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