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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, 1998
[ ] 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
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Securities registered under Section 12(g) of the Exchange Act: None
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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
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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. [ X ]
The aggregate market value of the common stock held by non-affiliates
of the registrant on March 29, 1999 was: $3,898,650. Number of shares of common
stock outstanding on March 29, 1999: 5,491,901.
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.
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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. ("AccuMed" or the "Company"), a
Delaware corporation is engaged in the development and commercialization of
products, using its patented and proprietary technology, that support the review
and analysis of cytology and histology preparations in the diagnostic laboratory
healthcare market. The Company was incorporated in California in June 1988 under
the name Alamar Biosciences, Inc. and was engaged in developing, manufacturing
and marketing microbiology products, including alamarBlue(TM) and certain
diagnostic test kits under the name Alamar ("Alamar"). AccuMed, Inc., an
Illinois corporation, was formed in February 1994 and was engaged in researching
and developing cytopathology products. Effective January 1995, AccuMed, Inc.
acquired the Sensititre(TM) microbiology business by purchasing certain assets
and all of the shares of Sensititre(TM) Limited ("Sensititre"). On December 29,
1995, AccuMed, Inc. merged with and into the Company (the "Merger"). The Company
changed its name to AccuMed International, Inc., and changed its fiscal year end
from September 30 to December 31 in 1995.
The Company has a wholly owned subsidiary, Oncometrics Imaging
Corp., a company continuing under the laws of the Yukon Territory, Canada
("Oncometrics"). 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.
The Company completed an underwritten public offering of its
Common Stock in October of 1996 and received $11,700,000 net of expenses. The
proceeds were used for research and development of new products, scale-up of
manufacturing, acquisitions and general corporate and working capital purposes.
On March 3, 1997, the Company acquired the ESP(TM) Culture
System II product line (the "ESP(TM) Product Line") consisting of accounts
receivable, inventories, production equipment and a portfolio of rental
instruments used to detect microorganisms in blood cultures. The $6,000,000
purchase price was ultimately funded by private placement of $8,500,000 of
convertible promissory notes and warrants to purchase shares of the Company's
Common Stock.
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 1,245,340 shares of Series A convertible preferred
stock, convertible into 830,227 shares of common stock, and 5-year warrants to
purchase 207,557 shares of common stock.
During March 1998, the Company completed a private placement
of 1,447,778 shares of common stock and 7-year warrants to purchase a total of
1,447,778 shares of common stock and received $5,800,000 net of expenses.
Proceeds of that offering were used for research and development, general
corporate and working capital purposes.
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On January 29, 1999, the Company sold substantially all of the
assets and certain liabilities related to its microbiology division, including
Alamar, Sensititre and the ESP product line (collectively, the "Microbiology
Business"). The Company received $15,150,000 in cash at the closing. The
proceeds were used to retire $9,415,000 in debt, and the balance was retained
for general corporate and working capital purposes.
(b) Financial Information About Industry Segments
The Company's operations are 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 December 22, 1998, the Company received shareholder approval to consummate
the sale of its Microbiology Business. Accordingly, this division is reported as
a discontinued operation in the accompanying financial statements.
(c) Narrative Description of Business
GENERAL
The Company's primary focus is on the development of cytology
and histology products that improve the quality of cell-based specimen analyses
and increase productivity in the clinical diagnostic laboratory. The initial
products developed were designed for review and analysis of both cervical and
non-cervical conventional Pap smears and liquid-based preparations. The Company
has made significant expenditures on research and development, patent
applications, and regulatory approvals to bring these products to a marketable
position.
The Company believes it is the only company competing in the
computer-aided cytology screening cytodiagnostic market with a modular,
expandable product (the "AcCell(TM)" cytopathology workstations and systems)
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, the
Company believes its 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.
Although the cervical Pap test is the largest volume
diagnostic cytology test, the cytopathology laboratory routinely conducts other
tests based on samples from numerous organs and areas of the body, all of which
require precision optical microscopy and careful error-free management of data
to be implemented effectively. The Company is currently developing products for
these applications by combining its AcCell(TM) technology with other proprietary
technology developed by AccuMed and to be licensed from Oncometrics for use in
connection with the analysis of these tests in a manner similar to that of
qualitative and quantitative Pap tests. The tests and methods rely, in part, on
computer-aided microscopy, electronic imaging, image cytometry, digital image
processing and analysis, cytochemistry, and medical informatics technologies.
Certain developments in the diagnostic markets served by the
Company 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
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efficiency of laboratory-based patient specimen interpretations and diagnoses.
The Company'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. The Company's growth and
profitability will depend, to a great extent, upon its ability to complete
development of and successfully introduce new products. To achieve this, the
Company will need to continue research and development activities and obtain
regulatory approval for such products with the U.S. Food and Drug Administration
(the "FDA").
EARLY LUNG CANCER SCREENING
The Company 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, the Company 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, the Company estimates the
worldwide market for early lung cancer screening of high-risk and asymptomatic
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.
The Company 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.
The Company believes a screening program for early lung cancer
detection and diagnosis is possible. It must rely upon identifying and
recruiting high-risk patient populations into non-invasive screening programs
before they become symptomatic. A screening program for high-risk 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.
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To achieve this goal, the Company is developing a cell and
sample analysis instrument platform, 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. The Company 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 its affiliates conducted, in five countries on
three continents, a 2-year field study and analysis 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 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.
LUNG CANCER SCREENING BUSINESS DEVELOPMENT
The Company 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.
ALLIANCE RELATIONSHIPS
AccuMed is also exploring alliance relationships with partners
that may further speed the commercialization of the early lung cancer screening
test by bringing additional technology (e.g., lung cancer probes for panel
assays), prospective customers (e.g., clinical trial sites and end-users),
distribution channels (e.g., pharmaceutical industry), and programmatic funding.
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MARKETS AND PRODUCTS
The Company's products and equipment are sold to customers
that operate principally in the clinical laboratory segments of the healthcare
market. For fiscal year 1998 and 1997, sales to this market represented the
majority of the Company's total sales.
Due in part to a recent trend toward consolidation of
diagnostic laboratories, including large testing laboratories, the Company
expects that the number of potential domestic customers for its cytopathology
products will decrease. Due to the relative size of the largest U.S.
laboratories, it is likely that a significant portion of cytopathology products
will be concentrated among a relatively small number of customers. In order to
promote acceptance in the market, the Company will need to foster an awareness
of and acceptance by these potential customers of the Company's products and the
potential benefits of such systems over current methods. The Company's
increasing dependence on sales to large laboratories may strengthen the
purchasing leverage of these potential customers.
CYTOPATHOLOGY PRODUCTS
ACCELL(TM) 2000 SERIES
The AcCell(TM) 2000 and 2001 are fully automated workstations
for the general microscopy user for industrial research Quality Control ("QC")
applications. It incorporates automated stage, slide handling (with cassette
loading in the AcCell(TM)2001, coordinates marking (x, y, z) forms and recall,
motorized focus and an integrated data base for information management and
process control monitoring.
This product focuses on the general microscopy-based cytology
screening and cytodiagnostic markets, including hospital cytology laboratories,
commercial diagnostic reference laboratories, and cytology laboratories within
healthcare provider organizations. It is a user friendly microscopy tool capable
of being networked into integrated with users' laboratory information systems
(i.e., LIS).
The Company believes various factors will influence the 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, by, for example, automatically producing accurate
management reports required by regulatories agencies. This product automates the
process of examining a slide under a microscope and recording the evaluation
information. The concern for potential liability due to false negative diagnoses
drives the need for reliable slide identification procedures. This product
automatically links the slide and the evaluation process with integrated bar
coding.
ACCELL(TM) CYTOPATHOLOGY SYSTEM
The AcCell(TM) Cytopathology system (the "AcCell system") is a
family of integrated technology-enhanced products that support the slide
screening process. Its initial application is intended to be in the high-volume
cervical cancer or Pap smear screening test environment. The Company believes it
can be adapted as an optimal cytologist "review station" for other areas of
cytology as well as histology and other microscopy-oriented areas of the
diagnostic laboratory.
The AcCell(TM) system incorporates the AcCell(TM) 2000 and
other components that enhance the work environment of the human screener. Of
particular importance is the AcCell(TM) DMS, a fully integrated data management
system that provides continuous data capture, monitoring and
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reporting functions for both gynecological and non-gynecological samples.
The Company believes this product clearly addresses several
important trends within the domestic healthcare marketplace.
First, diagnostic laboratories face pressure for cost
containment and improvement on profit margins. The Company believes this drives
the need for tools that streamline aspects of the operational process and that
can significantly reduce costs associated with laboratory testing. This product
offers seamless support for the entire process of Pap slide screening. The
system has direct impact on cost saving by (a) automating front-end patient and
specimen data input and (b) automating data management throughout the process.
Secondly, diagnostic laboratories need operational procedures
that minimize risk of data management errors and the related potential legal
liability. The Company believes this product offers documentation of the entire
screening process, automatically capturing and monitoring all significant
aspects of screening to allow ongoing process control procedures. It also
automates reporting for regulatory compliance purposes.
Third, laboratories must have a commitment to quality patient
outcomes resulting from the highest attainable accuracy levels in specimen
classification and diagnosis. The Company believes this product assures the
laboratory of the optimal working and screening environment to support
high-quality slide analysis.
Lastly, laboratories must have strategies to capture and
maintain their customer base. The Company believes this product provides the
laboratory with a tool to shorten cytology Pap test turn-around-time and results
reporting, providing customers with full accountability for the screening
process, while ensuring high-quality, cost-effective service.
TRACCELL(TM) 2000 SLIDE MAPPING SYSTEMS
The TracCell(TM) 2000 is a computer-aided optical microscope
system intended to be used to map adequately stained, well-preserved cervical
cytology preparations that have been prepared using a Papanicolaou or Pap-like
staining protocol. The TracCell(TM) 2000 supports the visual human screening of
these Pap-stained specimens for indications of cervical cancer and related
abnormalities. The TracCell(TM)2000 may be used with conventional Pap smear
slides as well as with ThinPrep(R) slides, a liquid-based cytology preparation.
The TracCell(TM) 2000 is not intended for use with other types of specimens or
specimen preparation methods.
The TracCell(TM) is a productivity enhancement tool. It is not
currently being marketed since it may only be used in laboratories that are
using AcCell(TM) workstations. However, the TracCell(TM) technology, including
its proprietary software and intellectual property, are being incorporated into
the AcCell-Savant product under development for early lung cancer detection and
diagnosis.
The TracCell(TM) 2000 Slide Mapping System was cleared by the
FDA in August 1997 for use with conventional cervical Pap smears. AccuMed
received FDA clearance of this product in October 1998 for its use with Cytyc
ThinPrep(R) samples.
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ACCELL-SAVANT/RESEARCH SYSTEMS
Oncometrics has developed a proprietary high-resolution image
cytometer (the "Savant") that now uses an AcCell(TM) computer-aided microscopy
workstation, a high-resolution digital camera, proprietary image processing and
analysis software, and high-speed computer processors to capture and analyze
cellular images from a microscope slide that has been stained using Oncometrics'
proprietary DNA staining method. Prototypes of the Oncometrics instrument have
been developed that are capable of detecting and measuring small variations in
the DNA in cell nuclei, which assists the cytologist in detecting, for example,
lung cancer at early, more curable stages of development. Because the presence
of cancer cells can cause changes in the nuclear DNA of neighboring
non-cancerous cells, in some cases the Oncometrics instrument can detect an
abnormal sample even in the absence of cancer cells.
The AcCell-Savant/research systems can scan and analyze
thousands of cells per slide without human intervention. It is currently
marketed as a cellular (nuclear) DNA image cytometer that can be used for many
image cytometry research applications including quality assurance in cytology,
cell cycle analysis, viral disease investigations, treatment planning and
monitoring research, a complement or alternative to flow microfluorimetery and
cell sorting instruments, transplant rejection analyses,
malignancy-associated-change research, and general cellular research.
The AcCell-Savant/research systems are being installed under
the terms of a strict commercialization agreement for AccuMed-qualified
collaborators, in clinical and industrial research laboratories. Terms of the
agreement give the Company the right to commercialize other potential
applications of the AcCell-Savant research systems. These early-adopter sites
could enable the Company to speed the development and introduction of
AcCell-Savant/clinical systems for an early cancer and other disease detection
programs.
The Company believes that this technology may be applied to
other diseases, such as cervical cancer, and is currently testing these methods
with scientists and clinicians at other cancer research and patient care
institutions.
SALES AND MARKETING
The Company currently markets its AcCell(TM) products directly
and on a limited basis in order to collect, analyze, and document AcCell(TM)
cytopathology workstation performance data in several primary clinical cytology
laboratory market segments. The marketing of the TracCell(TM) slide mapping
systems will occur after 1999 when greater acceptance and market penetration of
the AcCell(TM) cytopathology workstations can be achieved.
The Company has marketed its products on an international
basis through territory-based exclusive and semi-exclusive distributors.
Several automated slide-screening systems have been introduced
into the cervical cancer screening market and the Company expects that it will
benefit from the increased awareness and acceptance of these new technologies.
The Company believes it can generate revenue from both system
sales and per slide charges. For system sales, customers purchase the
instruments (e.g., AcCell) directly from the Company or through one of the
Company's distribution partners. Slide revenues would come from the Company's
placement of the instrument at the customer's site and the customer's payment of
an up-front fee for a
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specific number of slides that are processed (e.g., Acell-Savant).
Alternatively, the Company may place instruments without charge at customer
locations and to charge customers on a per test, or Fee-Per-Use ("FPU"), basis.
As an important element of its business strategy, the Company intends to use
third-party financing to support placements of systems.
The AcCell-Savant research systems are marketed directly by
the Company to university medical centers and research centers. This product
line includes disposable DNA staining kits.
In May 1997, the Company entered into an agreement with Leica
Microscopy und Systems GmbH ("Leica"), a leader in precision microscopy and
imaging technology, which gave Leica exclusive third-party distribution rights
to the AcCell(TM) 2000 and 2001 Systems outside the Western Hemisphere. Leica
had a right of first refusal and negotiation to be the exclusive distributor
outside the Western Hemisphere of future cytopathology products developed by the
Company. This agreement was terminated in May 1998.
From May 1996 until September 1997, the Company granted
Olympus America ("Olympus") exclusive third-party distribution rights to the
AcCell(TM) 2000 and 2001 Systems in the Western Hemisphere. Effective September
1997, the Company and Olympus entered into an amendment to terminate the
original agreement.
The Company entered into an agreement with Sunquest
Informations Systems in April of 1998 which gave them a semi-exclusive
third-party distribution rights to the AcCell(TM) 2000 and 2001 systems in the
USA.
On March 9, 1999, the Company announced it has signed a letter
of intent with Bell National Corporation to license the AcCell(TM) product line
including patents, engineering study results, and proprietary trade information.
The license, expected to close within 90 days, will give Bell National the
rights to use and sell AcCell(TM) products including the AcCell(TM) 2000, 2001
and 3000 computer-aided microscopy workstations. In addition, Bell National
agreed to purchase AcCell(TM) 2000 series equipment inventory and related assets
from AccuMed. Bell will assume responsibility for AccuMed's existing AcCell
installations, contracts and open quotations. This distribution channel for
AcCell(TM) will produce immediate cash and an AcCell(TM)-based royalty revenue
stream while enabling AccuMed to accelerate the commercialization of its Savant
medical technologies that will incorporate next-generation AcCell(TM) features
and benefits.
COMPETITION
The Company 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.
The Company's cytopathology products will face competition
from companies that have developed or may be developing competing or alternative
systems. The Company's existing and potential competitors possess substantially
greater financial, marketing, sales, distribution and technical resources than
the Company, and more experience in research and development, clinical trials,
regulatory matters, manufacturing and marketing.
OPERATIONS
The Company assembles and tests its cytopathology products
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at its Chicago facility. The Company 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, the
Company is not manufacturing product though it assembles and tests manufactured
subassemblies. The Company anticipates future AcCell(TM) production will be done
on a contract basis in the latter half of 1999, based on customer order backlog.
GOVERNMENTAL REGULATION
The Company'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 the Company'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 the Company'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
addition, product clearances or approvals may be withdrawn for failure to comply
with regulatory standards.
Marketing in the United States of the Company'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 the Company'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
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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, the Company may be required to provide the FDA with documentation
from the medical device regulatory authority of the country in which the
purchaser is located.
The Company 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 the
manufacturing of the Company's products are currently provided by single-source
vendors. Although the Company 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
the Company's ability to manufacture products until a new source of supply were
qualified.
RESEARCH AND DEVELOPMENT
The Company'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. The
Company believes that a commitment to research and development is critical to
its ability to achieve its goals. During the fiscal years ended December 31,
1998, 1997, and 1996 expenditures for research and development were
approximately $2,600,000, $4,000,000 and $2,500,000 respectively.
The Company 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
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<PAGE> 12
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.
The Company 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, the Company 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.
The Company 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. The Company 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
The Company 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. The Company 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.
The Company'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
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<PAGE> 13
have lung cancer at an early more curable stage. The Company 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 the Company's
products will result in an overall lower healthcare costs, the Company believes
it 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 the Company's products. The Company 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, the Company intends to provide
scientific and clinical data to support its claims of the safety and efficacy of
the Company's product lines.
The Company 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
The Company 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 the Company'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. The Company 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.
The Company 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, the Company cannot be certain that
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<PAGE> 14
the Company 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.
The Company owns "SpeciFind", "Relational Cytopathology Review
Guide", "MacroVision", "TracCell", "MacCell", "AcCell-Savant", "Improving
Cytology Processes", and is currently preparing and may file additional U.S. and
foreign trademark applications in the future.
EMPLOYEES
At March 25, 1999, the Company employed 15 full-time and one
part-time employees. None of the Company's employees are represented by a labor
union, and the Company considers its relations with its employees to be good.
ITEM 2. PROPERTY
The Company currently leases (i) a 12,500 square foot facility
at 900 North Franklin Street, Chicago, Illinois, pursuant to a lease expiring
September 30, 2004. The Company is in the process of trying to sublease
approximately 10,000 square feet of space at this location. (ii) An additional
5,200 square foot facility located at 920 North Franklin Street, Chicago,
Illinois, pursuant to a lease expiring September 30, 2004, each subject to
renewal by the Company. The Company's executive offices were relocated to the
920 North Franklin Street facility in December 1998. Collectively, the Company's
Chicago, Illinois facilities also house its research and development facilities,
an engineering laboratory and cytopathology product assembly and testing
facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material
litigation and is not aware of any pending or threatened litigation against the
Company that could have a material adverse effect upon the Company's business,
operating results or financial condition.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders was held on December 22,
1998. At such meeting the following matter was approved:
Shareholders approved a proposal to sell to AMI Acquisition
Corp. (renamed Trek Diagnostic Systems, Inc., the "Purchaser"), substantially
all of assets and liabilities related to the Company's Microbiology Business,
including all of the issued and outstanding ordinary shares of AccuMed
International, Ltd., an English registry company and wholly owned subsidiary of
the Company, pursuant to the terms and conditions of the Asset Purchase
Agreement dated as of November 20, 1998 between the Company and the Purchaser.
The vote was as follows: 2,789,981 (50.861%) for, 17,068 against, 7,557 abstain
and zero broker non-votes.
ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT
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<PAGE> 15
The following table lists the names, ages and positions of all
of the Company's executive officers. Officers are elected annually by the Board
of Directors at the first meeting of the Board following the annual meeting of
shareholders.
<TABLE>
<CAPTION>
NAME AGE POSITION
------ ----- ----------
<S> <C> <C>
Paul F. Lavallee 58 Chairman of the Board and Chief Executive Officer
Norman J. Pressman, Ph.D. 50 President and Chief Scientific Officer
Gary A. Newberry 41 Chief Financial Officer
</TABLE>
PAUL F. LAVALLEE. Mr. Lavallee has been a director of the
Company 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 and
Chief Scientific Officer in March 1999. He served as a Senior Vice President of
the Company and President of the Company'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 the Company, Dr.
Pressman was Manager of Biotechnology Development, Strategic Business
Development Group of Olympus America, the former exclusive distributor of
certain of the Company's cytopathology products in the Western Hemisphere.
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.
GARY A. NEWBERRY, CPA. Mr. Newberry has been Chief Financial
Officer of the Company since January 1999. He began his service with the
Company in April 1997 as controller and served in that capacity until his
appointment as Chief Financial Officer. From January 1995 until March 1997, he
was a director of GAN Consulting, providing financial and accounting services to
small businesses. August 1988 until December 1994, Mr. Newberry was corporate
controller for Tang Industries, Inc., a diversified holding company. He
previously held various accounting positions on the audit and tax staff of Grant
Thornton, a public accounting firm. Mr. Newberry has a B.S. degree in Accounting
from the University of Illinois, Urbana and a Masters of Business Administration
from DePaul University.
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
From January 1, 1998 to February 18, 1998, the Company's
Common Stock was quoted on the Nasdaq National Market under the symbol "ACMI".
Beginning on February 19, 1998, the Company's Common Stock has been 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.
<TABLE>
<CAPTION>
1997 FISCAL YEAR
<S> <C> <C>
First Quarter 26.63 14.44
Second Quarter 24.75 18.00
Third Quarter 22.88 13.50
Fourth Quarter 18.00 5.63
1998 FISCAL YEAR
First Quarter 13.88 3.75
Second Quarter 8.63 1.31
Third Quarter 2.06 0.56
Fourth Quarter 2.75 0.31
</TABLE>
As of March 25, 1999, the Company had approximately 300 record
holders of Common Stock. As of March 25, 1999, the Company estimates that there
are approximately 5,000 beneficial holders of Common Stock, based on preliminary
results of the broker search for the April 1, 1999 record date for the upcoming
shareholders meeting.
The Company 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 December 22, 1998, the company received shareholder
approval to consummate the sale of its Microbiology Business. Prior to the
Merger on December 29, 1995, the only Company operations were related to the
Microbiology Business. The income statement data presented below reflects the
Microbiology Business as discontinued operations. See Note 20 in the
accompanying Financial Statements starting on page F-1.
<TABLE>
<CAPTION>
Fiscal years Ended December 31, (1)
(in thousands, except per share data)
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ------------ -------------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net Sales $ 327 $ 1,001 $ 1,412 $ --- $ ---
Gross Profit (loss) (529) (556) 19 --- ---
Operating (Loss) (9,796) (15,800) (13,387) --- ---
Interest expense 1,411 3,569 458 --- ---
(Loss) before income taxes (10,360) (18,858) (10,904) --- ---
Income taxes --- --- --- --- ---
Discontinued
Operations 3,351 1,939 (670) (3,759) (3,113)
Net income (loss) (8,170) (16,919) (11,574) (3,759) (3,113)
PER SHARE DATA:
Net (Loss) (1.61) (4.60) (4.09) (3.54) (3.90)
Weighted average shares
outstanding (000's) 5,080 3,675 2,829 1,063 796
BALANCE SHEET DATA:
Working capital (deficit) 1,163 1,043 3,378 (246) 817
Total assets 17,573 20,549 14,480 2,989 2,049
Long-term debt 5,782 11,455 231 111 184
Shareholders' equity 4,223 733 10,136 1,098 1,345
</TABLE>
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(1) The Company changed from a September 30 fiscal year end to a
December 31 fiscal year end effective in 1995. Fiscal years
1995 and 1994 are September 30 year-end amounts. For the three
months ended December 31, 1995, the Company'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
The Company is engaged in the development of cost effective
screening instruments and systems for clinical diagnostic laboratories,
hospitals and others. The Company 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 December 31, 1995, the Company changed its fiscal year end
from September 30 to December 31. Unless otherwise noted, references to fiscal
1998, 1997 and, 1996 relate to the fiscal years ended December 31, 1998, 1997
and 1996.
OVERVIEW
The Company's primary focus is on the development of
computer-aided diagnostic imaging systems for the cytopathology laboratory
marketplace. The Company's integrated systems use reliable, accurate, sensitive
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 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 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. On November 20, 1998, the Company signed an agreement to sell its
Microbiology Business and obtained shareholder approval to close such sale on
December 22, 1998. On January 29, 1999, the Company completed the sale of its
Microbiology Business. Accordingly, the Microbiology Business is reported as
discontinued operations in the financial statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations.
In October 1998, the Company announced it would focus on
documenting quantitatively the benefits of its cytopathology products at three
laboratory sites, with each site representing a different segment of the
laboratory marketplace. The timeframe required to obtain and publish this data
is anticipated to be sometime in 1999. The Company has made reductions in its
cytopathology production and marketing workforce in conjunction with this
decision. On March 9, 1999, the Company announced it had signed a letter of
intent to license the AcCell(TM) 2000, 2001 and 3000 Series for use in cervical
cytology without imaging. In addition, certain inventory will be sold in the
transaction which is anticipated to close on or before June 1, 1999.
On December 29, 1995, the Company acquired all of the Common
Stock of AccuMed, Inc. and its wholly owned subsidiary. Pursuant to the
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<PAGE> 18
terms of the Merger Agreement, 313,652 shares of Common Stock and 21,158
warrants were issued to AccuMed, Inc. shareholders and warrantholders,
respectively, which were contingent and subject to forfeiture if specified
performance goals were not achieved by the Company. 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, the Company 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. The results of operations reflected in the Company's
consolidated statement of operations for fiscal year 1996 include the results of
operations of the Oncometrics from the date of acquisition, whereas results of
operations for fiscal year 1997 include the results of these acquisitions for
the entire year. In June 1998, the Company acquired the final one-third of
Oncometrics stock it did not own for $685,000.
RESULTS OF OPERATIONS
OVERVIEW
During 1998, the Company received shareholder approval to
dispose of its Microbiology Business. Accordingly, the results of the
Microbiology Business are reported as a discontinued operation in the
accompanying financial statements. The following management discussion and
analysis of financial condition and results of operations relate only to the
cytopathology business.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES AND GROSS MARGINS
Fiscal 1998 revenues reflect the initial sale of the
AcCell/Savant Clinical DNAnalyzer to a medical research facility. The Company
has ceased marketing its other products to develop quantitative data regarding
the benefits of its systems at three laboratory sites. The 1998 gross loss on
sales reflects noncaptializable manufacturing cost and costs associated with
suspending manufacturing operations.
OPERATING EXPENSES
General and administrative expenses decreased about $900,000
to $5.3 million as compared to $6.2 million in 1997. This decrease is due
primarily to the reduction in the number of management and administrative
personnel necessary to support the reduced level of activity and a reduction in
professional fees.
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<PAGE> 19
Sales and marketing expenses of $1.4 million were flat as
compared to 1997. This reflects the growth of staff and development of the
initial marketing program for the Company's AcCell product line which occurred
in the first three quarters of the year. The Company reduced sales efforts in
the fourth quarter of 1998 to focus on the documentation of the quantitative
benefits of its products.
Research and development expenses decreased $1.4 million to
$2.6 million in 1998 as compared to $4.0 million in 1997. The decrease is due to
the costs associated with the Company's 510(K) clearance received from the U.S.
Food and Drug Administration in August 1997, and a reduction in personnel to
focus on the Company's next generation product.
OTHER INCOME AND EXPENSE
Interest expense decreased $2.2 million to $1.4 million in
1998 as compared to $3.6 million in 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 the Company had a
write-off of $1.9 million related to the "in the money" conversion feature of
the 12% convertible notes.
Other income increased to $800,000 in 1998 from $500,000 in
1997. This increase reflects licensing fee income of $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 the
Microbiology Business which was disposed of in January 1999.
EXTRAORDINARY LOSS
For the year ended December 31, 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. The balance of $975,000 represented
non-cash costs associated with the write-off of the value of warrants issued as
an inducement to the converting noteholders, and original issue discount costs
associated with the converted debt.
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES AND GROSS MARGINS
Sales revenues for the fiscal year 1997 were $1.0 million
compared to $1.4 million for fiscal year ended 1996. The lack of increase in
cytopathology sales was due to delays in obtaining FDA approval to market a new
product and in building and training a direct sales force.
The loss of $556,000 on gross sales reflects
unabsorbed volume variances that relate mainly to overhead costs associated with
expanding manufacturing capacity of that product line which could not be
capitalized.
OPERATING EXPENSES
General and administrative expenses increased from $3.6
million in the year 1996 to $6.2 million in 1997, a 72% increase, due primarily
to increases in staffing, office, professional fees, and investor relations
efforts as a result of the Oncometrics acquisition and public offering occurring
in the fourth quarter of 1996.
Research and development expenses increased from $2.5 million
in the year 1996 to $4.0 million in the year 1997, a 60% increase, due primarily
to increased spending to develop and obtain FDA clearance for the TracCell(TM)
2000 Slide Mapping System.
Sales and marketing expenses increased from $1.3 million in
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<PAGE> 20
the year 1996 to $1.4 million in the year 1997, an 8% increase, due to the
expansion of the sales staff for marketing the AcCell(TM) and TracCell(TM) 2000
Slide Mapping Systems.
The goodwill write off of $3.6 million in 1997 reflects the
issuance of contingent shares issued as a result of the Merger in 1995. Acquired
research and development expenses for fiscal 1996 include $3.5 million of
in-process research and development cost which arose from the Merger and $2.5
million which arose mainly from the Oncometrics acquisition.
OTHER INCOME AND EXPENSE
Interest expense of $3.6 million in fiscal year 1997 reflected
amounts accrued on the three year notes issued in March 1997, the $1.9 million
write-off of the "in the money" conversion feature of those notes, and
installment and bridge financing received in the third quarter. The interest
expense for 1996 of $458,000 reflected non-cash interest incurred for issuance
of warrants connected with notes payable repaid in 1996.
The Company realized net other income of $2.9 million for
fiscal year 1996 compared to net other income of $500,000 for fiscal year 1997.
The primary reason for the decrease was the recognition of $3.5 million in
licensing fee income for fiscal 1996.
DISCONTINUED OPERATIONS
Discontinued operations reflect the operating results of the
Microbiology Business, which was disposed of in January 1999.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
The Company's primary cash requirements are for research and
development expenses, including salaries, material and consulting support, to
develop new cytopathology products. Throughout fiscal 1998, the Company has used
operating cash flow from its Microbiology Business, together with debt and
equity financing, to fund such activities.
The Company's cash balance at December 31, 1998 reflects the
Company's efforts to minimize interest expense due under its revolving credit
line. The Company believes that current cash balances and internally generated
funds, including the sale of the Company's Microbiology Business, closed on
January 29, 1999, will be sufficient to finance the Company's projected
operations through at least the next 12 months.
The increased inventory levels at December 31, 1998 as
compared to December 31, 1997 reflect a build up of cytopathology products to
service the Company's "try-buy" program and units returned from a former
distributor. The Company agreed to pay $650,000 for these units with $400,000
payable through February 1999 and the balance payable in $25,000 monthly
installments throughout 1999.
Current liabilities are lower at December 31, 1998 as compared
to the beginning of the year, mainly due to less vendor financing and less
accrued interest due to lower long-term debt levels. Accounts payable was
reduced as a result of the use of funds raised from the private placement of
Common Stock in March 1998. Long-term debt was reduced as a result of the debt
conversion on February 1998.
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<PAGE> 21
INVESTING ACTIVITIES
On June 29, 1998, the Company acquired the remaining one-third
of the outstanding stock of Oncometrics that it did not already own. The Company
paid $342,500 in cash and $342,500 in a convertible 18-month note with a rate of
2% over the Canadian prime rate in exchange for the stock and a loan payoff to
the seller of $154,000.
Oncometrics is developing a proprietary high-resolution image
cytometer that uses the Company's 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. Management believes that the Oncometrics technology may be
potentially applied to other types of cancer, such as cervical cancer.
The Company has no material commitments for property or
equipment investments at this time.
FINANCING ACTIVITIES
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 remained outstanding and unaffected by this exchange
throughout 1998.
The Company's most recent private placement, closed in March
1998, raised gross 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 $4.50 per share. As
part of this offering, a director of the Company converted a $1,000,000 loan
into Common Stock under the same terms. During the fiscal year 1998, the Company
also received an aggregate of $58,000 upon the exercise of stock options and
warrants.
At December 31, 1998, the Company's long-term debt consists
principally of: 1) $3,141,000 on unsecured 12% Convertible Notes, net of a
discount of $84,000 due March 2000, and 2) a $3,267,000 secured note payable,
net of a discount of $110,000, 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 14.5%. The
Company has a revolving credit facility, renewable monthly under which it may
borrow up to $4,000,000 based on the amount of eligible trade receivables. The
credit line under this arrangement was $1,600,000 based on borrowing based
calculations at December 31, 1998, of which $132,000 was unused. The interest
rate on the credit line is the higher of the highest prime rate plus 2.5% or 9%
(10.25% at December 31, 1998).
On January 29, 1999, the Company sold its Microbiology
Business and received cash proceeds of $15,150,000. The proceeds were
21
<PAGE> 22
used to retire the 12% convertible notes, the secured note payable, and the
revolving credit facility, with the balance of about $5,700,000 cash retained
for general corporate and working capital purposes.
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 research, development, and marketing activities and,
potentially, cease its operations. Any additional equity financing may involve
substantial dilution to the Company's then-existing shareholders.
YEAR 2000 COMMPLIANCE
The Year 2000 (Y2K) issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
This could result in a system failure or miscalculations causing disruption of
operations, including, but not limited to, a temporary inability to process
transactions, including invoices or other similar business activities.
STATE OF READINESS
The Company is currently in a research and development phase
and does not have significant interdependence of computer systems with
third-party customers or suppliers. The Company's Year 2000 compliance plan
provides for the conversion of noncompliant information technology systems in
the second and third quarter of 1999. The conversion project involves three
phases: selection and installation of hardware and software, loading the
financial database into the new system, and testing.
The Company has reviewed its non-information technology
systems and has determined that any required repair of imbedded technology
should not have a significant impact on the Company's operations. The Company
has received representations from its vendors of non-financial network servers
and software that these products are Y2K compliant. All of the Company's
products, including software sold in products to customers, have been developed
with consideration for the millenium change, and have undergone specific year
2000 date testing to verify and validate compliance.
The Company has made inquiry of its banks and lenders and has
received representation that the devices and software used by these third
parties are Y2K compliant.
COST TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The Company has used internal personnel versed in the Y2K
issue to evaluate its remediation cost. The cost of evaluation and remediation
of the Company's non-compliant systems, related to financial hardware and
software, are believed to be immaterial.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Company expects to be Y2K compliant by the third quarter
of 1999. The most reasonably likely worst case scenario due to the failure to be
Y2K compliant would be the Company's inability to process financial
transactions, including invoices or other normal business dealings. The Company
cannot quantify how significant the potential effect on liquidity or financial
condition could be.
22
<PAGE> 23
The Company has not undertaken a survey to ascertain the Y2K
readiness of its suppliers or customers. A reasonable description of the most
reasonably likely worst case Y2K scenario due to the failure of customers or
suppliers to be Y2K compliant would be a disruption in the production and
shipment of products, resulting in a decrease in sales and operating cash flow.
The Company cannot quantify now significant the potential sales or operating
cash flow decrease could be.
THE COMPANY'S CONTINGENCY PLANS
With the announced sale of the Microbiology Business and the
nature of the Company's continuing research and development operations,
management has elected to develop contingency plans on an ad hoc basis as the
need for such plans arise.
NEW ACCOUNTING STANDARDS
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 shareholder's equity during the
period except those resulting from investments by owners and distribution to
owners. Adoption of this statement did not have a material effect on the
financial statements.
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 Shareholders' 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
Officers of the Registrant". Information relating to directors appearing under
the caption "Election of Directors" in the definitive Proxy Statement for the
1999 Combined Annual and Special Meeting of Shareholders to be filed with the
Securities and Exchange Commission (the "Commission") within 120 days following
the Company'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
23
<PAGE> 24
Reporting Requirements" in the definitive Proxy Statement for the 1999 Combined
Annual and Special Meeting of Shareholders to be filed with the Commission is
within 120 days following the Company'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 1999 Combined
Annual and Special Meeting of shareholders to be filed with the Commission
within 120 days following the Company'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 1999 Combined Annual and Special Meeting of Shareholders to be
filed with the Commission within 120 days following the Company'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 1999 Combined Annual and Special Meeting of Shareholders to be
filed with the Commission within 120 days following the Company'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-21 following the
signature page:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
(b) No reports on Form 8-K were filed for the three month period
ended December 31, 1998.
(c) See Exhibit Index located on page 28.
(d) FINANCIAL STATEMENT SCHEDULES. The following financial
statement schedule is filed as part of this report as page F-22
following the signature page:
Schedule IX - Valuation and Qualifying Accounts
24
<PAGE> 25
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.
25
<PAGE> 26
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: March 31, 1999 ACCUMED INTERNATIONAL, INC.
By: \s\ PAUL F. LAVALLEE
----------------------------
Paul F. Lavallee, Chairman of
the Board and Chief Executive
Officer
(principal executive officer)
By: \s\ GARY A. NEWBERRY
----------------------------
Gary A. Newberry, Chief
Financial Officer (principal
accounting officer)
Pursuant to the requirements of the Securities and Exchange
Act of 1934, this report has been signed below on the 30th day of March, 1999,
by the following persons on behalf of the Registrant and in the capacities and
the dates so indicated.
Each Director of the registrant whose signature appears below,
hereby appoints Paul F. Lavallee and Gary A. Newberry, and each of them
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 Commission 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: March 31, 1999 By: \s\ PAUL F. LAVALLEE
----------------------------
Paul F. Lavallee, Chairman
DATED: March 31, 1999 By: \s\ HAROLD S. BLUE
---------------------------
Harold S. Blue, Director
DATED: March 31, 1999 By: \s\ JACK H. HALPERIN
--------------------------
Jack H. Halperin, Director
DATED: March 31, 1999 By: \s\ MARK BANISTER
--------------------------
Mark Banister, Director
DATED: March 31, 1999 By: \s\ LEONARD M. SCHILLER
--------------------------
Leonard M. Schiller, Director
DATED: March 31, 1999 By: \s\ ROBERT L. PRIDDY
-------------------------
Robert L. Priddy, Director
26
<PAGE> 27
DATED: March 31, 1999 By: \s\ J. DONALD GAINES
---------------------------
J. Donald Gaines, Director
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page
- ------- ---------------------- ----
<S> <C> <C>
3.1 Asset Purchase Agreement by and between AccuMed International,
Inc. and AMI Acquisition Corp. dated as of November 20, 1998
(22)
3.2 Bylaws of the Registrant. (1)
3.3 Amendment No. 1 to Bylaws of the Registrant. (19)
4.1 Certificate of Incorporation of the Registrant (1)
4.2 Certificate of Amendment to Certificate of Incorporation of the
Registrant 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 the
Registrant effecting reverse stock split (21)
4.6 Specimen Certificate for Common Stock (1)
4.7 Bylaws of the Registrant (1)
4.8 Amendment No. 1 to Bylaws of the Registrant (19)
4.9 Warrant Agreement dated as of February 23, 1998 between the
Company 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 the Registrant
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 the Registrant and each of
the investors in a Note Exchange Offer (15)
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C>
4.12 Warrant Agreement dated as of March 19, 1998, as amended by Amendment No.
1 dated as of March 23, 1998, between the Registrant 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
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 the Registrant and each of the
investors in a private placement (19)
4.16 Specimen stock certificate for Common Stock. (1)
5.1 Opinion of Joyce L. Wallach, Esq., General counsel to the Registrant,
regarding the legality of the securities offered hereby. (20)
10.1 Agreement and Plan of Reorganization dated as of April 21, 1995 between
the Registrant and AccuMed, Inc., as amended by Amendment No. 1 dated as
of August 1, 1995 and Amendment No. 2 dated as of October 6, 1995. (3)
10.2 The Registrant'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)
10.3 Employment Agreement between the Registrant and Peter P. Gombrich dated
August 1, 1994. (1)(4)
10.4 Employment Letter between the Registrant and Joyce L. Wallach dated as of
November 25, 1996. (4)(16)
10.5 Employment Agreement between the Registrant and Michael D. Burke dated
May 23, 1997. (4)(17)
10.6 Separation Agreement and General Release between the Registrant and
Michael D. Burke dated December 31, 1997. (4) (19)
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C>
10.7 Employment Agreement between the Registrant and Norman J. Pressman dated
June 13, 1996 and Addendum to Employment Agreement between the
Registrant and Norman J. Pressman dated July 16, 1996. (4)(5)
10.8 Escrow Agreement dated as of March 22, 1994, between the Registrant and
G&G Dispensing, Inc. (3)
10.9 License Agreement between the Registrant and Becton, Dickinson and
Company effective as of October 11, 1995. (3)
10.10 License and Distribution Agreement dated February 20, 1996 between the
Registrant and BioKit, S.A. (1)
10.11 Addendum to License and Distribution Agreement dated February 20, 1996
between the Registrant and BioKit, S.A. (19)
10.12 1995 Stock Option Plan. (1)(4)
10.13 Amendment No. 1 to the Registrant's 1995 Stock Option Plan. (4)(7)
10.14 Amendment No. 2 to the 1995 Stock Option Plan. (4)(16)
10.15 Amendment No. 3 to the 1995 Stock Option Plan. (4)(19)
10.16 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)
10.17 Form of Non-Qualified Stock Option Agreement governing options granted
to employees and consultants under the 1995 Stock Option Plan. (1)(4)
10.18 Form of Incentive Stock Option Agreement governing options granted to
employees under the 1995 Stock Option Plan. (1)(4)
10.19 Amended and Restated 1990 Stock Option Plan. (4)(8)
10.20 Amendment No. 1 to Amended and Restated 1990 Stock Option Plan. (4)(16)
10.21 The Registrant's Amended and Restated 1992 Stock Option Plan. (10)(4)
10.22 Amendment No. 1 to Amended and Restated 1992 Stock Option Plan. (4)(16)
10.23 Lease between the Registrant and NCP, LTD dated February 20, 1995
pertaining to the offices located at 29299 Clemens, Suite I-K, Westlake,
Ohio 44145. (1)
</TABLE>
30
<PAGE> 31
<TABLE>
<S> <C>
10.24 Franklin Square Commercial Lease dated July 13, 1994 between the
Registrant 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)
10.25 Rider 1 to Franklin Square Commercial Lease between the Registrant and
the Lumber Company dated May 30, 1996. (5)
10.26 Collaboration Agreement and Worldwide Exclusive License between the
Registrant and G&G Dispensing, Inc. dated March 22, 1994. (5)
10.27 Amendment No. 2 effective as of August 6, 1996 to the Collaboration
Agreement and Worldwide Exclusive License between the Registrant and G&G
Dispensing, Inc. dated March 22, 1994. (16)
10.28 O.E.M. Supply Agreement between Olympus America, Inc., Precision
Instrument division and the Registrant dated May 31, 1996. (11)
10.29 Securities Purchase Agreement dated May 31, 1996 among the Registrant,
Kingdon Associates, L.P., Kingdon Partners, L.P., and Kingdon Offshore
N.V. (12)
10.30 Share Purchase Agreement between the Registrant and Xillix Technologies
Corp. dated as of August 16, 1996. (10)
10.31 Subscription Agreement between the Registrant and Oncometrics Imaging
Corp. dated as of August 16, 1996. (10)
10.32 Stock Purchase Agreement by and among the Registrant, RADCO Ventures,
Inc. and the Selling Shareholders named therein dated as of August 15,
1996. (9)
10.33 Distribution Agreement by and between the Registrant and Fisher
Scientific Company, dated September 10, 1996. (11)+
10.34 Employment Agreement between the Registrant and Leonard R. Prange dated
September 9, 1996. (4)(9)
10.35 Security Agreement dated as of February 11, 1997 between the Registrant
and Oncometrics Imaging Corp. (16)
10.36 Promissory Note dated as on February 11, 1997 made by the Registrant in
favor of Oncometrics Imaging Corp. evidencing indebtedness in the
original principal amount of $500,000. (16)
10.37 Convertible Promissory Note made as of February 19, 1997 by the
Registrant in favor of Robert L. Priddy and Edmund H. Shea, Jr. as
Payees evidencing indebtedness in the original principal amount of $6.0
million. (16)
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C>
10.38 Loan Agreement dated as of February 19, 1997 among the Registrant and
Robert L. Priddy and Edmund H. Shea, Jr. (16)
10.39 Agency Agreement between the Registrant and Commonwealth Associates
dated as of March 3, 1997. (16)
10.40 Warrant Agreement among the Registrant, Commonwealth Associates and
American Stock Transfer and Trust Company as transfer agent relating to
Warrants to purchase an aggregate of 850,000 shares of Common Stock
dated March 13, 1997. (16)
10.41 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)
10.42 Form of Subscription Agreement between the Registrant and several
investors in the private placement consummated on March 13, 1997. (16)
10.43 Form of 12% Convertible Promissory Note evidencing indebtedness in the
original aggregate principal amount of $8.5 million made by the
Registrant in favor of several investors in the private placement
consummated on March 13, 1997. (16)
10.44 Form of Warrant to Purchase Common Stock dated February 23, 1998 between
the Registrant 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)
10.45 Manufacturing and License Agreement dated December 30, 1996, between the
Registrant and Salcom S.r.l. (16)
10.46 Asset Purchase Agreement dated as of March 3, 1997 between the
Registrant and Difco Microbiology Systems, Inc. (13)
10.47 Manufacturing Agreement dated as of March 3, 1997 among the Registrant,
Difco Laboratories Incorporated, a Michigan corporation, and Difco
Laboratories Incorporated, a Wisconsin corporation, as amended by
Amendment No. 1 dated as of March 10, 1997. (16)
10.48 Transition Services and Facilities Agreement dated as of March 3, 1997
between the Registrant and Difco Laboratories Incorporated, a Michigan
corporation. (16)
10.49 Base Media License Agreement dated as of March 3, 1997 between the
Registrant and Difco Laboratories Incorporated. (16)
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C>
10.50 Promissory Note dated December 30, 1996 made by Dr. Norman Pressman in
favor of the Registrant evidencing indebtedness in the original
principal amount of $64,409.20. (4)(16)
10.51 Promissory Note dated December 30, 1996 made by Dr. Norman Pressman in
favor of the Registrant evidencing indebtedness in the original
principal amount of $100,000. (4)(16)
10.52 O.E.M Supply Agreement between the Registrant and Leica Microscopie und
Systems GmbH dated as of May 26, 1996. (17)
10.53 Manufacturing and Supply Agreement between the Registrant and RELA, Inc.
dated as of May 26, 1997. (17)
10.54 Equipment Loan and Security Agreement dated as of September 23, 1997
between the Registrant and Transamerica Business Credit Corporation.
(17)
10.55 Promissory Note No. 1 dated as of September 30, 1997 by the Registrant
in favor of Transamerica Business Credit Corporation in the original
principal amount of $1,500,000. (17)
10.56 Promissory Note No. 2 dated as of September 30, 1997 by the Registrant
in favor of Transamerica Business Credit Corporation in the original
principal amount of $1,500,000. (17)
10.57 Promissory Note No. 3 dated as of September 30, 1997 by the Registrant
in favor of Transamerica Business Credit Corporation in the original
principal amount of $1,500,000. (17)
10.58 Loan and Security Agreement dated October 24, 1997 between the
Registrant as Borrower and Transamerica Business Credit Corporation as
Lender, and Schedule thereto. (19)
10.59 Revolving Credit Note dated October 24, 1997 in the original principal
amount of $4,000,000 by the Registrant in favor of Transamerica Business
Credit Corporation. (19)
10.60 Depository Account Agreement dated October 24, 1997 among Transamerica
Business Credit Corporation, the Registrant and Bank One, N.A.
(incorporated by reference to Exhibit 10.60 filed herewith). (19)
10.61 Patent and Trademark Security Agreement dated as of October 24, 1997
between the Registrant and Transamerica Business Credit Corporation.
(19)
10.62 Security Agreement in Copyrighted Works dated as of October 24, 1997
between the Registrant and Transamerica Business Credit Corporation.
(19)
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C>
10.63 Promissory Note made August 18, 1997 by the Registrant in favor of
Robert L. Priddy representing indebtedness in the original principal
amount of $500,000. (19)
10.64 Security Agreement dated as of August 18, 1997 between the Registrant as
Debtor and Robert L. Priddy as Secured Party. (19)
10.65 Warrant Agreement dated as of August 18, 1997 between the Registrant and
Robert L. Priddy representing warrants to purchase 50,000 shares of
Common Stock. (19)
10.66 Promissory Note made February 2, 1998 by the Registrant in favor of
Robert L. Priddy representing indebtedness in the original principal
amount of $1,000,000. (19)
10.67 Security Agreement dated as of February 2, 1998 between the Registrant
as Debtor and Robert L. Priddy as Secured Party. (19)
10.68 Warrant Agreement dated as of February 2, 1998 between the Registrant
and Robert L. Priddy representing warrants to purchase 100,000 shares of
Common Stock. (19)
10.69 Agreement between the Company and Paul F. Lavallee and Gypsy Hill LLC
effective January 29, 1998 (21)
10.70 Agency Agreement dated as of February 13, 1998, as amended by Amendment
No. 1 dated as of February 23, 1998, between the Registrant and
Commonwealth Associates pertaining to a Note Exchange Offer. (19)
10.71 Warrant Agreement dated as of February 23, 1998 between the Company 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)
10.72 Warrant Agreement dated March 19, 1998 between the Registrant 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)
10.73 Form of Subscription Agreement and Registration Rights Agreement dated
as of February 23, 1998 between the Registrant and each of the investors
in a Note Exchange Offer. (15)
10.74 Agency Agreement dated as of March 12, 1998, as amended by Amendment No.
1 dated as of March 19, 1998, between the Registrant and Commonwealth
Associates pertaining to a private placement. (19)
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C>
10.75 Warrant Agreement dated as of March 19, 1998, as amended by Amendment
No. 1 dated as of March 23, 1998, between the Registrant and
Commonwealth Associates pertaining to an aggregate of 8,686,667 Common
Stock purchase Warrants issued to investors in a private placement. (19)
10.76 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)
10.77 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)
10.78 Form of Subscription Agreement and Registration Rights Agreement dated
March 19, 1998 or March 23, 1998 between the Registrant and each of the
investors in a private placement. (19)
10.79 Second Amendment dated August 31, 1997 to O.E.M. Supply Agreement
between Olympus America, Inc., Precision Instrument division and the
Registrant dated May 31, 1996. (19)
10.80 1997 Stock Option Plan and Amendment No. 1 to the 1997 Stock Option Plan
(Appendix C in May 19, 1998 Proxy Statement)
21 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
23.2 Power of Attorney (contained in the signature page)
23.3 Consent of Joyce L. Wallach, Esq., General Counsel to the Registrant (20)
27.1 Financial Data Schedule
________________
</TABLE>
+ Confidential treatment granted as to certain portions.
(1) Incorporated by reference to the Registrant'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 the Registrant'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
35
<PAGE> 36
Registration Statement.
(5) Incorporated by reference to the Registrant's Registration Statement Form
S-2 (Regis. No. 333-09011) filed with the Commission on July 26, 1996.
(6) Incorporated by reference to the Registrant'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 the Registrant'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 the Registrant's Registration Statement on
Form S-3 (Reg. No. 333-07681), filed with the Commission on July 3, 1996.
(13) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated March 3, 1997.
(14) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Regis. No. 333-28125) filed with the Commission on May 30, 1997.
(15) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated March 20, 1998.
(16) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1996.
(17) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1997.
(18) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1997.
(19) Incorporated by reference to the Registrant'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 the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998.
(22) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated January 29, 1999.
36
<PAGE> 37
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 . . F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . F-7
F-1
<PAGE> 38
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 subsidiaries as of December 31, 1998 and 1997 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, 1998.
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 subsidiaries as of December 31, 1998 and December 31,
1997, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Chicago, IL
March 26, 1999
F-2
<PAGE> 39
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
ASSETS 1998 1997
-------------------- --------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 361,983 $ 469,639
Accounts receivable, net 3,535,819 4,664,152
Prepaid expenses 187,697 183,817
Production inventory 4,416,437 3,464,190
-------------------- --------------------
TOTAL CURRENT ASSETS 8,501,936 8,781,798
-------------------- --------------------
FIXED ASSETS, NET 2,889,960 5,178,528
-------------------- --------------------
Deferred financing costs, net 177,625 640,224
Purchased technology, net of amortization of $1,413,000 5,085,018 4,950,753
in 1998 and $925,000 in 1997, respectively
Other assets 918,989 997,414
------------------- --------------------
$ 17,573,528 20,548,717
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,598,538 $ 3,590,022
Payroll and related accruals 280,000 458,794
Accrued interest 189,069 441,100
Other current liabilities 646,834 660,842
Notes payable 1,468,266 1,888,273
Long term debt, current portion 1,155,400 700,000
-------------------- --------------------
TOTAL CURRENT LIABILITIES 7,338,107 7,739,031
-------------------- --------------------
Warranty reserves, non-current 230,625 467,299
Long term debt 5,781,850 11,454,755
Minority interest - 154,560
-------------------- -------------------
6,012,475 12,076,614
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 5,000,000 shares 4,329,466 -
authorized; 962,102 series A
convertible issued
and outstanding at December 31, 1998;
0 issued and outstanding at
December 31, 1997
Common stock, $0.01 par value; 54,801 37,881
50,000,000 shares authorized,
5,480,088 issued and
outstanding at
December 31, 1998;
3,788,145 issued and
outstanding at
December 31, 1997
Additional paid-in capital 59,539,649 52,143,231
Accumulated other comprehensive income (53,995) 22,586
Accumulated deficit (59,430,238) (51,253,889)
Treasury stock; 37,956 shares at (216,737) (216,737)
December 31, 1998 and 1997 -------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 4,222,946 733,072
-------------------- --------------------
$ 17,573,528 $ 20,548,717
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 40
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Sales
$ 326,862 $ 1,000,776 $ 1,412,256
Less cost of sales (855,788) (1,557,175) (1,393,631)
Gross profit (loss) -------------------- -------------------- --------------------
(528,926) (556,399) 18,625
-------------------- -------------------- --------------------
Operating expenses:
General and administrative 5,308,417 6,198,665 3,642,113
Acquired research and development - - 5,957,927
Research and development 2,569,864 4,035,360 2,474,408
Asset impairment - 3,582,068 -
Sales and marketing 1,388,826 1,427,735 1,331,088
-------------------- -------------------- --------------------
Total operating expenses 9,267,107 15,243,828 13,405,536
-------------------- -------------------- --------------------
Operating income (loss) (9,796,033) (15,800,227) (13,386,911)
-------------------- -------------------- --------------------
Other income (expense):
Interest expense (1,411,335) (3,568,603) (458,214)
Other income (expense) 847,613 511,145 2,941,270
-------------------- -------------------- --------------------
Total other income (expense) (563,722) (3,057,458) 2,483,056
-------------------- -------------------- --------------------
Loss before income taxes from
continuing operations (10,359,755) (18,857,685) (10,903,855)
Income tax expense - - -
-------------------- -------------------- --------------------
Loss from continuing operations
before extraordinary item (10,359,755) (18,857,685) (10,903,855)
Discontinued operations:
Income (loss) from discontinued operations 3,351,486 1,939,109 (669,958)
Extraordinary item - debt extinguishment loss (1,168,080) - -
-------------------- -------------------- --------------------
Net loss $(8,176,349) $(16,918,576) $(11,573,813)
==================== ==================== ====================
Basic loss per share from continuing operations
before extraordinary item $(2.04) $(5.13) $(3.85)
Income (loss) from discontinued operations 0.66 0.53 (0.24)
Extraordinary loss from debt extinguishment (0.23) - -
-------------------- -------------------- --------------------
Basic net loss per share $(1.61) $(4.60) $(4.09)
==================== ==================== ====================
Weighted average common shares outstanding 5,079,894 3,675,488 2,829,245
==================== ==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 41
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------------- ----------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 - $ - 2,595,198 $25,952 $23,464,255
------------- ------------ ---------- -------- -----------
Issuances of common stock - - 713,493 7,135 17,873,758
Issuances of warrants - - - - 1,689,464
Stock options exercised - - 96,456 965 749,409
Warrants exercised - - 42,784 428 743,697
Conversion of debt - - 27,765 277 77,848
Cumulative translation adjustment - - - - -
Shares received in litigation settlement - - - - -
Net loss - - - - -
------------- ------------ ---------- -------- -----------
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
Issuances of warrants - - - - -
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
============= ============ ========== ======== ===========
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS' COMPREHENSIVE
DEFICIT INCOME STOCK EQUITY INCOME
------------- ------------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $(22,761,500) $ - $ - $ 728,707 $ -
------------- ------------- ---------- ------------- --------------
Issuances of common stock - - - 17,880,893
Issuances of warrants - - - 1,689,464
Stock options exercised - - - 750,374
Warrants exercised - - - 744,125
Conversion of debt - - - 78,125
Cumulative translation adjustment - 32,586 - 32,586 32,586
Shares received in litigation settlement - - (194,465) (194,465)
Net loss (11,573,813) - - (11,573,813) (11,573,813)
------------- ------------- ---------- ------------- --------------
Balances at December 31, 1996 (34,335,313) 32,586 (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 (51,253,889) 22,586 (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 - - - - -
Issuances of warrants - - - - -
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 $(59,430,238) $ (53,995) $(216,737) $ 4,222,946 $ (8,252,930)
============= ============= ========== ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 42
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) (8,176,349) $(16,918,576) $(11,573,813)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,418,034 2,636,836 1,124,475
Write-off of debt discount - 2,139,000 -
Write-off of in-process research and development - - 5,957,927
Bad debt expense 337,353 267,190 93,077
Debt extinguishment loss 1,168,080 - -
Write-off of impaired goodwill - 3,582,068 -
Minority interest (191,560) (437,127) (123,919)
Expenses paid with issuances of stock or warrants 99,000 - 1,441,484
Non-cash gain on settlement - (22,272) (194,465)
Loss on asset disposals - - 74,706
Changes in assets and liabilities:
Decrease in restricted cash - 100,000 263,000
Decrease (Increase) in accounts receivable 790,980 (577,081) (1,361,961)
Decrease (Increase) in prepaid expenses (3,880) (83,953) (92,362)
and deposits
Decrease (Increase) in production inventory (952,247) (818,064) (629,007)
Decrease (Increase) in patents and other (66,975) (692,948) (33,316)
assets
Decrease (Increase) in purchased technology - - -
Increase (Decrease) in accounts payable (184,484) 1,364,512 334,908
Increase (Decrease) in other current (115,803) 120,997 (1,308,170)
liabilities
Increase (Decrease) in warranty reserves (236,674) (332,701) -
-------------------- -------------------- --------------
CASH USED IN OPERATING ACTIVITIES (4,114,525) (9,672,119) (6,027,436)
-------------------- -------------------- --------------
INVESTING ACTIVITIES:
Purchase of fixed assets (157,132) (1,208,130) (1,479,694)
Purchase of Oncometrics stock (342,500) - -
Acquisition of business, net - (6,000,000) (3,854,737)
-------------------- -------------------- --------------
CASH USED IN INVESTMENT ACTIVITIES (499,632) (7,208,130) (5,334,431)
-------------------- -------------------- --------------
FINANCING ACTIVITIES:
Proceeds from issuances of common stock, net 4,852,394 743,064 13,976,390
Deferred financing costs - (849,124) -
Notes receivable (issued) collected - 50,074 (214,273)
Payment of notes payable and capital lease obligation (1,329,312) (6,379,858) (1,429,536)
Proceeds from issuance of notes payable 1,000,000 14,994,373 1,025,000
Proceeds from bridge loan - 6,000,000 592,551
-------------------- -------------------- --------------
CASH PROVIDED BY FINANCING ACTIVITIES 4,523,082 14,558,529 13,950,132
-------------------- -------------------- --------------
EFFECT OF EXCHANGE RATES ON CASH (16,581) (10,000) 32,586
-------------------- -------------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (107,656) (2,331,720) 2,620,851
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 469,639 2,801,359 180,508
-------------------- -------------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 361,983 $ 469,639 $ 2,801,359
==================== ==================== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 43
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
AccuMed International, Inc. and subsidiaries ("the Company") engage in the
development and manufacturing of cost effective screening instruments and
systems for clinical diagnostic laboratories, hospitals and others. These
activities are conducted primarily in the United States, the United Kingdom and
Canada. The Company markets products 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 2)
Microbiology - proprietary disposable products and automated instruments used
to identify infectious organisms and determine susceptibility to antimicrobial
agents.
Basis of Presentation
In December 1998, the Company received stockholder approval to sell the
Company's microbiology division and such sale occurred in January 1999. As
discussed in Note 20, the operating results of the microbiology division have
been segregated from continuing operations and reported as a discontinued
operation. Other than net assets of the discontinued operations, substantially
all of the company's assets are located in the United States.
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 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 subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
Product revenue is recognized when products are shipped to customers.
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, work in process 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).
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
F-7
<PAGE> 44
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the related debt
using the effective interest rate method.
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.
Earnings Per Share
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128 regarding computation of Basic and Diluted
earnings per share (EPS). Basic EPS excludes all dilution, while Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings of
the entity. Adoption of this statement did not have a material impact on the
Company's Basic EPS for the reported fiscal years as compared to primary EPS.
Diluted EPS is not presented as the effect of the adjustments is anti-dilutive;
however, outstanding options and warrants may have a dilutive effect in future
years.
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
<PAGE> 45
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of trade receivables. The Company's trade
receivables result primarily from its microbiology operations and reflect a
broad customer base throughout the United States and Europe. At December 31,
1998 and 1997, respectively, the Company's foreign accounts receivable were
about $1,076,000 and $1,188,000.
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
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
1998 and 1997, the Company incorporated the following assumptions into the
model: risk free rate - ranging from 6% to 7%, expected volatility - 30% in
1998 and 20% in 1997 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 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 each reportable
segment derives its revenues.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
3. ACCOUNTS RECEIVABLE
Accounts receivable are carried at estimated net realizable value and
include the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Trade receivables $3,888,819 $5,058,972
Allowance for doubtful accounts (353,000) (394,820)
---------- ----------
Total $3,535,819 $4,664,152
========== ==========
</TABLE>
F-9
<PAGE> 46
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Bad debt expense was $377,353, $267,190 and $93,077 for the years ended
December 31, 1998, 1997 and 1996, respectively.
4. PRODUCTION INVENTORIES
Production inventories includes the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw material and packaging supplies $1,330,564 $999,561
Work in process 344,719 402,269
Finished goods 2,741,154 2,062,360
----------- -----------
Total $4,416,437 $3,464,190
=========== ===========
</TABLE>
5. FIXED ASSETS
Fixed assets includes the following at December 31:
<TABLE>
<CAPTION>
Estimated
Useful Life 1998 1997
----------- ---- ----
<S> <C> <C> <C>
Equipment 3 - 5 Years $7,182,790 $7,035,277
Leasehold improvements 5 - 13 Years 983,659 964,392
----------- ----------
8,166,449 7,999,669
Less accumulated depreciation and amortization (5,276,489) (2,821,141)
----------- -----------
Total $ 2,889,960 $ 5,178,528
=========== ===========
</TABLE>
Maintenance and repair expenses for the years ended December 31, 1998,
1997 and 1996 were $156,562, $166,720 and $106,144, respectively. There were
no material construction commitments outstanding as of December 31, 1998.
6. OTHER ASSETS
Other assets includes the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Patents, net of amortization of $50,000 and $29,000, respectively $795,839 $590,243
Deposits for equipment - - 125,000
Note receivable, officer 123,150 164,199
Other - - 117,972
-------------- -----------
Total $918,989 $ 997,414
============== ===========
</TABLE>
F-10
<PAGE> 47
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current portion of warranty reserve $ 112,000 $ 130,000
Accrued rent 158,000 31,000
Deferred revenue 254,502 125,452
Customer deposits - - 12,924
Other 122,332 361,466
------- -------
Total $ 646,834 $ 660,842
============ ============
</TABLE>
8. NOTES PAYABLE
The Company entered into a revolving line of credit in October 1997, the
balance of which was $1,468,266 and $1,888,273 at December 31, 1998 and 1997,
respectively. Under terms of the agreement, the Company may borrow up to 80% of
eligible accounts receivable up to $4,000,000. The line of credit was paid off
in January, 1999. See Note 21 regarding subsequent events. The line is secured
by substantially all of the Company's assets and bears an interest rate of the
higher of 9% or the highest prime rate plus 2.5% (10.25% at December 31, 1998).
9. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997, respectively, consists of
the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
14.5% secured note 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; net of unamortized discount of $109,800 and $181,200,
respectively $ 3,266,700 $ 4,085,055
12% unsecured convertible notes due March 13, 2000, net of
unamortized discount of $84,000 and $656,800, respectively 3,141,000 7,843,200
Floating rate convertible note payable due December 29, 1999 342,550 - - -
Non-interest bearing repayable contribution and other 187,000 226,500
------- -------
Total long-term debt 6,937,250 12,154,755
Less current installments 1,155,400 700,000
--------- -------
Long-term debt, excluding current installments $ 5,781,850 $11,454,755
============ ===========
</TABLE>
The 12 % unsecured convertible notes payable at December 31, 1998 are
convertible into 172,000 shares of common stock, at a conversion price of $18.75
per share at any time through the maturity date. See Note 19 regarding
F-11
<PAGE> 48
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
extinguishment of a portion of this debt in 1998 and Note 21 regarding
subsequent events related to the retirement of the balance of the convertible
notes in January 1999.
The 14.5% secured note payable agreement contains various financial
restrictions and covenants regarding lien restrictions and acquisition and sale
of assets and subsidiaries, and is secured by substantially all assets of the
Company. See Note 21 regarding subsequent events related to the repayment of
this note in January 1999.
The floating rate convertible note has a face amount of $500,000 Canadian
dollars and bears interest at a rate of 2% over the Canadian prime rate (8.75%
at December 31, 1998). The note is convertible, in whole or in part, into
common stock of the Company at a price of $1.79 per share.
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. Management does not estimate any future sales that would
result in a payment due in the next fiscal year.
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1998 are as follows:
1999 $1,155,400
2000 4,358,900
2001 1,422,950
2002 ---
2003 ---
Thereafter ---
10. STOCKHOLDERS' EQUITY
On February 23, 1998, the Company exchanged $5,275,000 in principal amount
of its 12% unsecured 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 has
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 19 regarding the extraordinary loss related to this debt conversion.
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 1998, 283,236 shares of Series A convertible preferred stock were
converted into 188,824 shares of common stock.
Warrants
At December 31, 1998, the Company had outstanding warrants to purchase
shares of common stock at any time through the expiration date as follows:
F-12
<PAGE> 49
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Shares Price Expiration Date
------- ----- ---------------
<S> <C> <C>
20,000 20.52 March, 1999
61,250 23.22 March, 1999
29,167 30.00 December, 1999
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
</TABLE>
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, 1998, there were 262,816 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, 1998. On May 19, 1998
the board of directors adjusted the number of shares of common stock reserved
for the 1997 Plan to 225,000 shares.
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
F-13
<PAGE> 50
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's Stock Option Plans been determined consistent with FASB
Statement No. 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss, as reported $ (8,176,349) $(16,918,576) $(11,573,813)
Net loss, Pro-forma $(10,476,223) $(17,906,072) $(12,147,534)
Net loss per share, as reported $(1.61) $(4.60) $(4.09)
Net loss per share, Pro-forma $(2.06) $(4.87) $(4.32)
</TABLE>
Pro forma net loss and 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 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.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Volatility 30% 20% 20%
Risk free interest rate 7% 7% 7%
Expected term in years 10 10 10
</TABLE>
Stock option activity during the periods indicated was as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average Exercise
Options Price
--------------- -----------------
<S> <C> <C>
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
========
</TABLE>
F-14
<PAGE> 51
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of options granted in 1998 and 1997 were $2.72 and $15.36 per
share, respectively. The following table summarizes information about stock
options outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
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
- ---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.78 to $4.50 272,857 9.03 $ 4.45 106,078 $ 4.38
$6.00 to $8.64 73,004 8.76 6.11 39,671 6.19
$10.50 21,557 2.05 10.50 21,557 10.50
$22.50 to $32.25 119,634 7.48 23.56 42,656 23.49
$37.50 to $50.28 13,102 2.46 45.50 8,735 45.50
------- -------
$3.78 to $50.28 500,154 8.15 10.60 218,697 10.68
======= =======
</TABLE>
11. INCOME TAXES
The net deferred tax assets and liabilities consist of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 15,037,000 $ 12,231,000
Research and development credits 527,000 300,000
Other 1,088,000 745,000
------------ ------------
Total 16,652,000 13,276,000
Valuation allowance (16,652,000) (13,276,000)
------------ ------------
Net deferred tax assets and liabilities $ --- $ ---
============ ============
</TABLE>
At December 31, 1998, the Company had approximately $36,596,000 and
$13,849,000 in net operating losses for federal and state tax purposes,
respectively, available to be carried forward to future periods. The carry
forwards expire from 2004 to 2018 for federal purposes and from 2011 to 2018 for
state purposes.
The Company's credits for research and development available to offset
future federal income taxes expire from 2004 to 2012.
The Company has recorded a valuation allowance equal to the deferred tax
assets based on its continuing operating losses. The valuation allowance was
increased by $3,376,000 in 1998 and $4,028,000 in 1997.
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.
12. WARRANTY RESERVE
The warranty reserve represents management's estimate of future costs
associated with repair or replacement of cytopathology and microbiology
products sold. The reserve balance on December 31, 1998 and
F-15
<PAGE> 52
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997 was $342,625 and $597,299, respectively. The estimated current warrant
reserve of $112,000 and $130,000 as of December 31, 1998 and 1997, respectively
is included with other current liabilities.
13. LEASES
Operating Leases
The Company leases its facilities and certain office equipment under
operating type leases expiring at various dates through 2004. Rental expense
is recognized on a straight-line basis over the life of the lease. Total
rental expense for facilities and equipment during the years ended December 31,
1998 and 1997 was $778,000 and $812,000, respectively.
Future minimum annual lease payments under operating leases as of December
31, 1998 are:
Year Amount
---- --------
1999 $354,000
2000 $320,000
2001 $330,000
2002 $340,000
2003 $350,000
Thereafter $269,000
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash investing and financing activities:
During the year ended December 31, 1998, the Company extinguished debt with
a carrying value of $4,818,800 through the issuance of Series A 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 and seven-year warrants to purchase
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.
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 16) 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.
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.
<TABLE>
<CAPTION>
Year Ended December 31,
Cash paid during the year for: 1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Operating Activities
Interest $1,336,566 $821,719 $76,350
Investing and Financing Activities
Deposit reclassified to fixed assets $ 125,000 --- ---
</TABLE>
F-16
<PAGE> 53
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company is obligated to repurchase certain
equipment sold to a former distributor. Terms of the agreement call for
maximum payment of $650,000 to be paid in monthly installments of $25,000 over
the next 12 months, with $350,000 due within five days of the closing of the
sale of the Company's microbiology business. See Note 21 regarding the sale of
the microbiology business.
The Company is involved in legal proceedings with certain vendors regarding
disputes over delivery of goods and services. The amount of loss, if any, is
not reasonably estimable. Accordingly, no provision for settlement of these
legal proceedings has been provided for in the consolidated financial
statements.
16. 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 acquire 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 the 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 will be 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.
17. 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. See Notes 18 and
20 regarding the 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.
F-17
<PAGE> 54
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1996, the Company issued 16,667 warrants valued at $230,000 to an
individual for consulting services. A major stockholder of the Company received
114,583 warrants valued at $852,000 for consulting services. Also, another
related party received 14,167 options valued at $224,000 for consulting
services.
18. ACQUISITIONS
On March 3, 1997 the Company acquired the ESP Product Line for a total
purchase price of $6,000,000. The acquisition of the ESP Product Line 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 the estimated fair values at the date of acquisition. This treatment
resulted in no excess purchase price over the estimated fair value of the net
assets received. The operations associated with this acquisition have been
included in the consolidated statement of operations since the date of
acquisition as part of the microbiology division. See Note 20 regarding the
disposal of the microbiology division.
The pro-forma results of operations of the Company giving effect to the
ESP Product Line acquisition as if it had occurred on January 1, 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Sales $ 1,000,776 $ 1,412,256
Net loss $(17,351,585) $(15,371,866)
Net loss per share $ (4.74) $ (5.46)
</TABLE>
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 includes $2,000,000 to be used solely as working capital for
Oncometrics. The acquisition has been accounted for using the purchase method
of accounting, and accordingly the purchase price has been allocated to assets
purchased and liabilities assumed based on the fair values at the date of
acquisition. The excess purchase price consists of $1,645,200 of acquired
in-process research and development and $1,096,000 of purchased technology and
reflects the 33% minority interest holding. The Company's share of operations
of Oncometrics from the purchase date have been recorded in the consolidated
statement of operations.
The pro-forma results of operations of the Company giving effect to the
Oncometrics acquisition as if it had occurred on January 1, 1996 are as
follows:
<TABLE>
<CAPTION>
Year ended
December 31,
1996
------------
<S> <C>
Sales $ 1,412,2566
Net loss $(12,066,170)
Net loss per share $ (4.26)
</TABLE>
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 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. The operating results of
Oncometrics have been included in the consolidated statement of operations from
the date of acquisition.
F-18
<PAGE> 55
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DEBT EXTINGUISHMENT
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.
20. DISCONTINUED OPERATIONS - MICROBIOLOGY DIVISION
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.
Accordingly, the microbiology division is accounted for as a discontinued
operation in the accompanying consolidated statement of operations. Microbiology
division revenues were $19,826,516, $18,108,885 and $4,810,193 for the years
ended 1998, 1997 and 1996 respectively. The net assets of the microbiology
division included in the accompanying consolidated balance sheets as of December
31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
Accounts Receivable $3,446,221 $4,178,251
Production Inventory 2,927,826 2,205,866
Other current assets 328,496 279,075
Current assets of discontinued operations 6,702,543 6,663,192
Fixed Assets, net 1,401,151 3,236,799
Other assets of discontinued operations 32,709 32,709
Notes payable 1,468,266 1,888,273
Accounts payable and other current liabilities 2,426,836 3,233,164
Current liabilities of discontinued operations 3,645,097 5,121,437
Warranty reserves, non-current 230,625 467,299
</TABLE>
F-19
<PAGE> 56
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net operating activity of the microbiology division after the
measurement date through December 31, 1998 was not significant. On January 29,
1999, the Company closed the sale of the microbiology division for an initial
sales price of $15,150,000 in cash, subject to final adjustment of working
capital items as defined in the sales agreement. The Company expects to realize
a gain from the disposition in the amount of about $9,000,000.
21. SUBSEQUENT EVENTS
In connection with the disposal of the microbiology division on January 29,
1999, the Company repaid in full a note payable under its revolving credit
agreement for $1,250,000 and its 14.5% secured note payable for $3,900,000,
including prepayment penalties. Additionally, on February 2, 1999, the Company
repaid in full its 12% unsecured convertible notes payable for $3,225,000 plus
accrued interest.
The Company has signed a letter of intent to license certain proprietary
technology and sell all related inventory, valued at $1,900,000, for up to
$3,000,000 in cash.
F-20
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AccuMed International, Inc.:
Under date of March 26, 1999 we reported on the consolidated balance sheets of
AccuMed International, Inc. and subsidiaries as of December 31, 1998 and 1997,
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,
1998, as contained in the annual report on Form 10-K for the year 1998. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule in the
report on Form 10-K. 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 26, 1999
F-21
<PAGE> 58
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additons
Balance at charged to Balance at
Beginning costs and Other end of
Description of period expenses Retirements changes period
--------------------------- -------------- -------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted
from asset accounts
Allowance for uncollectible
accounts receivable
Year Ended December 31, $17,932 $108,160 $- $- $126,092
1996
Year Ended December 31, $126,092 $268,728 $- $394,820
1997
Year Ended December 31, $394,820 $377,353 $(419,173) $- $353,000
1998
Reserves and allowances which support
balance sheet caption
reserves
Warranty reserves
Year Ended December 31, $- $30,000 $- $- $30,000
1996
Year Ended December 31, $30,000 $- $(332,701) $900,000 (a) $597,299
1997
Year Ended December 31, $597,299 $- $(236,674) $(18,000) (b) $342,625
1998
</TABLE>
(a) reserves acquired through ESP product line acquisition on March 3, 1997
(b) reserves of Oncometrics Imaging Corp. reclassified in current year.
F-22
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
1. AccuMed International, Limited, an English registry company.
2. Oncometrics Imaging Corp., a corporation continuing under the laws of the
Yukon Territory, Canada.
37
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
AccuMed International, Inc.:
We consent to incorporation by reference in the registration statements
on Form S-3 (Nos. 333-028125, 333-07681, 333-04715, and 333-56393) and on
Form S-8 (No. 333-11219) of AccuMed International, Inc. of our reports dated
March 26, 1999 relating to the consolidated balance sheets of AccuMed
International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows and related schedule for the years ended December 31, 1998, 1997 and
1996, which reports appear in this December 31, 1998 annual report on Form 10-K
of AccuMed International, Inc.
/s/ KPMG LLP
Chicago, IL
March 26, 1999
38
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 362
<SECURITIES> 0
<RECEIVABLES> 3,536
<ALLOWANCES> 0
<INVENTORY> 4,416
<CURRENT-ASSETS> 8,502
<PP&E> 2,890
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,574
<CURRENT-LIABILITIES> 7,338
<BONDS> 5,782
<COMMON> 55
0
0
<OTHER-SE> 4,168
<TOTAL-LIABILITY-AND-EQUITY> 17,574
<SALES> 326
<TOTAL-REVENUES> 326
<CGS> 856
<TOTAL-COSTS> 856
<OTHER-EXPENSES> 9,267
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,411
<INCOME-PRETAX> (10,360)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,360)
<DISCONTINUED> 3,351
<EXTRAORDINARY> (1,168)
<CHANGES> 0
<NET-INCOME> (8,176)
<EPS-PRIMARY> (1.61)
<EPS-DILUTED> (1.61)
</TABLE>
