with AccuMed's 510(K) clearance received from the U.S. Food and Drug Administration in August 1997, and a reduction in personnel to focus on our next generation product. Sales and marketing expenses decreased by $39,000 to $1,389,000 in 1998 compared to $1,428,000 1997. These expenses remained relatively flat in 1998 as a result of growth of staff and development of the initial marketing program for AccuMed's AcCell product line, which occurred in the first three quarters of 1998. AccuMed reduced sales efforts in the fourth quarter of 1998 to obtain additional documentation of the quantitative benefits of its products. OTHER INCOME AND EXPENSE Interest expense for the year ended December 31, 1998 was $1,411,000 compared to $3,568,000 for 1997. The decrease reflects reduced debt levels as a result of the conversion of $5.2 million in 12% convertible notes into Series A preferred stock in February 1998. Also, in 1997 AccuMed had a write-off of $1.9 million related to an "in the money" conversion feature of its 12% convertible notes. Other income increased to $848,000 in 1998 from $511,000 in 1997. This increase reflects licensing fee income of approximately $500,000 and interest income earned from cash received in the private placement in March 1998. DISCONTINUED OPERATIONS Discontinued operations reflect the operating results of AccuMed's microbiology business, which was disposed of in January 1999. LIQUIDITY AND CAPITAL RESOURCES AccuMed's primary cash requirements are for research and development, general corporate and marketing expenses, which include salaries, materials and consulting support, to develop and market our cytopathology products and technology. We anticipate that the receipt of the license fees and development funds under our license, product sales, and development agreement with Ventana, our available cash and marketable securities on hand, and collection of the line of credit with Microsulis Corporation will provide the necessary liquidity to finance our projected operations and financing obligations through the next twelve months. At December 31, 1999, AccuMed's non-current assets include purchased technology of $ 4,186,000, which is being amortized over a period of ten years, and patents of $842,000, which are being amortized over the useful lives of the patents, generally 17 years. The purchased technology was originally recorded in connection with the merger of AccuMed Inc. in 1995 and purchase of Oncometrics Imaging Corp. in 1996 and 1998. The carrying value of these assets is expected to be realized from our licensing to others, such as 30 31 Ventana, and our application in AccuMed's AcCell/Savant(R) Research Systems and AcCell/Savant(R) DNA Image Cytometer. At December 31, 1999, AccuMed has long-term debt, including the current portion, of $530,000. The long-term debt consists of a $500,000 Canadian dollar note and a non-interest bearing repayable contribution of $187,000. The Canadian dollar note is payable in monthly installments of $25,000 US dollars, plus interest at a rate of 6.0% over the Canadian prime rate, beginning March 15, 2000 through July 15, 2000, with the remainder due on demand. The demand portion of the Canadian note is convertible into shares of AccuMed's common stock at a price of $1.43 per share. The repayable contribution was received under a Canadian government program and calls for semi-annual installments based on a percentage of future sales of product and net working capital. AccuMed's equity at December 31, 1999 was $5,668,000, of which $8,199,000 was recorded in January 1999 from the gain on the sale of our microbiology business. OPERATING ACTIVITIES Cash used in operating activities decreased to $5,273,000 in 1999 from $10,418,000 in 1998 and $12,352,000 in 1997. The decrease in cash used in operating activities primarily reflects AccuMed's reduced operating costs during these periods. The use of cash in operating activities reflects AccuMed's ongoing efforts to develop our next generation product, which we believe will have applications for early lung cancer testing. In addition, over $1,000,000 of cash was used during 1999 to reduce vendor financing carried over from the third and fourth quarters of 1998. INVESTING ACTIVITIES For the year ended December 31, 1999, investing activities generated $13,976,000 in cash compared to the use of cash of $500,000 in 1998 and $7,290,000 in 1997. In 1999, AccuMed received $14,400,000 in proceeds, net of expenses incurred, from the sale of AccuMed's microbiology business and funded $400,000 under a line of credit arrangement to Microsulis Corporation, which is expected to be re-paid in the second quarter of 2000. In 1998 and 1997, we used $343,000 and $6,000,000, respectively, of cash to acquire the stock of our Oncometrics subsidiary. Capital expenditures declined to $24,000 in 1999 from $157,000 in 1998 and $1,208,000 in 1997. The decline in capital expenditures reflects the start-up of manufacturing activities and purchases of equipment for sales and marketing and research and development activities in 1997 and subsequent reduction in these activities in 1998 and 1999. AccuMed does not anticipate material capital expenditures during 2000. FINANCING ACTIVITIES For the year ended December 31, 1999, AccuMed used $8,498,000 in cash in financing activities compared to $4,943,000 and $12,670,000 provided by financing activities in 1998 and 1997, respectively. In January 1999, we 31 32 repaid all of our outstanding 14.5% secured notes and 12% unsecured convertible notes with proceeds from the sale of its microbiology business. In March 1998, AccuMed received $4,852,000 in net proceeds from a private placement of its common stock. During 1997, we received $12,151,000 in proceeds from long-term debt, net of fees paid. AccuMed currently has no commitments with respect to sources of additional financing other than with respect to funds to be received under the license and development agreement with Ventana. AccuMed's future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of the our product development and licensing efforts, the costs and timing of acceptance of AccuMed's products, competing technological and market developments, the progress of commercialization efforts of AccuMed 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. IMPACT OF YEAR 2000 We completed our Year 2000 readiness initiatives and did not experience any significant problems. We do not anticipate any significant adverse business effects related to this issue. AccuMed did not incur material costs to dedicated solely to Year 2000 remediation. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements are filed with this report as pages F-1 through F-20 following the signature page: Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information relating to executive officers is included in this report in the last section of Part I under the caption "Executive 32 33 Officers of the Registrant". Information relating to directors appearing under the caption "Election of Directors" in the definitive proxy statement for the 2000 Annual Meeting of Stockholders to be filed with the SEC within 120 days following AccuMed's last fiscal year end is hereby incorporated herein by reference. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 appearing under the caption "Compliance With Reporting Requirements" in the definitive proxy statement for the 2000 Annual Meeting of Stockholders to be filed with the SEC is within 120 days following AccuMed's last fiscal year end is hereby incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained under the caption "Executive Compensation" contained in the definitive proxy statement for the 2000 Annual Meeting of Stockholders to be filed with the SEC within 120 days following AccuMed's last fiscal year end is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the definitive proxy statement for the 2000 Annual Meeting of Stockholders to be filed with the SEC within 120 days following AccuMed's last fiscal year end is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the caption "Certain Relationships and Related Transactions" contained in the definitive Proxy statement for the 2000 Annual Meeting of Stockholders to be filed with the Commission within 120 days following AccuMed's last fiscal year end is hereby incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements. The following financial statements are filed as part of this report as pages F-1 through F-20 following the signature page: Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (b) No reports on Form 8-K were filed during the three month period ended December 31, 1999. 33 34 (c) Exhibit Index Exhibit Number Description of Exhibit - ------ ---------------------- 3.1 Bylaws of AccuMed. (1) 3.2 Amendment No. 1 to Bylaws of AccuMed. (19) 4.1 Certificate of Incorporation of AccuMed (1) 4.2 Certificate of Amendment to Certificate of Incorporation of AccuMed increasing authorized Common stock (14) 4.3 Certificate of Designation, Rights and Preferences of Series A Convertible Preferred Stock (15) 4.4 Certificate of Correction to Certificate of Designation, Rights and Preferences of Series A Convertible Preferred Stock (15) 4.5 Certificate of Amendment to Certificate of Incorporation of AccuMed effecting reverse stock split (21) 4.6 Specimen Certificate for Common stock (1) 4.7 Bylaws of AccuMed (1) 4.8 Amendment No. 1 to Bylaws of AccuMed (19) 4.9 Warrant Agreement dated as of February 23, 1998 between AccuMed and Commonwealth Associates, including form of Warrant Certificate attached as Exhibit A thereto, representing an aggregate of 1,245,340 (pre split) Common stock purchase Warrants issued to investors in a Note Exchange Offer. (15) 4.10 Warrant Agreement dated March 19, 1998 between AccuMed and Commonwealth Associates representing an aggregate of 350,000(pre split) Common stock purchase warrants issued to Commonwealth Associates and/or its designees in exchange for warrants issued thereto in connection with a Note Exchange Offer (19) 4.11 Form of Subscription Agreement and Registration Rights Agreement dated as of February 23, 1998 between AccuMed and each of the investors in a Note Exchange Offer (15) 4.12 Warrant Agreement dated as of March 19, 1998, as amended by Amendment No. 1 dated as of March 23, 1998, between AccuMed and Commonwealth Associates pertaining to an aggregate of 8,686,667 (pre split) Common stock purchase Warrants issued to investors in a private placement. (19) 34 35 4.13 Form of Warrant Certificate representing an aggregate of 8,686,667 (pre split) Common stock purchase Warrants issued to investors in a private placement in March 1998 (19) 4.14 Form of Warrant to Purchase Common stock dated March 19, 1998 or March 23, 1998, including form of Warrant Certificate attached as Exhibit A thereto, representing an aggregate of 1,337,333 (pre split) Common stock purchase Warrants issued to Commonwealth Associates, Bellingham Capital Industries, and Harold S. Blue and/or their respective designees in connection with a private placement. (19) 4.15 Form of Subscription Agreement and Registrant Rights Agreement dated March 19, 1998 or March 23, 1998 between AccuMed and each of the investors in a private placement (19) 4.16 Specimen stock certificate for Common stock. (1) 10.1 AccuMed's Board of Directors Compensation Plan as amended by Minutes of Board of Directors meeting dated January 18, 1996 authorizing grants of stock options to non-employee directors. (1)(4) 10.2 Employment Agreement between AccuMed and Norman J. Pressman dated June 13, 1996 and Addendum to Employment Agreement between AccuMed and Norman J. Pressman dated July 16, 1996. (4)(5) 10.3 1995 Stock Option Plan. (1)(4) 10.4 Amendment No. 1 to AccuMed's 1995 Stock Option Plan.(4)(7) 10.5 Amendment No. 2 to the 1995 Stock Option Plan. (4)(16) 10.6 Amendment No. 3 to the 1995 Stock Option Plan. (4)(19) 10.7 Form of Non-Qualified Stock Option Agreement governing options granted to former employees of AccuMed, Inc. pursuant to the Agreement and Plan of Reorganization dated as of April 21, 1995, as amended. (1)(4) 10.8 Form of Non-Qualified Stock Option Agreement governing options granted to employees and consultants under the 1995 Stock Option Plan. (1)(4) 10.9 Form of Incentive Stock Option Agreement governing options granted to employees under the 1995 Stock Option Plan. (1)(4) 10.10 Amended and Restated 1990 Stock Option Plan. (4)(8) 10.11 Amendment No. 1 to Amended and Restated 1990 Stock Option Plan.(4)(16) 10.12 Franklin Square Commercial Lease dated July 13, 1994 between AccuMed and the Lumber Company as Agent for the Beneficiary of LaSalle National Trust, N.A. pertaining to the premises located at Suite 401, 4th Floor North, 900 North Franklin Street, Chicago, Illinois. (1) 35 36 10.13 Form of Warrant Certificate dated as of March 13, 1997 evidencing right to acquire an aggregate of 850,000 shares of Common stock issued to several investors in a private placement consummated March 13, 1997. (16) 10.14 Form of Subscription Agreement between AccuMed and several investors in the private placement consummated on March 13, 1997. (16) 10.15 Form of Warrant to Purchase Common stock dated February 23, 1998 between AccuMed and Commonwealth Associates representing an aggregate of 200,000 Common stock purchase Warrants issued to Commonwealth Associates and/or its designees in exchange for warrants previously issued thereto in connection with the placement of 12% Convertible Promissory Notes. (19) 10.16 Warrant Agreement dated as of February 2, 1998 between AccuMed and Robert L. Priddy representing warrants to purchase 100,000 shares of Common stock. (19) 10.17 Agreement between AccuMed and Paul F. Lavallee and Gypsy Hill LLC effective January 29, 1998 (21) 10.18 Warrant Agreement dated as of February 23, 1998 between AccuMed and Commonwealth Associates, including form of Warrant Certificate attached as Exhibit A thereto, representing an aggregate of 1,245,340 Common stock purchase Warrants issued to investors in a Note Exchange Offer. (15) 10.19 Warrant Agreement dated March 19, 1998 between AccuMed and Commonwealth Associates representing an aggregate of 350,000 Common stock purchase Warrants issued to Commonwealth Associates and/or its designees in exchange for warrants issued thereto in connection with a Note Exchange Offer. (19) 10.20 Form of Subscription Agreement and Registration Rights Agreement dated as of February 23, 1998 between AccuMed and each of the investors in a Note Exchange Offer. (15) 10.21 Warrant Agreement dated as of March 19, 1998, as amended by Amendment No. 1 dated as of March 23, 1998, between AccuMed and Commonwealth Associates pertaining to an aggregate of 8,686,667 Common stock purchase Warrants issued to investors in a private placement. (19) 10.22 Form of Warrant Certificate representing an aggregate of 8,686,667 common stock purchase Warrants issued to investors in a private placement in March 1998. (19) 10.23 Form of Warrant to Purchase Common stock dated March 19, 1998 or March 23, 1998, including form of Warrant Certificate attached as Exhibit A thereto, representing an aggregate of 1,337,333 Common stock purchase Warrants issued to Commonwealth Associates, Bellingham Capital Industries, and Harold S. Blue and/or their respective designees in connection with a private placement. (19) 36 37 10.24 Form of Subscription Agreement and Registration Rights Agreement dated March 19, 1998 or March 23, 1998 between AccuMed and each of the investors in a private placement. (19) 10.25 1997 Stock Option Plan and Amendment No. 1 to the 1997 Stock Option Plan (19) 10.26 Asset Purchase Agreement by and between AccuMed International, Inc. and AMI Acquisition Corp. dated as of November 20, 1998 (22) 10.27 Floating Rate Convertible Promissory Note dated June 26, 1998 by AccuMed in favor of Xillix Technologies Corp. in the original principal amount of CDN$500,000. (23) 10.28 Amendment to Floating Rate Convertible Promissory Note dated March 15, 2000 between AccuMed and Xillix Technologies Corp. 10.29 License and Development Agreement dated March 24, 2000 between AccuMed and Ventana Medical Systems, Inc. + 10.30 Patent and Technology License and Registration Rights Agreement dated March 29, 2000 between AccuMed and BCAM International, Inc.+ 21.1 Subsidiary of AccuMed. 23.1 Consent of KPMG LLP. 27.1 Financial Data Schedule - --------------- + Confidential treatment sought for portions of this document. (1) Incorporated by reference to AccuMed's Transition Report on Form 10-KSB for the transition period ended December 31, 1995. (2) Incorporated by reference to Pre-Effective Amendment No. 4 to the Registration Statement on Form S-1 (Reg. No. 33-48302), filed with the Commission on October 9, 1993. (3) Incorporated by reference to AccuMed's Registration Statement on Form S-4 (File No. 33-99680), filed with the Commission on November 22, 1995. (4) Represents a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Registration Statement. (5) Incorporated by reference to AccuMed's Registration Statement Form S-2 (Regis. No. 333-09011) filed with the Commission on July 26, 1996. 37 38 (6) Incorporated by reference to AccuMed's Annual Report on Form 10-KSB for the year ended September 30, 1994. (7) Incorporated by reference to Pre-effective Amendment No. 1 to the Registration Statement on Form S-2 (Regis. No. 333-09011) filed with the Commission on August 29, 1996. (8) Incorporated by reference to AccuMed's Registration Statement on Form S-1 (Reg. No. 33-48302), filed with the Commission on June 3, 1992. (9) Incorporated by reference to Pre-effective Amendment No. 4 to the Registration Statement of Form S-2 (Regis. No. 333-09011) filed with the Commission on October 3, 1996. (10) Incorporated by reference to Pre-Effective Amendment No. 1 to Form SB-2, filed with the Commission on November 8, 1993). (11) Incorporated by Reference to Pre-effective Amendment No. 2 to the Registration Statement on Form S-2 (Regis. No. 333-09011) filed with the Commission on September 23, 1996. (12) Incorporated by reference to AccuMed's Registration Statement on Form S-3 (Reg. No. 333-07681), filed with the Commission on July 3, 1996. (13) Incorporated by reference to AccuMed's Current Report on Form 8-K dated March 3, 1997. (14) Incorporated by reference to AccuMed's Registration Statement on Form S-3 (Regis. No. 333-28125) filed with the Commission on May 30, 1997. (15) Incorporated by reference to AccuMed's Current Report on Form 8-K dated March 20, 1998. (16) Incorporated by reference to AccuMed's Annual Report on Form 10-KSB for the year ended December 31, 1996. (17) Incorporated by reference to Registrant's Quarterly Report on From 10-QSB for the quarter ended June 30, 1997. (18) Incorporated by reference to Registrant's Quarterly Report on from 10-QSB for the quarter ended September 30, 1997. (19) Incorporated by reference to AccuMed's Annual Report on Form 10-K for the year ended December 31, 1997. (20) Incorporated by reference to the Registration Statement on Form S-3 (Regis. No. 333-56393) filed with the Commission on June 9, 1998. (21) Incorporated by reference to AccuMed's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 38 39 (22) Incorporated by reference to AccuMed's Current Report on Form 8-K dated January 29, 1999. (23) Incorporated by reference to AccuMed's Registration Statement on Form S-3 filed with the Commission on November 9, 1999 (Regis. No. 333-90637). (d) Financial Statement Schedules. The following financial statement schedule is filed as part of this report as page F-22 following the signature page: 39 40 Schedule IX - Valuation and Qualifying Accounts All other schedules required by Form 10-K Annual Report have been omitted because they were not applicable, were included in the notes to be consolidated financial statements, or were otherwise not required under the instructions contained in Regulation S-X. 40 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: April 14, 2000 ACCUMED INTERNATIONAL, INC. By: /s/ PAUL F. LAVALLEE --------------------------------- Paul F. Lavallee, Chairman of the Board and Chief Executive Officer (principal executive officer and principal accounting officer) Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates so indicated. Each Director of the registrant whose signature appears below, hereby appoints Paul F. Lavallee individually as his attorney-in-fact to sign in his name and on his behalf as a director of the registrant, and to file with the SEC any and all Amendments to this Annual Report on Form 10-K to the same extent and with the same effect as if done personally. DATED: April 14, 2000 By: /s/ PAUL F. LAVALLEE ---------------------------------------- Paul F. Lavallee, Chairman DATED: April 14, 2000 By: /s/ JACK H. HALPERIN ---------------------------------------- Jack H. Halperin, Director DATED: April 14, 2000 By: /s/ MARK BANISTER ---------------------------------------- Mark Banister, Director DATED: April 14, 2000 By: /s/ LEONARD M. SCHILLER ---------------------------------------- Leonard M. Schiller, Director DATED: April 14, 2000 By: /s/ ROBERT L. PRIDDY ---------------------------------------- Robert L. Priddy, Director 41 42 Exhibit Number Description of Exhibit - ------ ---------------------- 3.1 Bylaws of AccuMed. (1) 3.2 Amendment No. 1 to Bylaws of AccuMed. (19) 4.1 Certificate of Incorporation of AccuMed (1) 4.2 Certificate of Amendment to Certificate of Incorporation of AccuMed increasing authorized Common stock (14) 4.3 Certificate of Designation, Rights and Preferences of Series A Convertible Preferred Stock (15) 4.4 Certificate of Correction to Certificate of Designation, Rights and Preferences of Series A Convertible Preferred Stock (15) 4.5 Certificate of Amendment to Certificate of Incorporation of AccuMed effecting reverse stock split (21) 4.6 Specimen Certificate for Common stock (1) 4.7 Bylaws of AccuMed (1) 4.8 Amendment No. 1 to Bylaws of AccuMed (19) 4.9 Warrant Agreement dated as of February 23, 1998 between AccuMed and Commonwealth Associates, including form of Warrant Certificate attached as Exhibit A thereto, representing an aggregate of 1,245,340 (pre split) Common stock purchase Warrants issued to investors in a Note Exchange Offer. (15) 4.10 Warrant Agreement dated March 19, 1998 between AccuMed and Commonwealth Associates representing an aggregate of 350,000(pre split) Common stock purchase warrants issued to Commonwealth Associates and/or its designees in exchange for warrants issued thereto in connection with a Note Exchange Offer (19) 4.11 Form of Subscription Agreement and Registration Rights Agreement dated as of February 23, 1998 between AccuMed and each of the investors in a Note Exchange Offer (15) 4.12 Warrant Agreement dated as of March 19, 1998, as amended by Amendment No. 1 dated as of March 23, 1998, between AccuMed and Commonwealth Associates pertaining to an aggregate of 8,686,667 (pre split) Common stock purchase Warrants issued to investors in a private placement. (19) 4.13 Form of Warrant Certificate representing an aggregate of 8,686,667 (pre split) Common stock purchase Warrants issued to investors in a private placement in March 1998 (19) 4.14 Form of Warrant to Purchase Common stock dated March 19, 1998 or March 23, 1998, including form of Warrant Certificate attached as Exhibit A thereto, representing an aggregate of 1,337,333 (pre split) Common stock 42 43 purchase Warrants issued to Commonwealth Associates, Bellingham Capital Industries, and Harold S. Blue and/or their respective designees in connection with a private placement. (19) 4.15 Form of Subscription Agreement and Registrant Rights Agreement dated March 19, 1998 or March 23, 1998 between AccuMed and each of the investors in a private placement (19) 4.16 Specimen stock certificate for Common stock. (1) 10.1 AccuMed's Board of Directors Compensation Plan as amended by Minutes of Board of Directors meeting dated January 18, 1996 authorizing grants of stock options to non-employee directors. (1)(4) 10.2 Employment Agreement between AccuMed and Norman J. Pressman dated June 13, 1996 and Addendum to Employment Agreement between AccuMed and Norman J. Pressman dated July 16, 1996. (4)(5) 10.3 1995 Stock Option Plan. (1)(4) 10.4 Amendment No. 1 to AccuMed's 1995 Stock Option Plan.(4)(7) 10.5 Amendment No. 2 to the 1995 Stock Option Plan. (4)(16) 10.6 Amendment No. 3 to the 1995 Stock Option Plan. (4)(19) 10.7 Form of Non-Qualified Stock Option Agreement governing options granted to former employees of AccuMed, Inc. pursuant to the Agreement and Plan of Reorganization dated as of April 21, 1995, as amended. (1)(4) 10.8 Form of Non-Qualified Stock Option Agreement governing options granted to employees and consultants under the 1995 Stock Option Plan. (1)(4) 10.9 Form of Incentive Stock Option Agreement governing options granted to employees under the 1995 Stock Option Plan. (1)(4) 10.10 Amended and Restated 1990 Stock Option Plan. (4)(8) 10.11 Amendment No. 1 to Amended and Restated 1990 Stock Option Plan.(4)(16) 10.12 Franklin Square Commercial Lease dated July 13, 1994 between AccuMed and the Lumber Company as Agent for the Beneficiary of LaSalle National Trust, N.A. pertaining to the premises located at Suite 401, 4th Floor North, 900 North Franklin Street, Chicago, Illinois. (1) 10.13 Form of Warrant Certificate dated as of March 13, 1997 evidencing right to acquire an aggregate of 850,000 shares of Common stock issued to several investors in a private placement consummated March 13, 1997. (16) 10.14 Form of Subscription Agreement between AccuMed and several investors in the private placement consummated on March 13, 1997. (16) 10.15 Form of Warrant to Purchase Common stock dated February 23, 1998 between AccuMed and Commonwealth Associates representing an aggregate of 200,000 Common stock purchase Warrants issued to Commonwealth Associates and/or 43 44 its designees in exchange for warrants previously issued thereto in connection with the placement of 12% Convertible Promissory Notes. (19) 10.16 Warrant Agreement dated as of February 2, 1998 between AccuMed and Robert L. Priddy representing warrants to purchase 100,000 shares of Common stock. (19) 10.17 Agreement between AccuMed and Paul F. Lavallee and Gypsy Hill LLC effective January 29, 1998 (21) 10.18 Warrant Agreement dated as of February 23, 1998 between AccuMed and Commonwealth Associates, including form of Warrant Certificate attached as Exhibit A thereto, representing an aggregate of 1,245,340 Common stock purchase Warrants issued to investors in a Note Exchange Offer. (15) 10.19 Warrant Agreement dated March 19, 1998 between AccuMed and Commonwealth Associates representing an aggregate of 350,000 Common stock purchase Warrants issued to Commonwealth Associates and/or its designees in exchange for warrants issued thereto in connection with a Note Exchange Offer. (19) 10.20 Form of Subscription Agreement and Registration Rights Agreement dated as of February 23, 1998 between AccuMed and each of the investors in a Note Exchange Offer. (15) 10.21 Warrant Agreement dated as of March 19, 1998, as amended by Amendment No. 1 dated as of March 23, 1998, between AccuMed and Commonwealth Associates pertaining to an aggregate of 8,686,667 Common stock purchase Warrants issued to investors in a private placement. (19) 10.22 Form of Warrant Certificate representing an aggregate of 8,686,667 common stock purchase Warrants issued to investors in a private placement in March 1998. (19) 10.23 Form of Warrant to Purchase Common stock dated March 19, 1998 or March 23, 1998, including form of Warrant Certificate attached as Exhibit A thereto, representing an aggregate of 1,337,333 Common stock purchase Warrants issued to Commonwealth Associates, Bellingham Capital Industries, and Harold S. Blue and/or their respective designees in connection with a private placement. (19) 10.24 Form of Subscription Agreement and Registration Rights Agreement dated March 19, 1998 or March 23, 1998 between AccuMed and each of the investors in a private placement. (19) 10.25 1997 Stock Option Plan and Amendment No. 1 to the 1997 Stock Option Plan (19) 10.26 Asset Purchase Agreement by and between AccuMed International, Inc. and AMI Acquisition Corp. dated as of November 20, 1998 (22) 10.27 Floating Rate Convertible Promissory Note dated June 26, 1998 by AccuMed in favor of Xillix Technologies Corp. in the original principal amount of CDN$500,000. (23) 10.28 Amendment to Floating Rate Convertible Promissory Note dated March 15, 2000 between AccuMed and Xillix Technologies Corp. 44 45 10.29 License and Development Agreement dated March 24, 2000 between AccuMed and Ventana Medical Systems, Inc. + 10.30 Patent and Technology License and Registration Rights Agreement dated March 29, 2000 between AccuMed and BCAM International, Inc.+ 21.1 Subsidiary of AccuMed. 23.1 Consent of KPMG LLP. 27.1 Financial Data Schedule - ------------------ + Confidential treatment sought for portions of this document. (1) Incorporated by reference to AccuMed's Transition Report on Form 10-KSB for the transition period ended December 31, 1995. (2) Incorporated by reference to Pre-Effective Amendment No. 4 to the Registration Statement on Form S-1 (Reg. No. 33-48302), filed with the Commission on October 9, 1993. (3) Incorporated by reference to AccuMed's Registration Statement on Form S-4 (File No. 33-99680), filed with the Commission on November 22, 1995. (4) Represents a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Registration Statement. (5) Incorporated by reference to AccuMed's Registration Statement Form S-2 (Regis. No. 333-09011) filed with the Commission on July 26, 1996. (6) Incorporated by reference to AccuMed's Annual Report on Form 10-KSB for the year ended September 30, 1994. (7) Incorporated by reference to Pre-effective Amendment No. 1 to the Registration Statement on Form S-2 (Regis. No. 333-09011) filed with the Commission on August 29, 1996. (8) Incorporated by reference to AccuMed's Registration Statement on Form S-1 (Reg. No. 33-48302), filed with the Commission on June 3, 1992. (9) Incorporated by reference to Pre-effective Amendment No. 4 to the Registration Statement of Form S-2 (Regis. No. 333-09011) filed with the Commission on October 3, 1996. (10) Incorporated by reference to Pre-Effective Amendment No. 1 to Form SB-2, filed with the Commission on November 8, 1993). (11) Incorporated by Reference to Pre-effective Amendment No. 2 to the Registration Statement on Form S-2 (Regis. No. 333-09011) filed with the Commission on September 23, 1996. (12) Incorporated by reference to AccuMed's Registration Statement on Form S-3 (Reg. No. 333-07681), filed with the Commission on July 3, 1996. 45 46 (13) Incorporated by reference to AccuMed's Current Report on Form 8-K dated March 3, 1997. (14) Incorporated by reference to AccuMed's Registration Statement on Form S-3 (Regis. No. 333-28125) filed with the Commission on May 30, 1997. (15) Incorporated by reference to AccuMed's Current Report on Form 8-K dated March 20, 1998. (16) Incorporated by reference to AccuMed's Annual Report on Form 10-KSB for the year ended December 31, 1996. (18) Incorporated by reference to Registrant's Quarterly Report on From 10-QSB for the quarter ended June 30, 1997. (18) Incorporated by reference to Registrant's Quarterly Report on from 10-QSB for the quarter ended September 30, 1997. (19) Incorporated by reference to AccuMed's Annual Report on Form 10-K for the year ended December 31, 1997. (20) Incorporated by reference to the Registration Statement on Form S-3 (Regis. No. 333-56393) filed with the Commission on June 9, 1998. (21) Incorporated by reference to AccuMed's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (22) Incorporated by reference to AccuMed's Current Report on Form 8-K dated January 29, 1999. (23) Incorporated by reference to AccuMed's Registration Statement on Form S-3 filed with the Commission on November 9, 1999 (Regis. No. 333-9063 46 47 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report ........................................... F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998 ........... F-3 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 ................... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 ................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 ................... F-6 Notes to Consolidated Financial Statements ............................. F-7
F-1 48 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders AccuMed International, Inc.: We have audited the accompanying consolidated balance sheets of AccuMed International, Inc. and subsidiary (the Company) as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AccuMed International, Inc. and subsidiary as of December 31, 1999 and December 31, 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Chicago, Illinois March 29, 2000 F-2 49 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------ ASSETS 1999 1998 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 196,303 $ 213,386 Accounts receivable, net -- 33,348 Prepaid expenses and other current assets 7,944 64,048 Available-for-sale security 121,301 -- Note receivable 400,000 -- Inventories 700,919 1,738,611 ------------ ------------ TOTAL CURRENT ASSETS 1,426,467 2,049,393 ------------ ------------ Fixed assets, net 705,273 1,488,809 Deferred financing costs, net -- 177,625 Purchased technology, net of amortization of $2,214,000 in 1999 and $1,315,000 in 1998 4,185,868 5,085,018 Patents, net of accumulated amortization of $130,000 in 1999 842,484 761,414 and $82,000 in 1998 Note receivable, officer 62,237 123,150 Net assets of discontinued operations -- 3,762,397 ------------ ------------ $ 7,222,329 $ 13,447,806 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Long term debt, current portion $ 362,550 $ 1,155,400 Accounts payable 223,822 1,808,249 Accrued interest 15,415 189,069 Income taxes 35,000 -- Other current liabilities 750,183 290,292 ------------ ------------ TOTAL CURRENT LIABILITIES 1,386,970 3,443,010 ------------ ------------ Long term debt 167,000 5,781,850 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock, Series A convertible, 5,000,000 shares authorized; 944,384 issued and outstanding at December 31, 1999; 962,102 issued and outstanding at December 31, 1998 4,249,735 4,329,466 Common stock, $0.01 par value; 50,000,000 shares authorized; 5,491,901 issued and outstanding at December 31, 1999; 5,480,088 issued and outstanding at December 31, 1998 54,919 54,801 Additional paid-in capital 59,619,262 59,539,649 Accumulated other comprehensive income (4,960) (53,995) Accumulated deficit (58,033,860) (59,430,238) Treasury stock; 6,326 shares at December 31, 1999 and 1998 (216,737) (216,737) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 5,668,359 4,222,946 ------------ ------------ $ 7,222,329 $ 13,447,806 ============ ============
See accompanying notes to consolidated financial statements. F-3 50 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Sales $ 136,405 $ 326,862 $ 1,000,776 Less cost of sales (1,146,291) (855,788) (1,557,175) ------------ ------------ ------------ Gross profit (loss) (1,009,886) (528,926) (556,399) ------------ ------------ ------------ Operating expenses: General and administrative 3,147,154 5,308,417 6,198,665 Research and development 1,869,587 2,569,864 4,035,360 Asset impairment 137,211 -- 3,582,068 Sales and marketing 282,398 1,388,826 1,427,735 ------------ ------------ ------------ Total operating expenses 5,436,350 9,267,107 15,243,828 ------------ ------------ ------------ Operating loss (6,446,236) (9,796,033) (15,800,227) ------------ ------------ ------------ Other income (expense): Interest expense (501,379) (1,411,335) (3,568,603) Other income, net 144,794 847,613 511,145 ------------ ------------ ------------ Total other income (expense) (356,585) (563,722) (3,057,458) ------------ ------------ ------------ Loss before income taxes from continuing operations (6,802,821) (10,359,755) (18,857,685) Income tax expense -- -- -- ------------ ------------ ------------ Loss from continuing operations before extraordinary item (6,802,821) (10,359,755) (18,857,685) ------------ ------------ ------------ Discontinued operations: (Loss) income from discontinued operations (158,250) 3,351,486 1,939,109 Gain on disposal, net of income taxes of $140,000 8,357,449 -- -- ------------ ------------ ------------ Income from discontinued operations 8,199,199 3,351,486 1,939,109 ------------ ------------ ------------ Extraordinary item - debt extinguishment loss -- (1,168,080) -- ------------ ------------ ------------ Net income (loss) 1,396,378 (8,176,349) (16,918,576) ============ ============ ============ Basic loss per share from continuing operations before extraordinary item $ (1.24) $ (2.04) $ (5.13) Income per share from discontinued operations 1.49 0.66 0.53 Extraordinary loss per share from debt extinguishment -- (0.23) -- ------------ ------------ ------------ Basic net loss per share $ 0.25 $ (1.61) $ (4.60) ============ ============ ============ Weighted average common shares outstanding 5,491,480 5,079,894 3,675,488 ============ ============ ============
See accompanying notes to consolidated financial statements F-4 51 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------------------- ---------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1996 -- -- 3,475,696 $ 34,757 $ 44,598,431 ------------ ------------ ------------ ------------ ------------ Issuances of common stock -- -- 11,892 119 206,170 Issuances of warrants -- -- -- -- 3,187,606 Stock options exercised -- -- 60,310 603 407,958 Warrants exercised -- -- 83,422 834 258,795 Refund of stock issuance fees, net -- -- -- -- 74,877 Cumulative translation adjustment -- -- -- -- -- Shares received in litigation settlement -- -- -- -- -- Contingent shares issued -- -- 156,825 1,568 3,409,394 Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1997 -- -- 3,788,145 37,881 52,143,231 ------------ ------------ ------------ ------------ ------------ Issuances of common stock -- -- 1,494,869 14,949 6,066,070 Issuances of preferred stock 1,245,338 5,604,030 -- -- -- Conversion of preferred stock to common (283,236) (1,274,564) 188,824 1,888 1,272,676 Stock options exercised -- -- 8,250 83 57,672 Cumulative translation adjustment -- -- -- -- -- Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1998 962,102 4,329,466 5,480,088 54,801 59,539,649 ------------ ------------ ------------ ------------ ------------ Conversion of preferred stock to common (17,718) (79,731) 11,813 118 79,613 Cumulative translation adjustment -- -- -- -- -- Change in value of available-for-sale security -- -- -- -- -- Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1999 944,384 $ 4,249,735 5,491,901 $ 54,919 $ 59,619,262 ============ ============ ============ ============ ============
ACCUMULATED OTHER COMPREHENSIVE ACCUMULATED TREASURY STOCKHOLDERS' COMPREHENSIVE INCOME DEFICIT STOCK EQUITY INCOME (LOSS) ------------- ------------ ------------ ------------- ------------- Balances at December 31, 1996 $ 32,586 $(34,335,313) $ (194,465) $ 10,135,996 $(11,541,227) ------------ ------------ ------------ ------------ ------------ Issuances of common stock -- -- -- 206,289 -- Issuances of warrants -- -- -- 3,187,606 -- Stock options exercised -- -- -- 408,561 -- Warrants exercised -- -- -- 259,629 -- Refund of stock issuance fees, net -- -- -- 74,877 -- Cumulative translation adjustment (10,000) -- -- (10,000) (10,000) Shares received in litigation settlement -- -- (22,272) (22,272) -- Contingent shares issued -- -- -- 3,410,962 -- Net loss -- (16,918,576) -- (16,918,576) (16,918,576) ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1997 22,586 (51,253,889) (216,737) 733,072 (16,928,576) ------------ ------------ ------------ ------------ ------------ Issuances of common stock -- -- -- 6,081,019 -- Issuances of preferred stock -- -- -- 5,604,030 -- Conversion of preferred stock to common -- -- -- -- -- Stock options exercised -- -- -- 57,755 -- Cumulative translation adjustment (76,581) -- -- (76,581) (76,581) Net loss -- (8,176,349) -- (8,176,349) (8,176,349) ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1998 (53,995) (59,430,238) (216,737) 4,222,946 (8,252,930) ------------ ------------ ------------ ------------ ------------ Conversion of preferred stock to common -- -- -- -- -- Cumulative translation adjustment (72,266) -- -- (72,266) (72,266) Change in value of available-for-sale security 121,301 -- -- 121,301 121,301 Net income -- 1,396,378 -- 1,396,378 1,396,378 ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1999 $ (4,960) $(58,033,860) $ (216,737) $ 5,668,359 $ 1,445,413 ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 52 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ 1,396,378 ($ 8,176,349) ($16,918,576) Adjustments to reconcile net income (loss) to net cash used in operating activities: Income from discontinued operations (8,199,199) (3,351,486) (1,939,109) Non-cash expenses of asset disposal 432,500 -- -- Write-off of leasehold improvements 137,211 -- -- Write-down of inventory 1,106,399 -- -- Depreciation and amortization 1,111,655 1,534,034 946,000 Write-off of impaired goodwill -- -- 3,582,068 Bad debt expense -- 337,353 -- Debt extinguishment loss -- 1,168,080 -- Writeoff of debt discount -- -- 2,139,000 Minority interest -- (191,560) (437,127) Non-cash gain on settlement -- -- (22,272) Expenses paid with issuances of stock or warrants -- 99,000 -- Changes in assets and liabilities: Decrease in restricted cash -- -- 100,000 Decrease in accounts receivable 33,348 58,950 714,937 Decrease in prepaid expenses and deposits 56,104 34,600 99,105 (Increase) in inventories (68,707) (456,472) (597,066) (Increase) in patents and other assets (15,821) (66,975) (555,925) (Decrease) in accounts payable (1,584,427) (1,241,309) (239,918) Increase (Decrease) in other current liabilities 321,237 (165,825) 776,530 ------------ ------------ ------------ CASH USED IN OPERATING ACTIVITIES (5,273,322) (10,417,959) (12,352,353) ------------ ------------ ------------ INVESTING ACTIVITIES: Purchase of fixed assets (23,999) (157,132) (1,208,130) Purchase of Oncometrics stock -- (342,500) (6,000,000) Increase in note receivable (400,000) -- -- Proceeds from sale of Microbiology division 15,150,000 -- -- Expenses related to sale of Microbiology division (750,000) Purchased technology -- -- (82,342) ------------ ------------ ------------ CASH PROVIDED BY (USED IN) INVESTMENT ACTIVITIES 13,976,001 (499,632) (7,290,472) ------------ ------------ ------------ FINANCING ACTIVITIES: Proceeds from issuances of common stock, net -- 4,852,394 743,064 Deferred financing costs -- (849,124) Notes receivable collected -- -- 50,074 Payment of notes payable and capital lease obligation (8,497,551) (909,305) (6,273,758) Proceeds from issuance of notes payable -- 1,000,000 13,000,000 Proceeds from bridge loan -- -- 6,000,000 ------------ ------------ ------------ CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (8,497,551) 4,943,089 12,670,256 ------------ ------------ ------------ CASH TRANSFER (TO) FROM DISCONTINUED OPERATIONS (209,945) 5,872,486 4,670,652 ------------ ------------ ------------ EFFECT OF EXCHANGE RATES ON CASH (12,266) (16,581) (10,000) ------------ ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (17,083) (118,597) (2,311,917) ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 213,386 331,983 2,643,900 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 196,303 $ 213,386 $ 331,983 ============ ============ ============
See accompanying notes to consolidated financial statements. F-6 53 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AccuMed International, Inc. and subsidiary ("the Company") engage in the development and assembling of cost effective screening instruments and systems for clinical diagnostic laboratories, hospitals and others. These activities are conducted primarily in the United States and Canada. The Company markets its products primarily to the Cytopathology laboratory market. Cytopathology systems are made up of multiple instruments networked via proprietary software that support the review and analysis of Pap smears and other microscope slide-based cellular preparations. Substantially all of the Company's assets are located in the United States. Basis of Presentation On December 22, 1998, (the measurement date), the company received shareholder approval to sell its microbiology division under a sales agreement negotiated by management under the approval of the board of directors. On January 29, 1999, AccuMed closed the sale of the microbiology division for proceeds of $15,150,000. The Company recognized a gain of $8,357,000, net of income taxes of $140,000 and after working capital adjustments, on the disposal of the microbiology division. Accordingly, the microbiology division is accounted for as a discontinued operation in the accompanying consolidated balance sheets, statements of operations and statements of cash flows. Reverse Stock Split On May 19, 1998, the stockholders approved a reverse one-for-six stock split, which was effected by the Board of Directors as of May 21, 1998. The reverse split covered all outstanding common shares and all agreements concerning stock options, warrants, convertible notes and other commitments payable in shares of the Company's common stock. All references to per-share information in the accompanying financial statements and notes to the consolidated financial statements have been adjusted to reflect the reverse split on a retroactive basis. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of AccuMed International, Inc. and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition Product revenue is recognized when products have been shipped and the customer has made final acceptance. Cash and Cash Equivalents Cash and cash equivalents include cash held by financial institutions and money market fund investments with original maturities of three months or less. Inventories Inventories consist primarily of raw materials and finished product and are stated at the lower of cost (average cost) or market. Cost is determined by the first-in first-out method (FIFO). In the fourth quarter of 1999, AccuMed reduced the carrying value of inventories by $1,106,399 based on management's estimate of the recoverability of the inventories. F-7 54 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Available-for-Sale Security The available-for-sale security is reported at fair market value. Unrealized gains and losses on the available-for-sale security are excluded from earnings and reported as a separate component of stockholders' equity until realized. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation of plant and equipment is provided using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is provided on the straight-line method over the shorter of the estimated useful life of the improvement or the term of the lease. Expenditures for repairs and maintenance are charged to operations when incurred. Purchased Technology Purchased technology consists principally of values assigned to acquired proprietary technology. Such amounts are being amortized on a straight-line basis over the expected periods to be benefited, generally 10 years. The Company assesses the recoverability of such assets by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows of the related acquired businesses using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of these various assets will be impacted if the estimated future operating cash flows are not achieved. Patents The cost of patents is amortized straight line over the estimated useful lives of the patent, generally 17 years. Research and Development Costs Research and development costs are charged to operations as incurred. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the difference between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Warranty Estimated future warranty obligations related to certain products are provided by charges to operations in the period in which the related revenue is recognized. F-8 55 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses to prepare these financial statements in conformity with generally accepted accounting principles. Estimates are used when accounting for the allowance for uncollectable accounts receivable, inventory valuation, depreciation, warranty costs, income taxes and contingencies, among others. Actual results could be materially different from those estimates. Valuation of Options and Warrants Issued The Company utilizes the Black-Scholes pricing model to determine the fair value of warrants and options issued in exchange for goods or services. During 1999, 1998 and 1997, the Company incorporated the following assumptions into the model: risk free rate - ranging from 5% to 7%, expected volatility - 143% in 1999, 30% in 1998 and 20% in 1997, and expected dividends of zero. The risk-free rate is determined based on the interest rate of U.S. Government treasury obligations with a maturity date comparable to the life of the option or warrant issued. Other assumptions, relating to option life, strike price and stock price, are determined at the date the option or warrant is issued. Non-monetary Transactions Non-monetary transactions are recorded based on the fair values of the assets or services involved. Fair values are determined based on the assets exchanged or received, whichever is more clearly evident. General Information Regarding Reportable Segments of an Enterprise Effective December 31, 1997, the Company adopted SFAS No. 131 regarding disclosures about segments of an enterprise and related information. Refer to Note 1 for a description of the types of products from which the Company derives its revenues. Subsequent to the sale of the Company's microbiology division on January 29, 1999, the Company's products are marketed solely to the Cytopathology laboratory market. 3. ACCOUNTS RECEIVABLE Accounts receivable are carried at estimated net realizable value. At December 31, 1999 and 1998, the Company had provided no allowances to write the carrying value of accounts receivable to estimated net realizable value. Bad debt expense was zero for each of the years ended December 31, 1999, 1998 and 1997, respectively. 4. NOTE RECEIVABLE On November 16, 1999, the Company entered into a merger agreement with Microsulis Corporation ("Microsulis"), which was subsequently terminated on February 28, 2000. Under the terms of the merger agreement, the Company agreed to provide a secured line of credit of $650,000 to Microsulis. The line of credit bears interest at 10% per annum, payable semi-annually, matures on April 18, 2000, and is secured by certain assets of Microsulis. At December 31, 1999, the Company had advanced $400,000 under the line of credit to Microsulis. F-9 56 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. AVAILABLE-FOR-SALE SECURITY On December 4, 1998, the Company received 85,776 common shares of Bell National Corporation, ("Bell), a public shell corporation, and warrants to purchase an additional 63,517 common shares of Bell at a price of $0.001 per share in exchange for its 2,000 membership units of InPath, L.L.C., a privately held company. No value was assigned to the Bell shares received because the underlying market value of Bell at the date of the transaction was deminimus. During 1999, the Company exercised all of the warrants. On May 26, 1999, Bell was merged into its wholly owned subsidiary, Ampersand Medical Corporation, ("Ampersand"). As a result of this merger, the Company's shares of Bell were exchanged for an equal number of shares of Ampersand. At December 31, 1999, the Company held 149,293 shares of Ampersand with a market value of $121,301. In February 2000, the Company sold 85,776 shares in the open market for proceeds of $334,844. In the first quarter of 2000, the Company recorded a realized gain on the sale of these shares of $334,844. 6. INVENTORIES Inventories include the following at December 31:
1999 1998 ---------- ---------- Raw material and packaging supplies $ 529,919 $ 907,038 Work in process -- -- Finished goods 171,000 831,573 ---------- ---------- Total $ 700,919 $1,738,611 ========== ==========
7. FIXED ASSETS Fixed assets includes the following at December 31:
Estimated Useful Life 1999 1998 ------------ ----------- ----------- Equipment 3 - 5 Years $ 1,876,344 $ 2,383,839 Leasehold improvements 5 - 13 Years 140,290 713,322 ----------- ----------- 2,016,634 3,097,161 Less accumulated depreciation and amortization (1,311,361) (1,608,352) ----------- ----------- Total $ 705,273 $ 1,488,809 =========== ===========
Maintenance and repair expenses for the years ended December 31, 1999, 1998 and 1997 were $14,663, $55,942 and $51,854, respectively. There were no material construction commitments outstanding as of December 31, 1999. F-10 57 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. OTHER CURRENT LIABILITIES Other current liabilities consist of the following at December 31:
1999 1998 -------- -------- Litigation reserves $485,000 $ -- Warranty reserve -- 12,000 Accrued rent 103,247 158,000 Payroll and related 136,787 50,000 Other 25,149 70,292 -------- -------- Total $750,183 $290,292 ======== ========
9. LONG-TERM DEBT Long-term debt at December 31, 1999 and 1998, respectively, consists of the following:
1999 1998 ---------- ---------- 14.5% secured note payable, net of unamortized discount of $109,800 in 1998 $ -- $3,266,700 12% unsecured convertible notes due March 13, 2000, net of unamortized discount of $84,000 in 1998 -- 3,141,000 Floating rate convertible note payable 342,550 342,550 Non-interest bearing repayable contribution 187,000 187,000 ---------- ---------- Total long-term debt 529,550 6,937,250 Less current installments 362,550 1,155,400 ---------- ---------- Long-term debt, excluding current installments $ 167,000 $5,781,850 ========== ==========
In 1998, $5,275,000 in principal amount of the 12% unsecured convertible notes was exchanged for Series A convertible preferred stock. See Note 18 Debt Extinguishment. On February 2, 1999, the Company repaid in full the remaining portion of principal of $3,225,000, plus accrued interest, of the 12% unsecured convertible notes with proceeds from the sale of its microbiology division. The 14.5% secured note payable was repaid on January 29, 1999 for $3,900,000, including prepayment penalties, with proceeds from the sale of the Company's microbiology division. The floating rate convertible note has a face amount of $500,000 Canadian dollars and was originally due on December 29, 1999. In 2000, the note was amended to provide for monthly principal installments of $36,000 Canadian dollars, plus interest, beginning March 15, 2000 through July 15, 2000. The remaining portion of the note is due on demand. The demand portion of the note is convertible, in whole or in part, into common stock of the Company at a price of $1.43 per share. Interest on the note is at 6% over the Canadian prime rate (7% at December 31, 1999). The repayable contribution was received under a foreign government program and calls for semi-annual installments based on future sales of product and net working capital. F-11 58 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1999 are as follows: 2000 $ 362,550 2001 167,000 2002 -- 2003 -- 2004 -- Thereafter --
10. STOCKHOLDERS' EQUITY On February 23, 1998, the Company exchanged $5,275,000 in principal amount of its 12% convertible promissory notes plus accrued interest thereon of $329,030 for 1,245,338 shares of Series A convertible 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 registered the resale of the shares of common stock underlying the preferred stock and warrants with the Securities and Exchange Commission during 1998. See Note 18 Debt Extinguishment. During March 1998, the Company completed 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. The Company has registered the resale of the outstanding common stock and the common stock underlying the Warrants with the Securities and Exchange Commission. During 1999 and 1998, 17,718 shares and 283,236 shares, respectively, of Series A convertible preferred stock were converted into 11,813 shares and 188,824 shares, respectively, of common stock. F-12 59 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Warrants At December 31, 1999, the Company had outstanding warrants to purchase shares of common stock at any time through the expiration date as follows:
Shares Price Expiration Date ------ ----- --------------- 4,213 30.00 April, 2000 41,639 3.78 May, 2000 49,040 3.78 August, 2000 20,266 4.92 August, 2000 20,266 9.84 August, 2000 20,266 14.82 August, 2000 10,583 1.50 September, 2000 12,500 6.78 December, 2000 119,834 7.50 December, 2000 16,667 7.50 January, 2001 16,667 12.78 March, 2001 33,334 6.78 March, 2002 8,334 15.00 September, 2002 40,964 15.60 September, 2002 16,667 4.50 February, 2003 207,557 6.75 February, 2003 58,334 6.75 February, 2005 1,503,483 4.50 March, 2005
Stock Option Plan The Company has the following stock option plans for its employees, directors and consultants: the 1990 plan, the 1992 plan, the 1995 plan and the 1997 plan. Terms of the plans are summarized as follows: Exercise Price - For the 1990 Plan, fair market value determined by the Board of Directors and not less than 110% of the determined fair market value in certain instances. For the 1992, 1995 and 1997 plans, fair market value as determined by the closing price of the common stock on the date of issuance as reported by NASDAQ. Vesting Period - A portion of the options granted to certain participants vest immediately with the remaining options vesting on varying schedules not exceeding six years from date of grant. Options granted to others vest on varying schedules not exceeding six years from date of grant. Shares Available - At December 31, 1999 there were 120,098 additional shares available for grant under the Plans. The maximum number of shares that may be issued under the plans is 510,117 at December 31, 1999. F-13 60 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company applies APB Opinion No. 25 and related interpretations in accounting for its Stock Option Plans for employees. Accordingly, no compensation cost has been recorded. Had compensation cost for the Company's Stock Option Plans been determined consistent with FASB Statement No. 123, the Company's net income (loss) and net income (loss) per share would have been as indicated below.
Year Ended December 31, ---------------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Net income (loss), as reported $ 1,396,378 $ (8,176,349) $ (16,918,576) Net income (loss), pro forma $ 715,784 $ (10,476,223) $ (17,906,072) Net income (loss) per share, as reported $ 0.25 $ (1.61) $ (4.60) Net income (loss) per share, pro forma $ 0.13 $ (2.06) $ (4.87)
Pro forma net income (loss) and net income (loss) per share reflect only options granted since December 31, 1994. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation cost is reflected over the options' vesting period of up to 10 years and compensation cost for options granted prior to January 1, 1995 is not considered. The compensation cost of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996.
Year Ended December 31, -------------------------- 1999 1998 1997 ---- ---- ---- Dividend yield 0% 0% 0% Volatility 143% 30% 20% Risk free interest rate 5.23% 7.00% 7.00% Expected life in years 5 10 10
F-14 61 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock option activity during the periods indicated was as follows:
Weighted Number of Average Exercise Options Price --------- ---------------- Balance at December 31, 1996 289,172 $ 18.90 Granted 269,400 $ 23.64 Exercised (60,310) $ 6.78 Forfeited (82,010) $ 34.20 Expired -- -- -------- Balance at December 31, 1997 416,252 $ 20.70 Granted 370,004 $ 4.87 Exercised (8,250) $ 7.00 Forfeited (277,852) $ 18.23 Expired -- -- -------- Balance at December 31, 1998 500,154 $ 10.60 Granted 307,670 $ 1.20 Exercised -- -- Forfeited (114,925) $ 19.10 Expired (792) $ 8.34 -------- Balance at December 31, 1999 692,107 $ 4.98 ========
The fair value of options granted in 1999, 1998 and 1997 was $1.09, $2.72 and $15.36 per share, respectively. The following table summarizes information about stock options outstanding as of December 31, 1998:
Options outstanding Options exercisable --------------------------------------------- --------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise exercise prices Outstanding Life Price Exercisable Price --------------- ----------- ----------- --------- ----------- -------- $1.00 to $1.31 292,670 9.19 $ 1.21 66,670 $ 1.23 $3.78 to $4.50 272,745 8.03 4.45 189,412 4.43 $6.00 to $8.64 52,919 7.08 6.07 36,252 6.11 $10.50 19,890 1.08 10.50 19,890 10.50 $22.50 to $23.64 49,215 5.17 23.45 45,603 23.43 $37.50 to $50.28 4,668 1.57 41.15 4,668 41.15 -------- -------- $1.00 to $50.28 692,107 8.00 4.98 362,495 7.21 ======== ========
F-15 62 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES The Company's income tax provision for the years ended December 31, 1999, 1998 and 1997 was allocated as follows:
1999 1998 1997 ------------------------------------ Income from continuing operations $ -- $ -- $ -- Discontinued operations 140,000 -- -- Extraordinary item -- -- -- ------------------------------------ $140,000 $ -- $ -- ====================================
A reconciliation of the significant differences between the Company effective tax rate applicable to income from continuing operations and the federal statutory tax rate for the years ended December 31, 1999, 1998, and 1997 is as follows:
1999 1998 1997 ------ ------ ------ Federal statutory income tax rate (34.0)% (34.0)% (34.0)% State taxes, net of federal (6.0) (6.0) (6.0) benefit Increase in valuation allowance 40.0 40.0 40.0 ---------------------------------- Effective income tax rate 0.0% 0.0% 0.0% ==================================
The net deferred tax assets and liabilities consist of the following at December 31:
1999 1998 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 12,972,000 $ 15,037,000 Research and development credits 595,000 527,000 Other 1,763,000 1,088,000 ------------ ------------ Total 15,330,000 16,652,000 Valuation allowance (15,330,000) (16,652,000) ------------ ------------ Net deferred tax assets and liabilities $ -- $ -- ============ ============
At December 31, 1999, the Company had approximately $32,429,000 and $10,718,000 in net operating losses for federal and state tax purposes, respectively, available to be carried forward to future periods. The carry forwards expire from 2005 to 2018 for federal purposes and from 2012 to 2018 for state purposes. The Company's credits for research and development available to offset future federal income taxes expire from 2002 to 2013. The Company has recorded a valuation allowance equal to the deferred tax assets based on its continuing operating losses. The valuation allowance was decreased by $1,322,000 in 1999 and increased by $3,376,000 in 1998. During the last three years, the Company has had more than a 50% change in ownership. Section 382 of the Internal Revenue Code and comparable state statutes impose certain annual limitations on the utilization of net operating loss carry forwards and research and development credits that can be used to offset income in future periods. F-16 63 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. LEASES Operating Leases The Company leases its facilities under operating type leases expiring through 2004. Rental expense is recognized on a straight-line basis over the life of the lease. As a result of the Company's consolidation of certain of its facilities and re-negotiation of its leasing arrangements in February 2000, the Company recorded an expense in 1999 for the write-off of $137,211 in net book value of impaired leasehold improvements. At December 31, 1999, other current liabilities include an accrual of $103,247 for rent concessions negotiated as part of the new leasing arrangements. Total rental expense under operating type leases during the years ended December 31, 1999, 1998 and 1997 was $531,000, $379,000 and $394,000, respectively. Future minimum annual lease payments under operating leases as of December 31, 1999 are:
Year Amount ---- -------- 2000 $238,000 2001 $154,000 2002 $152,000 2003 $160,000 2004 $124,000 Thereafter $ --
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Non-cash investing and financing activities: During the year ended December 31, 1999, 17,718 shares of Series A convertible preferred stock were converted into 11,813 shares of common stock. During the year ended December 31, 1998, the Company extinguished debt with a carrying value of $4,818,800 through the issuance of convertible preferred stock and common stock 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. During 1998, 283,236 shares of Series A convertible preferred stock were converted into 188,824 shares of common stock. The Company issued a note in 1998 for $342,550 in connection with the purchase of a one-third interest in Oncometrics Imaging Corp. stock it did not already own. F-17 64 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the year ended December 31, 1997, the Company issued common stock and warrants for the payment of interest, fees, consideration for the merger (see Note 15) and patents. The value of common stock and warrants issued was $2,101,000, $77,500, $3,582,000 and $206,000, respectively. The Company received common stock as compensation for a litigation settlement, valued at $22,272 and recorded as treasury stock in the accompanying consolidated balance sheet.
Year Ended December 31, ------------------------------------------ Cash paid during the year for: 1999 1998 1997 ---------- ---------- ---------- Operating Activities Interest $ 292,008 $1,336,566 $ 821,719 Income taxes $ 105,000 -- -- Investing and Financing Activities Deposit reclassified to fixed assets -- $ 125,000 --
14. COMMITMENTS AND CONTINGENCIES The company is involved in legal proceedings with certain vendors regarding disputes over delivery of good and services. The Company has recorded an estimated accrual of $485,000 relating to the probable settlement of these legal proceedings. See Note 8, Other Current Liabilities. 15. MERGER AND RELATED TRANSACTIONS On December 29, 1995, the Company acquired all of the common stock of AccuMed, Inc. and its wholly owned subsidiary. Pursuant to the terms of the merger agreement, 313,650 shares of common stock and 21,158 warrants were issued to AccuMed, Inc. stockholders and warrantholders respectively, which were contingent and subject to forfeiture if specified performance goals were not achieved by the merged entity during the 24 months beginning January 1, 1996. The contingency associated with 156,825 shares of common stock and 10,579 warrants was resolved (performance goal achieved) in March 1996 resulting in contingent consideration of approximately $5,430,000. Such amount has been allocated to acquired proprietary technology ($1,930,000) and in-process research and development ($3,500,000). The acquired proprietary technology is being amortized over the expected period to be benefited of ten years, with the in-process research and development charged to operations during 1996. The contingency associated with the remaining 156,825 shares of common stock and 10,579 warrants was resolved (performance goal achieved) in March 1997 resulting in contingent consideration of approximately $3,582,000. Such amount has been recorded as goodwill associated with the merger and charged off in its entirety to operations during 1997 as an impaired asset. The acquisition of AccuMed, Inc. was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the tangible assets has been allocated to identifiable intangibles of acquired proprietary technology ($2,645,000) and in-process research and development ($3,965,000). The acquired proprietary technology is being amortized over the expected period to be benefited, which is estimated to be 10 years with the in-process research and development charged to operations at the date of acquisition. On October 15, 1996, the Company acquired a two-thirds interest in Oncometrics Imaging Corp. ("Oncometrics") for a total purchase price of $4,000,000, which included $2,000,000 to be used solely as working capital for Oncometrics. 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 $342,500 in cash and $342,500 ($500,000 in Canadian dollars) in a convertible note in exchange for the stock and a loan payoff to the seller of $154,000. The note is F-18 65 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) convertible, in whole or in part, into common stock of the Company at a price of $1.43 per share. See Note 9 Long-Term Debt. These acquisitions have been accounted for using the purchase method of accounting, and accordingly the purchase prices have been allocated to assets purchased and liabilities assumed based on the fair values at the dates of acquisition. The excess purchase price consists of $1,645,200 of acquired in-process research and development and $1,796,000 of purchased technology. The Company's share of Oncometrics' operations from the dates of acquisition have been recorded in the consolidated statements of operations. 16. RELATED-PARTY TRANSACTIONS On February 2, 1998 a director/stockholder loaned the Company $1,000,000 at 12% annual interest plus 16,667 5-year warrants to purchase common stock of the Company at an exercise price of $9.36 per share. The loan was converted into common stock under the terms of the private placement of common stock in March 1998 and the exercise price of the warrants were repriced to $4.50 per share. In March 1997, the Company received a $6,000,000 bridge loan from a director/shareholder of the Company. The loan was repaid 10 days later, together with interest and a prepayment premium of $130,000. The Company used the proceeds from this loan to purchase the ESP Product Line of its discontinued microbiology division. In September 1997, the Company received a $500,000 bridge loan from a director/shareholder of the Company. The loan was repaid 30 days later, together with interest and a prepayment premium of $10,000 and 8,334 5-year warrants to purchase common stock of the Company at an exercise price of $15.00 per share. The warrants were valued at $39,500 and recorded as interest expense in 1997. 17. DEBT EXTINGUISHMENT In 1998, the Company incurred an extraordinary loss of $1,168,080 related to the exchange of $5,275,000 in principal amount of its 12% convertible notes into Series A convertible preferred stock. This loss included stock, warrants and fees paid to the placement agent, warrants issued as an inducement to the converting noteholders, 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 - 30%, 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 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. F-19 66 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUBSEQUENT EVENTS On March 24, 2000, the Company entered into a license and development agreement with Ventana Medical Systems, Inc. ("Ventana"), whereby the Company agreed to license its patents and proprietary information and rights to Ventana for certain medical applications. Under the terms of the agreement, the Company has received an up-front licensing fee, advance royalty payment, and development funds. Additional funds will be received over the next twelve months for contract research, purchase of AcCell Systems, and royalties to be received in the future on the sale of covered products by Ventana. On March 29, 2000, the Company entered into patent and technology license agreement with BCAM International, Inc. ("BCAM"), whereby the Company agreed to license its patents and proprietary information and rights to BCAM for certain medical applications. Under the terms of the agreement, the Company will receive guaranteed license fees over the next nine months, shares of BCAM common stock, and royalties to be received in the future on the sale of covered products by BCAM. F-20 67 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders AccuMed International, Inc.: Under date of March 29, 2000 we reported on the consolidated balance sheet of AccuMed International, Inc. and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999, as contained in the annual report on Form 10-K for the year 1999. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule included in the annual report on Form 10-K for the year 1999. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Chicago, IL March 29, 2000 F-21 68 ACCUMED INTERNATIONAL, INC AND SUBSIDIARIES SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS
Reserves and Allowances deducted from asset accounts Additions Balance at Charged to Write-offs Balance Beginning Costs and and Other at End of Description of Period Expenses Disposals Changes Period - ----------------- ----------- ----------- ----------- ----------- ----------- Allowance for uncollectible accounts receivable Year Ended December 31, 1997 -- -- -- -- -- Year Ended December 31, 1998 -- $ 245,592 -- -- $ 245,592 Year ended December 31, 1999 $ 245,592 -- ($ 245,593) -- -- Inventory Valuation Reserve Year ended December 31, 1997 -- -- -- -- -- Year ended December 31, 1998 -- -- -- -- -- Year ended December 31, 1999 -- $ 1,106,399 -- -- $ 1,106,399
Reserve Allowances which support balance sheet caption reserves Deductions Balance at Credited to Payments Balance Beginning Costs and Under Other at End of Description of Period Expenses Warranty Changes Period - ----------------- ----------- ----------- ----------- ----------- ----------- Warranty Reserves Year ended December 31, 1997 $ 30,000 -- -- -- $ 30,000 Year ended December 31, 1998 $ 30,000 -- -- ($ 18,000)(a) $ 12,000 Year Ended December 31, 1999 $ 12,000 ($ 12,000) -- -- --
(a) Reserves of Oncometrics Imaging Corp. reclassified in current year EX-10.28 2 EXHIBIT 10.28 1 EXHIBIT 10.28 AMENDMENT TO FLOATING RATE CONVERTIBLE PROMISSORY NOTE Amendment dated March 15, 2000 (this "Amendment") to the Floating Rate Convertible Promissory Note made June 26, 1998 (the "Promissory Note"), in the original principal amount of CND$500,000, between AccuMed International, Inc. ("AccuMed") and Xillix Technologies Corp. (the "Payee"). All capitalized terms not otherwise defined herein shall have the same meaning as assigned in the Promissory Note. Whereas, the parties have previously extended the Maturity Date under the Promissory Note until February 25, 2000; and the parties currently desire to amend the terms for payment and interest under the Promissory Note. Now, therefore, based upon the mutual covenants and promises set forth below, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows. 1. Payment Schedule for Approximately One-third of Principal Balance. (a) On March 15, 2000, AccuMed paid to the Payee US$27,344.26 allocated as (i) US$25,000 in repayment of principal, and (ii) US$2,344.26 in payment of accrued interest. (b) On each of April 14, 2000, May 15, 2000, June 15, 2000, and July 14, 2000, AccuMed will pay the Payee US$25,000 in principal, plus the interest accrued on the entire principal balance outstanding since the most recent prior payment. (c) On the 15th of each month (or if the 15th is not a banking day, then on the immediately preceding banking day), commencing on August 15, 2000, AccuMed will make a minimum payment of US$25,000 in principal plus interest accrued on the entire principal balance outstanding since the most recent prior payment until such time as the principal and interest have been converted into AccuMed common stock or repaid in full. 2. Payment or Conversion of Approximately Two-thirds of Principal Amount. The balance of the principal amount not provided to be repaid pursuant to Sections 1(a) and 1(b), together with accrued and unpaid interest thereon, shall be due and payable on demand of the Payee. At the Payee's election, such principal amount and accrued interest may be converted into AccuMed common stock at the rate of US$1.43 per share pursuant to the terms of the Promissory Note. 3. Interest Rate. Beginning on March 16, 2000, interest on the unpaid principal balance shall accrue at a rate of the Prime Rate plus 6%. 4. Registration Statement. AccuMed will use its best efforts to cause the Registration Statement on Form S-3 (file no. 333-90637) to be declared effective by the Securities and 1 2 Exchange Commission following filing by AccuMed of its Annual Report on Form 10-K for the year ended December 31, 1999. 5. Other Terms in Effect. All other terms and conditions of the Promissory Note shall remain in full force and effect. 6. Counterparts. This Amendment may be executed in one or two counterparts, each of which shall be deemed an original and together shall constitute one and the same Amendment. The parties have caused this Amendment to be duly executed as of the date first above written. ACCUMED INTERNATIONAL, INC. XILLIX TECHNOLOGIES CORP. By: /s/ PAUL F. LAVALLEE By: /s/ PIERRE LEDUC -------------------- ---------------- Paul F. Lavallee Pierre Leduc Chairman and Chief Executive Officer President and Chief Executive Officer 2 EX-10.29 3 EXHIBIT 10.29 1 Exhibit 10.29 PATENT AND TECHNOLOGY LICENSE AND REGISTRATION RIGHTS AGREEMENT This PATENT AND TECHNOLOGY LICENSE AND REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of March 29, 2000 by and between AccuMed International, Inc., a Delaware corporation ("AccuMed"), and BCAM International, Inc., a New York corporation ("Licensee"). NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which is hereby acknowledged, AccuMed and Licensee hereby agree as follows: SECTION 1 DEFINITIONS The following capitalized terms used in this Agreement shall have the respective meanings ascribed to them below in this Section unless otherwise expressly defined in this Agreement (such definitions shall be equally applicable to both the singular and plural forms of the defined terms). The words "hereof," "herein" and "hereunder" and words of like import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section references are to this Agreement unless otherwise specified. "AccuMed Improvement" means any redesign, enhancement, or modification, of the Licensed Products, whether or not patentable, developed by AccuMed or any third party on AccuMed's behalf. "Affiliate" means, with respect to a specified Person, (a) any Person that directly or indirectly controls, is directly or indirectly controlled by, or is directly or indirectly under common control with such specified Person. "Cash/Stock Payment" has the meaning set forth in Section 3.3. "Claim" means a patent claim made in a pending patent application or in an issued patent. "Copyrighted Work" means AccuMed's copyrighted works which relate to the Patent Rights or Technology and which are delivered to and accepted by Licensee pursuant to Section 2.7. "Field" means the field of morphological, cytochemical, cytogenetic, and 2 quantitative sputum cytology, including without limitation DNA, malignancy-associated changes, and any other genetic or molecular diagnostic analyses for early lung cancer detection, screening, diagnosis, prognosis and therapeutic monitoring. "Field Exclusivity" means that the Field is exclusive to Licensee. "Foreign Patents" means, collectively, the letters patent, if any, covering Claims of the U. S. Patents which are applied for by AccuMed or issued to AccuMed in a country other than the United States as listed on Schedule 2 (as amended from time to time to include all future AccuMed patents related to the Field), subject to the provisions of Section 5.1 governing the prosecution thereof. "Guaranteed Cash License Fee" has the meaning set forth in Section 3.1. "Licensed Product" means any device, apparatus, instrument, equipment, consumables, data, system, or component thereof, or method or process or embodiments thereof which are covered by the Claims of the Patents or the subject matter of the Technology, including without limitation AcCell, TracCell, MACcell, AcCell-Savant, AccuTech, BioSight, Cognetics (certain of the preceding product names are trademarks of AccuMed), DNA stains and kits, and related supplies (e.g. calibration slides). "Licensee Improvement" means any redesign, enhancement, or modification, of the Licensed Products, whether or not patentable, developed by Licensee or any third party on Licensee's behalf. "Non-Cancellation Period" has the meaning set forth in Section 9.3. "Patents" means, collectively, the U. S. Patents and the Foreign Patents. "Person" means any individual, sole proprietorship, partnership, limited liability partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, governmental authority, or any other entity. "Proprietary Information" has the meaning set forth in Section 6.1. "Required Royalty" has the meaning set forth in Section 3.2. "Sales" means the gross amount of all sales, revenues, receipts, cash, monies, fees, other amounts invoiced or collected by Licensee (whether on its own or through its distributors or agents) in any currency or denominations (whether in cash or by way of other benefit, advantage, or concession (in which case the applicable revenue will be the monetary equivalent or value of same)) from the manufacture, use, sale, offer to sell, rental, lease or other transfer of any Licensed Product, including without limitation on a per click, per test, per assay, per slide or per use basis. "Stock Payment" has the meaning set forth in Section 3.4. 2 3 "Technology" means product designs, models, prototypes, schematics, copyrighted works, know-how, technical information, and trade secrets (including, without limitation, ideas, formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), manufacturing and production processes and techniques, research and development information, drawings, blue prints, specifications, designs, bills of material, computer software, and documentation), and embodiments thereof (in whatever form or medium) of AccuMed (whether currently existing or developed by AccuMed during the term of this Agreement) which directly relate to the Field, and to, more generally, computer-aided microscopy, quantitative microscopy systems, and automated cytometry and histomery systems.. "Termination Default" has the meaning set forth in Section 8.1. "Territory" means the United States and any other country throughout the world. "U. S. Patents" means (i) Patents and the Applications for Letters Patent listed on Schedule 2 (as amended from time to time to include all future AccuMed patents related to the Field), (ii) the continuations, continuations-in-part or divisions thereof, (iii) the letters patent issuing therefrom by the United States Patent and Trademark Office, and (iv) the extensions, renewals or reissues of such letters patent. SECTION 2 LICENSE OF PATENTS AND TECHNOLOGY 2.1 GRANT OF LICENSE IN PATENTS. AccuMed hereby grants to Licensee, and Licensee accepts from AccuMed, a non-transferable, non-divisible license to make, have made, use, offer to sell, and sell Licensed Products covered by the Claims of the Patents (whether now existing or developed in the future by AccuMed) throughout the Territory on the terms and provisions hereof; the license is exclusive as to the Field. 2.2 GRANT OF LICENSE IN TECHNOLOGY. AccuMed hereby grants to Licensee, and Licensee accepts from AccuMed, an exclusive, non-transferable, non-divisible license to make, have made, use, offer to sell, and sell Licensed Products covered by the subject matter of the Technology (whether now existing or developed in the future by AccuMed) throughout the Territory on the terms and provisions hereof; the license is exclusive as to the Field. 2.3 GRANT OF LICENSE IN COPYRIGHTS. AccuMed hereby grants to Licensee, and Licensee accepts from AccuMed, an exclusive, nontransferable, non-divisible license to use and copy the Copyrighted Works in the Field on the terms and provisions hereof. 2.4 SCOPE OF GRANT. (a) The licenses in the Patents, the Technology, and the Copyrighted Works granted hereunder are not transferable (except as expressly permitted by Section 11.8) and no right to sublicense is extended by this Agreement. Licensee acknowledges that no license or right is hereby granted by implication, estoppel, or otherwise, under any patent or patent right, know-how, or trade secret not expressly identified in this Agreement. Licensee 3 4 shall not make, have made, use, offer to sell, sell, or otherwise commercially exploit any Licensed Products outside the scope of the licenses granted hereunder. (b) AccuMed reserves all rights not expressly granted herein. The license in the Copyrighted Works granted hereunder shall be coincident and coterminous with the licenses in the Patents and the Technology hereunder. Without limiting the foregoing, the licenses granted hereunder shall not be interpreted to limit or derogate AccuMed's right or ability to make, have made, use, offer to sell, sell, license or to otherwise commercially exploit for its own benefit the Patents, the Technology, and the Copyrighted Works in any manner in connection with any products, systems, or processes or licenses outside of the Field Exclusivity. 2.5 IMPROVEMENTS. Licensee Improvements will be owned by Licensee. AccuMed Improvements will be owned by AccuMed. Licensee hereby grants to AccuMed a non-exclusive license to use Licensee Improvements outside the Field Exclusivity, solely to the extent Licensee shall have rights therein and coterminous with the licenses granted to Licensee hereunder. AccuMed Improvements shall be covered by the license grants under this Agreement solely to the extent AccuMed shall have rights therein. Each party shall keep the other party fully apprised of any improvements it may develop for the Licensed Product and shall give the other party prompt written notice of any of the same, which shall be given, in any event, not later than ten (10) business days after such party becomes aware of the same. 2.6 DUTY TO MARKET. Licensee hereby covenants and agrees that during the term of this Agreement it will use its best efforts to design, develop, manufacture, sell, market, and support the Licensed Products as they are deemed by Licensee to be useful in Licensee's business development within the Field. 2.7 DUTY TO DELIVER DOCUMENTATION. AccuMed shall at its sole cost and expense, within forty-five (45) days after execution of this Agreement by Licensee, deliver to Licensee a tangible and/or electronic copy of all of AccuMed's documentation of the Patents and the Technology. SECTION 3 LICENSE FEES, ROYALTIES, RECORDS, AND REPORTS 3.1 GUARANTEED CASH LICENSE FEE. Licensee shall pay AccuMed a Guaranteed Cash License Fee equal to [***] (the "Guaranteed Cash License Fee"), of which [***] shall be paid by Licensee to AccuMed on the date hereof by wire transfer to the account of AccuMed designated in writing (and shall be a condition precedent to the effectiveness of the license grants hereunder) and the remainder of which shall be payable in accordance with the following payment schedule: - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 4 5 (i) [***] (ii) [***] (iii) [***] (iv) [***] (v) [***] (vi) [***] The payments referred to in (i) through (vi) above shall be made by wire transfer to the account of AccuMed designated in writing by AccuMed at least two business days prior to the payment due date. Licensee shall pay AccuMed a [***]% late fee on the amount of any late payment from the fifth day after the due date until the payment is made. The Guaranteed Cash License Fee shall be deemed to be a license issue fee and shall neither be (i) refundable nor (ii) (except as expressly provided in paragraph (b) of Section 5.1, in Section 5.2, and in Section 5.3) in any circumstance credited or recoupable against any of the Required Royalty payments due AccuMed under this Agreement. 3.2 REQUIRED ROYALTY; CREDIT FOR FIRST $[***]. For the rights and privileges granted to Licensee under this Agreement, Licensee (subject to paragraph (b) of Section 5.1, Section 5.2, and Section 5.3) shall pay to AccuMed from and after the date hereof until the licenses hereunder are terminated in accordance with this Agreement, a royalty rate equal to the percentage specified on Schedule 1 of all Sales of any Licensed Product (the "Required Royalty"). A product is considered subject to a Sale hereunder when payment is collected. Licensee shall make the Required Royalty payments quarterly on or prior to the tenth business day following the end of each quarter for which Required Royalties are owing. The first $[***] of Required Royalties shall be credited against the Cash/Stock Payment. Licensee's obligation to make quarterly payments of Required Royalties shall commence with the first quarter in which Required Royalties in excess of $[***] have been accrued. 3.3 CASH/STOCK PAYMENT. (a) As part of the consideration paid for the licenses granted herein, Licensee shall pay AccuMed either $[***] (the "Cash/Stock Payment") in cash or shares of Licensee's common stock ("Licensee Common Stock"). On the first anniversary of this Agreement, Licensee shall notify AccuMed whether it elects to make the Cash/Stock - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 5 6 Payment in cash or Licensee Common Stock. If Licensee elects to make such payment in cash, it shall pay the cash to AccuMed within ten business days following the first anniversary of this Agreement. (b) If Licensee elects to make such payment in Licensee Common Stock, Licensee shall deliver to AccuMed a certificate or certificates representing the Licensee Common Stock within ten business days following the date on which the Securities and Exchange Commission (the "SEC") declares effective the registration statement registering the resale of such shares by AccuMed, as provided in Section 10. Notwithstanding the foregoing, if the SEC has not so declared such registration statement effective on or prior to the ninetieth day following the first anniversary of this Agreement, Licensee shall make the Cash/Stock Payment to AccuMed in cash within ten business days following such ninetieth day. The number of shares of Licensee Common Stock delivered to AccuMed having a fair market value of $[***] shall be determined by reference to (i) the average closing bid price of the Licensee Common Stock, for twenty (20) consecutive trading days ending on the date on which the SEC declares the registration statement effective, as reported by Nasdaq, if the Licensee Common Stock is traded on the Nasdaq Bulletin Board or SmallCap Market, or (ii) the average last reported sales price of the Licensee Common Stock, for twenty (20) consecutive trading days ending on the date on which the SEC declares the registration statement effective, as reported by the primary exchange on which the Licensee Common Stock is traded, if the Licensee Common Stock is traded on a national securities exchange, or by Nasdaq, if the Licensee Common Stock is traded on the Nasdaq National Market. The Licensee Common Stock, if issued in payment of the Cash/Stock Payment, shall be fully paid and non-assessable, and shall be issued without violation of any preemptive rights. 3.4 STOCK PAYMENT. As part of the consideration paid for the licenses granted herein, Licensee shall issue to AccuMed a number of shares of Licensee Common Stock (the "Stock Payment") determined as follows. The number of shares shall equal to [***]% of the total number of shares of Licensee Common Stock and any other class of common stock of the Licensee outstanding on the first anniversary of this Agreement determined as follows. For purposes of this calculation shares outstanding: (i) except as provided in paragraph (ii) below, shall include all shares issuable upon exercise of warrants, conversion of convertible preferred stock, convertible notes and any other securities (other than employee and director stock options) outstanding on the first anniversary of this Agreement exercisable for or convertible into any class of common stock of Licensee; (ii) shall include all shares issued and outstanding on the date hereof and all shares issued and outstanding or issuable upon exercise or conversion of securities sold during the first year of this Agreement having aggregate gross proceeds of up to $[***]; and shall exclude any shares issued or issuable as a result - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 6 7 of sales of securities during the first year of this Agreement exceeding the $[***] referenced in the immediately preceding clause. Licensee shall deliver to AccuMed a certificate or certificates representing the Stock Payment within ten business days following the first anniversary of this Agreement. If AccuMed's board of directors declares a dividend of all or part of the Stock Payment to AccuMed's stockholders, Licensee shall reimburse AccuMed for all reasonable, documented expenses related to such dividend distribution. The Licensee Common Stock issued in payment of the Stock Payment shall be fully paid and non-assessable, and shall be issued without violation of any preemptive rights. 3.5 SCOPE OF ROYALTY. Sales subject to royalty shall not in any way be limited by territorial limitations or by the source of those revenues, and will include any revenues which Licensee directs to be paid to any other Person. The calculation of Sales will be carried out in accordance with generally accepted accounting principles applied on a consistent basis. Licensee will take all reasonable and prudent steps necessary to collect monies payable on account of Licensed Products. 3.6 AFFILIATED PERSON SALES. If Licensee sells, rents, or offers for use a Licensed Product or otherwise makes a Sale to any Affiliate, then the Sales with respect thereto shall be the price or terms at which Licensee should have made the same Licensed Product available to a bona fide third party on an arms length basis. No deductions or allowances whatsoever shall be made for the cost of collections, or for commissions to Licensee's employees, officers, or directors or any Affiliate. 3.7 PERIODIC REPORTS. Licensee, on the fifth business day following the close of each calendar quarter, beginning with the calendar quarter in which Licensee commences any actual Sales of Licensed Products, shall deliver to AccuMed a true and accurate written report certified by Licensee's chief financial officer of all of its Sales activities relating to the Licensed Product for the immediately preceding calendar quarter to facilitate the proper computation of the Required Royalty. These reports shall include the following: (i) true and correct copies of all current product catalogues and price lists of Licensee; (ii) identification of the quantity and type of any Licensed Products sold, leased or rented upon which royalties are due; (iii) gross receipts for such sale, lease or rental; and (iv)royalty due AccuMed. In addition to the periodic reports described above, Licensee shall provide AccuMed with copies of Licensee's annual audited financial statements within one hundred twenty (120) days after the end of Licensee's fiscal year. 3.8 FINANCIAL RECORDS. Licensee shall keep full, true, and accurate books of account containing all particulars which may be necessary for the purpose of showing the royalty amounts payable to AccuMed hereunder. These books of account shall be kept by Licensee at the usual place where its other books are kept. These books and their supporting data will be open at reasonable times, for a period of three (3) years following the end of the calendar year to which they pertain, for inspection by an independent certified public accountant retained by - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 7 8 AccuMed for the purpose of verifying Licensee's royalty statements or Licensee's compliance with other provisions of this Agreement pursuant to Section 3.9. Licensee shall prepare or cause the preparation of annual audited financial statements for the purposes of reporting under Section 3.7. 3.9 AUDIT RIGHTS. AccuMed shall have the right to have periodic audits of Licensee performed on not less than fifteen (15) days' advance written notice by AccuMed to Licensee for the purposes of verifying royalty payments under this Agreement. AccuMed shall be permitted to perform such audits not more often than once in any calendar year. AccuMed may, in its discretion, retain the services of an independent certified public accountant to perform any such audit. AccuMed shall pay for the services of any such independent certified public accountant, except as provided in this Section below. AccuMed will notify Licensee if AccuMed's independent certified public accountant determines that Licensee has understated the royalties due AccuMed by five percent (5%) or more over a calendar quarter (a "Royalty Understatement"). If Licensee notifies AccuMed within fifteen (15) days of such notice that Licensee's own independent certified public accountant disputes the determination of AccuMed's certified public accountant as to any Royalty Understatement (a "Licensee Dispute Notice"), then the parties shall mutually designate a third independent certified public accountant to audit the royalty payments hereunder. The determination of such third accountant shall be binding on the parties. If Licensee does not make a Licensee Dispute Notice or if any such third accountant also determines that there has been a Royalty Understatement, then Licensee shall pay to AccuMed, within fifteen (15) days after notice of a Royalty Understatement by AccuMed or such third accountant, as applicable, (i) the balance of such Royalty Understatement as determined by AccuMed's accountant, but if there is a third accountant, as determined by such third accountant, (ii) a penalty fee equal to five percent (5%) of any such Royalty Understatement plus interest thereon at a rate equal to one percent (1%) per month or such lesser amount as required by law, computed from the day on which such royalties were due and owing to AccuMed, and (iii) the reasonable fees of AccuMed's accountant for its services and, if applicable, any third accountant for its services. If any such third accountant determines that there has not been a Royalty Understatement, then AccuMed shall pay the reasonable fees for the services of such third accountant. 3.10 INTEREST. Licensee shall pay AccuMed interest on all royalty amounts which are past due under this Agreement at an interest rate equal to one percent (1%) per month (or such lesser amount as required by law). Interest under this Section shall be computed from the day the royalty amounts are due and payable under this Agreement. 3.11 CURRENCY. All payments from Licensee to AccuMed shall be in U.S. dollars (U.S.$), unless Licensee has been paid by any purchaser of the Licensed Products in some other currency and AccuMed elects to be paid by Licensee with regard to that transaction in the same currency. 3.12 TAXES. The payment to AccuMed of the royalties, fees, compensation, and other payments provided for in this Agreement shall be free of any taxes, charges, or remittance fees, whether levied by the federal, state, or municipal governments in the Territory, or by other authorities, except for such income tax which may be expressly required by the laws of the 8 9 governments in the Territory to be paid for the account of AccuMed. The payment of any such income taxes levied upon or withheld from royalties, fees, compensations, or other payments due to AccuMed, and the filing of any information or tax returns with respect thereto, shall be the responsibility of Licensee, who shall be liable to AccuMed with respect to any amounts, fines, or penalties arising out of or resulting from any failure, delay, or error in discharging the aforesaid obligation. SECTION 4 VALIDITY AND MARKING 4.1 VALIDITY. If Licensee or another challenges the validity of any of the Patents once issued, Licensee agrees and is obligated to continue paying all royalties due before such time as a final determination of invalidity and during the pendency of any such validity challenge, and Licensee is not entitled to any refund or credit for any such past royalty or Guaranteed Cash License Fee. If Licensee challenges the validity of any of the Patents, Licensee agrees to pay AccuMed's reasonable attorneys' fees and all associated costs in defending such action, unless all of the Claims of each challenged Patent are held invalid or unenforceable. Licensee agrees and is obligated to continue paying royalty payments during the pendency of any challenge to the validity of any of the Patents. If final judgments that are beyond further right of appeal are entered which finally invalidate all issued Patents, thereafter Licensee's sole remedy shall be the reduction in the rate of the Required Royalty in accordance with Section 9.2; and Licensee shall continue thereafter to be obligated to pay such reduced Required Royalty and any unpaid Guaranteed Cash License Fee, Cash/Stock Payment and Stock Payment. Licensee shall not challenge the validity of any of the Technology or the Copyrighted Works. 4.2 MARKING. As to any Patents issued, Licensee shall mark all Licensed Products covered by the Claims of such Patent with the following statement, with the bracketed language completed as appropriate, or, if any Foreign Patent issues, such other similar statement as may be required under the laws applicable to the marking of any such Foreign Patent: "Licensed by [current corporate name of Licensee] under one or more of the following patents: United States Patent Nos. [insert the applicable patent numbers for the Patents which have issued]." SECTION 5 PROSECUTION; PROTECTION; AND INFRINGEMENT 5.1 PROSECUTION AND PROTECTION. (a) AccuMed shall diligently and in a commercially reasonable manner prosecute the application for and the issuance of the U.S. Patents and Foreign Patents that AccuMed, in its sole discretion, decides to prosecute, at the sole cost and expense of AccuMed. AccuMed shall diligently and in a commercially reasonable manner maintain issued Patents at AccuMed's sole cost and expense. If AccuMed determines in its sole discretion for commercial reasons to abandon prosecution or maintenance of a patent application or issued patent, as the case may be, in any jurisdiction, Licensee may elect to prosecute such application or maintain such issued 9 10 patent in such jurisdiction at its sole expense. In such case, AccuMed shall assign all rights to Licensee necessary for Licensee to pursue such action. (b) Licensee shall notify AccuMed in writing of Licensee's sale of Licensed Products in any foreign country upon or prior to the date on which Licensee first sells Licensed Products in such country. If a Foreign Patent shall not already be pending or issued in such country, AccuMed shall have twenty-one (21) days from such written notice to notify Licensee in writing whether or not AccuMed will commence the prosecution of a Foreign Patent in such country. If AccuMed elects, in such notice, to prosecute a Foreign Patent in such country, AccuMed will promptly commence the prosecution thereof. If AccuMed elects, in such notice, not to prosecute a Foreign Patent in such country or if AccuMed fails to make a timely election, then Licensee may elect to prosecute such Foreign Patent, at Licensee's sole cost and expense, for and on behalf of and in the name of AccuMed. Licensee may deduct all reasonable out-of-pocket costs and expenses, including without limitation, attorneys' fees and filing costs, incurred by Licensee for its prosecution (in accordance its election under with this paragraph) of Foreign Patents in any foreign country from the Required Royalties (but not the Guaranteed Cash License Fee) applicable to that country under Section 3.2. AccuMed will provide to Licensee all information, papers, instruments or affidavits required to apply for and obtain Foreign Patents in AccuMed's name and will provide reasonable assistance to Licensee in Licensee's efforts to prosecute any Foreign Patents in accordance with its election under this paragraph. Any such Foreign Patents prosecuted by Licensee for and on behalf of AccuMed shall be the sole and exclusive property of AccuMed, but Licensee shall be granted a license thereunder coincident with the grant under Section 2.1 for all Foreign Patents. (c) Except as provided in this Section, for and on behalf of AccuMed, Licensee shall not prosecute any letters patent in any foreign country covering any of the Claims of the U. S. Patents or any Foreign Patents. As requested by AccuMed from time to time, Licensee shall provide reasonable assistance to AccuMed (at AccuMed's sole cost and expense for the U. S. Patents and the Foreign Patents in Canada and the European Community but otherwise at the equal cost and expense of AccuMed and Licensee or Licensee's sole expense as determined in accordance with paragraph (b) of this Section) in AccuMed's prosecution of the Patents in accordance with this Section. AccuMed shall maintain any issued Patents in a commercially reasonable manner. AccuMed shall use commercially reasonable efforts to maintain the secrecy of its trade secrets comprising any of the Technology. To the extent Licensee becomes aware of any matters or events which may affect the validity of the Patents or protection of the Technology, Licensee shall inform AccuMed of such matters or events within ten (10) business days after Licensee becomes aware of any such matters or events. (d) Nothing in this Section shall (i) require either AccuMed or Licensee to prosecute patents in any foreign country or (ii) restrict Licensee from exercising its exclusive license rights under this Agreement in any foreign country or throughout the Territory, regardless of whether Licensee or AccuMed elects to prosecute any application for Foreign Patents therein. 5.2 INFRINGEMENT BY THIRD PARTIES. Each party shall inform the other party of any infringement or suspected infringement of the Patents or infringement (including any misappropriation) of the Technology of which such party becomes aware within ten (10) business days after such party becomes aware of any such infringement or suspected 10 11 infringement. For a period of thirty (30) days after receipt by AccuMed of, or AccuMed's sending of, such notice of infringement, AccuMed will have the exclusive right to commence an action and otherwise assert rights in the Patents and the Technology against any such infringers or suspected infringers and retain all proceeds of such action or proceeding brought by it and will have the right at its sole discretion to make any settlement or compromise with the third-party infringer. If AccuMed shall elect to prosecute any such infringer, Licensee shall take such steps as are reasonably requested by AccuMed to enable it to protect its rights under the Patents and under the Technology against any such infringement or suspected infringement. If (i) AccuMed fails to commence an action or otherwise assert its rights in the Patents and the Technology against any such infringers or suspected infringers within such thirty (30) day period and (ii) Licensee provides AccuMed with the opinion of patent counsel mutually acceptable to the parties stating that there is a likelihood of infringement or misappropriation by such suspected infringers (an "Infringement Opinion"), then Licensee may bring an action or proceeding (including any alternative dispute resolution process) to enjoin the infringement, to recover damages for it, or both and AccuMed grants Licensee the right to use AccuMed's name in connection therewith and will have the right at Licensee's sole discretion to make any settlement or compromise with the third-party infringer, in accordance with and subject to the provisions set forth below. If an Infringement Opinion is delivered to AccuMed and, accordingly, Licensee is permitted to bring such action, then Licensee may elect to deduct a percentage of its out-of-pocket costs and expenses (but otherwise will bear all other costs and expenses), which includes without limitation court costs and attorneys' fees for such action up to a maximum deduction of fifty percent (the "Fee Percentage") and shall notify AccuMed of such election and the applicable Fee Percentage when the Infringement Opinion is delivered by Licensee to AccuMed. Licensee shall be permitted to deduct from future Guaranteed Cash License Fees, and Required Royalties, as they become due under this Agreement, that portion of its out-of-pocket expenses in an amount equal to the Fee Percentage thereof. All proceeds of such action or proceeding brought by Licensee (if any) shall be shared between AccuMed and Licensee pro rata in accordance with the Fee Percentage (i.e. AccuMed shall receive the Fee Percentage of such proceeds and Licensee shall receive the remainder). If Licensee shall be permitted to bring an action pursuant to this Section, AccuMed shall take such steps as are reasonably requested by Licensee to enable it to protect its Licensee rights under the Patents and under the Technology against any such infringement or suspected infringement. 5.3 INFRINGEMENT OF THIRD PARTY RIGHTS. If Licensee makes or incurs any out-of-pocket payments for settlements, damages, and/or royalties owing to third parties (exclusive of one-half of Licensee's court costs, attorneys' fees and other expenses of defense) as result of any claim by a third party that the Patents or Technology incorporated in any Licensed Products infringe or violate any third party patent, copyright, trademark, trade secret or other proprietary right, then Licensee may deduct an amount equal to such out-of-pocket payments from future Guaranteed Cash License Fees or Required Royalties as they become due under this Agreement. The foregoing remedy will be the exclusive remedy of Licensee for any third-party claim of infringement or misappropriation. SECTION 6 CONFIDENTIALITY; COLLABORATION 11 12 6.1 CONFIDENTIALITY. (a) Proprietary Information. Each party will exercise all reasonable precaution to retain in confidence and not disclose proprietary information relating to (I) the Patents (except to the extent that the Patents are or become issued patents) and the Technology, (ii) product designs, prototypes, schematics, trade secrets (including ideas, formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, bills of material, and technical data), and embodiments thereof (in whatever form or medium), (iii) information concerning unsuccessful tests and ideas and technologies which have not worked, as well as information concerning successful technologies, (iv) information concerning either party's and its Affiliates' and subsidiaries' business plans, (v) information which either party compiles and maintains in databases for its Affiliates' and subsidiaries' internal business purposes, (vi) information disclosed to either party in documents marked "confidential," (vii) any software, firmware, documents (including, without limitation, manuals, manuscripts, drawings, blueprints, schematics, engineering logbooks, and laboratory notebooks), and methodologies, and (viii) other things and ideas which one party may disclose to the other party in connection with this Agreement or which one party may commission the other party to create, improve or develop, and any other information which a party is informed that the other party regards as confidential ("Proprietary Information"); provided however that, notwithstanding anything contained herein to the contrary, (a) such Proprietary Information shall only include such information (1) that each party actually treats as confidential and (2) with respect to which each party takes appropriate steps to safeguard from disclosure to others and (b) such Proprietary Information described in clauses (ii) through (viii) above shall only include such information which one party may disclose to and which is received by the other party. (b) Non-disclosure. Each party shall receive, develop and hold Proprietary Information in confidence and shall use its best efforts to preserve the confidentiality of such Proprietary Information consistent with the manner in which it protects its own most confidential business information. Disclosures of Proprietary Information to a party's personnel shall be limited to "designated employees" with a need to know same and made solely as necessary to enable them to exercise their employment or fiduciary duties. Each party shall require each of its designated employees to sign a confidentiality agreement prior to the time such individual is first allowed access to Proprietary Information. (c) Remedies. Each party acknowledges that its breach of the foregoing confidentiality obligations would cause the other party irreparable injury for which there would be no adequate remedy at law. Accordingly, each party agrees that if such breach or threatened breach is proved by the other party, the other party shall be entitled to appropriate injunctive relief and such other relief as the court deems equitable in the circumstances. (d) Duration. The parties' confidentiality obligations under this Section shall remain in effect until the later of (I) five years after the termination of this Agreement and (ii) so long as such information remains protectable as a trade secret under applicable law, even if dealings between Licensee and AccuMed have ceased. 12 13 (e) Public Domain. This Section shall not restrict the rights of a party to disclose information that: (i) is requested or consented to be disclosed by the owner thereof in writing; (ii) is or becomes generally available to the public other than by breach of this Agreement or other obligation of confidentiality; or (iii) one party is required by law to disclose provided, however, prior to any such disclosure, such party shall immediately notify the other party in writing if such party believes that there will be a legal requirement to disclose, to enable the other party to determine a more appropriate means of disclosure and so that the other party is provided the opportunity to contest such disclosure requirement through legal means. 6.2 COLLABORATION WITH ACCUMED PERSONNEL. From the date hereof through May 30, 2000, AccuMed will make available to Licensee the limited time and effort of Norman J. Pressman and AccuMed's technical/scientific research and development personnel to assist and support Licensee in its capital raising activities, provided that Licensee promptly reimburse AccuMed for the reasonable, documented out-of-pocket expenses of such personnel in performing such assistance and support. SECTION 7 GENERAL REPRESENTATIONS AND WARRANTIES 7.1 REPRESENTATIONS OF LICENSEE. Licensee hereby represents and warrants to AccuMed, as of the date hereof, as follows: (a) Licensee: (i) is a corporation duly formed and validly existing under the laws of the State of New York; (ii) has the power and authority to own its property and to carry on its business as now conducted or as presently contemplated; and (iii) has the power and authority to execute, deliver and perform this Agreement. (b) The execution, delivery and performance by Licensee of this Agreement: (i) have been duly authorized by all requisite action on the part of Licensee, including any requisite approval of its board of directors; (ii) do not violate any provision of law, the certificate of incorporation or bylaws of Licensee, or any applicable order of any court or other governmental agency; (iii) do not breach of the terms of any agreement, document, or instrument to which Licensee is a party or which is binding upon Licensee or its property; and (iv) do not require the approval, consent, authorization or act of, or the making of any declaration, filing or registration with, any person or entity (other than as required by Licensee pursuant to Section 11.2). 13 14 (c) This Agreement constitutes a legal, valid and binding obligation of Licensee, enforceable against Licensee in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, reorganization, insolvency and similar laws affecting creditors' rights generally and to moratorium laws from time to time in effect and to the extent that such enforcement is subject to the principles of equity in a proceeding at law or in equity. 7.2 REPRESENTATIONS OF ACCUMED. AccuMed hereby represents and warrants to Licensee, as of the date hereof, as follows: (a) AccuMed: (i) is a corporation duly organized and validly existing under the laws of the State of Delaware; (ii) has the power and authority to own its property and to carry on its business as now conducted or as presently contemplated; and (iii) has the power and authority to execute, deliver and perform this Agreement. (b) The execution, delivery and performance by AccuMed of this Agreement: (i) have been duly authorized by all requisite corporate action on the part of AccuMed, including any requisite approval of its board of directors; (ii) do not violate any provision of law, the certificate of incorporation or bylaws of AccuMed, or any applicable order of any court or other governmental agency; (iii) do not breach of the terms of any agreement, document, or instrument to which Licensee is a party or which is binding upon AccuMed or its property; and (iv) do not, subject to Licensee's obligations under Section 11.2, require the approval, consent, authorization or act of, or the making of any declaration, filing or registration with, any person or entity by AccuMed. (c) This Agreement constitutes a legal, valid and binding obligation of AccuMed, enforceable against AccuMed in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, reorganization, insolvency and similar laws affecting creditors' rights generally and to moratorium laws from time to time in effect and to the extent that such enforcement is subject to the principles of equity in a proceeding at law or in equity. (d) The Patents and Technology licensed hereunder constitute all of the Patents and Technology related to the Field owned by AccuMed. (e) AccuMed has not received any notice of, and to AccuMed's knowledge there is no basis to support, any third party claim that the Patents or Technology infringe upon or otherwise violate the rights of a third party. (f) AccuMed does not have pending, and to AccuMed's knowledge, there is no basis to assert, any claim against any current or former employee for misappropriation of the Patents or Technology. (g) AccuMed has good and clear title to the Technology and Patents, and there are no liens or encumbrances thereon. SECTION 8 DEFAULT AND REMEDIES 14 15 8.1 TERMINATION DEFAULT. The occurrence of the following events shall constitute a "Termination Default" under this Agreement, Licensee fails to pay to AccuMed any of the Guaranteed Cash License Fee, the Required Royalty, or any other royalty payments, interest, fees, or other amounts due and owing to AccuMed and any such failure to pay shall continue for more than fifteen (15)days after written notice thereof from AccuMed to Licensee. 8.2 REMEDIES. If any Termination Default occurs, AccuMed may elect, at its option, any or all of the following: (a) to terminate or suspend any or all of the licenses granted under this Agreement; or (b) convert any or all of the licenses granted under this Agreement to non-exclusive licenses. This Agreement and the licenses granted by AccuMed to Licensee hereunder cannot be terminated for any default of any term or condition of this Agreement other than a Termination Default. If a default hereunder other than a Termination Default occurs, the non-defaulting or non-breaching party may not terminate this Agreement but may seek monetary damages or appropriate injunctive relief (other than termination of the licenses hereunder) from the defaulting or breaching party in a court or arbitration body of competent jurisdiction. 8.3 CUMULATION. Each party shall have, in addition to any other rights and remedies contained in this Agreement, all of the rights and remedies available under applicable laws, all of which rights and remedies shall be cumulative, and non-exclusive, to the extent permitted by law. 8.4 EFFECTS OF WAIVER. The failure of either party to exercise any of its rights hereunder shall not constitute a waiver of any of such rights, or other rights or remedies available to that party hereunder or under applicable law. 8.5 NO WAIVER. No delay or omission of either party to exercise any right under this Agreement shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of this Agreement whatsoever shall be valid unless in a writing signed by that party and then only to the extent in such writing specifically set forth. All remedies contained in this Agreement, or by law afforded shall be cumulative. SECTION 9 TERM AND TERMINATION; ACCUMED BUY-BACK; PARTIAL REFUND OF PAYMENTS 9.1 TERM. Unless earlier terminated by AccuMed pursuant to Section 8.2 or by Licensee or AccuMed pursuant to Section 9.3, this Agreement and the licenses granted herein shall terminate upon the later of (x) 20 years from the effective date hereof and (y) if any Patent shall issue, the expiration or termination of the last issued Patent, including any modifications, extensions, or reissues thereof. 9.2 EFFECT OF PATENT INVALIDATION. As to any Patents that have or shall issue and, thereafter, if all Claims of all of the Patents should be finally determined to be invalid by a decision of a court of competent jurisdiction that is final beyond further right of appeal, then the 15 16 rate of the Required Royalty shall be reduced by one-half of one percent (0.5%). Licensee acknowledges that the licenses hereunder in the Technology independent of any issued and valid Patent are valuable and reasonable consideration for the Required Royalty. Licensee shall pay (subject to paragraph (b) of Section 5.1, Section 5.2, and Section 5.3) all Required Royalties (at the percentage rate specified on Schedule 1) due and payable before any such final determination of invalidity and during the pendency of any validity challenge, and Licensee is not entitled to any refund or credit for any past Required Royalties, or the Guaranteed Cash License Fee payments, the Cash/Stock Payment or the Stock Payment. Licensee shall pay all royalty payments accruing during the pendency of any challenge to the validity of any of the Patents. 9.3 TERMINATION BY LICENSEE; ACCUMED BUY-BACK OF LICENSED RIGHTS. (a) Non-cancellation Period. Licensee shall not be entitled to terminate its obligations under this Agreement until the earlier to occur of (i) the fifth anniversary date of this Agreement and (ii) AccuMed's receipt of the Guaranteed Cash License Fee, the Cash/Stock Payment and the Stock Payment. (The period from and after the date of execution of this Agreement and ending upon the earlier event described in the immediately preceding sentence is the "Non-Cancellation Period"). After the commencement of the Non-Cancellation Period, Licensee may, at its election, (x) if Licensee shall have notified AccuMed after the Non-Cancellation Period that in Licensee's reasonable determination the commercial exploitation of the Licensed Product is not commercially viable, terminate the exclusivity of the licenses granted hereunder upon thirty (30) days' written notice to AccuMed or (y) terminate this Agreement. If Licensee shall elect to terminate the exclusivity in accordance with clause (x) above, then Licensee shall continue to be obligated to make payments to AccuMed of any Required Royalties. Licensee shall pay all amounts due and payable to AccuMed hereunder before any such election to terminate the exclusivity in accordance with clause (x) above and Licensee is not entitled to any refund or credit for any past Required Royalties, or the Guaranteed Cash License Fee payments, Cash/Stock Payment or Stock Payment. (b) AccuMed Buy-back of Licensed Rights. If by the [***] anniversary of this Agreement AccuMed has not received an aggregate of $[***] in Required Royalty payments, excluding the first $[***] in Required Royalty payments, AccuMed may elect to terminate this Agreement on 30 days' written notice to Licensee; provided however, that AccuMed shall repurchase all rights granted to Licensee hereunder (except as otherwise provided in this Section 9.3(b)); provided further, that Licensee may unilaterally prevent such termination and repurchase if Licensee pays AccuMed within such 30-day period $[***] in cash by wire transfer to the account designated by AccuMed. The repurchase payment shall equal the aggregate amount of - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 16 17 (i)[***], and (ii)[***]. The only rights of Licensee to survive such repurchase shall be the licenses granted in Sections 2.1, 2.2 and 2.3 on a royalty free, non-exclusive basis for use only in connection with automation of Licensee's Trend CytoGram(registered trademark) in the Field. 9.4 EFFECT OF TERMINATION. Upon any termination of this Agreement becoming effective, Licensee shall be relieved of all duties and obligations, except that Licensee shall in any event be obligated to pay to AccuMed (i) royalties and interest accrued and unpaid up to that time and royalties and interest subsequently due on Licensed Products used, sold, leased or rented for use in connection with the rights granted under this license prior to termination becoming effective and (ii) any unpaid Required Royalties accrued and unpaid as of the time of such termination. Licensee shall under no circumstances be entitled to a return of monies theretofore paid or to an abatement of royalties and interest accrued and unpaid on the effective date of termination, including royalties and interest on Licensed Products used, rented or sold in connection with the rights granted under this license prior to the effective date of termination. If this Agreement shall terminate, then Licensee shall, upon request of AccuMed, promptly return to AccuMed (or, at AccuMed's discretion, destroy and certify to AccuMed the destruction of) the originals and all copies of any and all materials in its possession or under its control to the extent they are Copyrighted Works. Upon any election by Licensee in accordance with this Agreement to convert the licenses hereunder to non-exclusive licenses, then Licensee shall, upon request of AccuMed, promptly return to AccuMed copies of any and all materials and documents in its possession or under its control to the extent these materials relate in any manner to the Licensed Product. 9.5 SURVIVAL OF CERTAIN TERMS. Notwithstanding the termination of this Agreement as provided above, Sections 2.5, 5.3, 6.1, 8.1, 8.2, 8.3, 8.4, 8.5, 9.1, 9.2, 9.3, 9.4, 9.5, 11.1, 11.2, 11.3, 11.4, 11.5, 11.6, 11.7, 11.8 11.9, and 11.10 shall survive the termination of this Agreement. All representations, warranties, indemnities and covenants contained in this Agreement shall continue in full force and effect and shall survive notwithstanding the final payments of all amounts due hereunder or the termination of this Agreement in any manner whatsoever. 9.6 TECHNOLOGY ESCROW. Within 45 days following the date hereof, AccuMed shall deposit into escrow documentation, in the forms mutually agreed by the parties, of all the Technology and Patents, including without limitation technical drawings, (the "Escrow"). AccuMed shall provide Licensee a listing of all documentation placed in the Escrow. The Escrow shall provide that upon AccuMed filing for bankruptcy protection, or ceasing to do business and AccuMed has not assigned its obligations hereunder pursuant to Section 11.8, then the contents of the Escrow shall be released to Licensee. SECTION 10 REGISTRATION OF LICENSEE COMMON STOCK; RESALE LIMITATIONS - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 17 18 10.1 LISTING OF LICENSEE COMMON STOCK. Licensee shall take such actions as are necessary to have the Licensee Common Stock which is issued to AccuMed to be included for trading on the Nasdaq Bulletin Board or in such Nasdaq market or stock exchange on which the Licensee Common Stock is traded at the time the Licensee Common Stock is issued to AccuMed. 10.2 REGISTRATION UNDER SECURITIES ACT. (a) Licensee shall register for resale all shares of Licensee Common Stock issued to AccuMed pursuant to this Agreement (the "Registrable Securities") under the Securities Act of 1933, as amended (the "Act"). Licensee shall prepare and file with the SEC a registration statement under the Act covering the Registrable Securities and shall use its reasonable best efforts to cause such registration statement to become effective. (b) In the event that at the time Licensee is required to register the Registrable Securities Licensee is in the process of preparing a registration statement under the Act relating to an underwritten public offering, then no holder of securities of Licensee, including Requesting Holders, may include securities in such registration if in the good faith judgment of the managing underwriter of such public offering the inclusion of such securities would interfere with the successful marketing of the securities being underwritten. Shares to be excluded from an underwritten public offering shall be selected in a manner provided in this Section 10.3. To the extent only a portion of the Registrable Securities held by AccuMed is included in the underwritten public offering, a registration statement covering those Registrable Securities which are excluded from the underwritten public offering will be filed within 180 days of the consummation of the underwritten public offering. (c) Licensee shall pay the expenses described in Section 10.5 for the registration statement filed pursuant hereto, except for underwriting discounts and commissions and legal fees of AccuMed, which shall be borne by AccuMed. 10.3 UNDERWRITTEN OFFERING. If any registration pursuant hereto shall be underwritten in whole or in part, Licensee may require that the Registrable Securities be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. In the event that the Registrable Securities together with any other shares which have similar registration rights (such shares and the Registrable Securities being collectively referred to as the "Requested Stock") would, in the good faith judgment of the managing underwriter of such public offering, reduce the number of shares to be offered by Licensee or interfere with the successful marketing of the shares of stock offered by Licensee, the number of shares of Requested Stock otherwise to be included in the underwritten public offering may be reduced pro rata (by number of shares) among the holders thereof requesting such registration or excluded in their entirety if so required by the underwriter. To the extent only a portion of the Requested Stock is included in the underwritten public offering, those shares of Requested Stock which are thus excluded from the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 180 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. A registration statement covering those shares of Requested Stock excluded from the underwritten offering will be filed within 180 days of the consummation of the underwritten public offering. 18 19 10.4 REGISTRATION PROCEDURES. Licensee will: (a) prepare and file with the SEC a registration statement with respect to the Registrable Securities, and use its reasonable best efforts to cause such registration statement to become and remain effective until the Registrable Securities are freely salable without the volume limitations of Rule 144; (b) prepare and file with the SEC such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective until the Registrable Securities are freely salable without the volume limitations of Rule 144; (c) furnish to AccuMed and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities; (d) use its reasonable best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as AccuMed may reasonably request in writing within twenty (20) days following the original filing of such registration statement, except that Licensee shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) notify AccuMed, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (f) notify AccuMed promptly of any request by the SEC for the amending or supplementing of such registration statement or prospectus or for additional information; (g) prepare and file with the SEC, promptly upon the request of AccuMed, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for AccuMed (and concurred in by counsel for Licensee), is required under the Act or the rules and regulations thereunder in connection with the distribution of Registrable Securities by AccuMed; (h) prepare and promptly file with the SEC and promptly notify AccuMed of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the 19 20 statements therein, in the light of the circumstances in which they were made, not misleading; and (i) advise AccuMed, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the SEC suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its reasonable best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued. 10.5 EXPENSES. (a) All fees, costs and expenses of and incidental to registration hereunder, inclusion and public offering (as specified in paragraph (b) below) in connection therewith shall be borne by Licensee, provided, however, that AccuMed shall bear its pro rata share of the underwriting discount and commissions and transfer taxes. (b) The fees, costs and expenses of registration to be borne by Licensee as provided in paragraph (a) above shall include, without limitation, all registration, filing, and NASD fees, printing expenses, fees and disbursements of counsel and accountants for Licensee, and all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered and qualified. Fees and disbursements of counsel and accountants for AccuMed and any other expenses incurred by AccuMed not expressly included above shall be borne by the AccuMed. 10.6 INDEMNIFICATION. (a) Licensee will indemnify and hold harmless AccuMed, its directors and officers, and any underwriter (as defined in the Act) for AccuMed and each person, if any, who controls AccuMed or such underwriter within the meaning of the Act, from and against, and will reimburse AccuMed and each such underwriter and controlling person with respect to, any and all loss, damage, liability, cost and expense to which AccuMed or any such underwriter or controlling person may become subject under the Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that Licensee will not be liable in any such case to the extent that any such loss, damage, liability, cost or expenses arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by AccuMed, such underwriter or such controlling person in writing specifically for use in the preparation thereof. 20 21 (b) AccuMed will indemnify and hold harmless Licensee, its directors and officers, any controlling person and any underwriter from and against, and will reimburse Licensee, its directors and officers, any controlling person and any underwriter with respect to, any and all loss, damage, liability, cost or expense to which Licensee or any controlling person and/or any underwriter may become subject under the Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with written information furnished by or on behalf of AccuMed specifically for use in the preparation thereof. (c) Promptly after receipt by an indemnified party pursuant to the provisions of paragraph (a) or (b) of this Section 10.6 of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, provided, however, if the defendants in any action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or in addition to those available to the indemnified party, or if there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the provisions of the preceding sentence, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. 21 22 10.7 RESALE LIMITATIONS. During each of the first four 30-day periods beginning on the date on which Licensee delivers to AccuMed a certificate or certificates representing the Cash/Stock Payment, AccuMed shall not sell, transfer or otherwise dispose of more than 25% of the total number of those shares of Licensee Common Stock constituting the Cash/Stock Payment. SECTION 11 MISCELLANEOUS PROVISIONS 11.1 USE OF BRANDING AND NAMES. As to any Licensed Product delivered hereunder which bears branding of an AccuMed trademark, trade name or service mark, Licensee shall not remove or obscure such branding. Licensee may negotiate with AccuMed to deliver Licensed Products under private labeling on mutually acceptable terms. 11.2 GOVERNMENT AUTHORIZATION. Licensee assumes the obligation at all times, and at its own expense, of complying with all laws, requirements, and regulations of the government of the Territory affecting or relating to this Agreement or the Licensed Product. 11.3 LIMITATION OF LIABILITY AND WARRANTIES; INDEMNIFICATION. (a) AccuMed DISCLAIMS ANY WARRANTIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, FOR ANY INFORMATION OR THE RESULTS OF USING ANY INTELLECTUAL PROPERTY LICENSED UNDER THIS AGREEMENT WITH RESPECT TO Licensee OR ANY PURCHASER OF LICENSED PRODUCTS, OR (EXCEPT AS EXPRESSLY PROVIDED IN SECTION 5.3) INTELLECTUAL PROPERTY INFRINGEMENT RELATED IN ANY WAY TO THIS AGREEMENT. (b) Notwithstanding anything to the contrary contained herein, no party shall, under any circumstances, be liable to any other party for consequential, incidental, or special damages of the other party, including but not limited to, lost profits, even if such party has been apprised of the likelihood of such damages. (c) Licensee shall fully protect, indemnify and hold harmless AccuMed and its subsidiaries, Affiliates and their officers, directors, and employees from and against any and all costs, expenses, liabilities, or claims of whatsoever nature or kind of any injury or damage, including, without limitation, consequential damages, to third persons or property of third persons, based upon or arising directly out of or resulting directly from: (i) Any breach by Licensee of any of its obligations or covenants contained herein; 22 23 (ii) Licensee's or its agent's manufacture, use, servicing, maintenance, or sales of the Licensed Products, or parts thereof; (iii) Any claims alleging product liability, false or misleading advertising, disease or death of any person, negligence or other tortious acts or omissions based on the design and application of the Licensed Products; or (iv) Any claims for Licensee's negligent or willful acts or omissions. (d) If Licensee or any of its customers, distributors, agents, or dealers is charged with or sued for infringement of any Patent by reason of having manufactured, used, offered to sell, or sold any of the Licensed Products within the scope of this Agreement herein granted, Licensee shall have the sole responsibility for the investigation of each such charge or suit of infringement, the defense of each such charge or suit, and the settlement of each charge or suit. (e) From and after the date of any first Sale of any Licensed Product and during the term of this Agreement, Licensee shall maintain at its own expense comprehensive general liability insurance for claims for damages arising from bodily injury (including death) and property damages caused by, or arising out of, acts or omissions of its employees and shall name AccuMed as an additional insured thereon. The minimum limits of such insurance will be $1,000,000 per individual; $2,000,000 per accident involving bodily injury; and $1,000,000 per accident involving property damage. Maintenance of such insurance coverage shall not relieve Licensee of any responsibility under this Agreement for damages in excess of such insurance limits. Licensee shall name AccuMed as an additional insured on its general commercial liability insurance policies, and Licensee shall furnish or cause to be furnished to AccuMed a certificate of such insurance promptly upon request by AccuMed. Any such insurance policy shall provide that the insurer shall give AccuMed at least thirty days' prior written notice of any impending cancellation, nonrenewal, expiration, or reduction in coverage of the insurance. 11.4 ENTIRE AGREEMENT. This Agreement, together with the Schedules incorporated by reference herein and the Mutual Non-disclosure Agreement effective December 1, 1999 between the parties, constitutes the entire agreement between AccuMed and Licensee relating to the subject matter hereof. There are no terms, obligations, covenants, representations, statements, or conditions other than those contained herein and therein. No variation or modification of this Agreement or waiver of any of the terms or provisions hereof shall be deemed valid unless made in a writing signed by all parties hereto. 11.5 NOTICES. All notices and other communications required or desired to be served, given, or delivered hereunder shall be made in writing or by a telecommunications device capable of creating a written record and shall be addressed to the party to be notified as follows: 23 24 If to AccuMed: 920 N. Franklin St., Ste. 401 Chicago, IL 60610 Attn: Paul F. Lavallee Chairman and Chief Executive Officer Telephone no. 312-642-9200 Telecopy no. 312-642-3101 If to Licensee: BCAM International, Inc. 1800 Walt Whitman Road Melville, NY 11747 Attn: Michael Strauss Chairman, President and Chief Executive Officer Telephone no. 516-752-3550 Telecopy no. 516-752-3558 or, as to each party, at such other address as designated by such party in a written notice to the other party. Notices shall be deemed to have been duly given (i) if delivered personally or otherwise actually received, (ii) if sent by overnight delivery service, (iii) if mailed by first class United States mail, postage prepaid, registered or certified, with return receipt requested, or (iv) if sent by telecopy. Notice mailed as provided in clause (iii) above shall be effective upon the expiration of three (3) business days after its deposit in the United States mail and notice sent as provided in clause (iv) above shall be effective upon transmission. Notice given in any other manner described in this paragraph shall be effective upon receipt by the addressee thereof; provided, however, that if any notice is tendered to an addressee and delivery thereof is refused by such addressee, such notice shall be effective upon such tender. 11.6 HEADINGS. The headings appearing at the beginning of the numbered articles and sections hereof have been inserted for convenience only and do not constitute any part of this Agreement. 11.7 INVALID SECTIONS. Should any one section, or portion thereof, of this Agreement be held invalid or invalidated by reason of any law, statute or regulation existing now or in the future in any jurisdiction by any court of competent jurisdiction or by a legally enforceable directive of any governmental body, such section or portion thereof shall be validly reformed so as to approximate the intent of the parties as nearly as possible, and, if unenforceable, shall be divisible and deleted in such jurisdiction; and otherwise this Agreement shall not be affected. 24 25 11.8 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of Licensee and its successors and assignees permitted hereunder and AccuMed and its successors and assignees permitted hereunder. Licensee shall not assign this Agreement, except in a sale of substantially all of the assets or equity shares of Licensee, to, or through a merger of Licensee into, another entity which agrees in writing to be bound by this Agreement. AccuMed shall not assign this Agreement, except in a sale of substantially all of the assets or equity shares of AccuMed to, or through a merger of AccuMed into, another entity which agrees in writing to be bound by this Agreement. 11.9 GOVERNING LAW; JURISDICTION. This Agreement shall be considered as having been made in the United States of America and shall be construed and the respective rights of the parties determined in accordance with the laws of the State of Illinois. Each party hereto agrees that any legal action or proceeding arising hereunder shall be brought either in federal or state courts located in Cook County, Illinois and irrevocably submit themselves to the jurisdiction of those courts. 11.10 INDEPENDENT CONTRACTORS. Each party hereto acknowledges that it is and will be an independent contractor and under no circumstances shall such be considered an agent, employee, partner or joint venturer of or with any other party hereto. No authority or right is granted to any party to assume or create any obligation or responsibility, express or implied, on behalf of or in the name of any other party. 11.11 FIRST NOTIFICATION. AccuMed shall notify Licensee within five business days after receiving a bona fide offer to purchase substantially all of its assets or to be acquired in a merger, or following the date on which AccuMed's board of directors adopts a resolution directing management to seek such an offer. 11.12 PRESS RELEASES. AccuMed and Licensee shall issue, individually or jointly, an initial press release or releases disclosing execution of this Agreement. If the initial press release is joint, the parties will mutually agree to the language. If the initial press releases as individual, each party must approve the other party's language, which approval will not be unreasonably withheld. Neither AccuMed nor Licensee shall issue a press release or make any other public announcement regarding the subject matter of this Agreement without the prior agreement of the other party, unless the releasing party, in good faith, believes it is required to make such announcement under the federal securities laws or applicable rules of Nasdaq or the stock exchange on which its stock is quoted or traded. 11.13 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be considered an original, and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Patent and Technology License Agreement to be executed as of the day and year first above written. 25 26 ACCUMED INTERNATIONAL, INC. By: /s/ Paul F. Lavallee ------------------------------ Paul F. Lavallee Chairman and Chief Executive Officer BCAM INTERNATIONAL, INC. By: /s/ Michael Strauss ------------------------------ Michael Strauss Chairman, President, and Chief Executive Officer 26 EX-10.30 4 EXHIBIT 10.30 1 Exhibit 10.30 LICENSE AND DEVELOPMENT AGREEMENT This Agreement is entered as of March 24, 2000 (the "Effective Date") by and between AccuMed International, Inc. ("AccuMed"), a Delaware corporation, with a place of business at 920 N. Franklin, Suite 402, Chicago, IL 60610 and Ventana Medical Systems, Inc. ("Ventana"), a Delaware corporation, with a place of business at 3865 N. Business Center Drive, Tucson, AZ 85705. 1. DEFINITIONS. "AccuMed Imaging Assets" shall mean all the assets, properties, rights, titles and interests of every kind and nature, whether tangible or intangible, worldwide related to AccuMed's imaging products, systems, or services, including but not limited to fixed assets, equipment, tooling, intellectual property rights, designs, software, and rights existing under agreements of any type (including but not limited to development and marketing contracts). "AccuMed Intellectual Property Rights" shall mean all intellectual property rights now or hereafter owned, licensed, or controlled by AccuMed or any of its Subsidiaries, including but not limited to AccuMed Patent Rights and AccuMed Technical Information, and any other patent rights, copyrights, trademarks, and trade secret rights of AccuMed. "AccuMed Patent Rights" shall mean any patent rights (including rights to issued patents and pending patent applications) now or hereafter owned, licensed, or controlled by AccuMed or any of its Subsidiaries during the term of this Agreement, including but not limited to rights to the patents and patent applications listed in Exhibit 1-1 (along with any divisionals, continuations, continuations-in-part, reissues, re-examinations, re-registrations or extensions thereof). "AccuMed Software" shall mean AccuMed's pre-existing and later-developed software, tools, modules, products, and related documentation, and any updates made thereto, in both object code and source code form including but not limited to related Source Code owned by AccuMed. AccuMed Software includes, but is not limited to, any AccuMed software or data incorporated into any Software Products or other deliverables provided to Ventana under this Agreement. "AccuMed Technical Information" shall mean all of AccuMed's trade secrets, information, and know-how, now or hereafter owned, licensed or controlled by AccuMed or any of its Subsidiaries during the term of this Agreement. "Alpha Testing" shall mean the alpha testing of Engineering Prototypes of the imaging hardware platform AccuMed will supply Ventana and of each Software 1 2 Product. Alpha Testing shall consist of Ventana's testing with assistance from AccuMed of the performance of a product against a performance protocol to be established by Ventana under this Agreement where such testing may be done in-house at either Ventana's and/or AccuMed's facilities as Ventana may decide in its sole discretion. A product shall be considered to have passed Alpha Testing if it performs to the performance protocol as demonstrated to Ventana's reasonable satisfaction. "Basic Imaging and Report Generation Product" shall mean a software product for capturing an image of tissue mounted on a microscope slide, manipulating the image, and preparing a report to Ventana's specifications as will be more fully described in the Marketing Specifications. "Beta Testing" shall mean the beta testing of Manufacturing Prototypes to a performance protocol established by Ventana in Ventana customer labs as selected by Ventana for a period determined by Ventana in its sole discretion. A product will be considered to have passed Beta Testing if it performs to the performance protocol in all customer labs selected by Ventana for Beta Testing. "Breast Cancer Panel" shall mean [***]software products for performing quantitated immunohistochemistry (QIHC) on patient breast cancer slides stained for estrogen receptor, progesterone receptor, proliferation receptor (as measured using either Ki-67 or MIB-1 antibodies) and her-2/neu receptor as will be more fully described in the Marketing Specifications. "Developed Software" shall mean all software and related documentation developed by AccuMed for Ventana under this Agreement and any updates made thereto. "Development Plan" and "Development Schedule" will mean, respectively, a plan and schedule designated as such in Section 6.1. "Direct Costs" shall mean personnel, supplies, materials, and contracted and outside services costs attributable to the materials or for the production of an item. "Effective Date" is defined in the preamble to the Agreement. "Engineering Prototypes" shall mean fully developed hardware or software products related to the Imaging System to be delivered to Ventana that have not yet passed Alpha Testing. "Excluded Field" shall mean but not limited to: [***] Excluded Field shall not extend to Ventana's Medical Research Sales and Internal Research and Development. "FDA Approval" shall have the meaning specified in Section 9.1.6. - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 2 3 "Field" [***] Field shall exclude the Excluded Field. "Field Exclusivity" shall mean the rights granted to Ventana and the restrictions on AccuMed as specified in Section 5.1. "Foreground Technology" shall have the meaning specified in Section 3.1. "Functional Specifications" shall mean a detailed engineering specification that is in accordance with the Marketing Specifications and which will be used by software and hardware engineers to develop the Imaging System and Software Products. "Imaging System" shall mean an automated pathology imaging system based on AccuMed's existing AcCell 2001 workstation and to be further developed by AccuMed in conformance with the Functional Specifications and improvements made thereto by either party during the term of this Agreement. The Imaging System includes but is not limited to certain basic software used in the operation of the Imaging System. "Installations" shall have the meaning specified in Section 7.4. "Internal Research and Development" shall mean the internal use of Imaging Systems by employees and contractors of a party to this Agreement only for research and development. "Maintenance" shall have the meaning specified in Section 7.4. "Manufacturing Prototypes" shall mean the initial manufacturing prototypes of the Imaging System and each Software Product manufactured or made by AccuMed to be delivered to Ventana for Beta Testing in Ventana customer labs. "Manufactured Product" shall mean each Imaging System manufactured and sold by AccuMed to Ventana hereunder. "Marketing Specifications" shall mean a detailed specification of the performance requirements for the Imaging System and the Software Products prepared by Ventana and will be an expanded version of the specifications contained in Exhibit 1-2. "Master Validation Protocol" shall mean a master validation protocol used by Ventana to seek FDA 510k approval from the U.S. Food and Drug Administration for the Imaging System and Software Products. - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 3 4 "Medical Research Sales" shall mean the sale by or under the authority of a party to this Agreement of Imaging Systems to end customers only for their internal medical research purposes, and expressly excludes the use or sale of such Imaging Systems for: (i) any commercial use or gain by any such end customers, (ii) any commercial use in the direct or indirect treatment of patients, or (iii) any resale or further distribution by such end customers. "Payment Report" shall mean a report designated as such in Section 9.5.3. "Ploidy Product" shall mean a software product to be developed by AccuMed for Ventana for conducting DNA ploidy analysis as will be more fully described in the Marketing Specifications. "Product Exclusivity" shall mean the exclusivity of the licenses granted to Ventana in Article 2. "Products" shall mean any medical products and systems, including but not limited to the [***] Products shall also include any subsequent hardware and software products developed by AccuMed for Ventana under this Agreement. "Proprietary Information" shall have the meaning specified in Section 4.1. "Rare Event Detection Product" shall mean a software product to be developed by AccuMed for Ventana that will permit Ventana [***] The FDA labeling that Ventana will be seeking and the protocol that will be required by the FDA to obtain this label is referenced in Exhibit 1-4. "Royalty Product" shall mean an Imaging System manufactured and sold by or under the authority of Ventana. Royalty Product shall exclude any Manufactured Product. "Subsidiaries" shall mean any legal entity more than or equal to fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly by a party. "Software Products" shall mean any software product developed or customized for Ventana under this Agreement, including but not limited to the [***] "Source Code" shall mean all source code and documentation for the Software Products and any other software related to or used with any Imaging System, and updates to all of the foregoing during the term of this Agreement. - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 4 5 "Technology Transfer" shall mean the transfer of AccuMed Intellectual Property Rights embodied in tangible form, including copies of any issued patents and pending patent applications, to Ventana as set forth in Article 8. "Telepathology Product" shall mean[***] 2. Grant of LicenseS. 2.1 Subject to the terms and conditions of this Agreement, AccuMed hereby grants to Ventana and its Subsidiaries a perpetual, irrevocable, worldwide, royalty-free (except as otherwise provided to be royalty-bearing hereunder) license under AccuMed Patent Rights and AccuMed Technical Information to use, make, have made, import, offer to sell and sell Products and to practice any process or method involved in the manufacture or use of Products. The foregoing license shall be (i) exclusive in the Field (even as against AccuMed except as provided in Section 2.4 below) and non-exclusive outside the Field, provided that such non-exclusive license shall not extend to the Excluded Field; and (ii) sublicensable with AccuMed's written approval, which shall not be unreasonably withheld. 2.2 Subject to the terms and conditions of this Agreement, AccuMed hereby grants to Ventana and its Subsidiaries a sublicensable, perpetual, irrevocable, worldwide, royalty-free (except as otherwise provided to be royalty-bearing hereunder) license under AccuMed Intellectual Property Rights to use, reproduce, distribute (directly or indirectly through one or more levels of distribution), modify, adapt, and create derivative works of the AccuMed Software (including any modifications and derivative works thereof made by Ventana) and to otherwise utilize the AccuMed Software in the manufacture, sale, or design of Products; provided that the AccuMed Software and modifications and derivative works thereof may be distributed only in source and object code form integrated into or bundled with Products or as updates of the AccuMed Software provided to end-user customers of Products. The foregoing license shall be (i) exclusive in the Field (even as against AccuMed) and non-exclusive outside the Field, provided that such non-exclusive license shall not extend to the Excluded Field; and (ii) sublicensable with AccuMed's written approval, which shall not be unreasonably withheld. 2.2.1 With respect only to Source Code owned by AccuMed, the foregoing license shall be limited to the maintenance, support, and continued development of the Software Products and any other software related to or useful with the Imaging System. 2.3 License Grant-Back. Subject to the terms and conditions of this Agreement and during the term hereof, Ventana hereby grants to AccuMed a non-exclusive, worldwide, non-sublicensable, royalty-free license, but only outside of the - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 5 6 Field, to use, reproduce, distribute, modify, adapt, and create derivative works of the Developed Software; provided that the Developed Software may be distributed only in source and object code form under the terms of an End-User Software License reasonably acceptable to and approved in advance in writing by Ventana. 2.4 Reservation. The license granted in Section 2.1 above is subject to a reserved worldwide non-exclusive license in the Field to AccuMed solely for Internal Research and Development and Medical Research Sales, subject to AccuMed's obtaining a written agreement from end customers of Medical Research Sales that any Imaging Systems sold are not licensed for commercial use by others in the direct or indirect treatment of patients and shall not be resold or further distributed. 2.5 Improvements. Any AccuMed modifications or improvements to the AccuMed Software or Imaging System made before the termination of this Agreement shall be included in the licenses of this Article 2 without additional charge to Ventana. AccuMed agrees to promptly disclose such modifications and improvements. To assist in the transfer of modifications and improvements, Ventana shall be entitled to have a development engineer observe the operations of AccuMed related to the subject matter of the licenses of this Article 2 for up to one month per year during the term of this Agreement. 3. OWNERSHIP. 3.1 Ownership. Ventana shall exclusively own all right, title and interest (including patent rights, copyrights, trade secret rights, mask work rights and all other intellectual and industrial property rights of any sort throughout the world) in any inventions, works of authorship, mask works, ideas or information made or conceived or reduced to practice by AccuMed in the course of performance under this Agreement (the "Foreground Technology"), which course of performance shall include without limitation the initial and future development of the Imaging System and Software Products or any maintenance provided by AccuMed hereunder as part of this Agreement. However, Ventana shall have no ownership of any Developer Stock. "Developer Stock" shall mean AccuMed's preexisting software engines, development tools and routines, as well as derivatives and modifications thereof; provided that if any such derivative or modification is made in the course of performance under this Agreement, then it will qualify as Developer Stock only if it (i) has substantially the same functionality as other Developer Stock and (ii) has general applicability apart from the Software Products. 3.1.1 AccuMed may use third party software in the software to be delivered to Ventana under this Agreement; provided that (i) Ventana obtains the rights from such third parties necessary to provide all rights granted to Ventana under this Agreement and (ii) AccuMed obtains such third party software at AccuMed's sole expense. Notwithstanding the foregoing, Ventana shall be responsible for obtaining a license for the software to be used in the Telepathology Product. If AccuMed uses Accumed or third party software or data in any software or other materials to be delivered to Ventana under this Agreement, AccuMed shall identify the software modules 6 7 containing AccuMed Software and separately identify the modules containing third party software at the time of delivery to Ventana. 3.2 AccuMed hereby makes and agrees to make any assignments necessary to accomplish the foregoing ownership provisions. In interpreting such ownership provisions anything made or conceived or reduced to practice by an employee or contractor of AccuMed in the course of performance under this Agreement will be deemed so made or conceived or reduced to practice by that party; AccuMed has and will have appropriate agreements with all such employees and contractors necessary to fully effect the provisions of this Article 3. 3.3 Ventana will have the exclusive right to, and, at Ventana's expense, AccuMed agrees to assist Ventana in every proper way (including, without limitation, becoming a nominal party) to, evidence, record and perfect the foregoing assignments and to apply for and obtain recordation of and from time to time enforce, maintain, and defend any proprietary right assigned to Ventana under this Agreement. AccuMed will execute all documents Ventana may reasonably request for such purposes. 3.4 Any assignment by AccuMed of copyright hereunder includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as "moral rights" (collectively "Moral Rights"). To the extent such Moral Rights cannot be assigned under applicable law and to the extent the following is allowed by the laws in the various countries where Moral Rights exist, AccuMed hereby ratifies and consents to any action consistent with the terms of this Agreement that would violate such Moral Rights in the absence of such ratification/consent. AccuMed will confirm any such ratifications and consents from time to time as requested by Ventana. 4. Confidential Information. 4.1 Confidentiality. Each party agrees that all inventions, processes, materials, chemicals, know-how and ideas and all other business, technical and financial information they obtain from the other are the confidential property of the disclosing party ("Proprietary Information" of the disclosing party). Except as expressly allowed in this Agreement, the receiving party will hold in confidence and not use or disclose any Proprietary Information of the disclosing party and shall similarly bind its employees in writing. The receiving party shall not be obligated under this Section 4.1: (i) beyond five years after termination of this Agreement or (ii) with respect to information the receiving party can document: (a) is or has become readily publicly available through no fault of the receiving party or its employees or agents; or (b) is received from a third party lawfully in possession of such information and lawfully empowered to disclose such information and provided the receiving party abides by all restrictions imposed by such third party; or 7 8 (c) was rightfully in the possession of the receiving party prior to its disclosure by the other party provided the receiving party abides by all restrictions imposed on its possession of such information; or (d) was independently developed by employees or consultants of the receiving party without access to such Proprietary Information. 5. field Exclusivity. 5.1 Neither AccuMed nor any Subsidiary shall develop, manufacture, purchase, distribute, or market anywhere worldwide during the term of this Agreement (or have or enter into any agreement or arrangement with respect to) any product or system: (i) competitive with or substantially similar to the Imaging System or Software Products or (ii) in the Field. 5.2 Termination of Field Exclusivity shall have no effect on Product Exclusivity under the licenses granted to Ventana under Article 2. 6. PRODUCT DEVELOPMENT. 6.1 Imaging System and Software Product Specifications. With respect to the Imaging System and the Software Products, AccuMed shall, within [***]of receiving the Marketing Specifications, complete the Functional Specifications and a development plan and schedule consistent with the Marketing Specifications ("Development Plan" and "Development Schedule") for the Imaging System and the Software Products. Ventana agrees to consult with and assist AccuMed in doing so including but not limited to providing AccuMed's development engineers with ongoing assistance by Ventana's medical experts as reasonably necessary to develop the Software Products with functionality consistent with the Functional Specifications and Ventana's intended customer markets. The completed Functional Specifications and Development Plan and changes thereto are subject to the approval of Ventana, which approval shall not be unreasonably withheld. 6.2 AccuMed's Development Obligations. For the Imaging System and Software Products, AccuMed will perform the following activities consistent with the Functional Specifications, Development Plan, and Development Schedule: (i) undertake and complete development of the Imaging System and Software Products as set forth in the completed Functional Specifications, including manufacturing scale-up, (ii) prepare and provide Ventana with development information for the Imaging System and Software Products as necessary or reasonably desirable for any regulatory filings, (iii) assist with Alpha Testing and Beta Testing of the Imaging System and Software Products as set forth herein, and (iv) deliver the Engineering Prototypes and Manufacturing Prototypes to Ventana. - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 8 9 6.2.1 Within [***] of the Effective Date, AccuMed shall deliver to Ventana a first Engineering Prototype of the Imaging System and an Engineering Prototype of the Rare Event Detection Product (each in a form suitable for conducting FDA clinical trials). 6.2.2 Within [***] of the Effective Date, AccuMed shall deliver a second Engineering Prototype of the Imaging System and Engineering Prototypes of the [***]. 6.2.3 Within [***] of the Effective Date, AccuMed shall deliver the Engineering Prototype for the [***]. 6.2.4 AccuMed shall deliver [***] Manufacturing Prototypes of the Imaging System and [***] copies of each of the [***] 6.2.5 AccuMed shall deliver [***] Manufacturing Prototypes of the [***] to Ventana for Beta Testing within 10 days of the completion of Alpha Testing thereof. 6.2.6 Telepathology Product. AccuMed shall assist Ventana in its search for and selection of a third party vendor for a software product suitable for customization by AccuMed to deliver the Telepathology Product under this Agreement. AccuMed or its contractors shall perform customization to such vendor's product as necessary to ensure compliance with the Functional Specifications and the compatibility and interoperability of the Telepathology Product with the Imaging System and other Software Products and the manner of Ventana's intended use thereof. AccuMed shall deliver an Engineering Prototype and a Manufacturing Prototype of the Telepathology Product to Ventana on reasonable successive dates consistent with other delivery dates hereunder and as mutually agreed by the parties. 6.3 Ventana's Development Obligations. 6.3.1 Ventana shall provide AccuMed with the Marketing Specifications within 15 days after the Effective Date for AccuMed's use in preparing the Functional Specifications. - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 9 10 6.3.2 Ventana shall complete Alpha Testing for the first Engineering Prototype of the Imaging System and the Engineering Prototype of the [***]to be delivered under Section 6.2.1 within [***]of the receipt thereof. 6.3.3 Ventana shall complete Alpha Testing for the second Engineering Prototype of the Imaging System and the Engineering Prototypes of the [***]to be delivered under Section 6.2.2 within [***]of the receipt thereof. 6.3.4 Ventana shall complete Beta Testing for the Manufacturing Prototypes of the Imaging System, the [***]to be delivered under Section 6.2.4 within [***]of the receipt thereof. 6.3.5 Ventana shall complete Alpha Testing for the Engineering Prototype of the [***]to be delivered under Section 6.2.3 within [***]of the receipt thereof. 6.3.6 Ventana shall complete Beta Testing for the Manufacturing Prototype of the [***]to be delivered under Section 6.2.5 within [***]of the receipt thereof. 6.3.7 Ventana may in its sole discretion and at its expense obtain any regulatory approvals necessary for Ventana's manufacturing, sales, marketing, and service of the Imaging System, including but not limited to any beta testing of the Manufacturing Prototypes by Ventana. Ventana's obligations hereunder shall include, without limitation, all testing and other activity necessary or useful to ensure compliance with applicable governmental or administrative rules and regulations. Ventana shall be entitled to submit the filings in its name. 6.3.8 Ventana shall commence FDA clinical trials for the Master Validation Protocol within [***]after the completion of Alpha Testing for the first Engineering Prototype of the Imaging System and the Engineering Prototype of the [***]with an expectation of FDA clearance within [***]of the Effective Date, assuming the Rare Event Detection Product is delivered by AccuMed on time as provided hereunder and passes Alpha Testing within [***]of receipt by Ventana. - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 10 11 6.4 Acceptance. 6.4.1 Acceptance of Deliverables. All deliverables provided by AccuMed under this Agreement shall be delivered for Ventana's acceptance testing in accordance with the acceptance procedure set forth in Section 6.4.2 below. Prior to each delivery, AccuMed shall have completed all required testing applicable to such deliverables to ensure material compliance with the applicable specifications hereunder. 6.4.2 Acceptance Testing. (a) Acceptance Standards. Following receipt of each deliverable, including but not limited to any deliverables intended for Alpha Testing or Beta Testing, Ventana shall have the time period for testing as set forth under this Agreement, or if not otherwise set forth herein for any deliverable, a time period of 30 days (the "Verification Period") in which to use commercially reasonable efforts to review, examine and verify such deliverable and notify AccuMed of either: (a) any material failure thereof as determined by Ventana to meet the applicable specifications, or (b) any other rejection for technical reasons by Ventana as determined in its reasonable sole discretion (a "Failure"). (b) Beta Testing. Any deliverable subject to Beta Testing hereunder shall also be subject to technical acceptance by Ventana's selected beta site customers. Such technical acceptance shall be determined by such customer in its sole reasonable discretion. Such technical acceptance shall be communicated to AccuMed by Ventana and shall be subject to the time limit for the Verification Period above and the Acceptance Procedure set forth in subsection (c) below. (c) Acceptance Procedure. If Ventana discovers any Failure, it shall promptly provide AccuMed with written notice of such Failure, including all information reasonably available regarding such Failure. Upon receipt of such notice, AccuMed shall use its best efforts, at AccuMed's sole cost and expense, to correct any such Failure and to resubmit the corrected applicable deliverables to Ventana as soon as commercially and technically practicable, but in all events within 21 days following Ventana's notification of a Failure. AccuMed shall repeat the process of correction and resubmission of the applicable deliverable, subject to additional Verification Periods, until Ventana's acceptance. The parties agree that any failure by Ventana to discover and notify AccuMed of defects within any Verification Period shall not negate any of AccuMed's representations or warranties, nor waive any of Ventana's rights or remedies hereunder. 6.5 Future Development. AccuMed shall develop any improvements to the Imaging System and Software Products as may be reasonably requested in writing by Ventana from time to time during the term of this Agreement for Ventana's continued expansion of its products sales and services and the continuing introduction of new product features. Such requests may include but not be limited to modifications to the 11 12 initial Imaging System hardware platform, the development of a totally new, higher throughput imaging system for larger labs, modifications to existing software modules, and the development of completely new software modules for use with existing or future imaging systems. Such development under this Section 6.5 shall be pursuant to specifications developed by Ventana with the cooperation of AccuMed. Ventana shall pay AccuMed for such development work at an additional development cost as mutually agreed by the parties. 7. SUPPLY AND MARKETING. 7.1 AccuMed's Supply Obligations. AccuMed shall manufacture and deliver those quantities of Manufactured Product as specified below, FOB AccuMed's plant. Manufactured Products delivered by AccuMed shall incorporate the latest improvements to the Imaging System developed by AccuMed hereunder or otherwise at no additional cost to Ventana, including but not limited to any such improvements related to Maintenance. Each Manufactured Product shall include without limitation all specified hardware and the Basic Imaging and Report Generating Product. 7.2 Quantity. 7.2.1 AccuMed will manufacture and deliver [***] Manufactured Products to Ventana with delivery at a rate of [***] Manufactured Products per calendar quarter commencing with the first full calendar quarter following the completion of Beta Testing for the Imaging System and all Software Products and receipt by Ventana of FDA Approval. Delivery of such Manufactured Products may be accelerated with mutual agreement. Each Manufactured Product will be delivered with the AccuMed Software and/or Software Products as specified in Ventana's sole discretion. 7.2.2 If AccuMed fails to ship at least 75% of the amount of any Manufactured Product for a given calendar quarter as required above, (a "Supply Deficiency"), Ventana may so notify AccuMed in writing whereby: (i) Technology Transfer will be accelerated as necessary to permit the immediate manufacture of Imaging Systems by Ventana, and (ii) AccuMed will promptly prepare a plan as to how to remedy the situation (which may involve new or expanded production facilities or a third party producer). AccuMed will use diligent efforts to implement such plan and shall provide Ventana with quarterly reports on its progress. If such plan is not substantially implemented within 2 months from Ventana's notice (and it will not be substantially implemented in significantly less time than Ventana could begin commercial production thereafter) (an "Implementation Failure"), then AccuMed will provide Ventana with all technical assistance reasonably necessary for Ventana to make and have made such Manufactured Products to meet the portion of Ventana's requirements of that Manufactured Product that AccuMed cannot supply hereunder, for which such portion of Manufactured Products shall not be subject to a royalty as - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 12 13 otherwise provided hereunder. In addition to the foregoing rights, in the event of a Supply Deficiency, Ventana shall have the right to terminate any further obligation to purchase Manufactured Products effective immediately upon providing written notice to AccuMed. 7.3 Ventana's Marketing Obligations. Ventana represents, warrants and agrees: 7.3.1 to comply with all export laws and restrictions and regulations of the Department of Commerce or other United States or foreign agency or authority, and not to export, or allow the export or reexport of any Proprietary Information of AccuMed or any product thereof in violation of any such restrictions, laws or regulations. 7.3.2 in addition to and without in any way limiting Ventana's other obligations hereunder, to use all methods to protect the parties' rights with respect to the Proprietary Information of AccuMed as it uses to protect its own or any third party's confidential information or intellectual property rights. 7.4 Maintenance. AccuMed shall provide maintenance services (including but not limited to engineering and testing work) for the correction of defects or errors and the development of improvements for all Manufactured Products and Royalty Products or any other deliverables sold or provided to Ventana under this Agreement (the "Maintenance"); provided that Ventana shall be responsible for the actual installation and retrofitting (the "Installations") of software upgrades or hardware improvements for any Manufactured Products and Royalty Products that have been installed for use in a Ventana facility or purchased by any other third party. 7.4.1. Maintenance shall include but not be limited to prompt correction of any software errors and any hardware defects in any deliverables provided to Ventana hereunder and AccuMed shall provide all personnel and bear any and all expenses, travel or otherwise, as required as part of Maintenance except for Installations. AccuMed shall commit at least one full-time equivalent employee for providing Maintenance. Maintenance shall further include the providing of all updates to any software and all improvements to any hardware for any deliverables that have been provided to Ventana hereunder. 7.4.2 All software and hardware upgrades and improvements shall be delivered to Ventana as part of Maintenance at no additional cost to Ventana, except that Ventana shall pay AccuMed [***]for any hardware parts provided as part of Maintenance that provide an improvement in performance other than due to an error or defect correction. 7.4.3 During the term of this Agreement and as payment for the Maintenance, Ventana shall pay AccuMed a maintenance fee of U.S. [***]with the first - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 13 14 such installment commencing on the first day of the first month of the first full calendar quarter following receipt by Ventana of FDA Approval and completion of Beta Testing for the Imaging System and all Software Products. Ventana may discontinue Maintenance at any time with written 90-day notice. 7.5 Ventana shall purchase parts from AccuMed's current parts inventory: (i) as required for the replacement of parts for the Manufactured Products installed for end-use at any Ventana facility, and (ii) as needed by Ventana for its manufacture of any Royalty Products; provided that the foregoing obligation (a) shall only apply for those Manufactured Products or Royalty Products using the AcCell 2001 hardware platform (and only for such parts that are usable), and (b) shall not apply to any parts added to AccuMed's inventory after the Effective Date. AccuMed shall provide a full written inventory list of such parts and AccuMed's Direct Costs for each part to Ventana within 60 days of the Effective Date. AccuMed shall internally identify and track such parts in its inventory, and report such information to Ventana from time to time as reasonably requested by Ventana, to assist Ventana in determining the extent of its purchase obligation under this Section 7.5. Any parts purchased by Ventana under this Section 7.5 shall be at AccuMed's[***]; provided that with respect to parts purchased for Royalty Products, in no event will Ventana's total costs for such parts per Royalty Product exceed $15,000. The obligations of this Section 7.5 shall not apply to any sublicensees of Ventana. 8. TECHNOLOGY TRANSFER. 8.1 Transfer of Technology. To carry on the physical transfer of AccuMed Technical Information from AccuMed to Ventana, AccuMed shall provide to Ventana as soon as reasonably practicable after the Effective Date all AccuMed Intellectual Property Rights embodied in tangible form as is reasonably necessary for Ventana to be ready to begin manufacture and continue development of the Imaging System and the Software Products (including but not limited to the Source Code, all related object code and documentation, and any other related information) beginning on the earlier of: (i) one year after the Effective Date or (ii) the completion of delivery of [***] Manufactured Products to Ventana. 8.1.1 AccuMed shall further promptly disclose and transfer to AccuMed on a monthly basis all Foreground Technology. 8.2 Technical Assistance. During the term of this Agreement, AccuMed shall provide ongoing technical assistance by qualified AccuMed employees at Ventana's site as necessary to transfer manufacturing capability for Manufactured Products to Ventana and to support Ventana's ongoing manufacturing and development efforts related to the Imaging System. Ventana shall pay reasonable travel and lodging expenses to AccuMed - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 14 15 for such technical assistance; provided such travel is approved in advance in writing by Ventana. 8.3 Source Code. AccuMed shall deliver the Source Code to Ventana as soon as reasonably practicable after the Effective Date and shall deliver updates of the Source Code to Ventana on a quarterly basis thereafter. 9. PAYMENTS. 9.1 Development Funds. Ventana shall pay to AccuMed a total fee of U.S. [***]for all development of the Imaging System and the delivery of the Engineering Prototypes (including but not limited to all related software) under this Agreement payable in installments as follows (the "Development Funds"): 9.1.1 Upon the execution of this Agreement by both parties, Ventana shall pay [***] to AccuMed. 9.1.2 Upon completion of Alpha Testing and Ventana's acceptance of the Engineering Prototypes for the Imaging System and the[***], Ventana shall pay [***] to AccuMed. 9.1.3 Upon completion of Alpha Testing and Ventana's acceptance of the Engineering Prototypes for the[***], Ventana shall pay [***] to AccuMed. 9.1.4 Upon completion of Beta Testing and acceptance by Ventana and Ventana's beta site customers of the Engineering Prototypes for the Imaging System, the[***], Ventana shall pay [***] to AccuMed. 9.1.5 Upon completion of Beta Testing and Ventana's acceptance of the Engineering Prototype for the[***], Ventana shall pay [***] to AccuMed. 9.1.6 Upon the U.S. FDA issuing to Ventana a letter of approvability of a Master Validation Protocol that is a 510k equivalent to that obtained by [***]("FDA Approval"), Ventana shall pay [***] to AccuMed. - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 15 16 9.2 Use of Development Funds. AccuMed shall hold and use the Development Funds solely for the purpose of applying to AccuMed's direct and indirect development costs under this Agreement until the completion of Beta Testing, after which the foregoing restriction shall no longer apply. 9.3 Manufacturing Prototype Pricing. In addition to the Development Funds, Ventana shall pay AccuMed U.S. [***]for each Manufacturing Prototype of the Imaging System delivered to and accepted by Ventana hereunder. No payment shall be due for any Manufacturing Prototypes of the Software Products. 9.4 Manufactured Product Pricing. In connection with the supply of Manufactured Products, Ventana shall pay AccuMed U.S. [***]for each Manufactured Product of the Imaging System delivered to and accepted by Ventana hereunder. Except as set forth in Section 9.5 below, no payment shall be due for any Software Products delivered with a Manufactured Product. 9.5 Royalties. Ventana will pay a royalty to AccuMed on the sale of each Royalty Product and those software products set forth below by or under the authority of Ventana; provided that no royalty shall be due for any Manufactured Product purchased from Ventana or any bona fide sample and clinical trial products or copies of software. 9.5.1 Royalty Amounts. The royalty shall be U.S. [***]for each Royalty Product sold. 9.5.2 Software Products. In addition to the payment of a royalty for each Royalty Product, Ventana shall pay an additional royalty to AccuMed for each of the following listed software products integrated into or bundled with either: (i) a Manufactured Product purchased from AccuMed, or (ii) a Royalty Product manufactured and sold by Ventana; provided that in no event shall any royalty be due for any such software product obtained or licensed by Ventana from a third party (including but not limited to the Telepathology Product). No royalty shall be due for other Software Products not listed below. The royalty rates for software products under this Section 9.5.2 shall be as follows:
- ------------------------------------------------------------------------------- PRODUCT ADDITIONAL ROYALTY PER IMAGING SYSTEM - ------------------------------------------------------------------------------- [***] [***] - ------------------------------------------------------------------------------- [***] [***] - -------------------------------------------------------------------------------
- --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 16 17 9.5.3 Payment Report. With each payment of royalties, Ventana shall provide AccuMed with a report delineating: (a) the number and types of Royalty Products sold during the applicable period, and (b) the calculation of the amount due (the "Payment Report"). 9.5.4 Payment Terms. Royalties for sales of Royalty Product will be due within sixty (60) days of the end of each calendar quarter with respect to sales of Royalty Product recognized or received in such period. Royalties for software products under Section 9.5.2 above are due at the same time as royalties for the corresponding Royalty Product in which such software products have been installed or in the calendar quarter of installation, if installed later. 9.5.5 Records and Audit Rights. Ventana shall keep complete and accurate records reflecting all information necessary or useful in verifying the accuracy of each Payment Report. AccuMed shall have the right to hire an independent certified public accountant to inspect all such records so required to be kept by Ventana (which accountant shall agree in writing to keep all information confidential except as needed to disclose any discovered discrepancies to AccuMed); provided such audit: (i) is conducted during normal business hours, (ii) is conducted no more often then once per year (unless a discrepancy is discovered in favor of AccuMed), and (iii) is conducted only after AccuMed has given thirty days prior written notice. AccuMed shall bear the full cost and expense of such audit, unless AccuMed discovers a discrepancy of more than 1% in which case such cost and expense shall be equally shared. 9.6 Up-Front License Fee Payments. Upon the execution of this Agreement by both parties and as partial consideration for the license grants hereunder, Ventana shall pay AccuMed: (i) an up-front non-creditable fee of[***], and (ii) an additional up-front fee of [***] to be creditable against future royalties due hereunder by Ventana. 10. LIMITED LIABILITY. NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY WILL BE LIABLE TO THE OTHER WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES. 11. TERM AND TERMINATION. - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 17 18 11.1 Term. This Agreement will remain in effect for [***] years with automatic [***]-year renewals unless either party gives written notice 180 days prior to the end of the then current term not to renew or unless terminated pursuant to Section 11.2. 11.2 Termination. This Agreement may be terminated in its entirety by a party for cause immediately upon the occurrence of any of the following events: (a) If the other ceases to do business, or otherwise terminates its business operations; (b) If the other materially breaches any provision of this Agreement and fails to cure such breach within sixty (60) days of written notice describing the breach; or (c) If the other shall seek protection under any bankruptcy, receivership, trust deed, creditors arrangement, composition or comparable proceeding, or if any such proceeding is instituted against the other (and not dismissed within one hundred and twenty (120) days). 11.3 Liability Disclaimer. Neither party shall incur any liability whatsoever for any damage, loss or expenses of any kind suffered or incurred by the other (or for any compensation to the other) arising from or incident to any termination of this Agreement by such party which complies with the terms of the Agreement whether or not such party is aware of any such damage, loss or expenses. 11.4 Effect of Termination. For any expiration or termination of this Agreement, the following provisions shall survive: Sections 2.1, 2.2, 2.3, 2.4, 3, 4, 9.5, 10, 12, 13, and 15 and any other Sections as necessary for Ventana to fully exploit its licenses under Article 2. Remedies for breaches will also survive. Each party will promptly return all Proprietary Information of the other (and all copies and abstracts thereof) that it is not entitled to use under the surviving terms of this Agreement; provided that Ventana may retain all Source Code and object code and documentation for the Software Products, all information transferred by AccuMed as part of Technology Transfer, and any other information received by Ventana hereunder that Ventana reasonably believes necessary or desirable for exploitation of its licenses under Article 2. 11.5 Termination Not Sole Remedy. Termination is not the sole remedy under this Agreement and, whether or not termination is effected, all other remedies will remain available. 12. WARRANTY AND WARRANTY DISCLAIMERS. - --------------- [***] Confidential treatment has been requested for the bracketed portion. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 18 19 12.1 AccuMed hereby represents, warrants, and covenants to Ventana as follows: 12.1.1 The Engineering Prototypes, the Manufacturing Prototypes, and the Manufactured Products and the Software Products will conform to the applicable Functional Specifications, as then in effect, and any published AccuMed documentation related thereto. Such warranty does not apply to units that have been mishandled or mistreated. 12.1.2 AccuMed and its Subsidiaries are the sole owner of the patents and patent applications listed in Exhibit 1-1 and there are no other patents issued and no other patent applications filed in any country worldwide, in each case owned or filed by or specifically licensed to AccuMed or any of its Subsidiaries relating to the Imaging System or the Software Products or methods of use or the manufacture thereof. 12.1.3 AccuMed has not granted any third party any rights or interests to any AccuMed Intellectual Property Rights relating to the Imaging System or the Software Products. 12.1.4 AccuMed is not aware of any actual or potential violation, infringement or misappropriation of any third party's rights (or any claim or potential claim thereof) by any of the deliverables to be provided by AccuMed hereunder (or inherent in the development, use or production thereof). 12.1.5 AccuMed has full power and authority to enter into and perform this Agreement. 12.1.6 Neither AccuMed's entering nor performing this Agreement will violate any right of or breach any obligation to any third party under any agreement or arrangement between AccuMed and such third party. 12.2 EXCEPT FOR THE FOREGOING WARRANTY OF SECTION 12.1.1, ACCUMED DOES NOT WARRANT THE MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF ANY UNITS DELIVERED TO VENTANA UNDER THIS AGREEMENT. 13. INDEMNITY. AccuMed shall hold Ventana and its officers, directors, agents and employees harmless from liability resulting from infringement by the Imaging System, the Software Products, or any other Products using parts, software, or technical information provided by AccuMed of any patent, copyright, trade secret, or other intellectual property right, provided AccuMed is promptly notified of any and all threats, claims and proceedings related thereto and given reasonable assistance and the opportunity to assume sole control over the defense and all negotiations for a settlement or compromise; AccuMed will not be responsible for any settlement it does not approve in writing. The foregoing obligation of AccuMed does not apply with respect to any parts, software, or technical information: (i) not supplied by AccuMed, (ii) to the extent 19 20 such infringement arises from Ventana's specifications, (iii) which are modified by Ventana after shipment by AccuMed, to the extent the alleged infringement relates to such modification, (iv) combined, processed or used with other products, processes or materials where the alleged infringement relates to such combination, process or use, or (v) where the infringement is incident to use of the Product but does not result primarily from the Product. 14. RIGHT OF NOTIFICATION. AccuMed shall notify Ventana in writing within 3 days following the date on which any of the following occur: (i) AccuMed receives from any person or entity a bona fide solicitation, proposal or offer with respect to the merger or consolidation, purchase of common stock or securities convertible into common stock of AccuMed exceeding 10% of AccuMed's then outstanding common stock (on a fully diluted basis), or acquisition of assets (other than inventory and excluding the license of assets) outside the ordinary course of business, or similar transaction or business combination involving AccuMed, or (ii) AccuMed determines (through its board of directors or otherwise) to solicit, initiate, or participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate or facilitate in any other manner any effort or attempt by any other person to do or seek any of the transactions described in subsection (i) above. During the 20 day period beginning on the date of any such notice to Ventana, AccuMed shall not enter into binding agreement to complete such transaction, and shall not enter into any no-shop or standstill agreements with any person with respect to such transaction. 15. GENERAL. 15.1 Amendment and Waiver. Except as otherwise expressly provided herein, any provision of this Agreement may be amended and the observance of any provision of this Agreement may be waived (either generally or in any particular instance and either retroactively or prospectively) only with the written consent of the parties. However, it is the intention of the parties that this Agreement be controlling over additional or different terms of any purchase order, confirmation, invoice or similar document, even if accepted in writing by both parties, and that waivers and amendments shall be effective only if made by non-pre-printed agreements clearly understood by both parties to be an amendment or waiver. The failure of either party to enforce its rights under this Agreement at any time for any period shall not be construed as a waiver of such rights. 15.2. Governing Law and Legal Actions. This Agreement shall be governed by and construed under the laws of the State of Arizona without regard to conflicts of laws provisions thereof and without regard to the United Nations Convention on Contracts for the International Sale of Goods. Unless otherwise elected by Ventana in writing for a particular instance (which Ventana may do at its option), the sole jurisdiction and venue for actions related to the subject matter hereof initiated by Ventana shall be the Arizona state and U.S. federal courts having within their jurisdiction the location of Ventana's place of business in Arizona. The sole jurisdiction and venue for actions related to the subject matter hereof initiated by AccuMed shall be the Illinois state and U.S. federal courts having within their jurisdiction the location of AccuMed's place of business in 20 21 Illinois. Both parties consent to the jurisdiction of such courts and agree that process may be served in the manner provided herein for giving of notices or otherwise as allowed by Arizona or Illinois state, as is applicable, or U.S. federal law. In any action or proceeding to enforce rights under this Agreement, the prevailing party shall be entitled to recover costs and attorneys' fees. 15.3 Headings. Headings and captions are for convenience only and are not to be used in the interpretation of this Agreement. 15.4 Notices. Notices under this Agreement shall be sufficient only if personally delivered, delivered by a major commercial rapid delivery courier service or mailed by certified or registered mail, return receipt requested to a party at its addresses first set forth herein or as amended by notice pursuant to this subsection, to the attention of the Chief Executive Officer in the case of AccuMed and to the attention of the Chief Financial Officer in the case of Ventana. Any notice sent by AccuMed hereunder shall further require sending a copy of such notice to: Ventana Medical Systems, Inc., 3865 N. Business Center Drive, Tucson, AZ 85705, Attention: Legal Dept. If not received sooner, notice by mail shall be deemed received 5 days after deposit in the U.S. mails. 15.5 Entire Agreement. This Agreement supersedes all proposals, oral or written, all negotiations, conversations, or discussions between or among parties relating to the subject matter of this Agreement and all past dealing or industry custom. 15.6 Severability. If any provision of this Agreement is held to be illegal or unenforceable, that provision shall be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. 15.7 Basis of Bargain. Each party recognizes and agrees that the warranty disclaimers and liability and remedy limitations in this Agreement are material bargained for bases of this Agreement and that they have been taken into account and reflected in determining the consideration to be given by each party under this Agreement and in the decision by each party to enter into this Agreement. 15.8 Relationship of Parties. The parties hereto expressly understand and agree that the other is an independent contractor in the performance of each and every part of this Agreement, is solely responsible for all of its employees and agents and its labor costs and expenses arising in connection therewith. 15.9 Assignment. This Agreement and the rights and obligations hereunder are not transferable or assignable without the prior written consent of the parties hereto, except for rights to payment and except to a person or entity who acquires all or substantially all of the assets or business of a party, whether by sale, merger or otherwise. 15.10 Publicity and Press Releases. Except to the extent necessary under applicable laws, the parties agree that no press releases or other publicity relating to the 21 22 substance of the matters contained herein will be made without joint approval. A press release announcing this Agreement will be jointly developed and released by the parties. 15.11 Force Majeure. No liability or loss of rights hereunder shall result to either party from delay or failure in performance (other than payment) caused by force majeure, that is, circumstances beyond the reasonable control of the party affected thereby, including, without limitation, acts of God, fire, flood, war, government action, compliance with laws or regulations (including, without limitation, those related to infringement), strikes, lockouts or other serious labor disputes, or shortage of or inability to obtain material or equipment. 15.12 Remedies. Except as otherwise expressly stated in this Agreement, the rights and remedies of a party set forth herein with respect to failure of the other to comply with the terms of this Agreement (including, without limitation, rights of full termination of this Agreement) are not exclusive, the exercise thereof shall not constitute an election of remedies and the aggrieved party shall in all events be entitled to seek whatever additional remedies may be available in law or in equity. 15.13 Nonsolicitation. Neither party will encourage or solicit any employee or consultant to leave the employ of the other; provided that the foregoing (i) does not prohibit mass media advertising not specifically directed towards employees or consultants of a party and (ii) will not apply after any termination or expiration of this Agreement. [SIGNATURES ON NEXT PAGE] 22 23 ACCUMED VENTANA By: /s/ PAUL LAVALLEE By: /s/ JOHN PATIENCE --------------------------- ---------------------------- Name: Paul Lavallee Name: John Patience Title: Chairman and CEO Title: Vice Chairman 23 EX-21.1 5 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBISDIARY OF ACCUMED INTERNATIONAL, INC. Oncometrics Imaging Corp., a corporation continuing under the laws of the Yukon Territory. EX-23 6 CONSENT OF EXPERTS AND COUNSEL 1 Exhibit 23.1 CONSENT OF KPMG LLP The Board of Directors AccuMed International, Inc.: We consent to incorporation by reference in the registration statements on Form S-3 (Nos. 333-28125, 333-07681, 333-04715 and 333-56393) and on Form S-8 (No. 333-11219) of AccuMed International, Inc. of our reports dated March 29, 2000 relating to the consolidated balance sheets of AccuMed International, Inc. and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999 and related schedule, which reports appear in the December 31, 1999 annual report on Form 10-K of AccuMed International, Inc. /s/ KPMG LLP Chicago, IL April 12, 2000 EX-27 7 FINANCIAL DATA SCHEDULE
5 1000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 196 0 0 0 701 1,426 2,017 1,311 7,222 1,387 530 0 4,250 55 1,364 7,222 136 136 1,146 1,146 5,436 0 501 (6,803) 0 (6,803) 8,199 0 0 1,396 0.25 0.25
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