<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the quarterly period ended September 30, 1998.
OR
- --- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
---- ----
Commission file number: 0-20652
ACCUMED INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4054899
-------------------------------- ------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
900 N. Franklin St., Suite 401, Chicago, IL 60610
(Address of principal executive offices)
(312) 642-9200
--------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
The registrant had 5,485,453 shares of common stock outstanding as of
November 13, 1998.
<PAGE> 2
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 . . . . . . 1
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1998 and 1997 . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 . . . . 3
Notes to Condensed Consolidated Financial Statements . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . 13
<PAGE> 3
PART I - FINANCIAL INFORMATION
ACCUMED INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED AUDITED
-------------- -------------
ASSETS SEPT. 30, 1998 DEC. 31, 1997
-------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 114,339 $ 469,639
Accounts receivable, net 4,289,957 4,664,152
Prepaid expenses 319,768 183,817
Production inventory 5,194,688 3,464,190
------------ ------------
TOTAL CURRENT ASSETS 9,918,752 8,781,798
------------ ------------
FIXED ASSETS, NET 3,655,305 5,178,528
------------ ------------
Notes receivable 164,199 164,199
Deferred financing costs 196,824 640,224
Purchased technology 5,244,573 4,950,753
Other assets 812,165 833,215
------------ ------------
$ 19,991,818 $ 20,548,717
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,519,842 $ 3,590,022
Payroll and related accruals 120,000 458,794
Accrued interest 94,865 441,100
Other current liabilities 753,924 660,842
Notes payable 1,636,582 1,888,273
Long term debt, current portion 802,900 700,000
------------ ------------
TOTAL CURRENT LIABILITIES 5,928,113 7,739,031
------------ ------------
Warranty reserves, non-current 430,626 467,299
Long term debt 6,289,139 11,454,755
Minority interest -- 154,560
------------ ------------
6,719,765 12,076,614
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, series A convertible 4,329,466 --
Common stock, $0.01 par value 54,855 227,289
Additional paid-in capital 59,539,595 51,953,823
Other comprehensive income 14,783 22,586
Accumulated deficit (56,378,022) (51,253,889)
Treasury stock (216,737) (216,737)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 7,343,940 733,072
------------ ------------
$ 19,991,818 $ 20,548,717
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 1 -
<PAGE> 4
ACCUMED INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
------------------------------------ -----------------------------------
1998 1997 1998 1997
----------------- ---------------- ------------------ ---------------
<S> <C> <C> <C> <C>
SALES $ 4,917,491 $ 4,914,004 $ 15,451,174 $ 14,157,306
COST OF SALES (2,784,895) (3,331,740) (8,825,530) (8,905,595)
------------ ------------ ------------ ------------
Gross profit 2,132,596 1,582,264 6,625,644 5,251,711
------------ ------------ ------------ ------------
OPERATING EXPENSES:
General and administrative 1,666,923 1,833,732 4,928,149 6,280,715
Research and development 767,393 1,340,234 2,621,889 3,639,509
Goodwill writeoff -- -- -- 3,582,068
Sales and marketing 872,244 1,125,213 2,560,261 3,215,636
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,306,560 4,299,179 10,110,299 16,717,928
------------ ------------ ------------ ------------
OPERATING (LOSS) (1,173,964) (2,716,915) (3,484,655) (11,466,217)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (343,304) (472,851) (1,267,913) (2,960,893)
Other income 549,012 102,090 796,515 342,042
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 205,708 (370,761) (471,398) (2,618,851)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES FROM
CONTINUING OPERATIONS (968,256) (3,087,676) (3,956,053) (14,085,068)
INCOME TAX EXPENSE -- -- -- --
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (968,256) (3,087,676) (3,956,053) (14,085,068)
EXTRAORDINARY ITEM - DEBT EXTINGUISHMENT LOSS -- -- (1,168,080) --
------------ ------------ ------------ ------------
NET LOSS $ (968,256) $ (3,087,676) $ (5,124,133) $(14,085,068)
============ ============ ============ ============
BASIC LOSS PER SHARE BEFORE EXTRAORDINARY ITEM $ (0.18) $ (0.82) $ (0.80) $ (3.92)
EXTRAORDINARY LOSS PER SHARE FROM DEBT
EXTINGUISHMENT -- -- (0.24) --
------------ ------------ ------------ ------------
BASIC NET LOSS PER SHARE $ (0.18) $ (0.82) $ (1.04) $ (3.92)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,485,453 3,747,051 4,950,396 3,595,683
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 2 -
<PAGE> 5
ACCUMED INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
UNAUDITED
---------------------------------------
1998 1997
------------------- ------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (5,124,133) $(14,085,068)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,379,000 2,161,617
Write-off of debt discount -- 1,966,340
Debt extinguishment loss 1,168,080 --
Write-off of impaired goodwill -- 3,582,068
Minority interest (191,560) (303,785)
Non-cash gain on settlement -- (22,272)
Changes in assets and liabilities:
Decrease in restricted cash -- 100,000
Decrease (Increase) in accounts receivable 58,195 (679,152)
Decrease (Increase) in prepaid expenses and deposits (135,951) (436,495)
Decrease (Increase) in production inventory (1,414,498) (457,178)
Decrease (Increase) in other assets (7,770) (571,147)
Decrease (Increase) in deferred financing costs (1,100) (821,884)
Increase (Decrease) in accounts payable (971,180) 2,387,921
Increase (Decrease) in other current liabilities (411,708) (61,844)
Increase (Decrease) in warranty reserves (36,673) (435,908)
------------ ------------
CASH USED IN OPERATING ACTIVITIES (4,689,298) (7,676,787)
------------ ------------
INVESTING ACTIVITIES:
Purchase of fixed assets (164,580) (898,372)
Purchase of Oncometrics stock (528,000) --
Acquisition of business, net -- (6,000,000)
------------ ------------
CASH USED IN INVESTMENT ACTIVITIES (692,580) (6,898,372)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuances of common stock, net 4,852,394 556,466
Notes receivable (issued) collected -- (11,427)
Payment of capital lease obligation -- (32,870)
Proceeds from issuance of notes payable 1,362,550 14,750,000
Proceeds from bridge loan -- 6,000,000
Payment of notes payable and bridge loan (1,188,366) (7,938,455)
------------ ------------
CASH PROVIDED BY FINANCING ACTIVITIES 5,026,578 13,323,714
------------ ------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (355,300) (1,251,445)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 469,639 2,801,359
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 114,339 $ 1,549,914
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 3 -
<PAGE> 6
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Preparation of Interim Financial Statements
In the opinion of the management of AccuMed International, Inc. and
Subsidiaries ("the Company"), the accompanying unaudited condensed consolidated
financial statements include all normal adjustments considered necessary to
present fairly the financial position as of September 30, 1998, and the results
of operations for the three months and nine months ended September 30, 1998 and
cash flows for the nine months ended September 30, 1998 and 1997. Interim
results are not necessarily indicative of results for a full year.
The condensed consolidated financial statements and notes are presented as
permitted by Form 10-Q, and do not contain certain information included in the
Company's audited consolidated financial statements and notes for the fiscal
year ended December 31, 1997.
2. Basis of Presentation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances, transactions and stockholdings have been eliminated.
Since June 1998, the Company has been actively negotiating to sell the
Company's microbiology division to a third party. Consummation of such sale is
subject to approval by the Board of Directors of terms of a definitive agreement
and execution and delivery of such agreement, stockholder approval and certain
other approvals and other conditions to closing. The Company will present the
operating results of the microbiology division as discontinued operations if the
stockholders approve the proposed sale.
During the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements, and requires a total for
comprehensive income to be provided in condensed financial statements of interim
periods. Comprehensive income includes all changes in stockholders' equity
during the period except those resulting from investments by owners and
distributions to owners. Comprehensive loss consisted of the following:
<TABLE>
<CAPTION>
3 Months ended Sept. 30, 9 Months Ended Sept. 30,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (968,256) $ (3,087,676) $ (5,124,133) $ (14,085,068)
Other comprehensive income (loss):
Foreign currency translation adjustments (5,991) - (7,803) -
------------ ------------- -------------- --------------
Comprehensive loss $ (974,247) $ (3,087,676) $ (5,131,936) $ (14,085,068)
------------ ------------- -------------- --------------
</TABLE>
<PAGE> 7
3. 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 condensed consolidated financial statements have been
adjusted to reflect the reverse split on a retroactive basis.
4. Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw material and packaging $ 1,694,034 $ 999,561
Finished good and work in process 3,500,654 2,464,629
----------- ----------
Total inventories $ 5,194,688 $ 3,464,190
----------- -----------
</TABLE>
5. Debt Conversion
On February 23, 1998, the Company exchanged $5,275,000 in principal amount
of its 12% Convertible Promissory Notes (the "Convertible Notes") plus accrued
interest thereon of $329,030 for 1,245,340 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") and 5-year warrants to purchase 207,557
shares of Common Stock at an exercise price of $6.75 per share. The Preferred
Stock is convertible into 830,227 shares of Common Stock at a conversion price
of $6.75 per share. The Company has registered the resale of the shares of
Common Stock underlying the Preferred Stock and Warrants with the Securities and
Exchange Commission during 1998.
Related to the debt conversion, the Company incurred an extraordinary
loss of $1,168,080, including stock, warrants and fees paid to the placement
agent, warrants issued as an inducement to the converting noteholders,
accounting fees, and the write-off of a proportional amount of deferred
financing costs associated with the issuance of the Convertible Notes. The
placement agent received fees of $175,000, 8,334 shares of Common Stock valued
at $40,000, 7-year warrants to purchase 58,334 shares of Common Stock at $6.75
per share valued at $84,000, and repricing of previously issued 4-year warrants
to purchase 33,334 shares of Common Stock at an exercise price of $18.75 per
share to $6.75 per share, valued at $26,000. The converting noteholders received
5-year warrants to purchase 207,557 shares of Common Stock at an exercise price
of $6.75 per share, valued at $37,380.
The Company utilized the Black-Scholes pricing model to determine the fair
value of warrants issued. The following assumptions were incorporated into the
model: risk-free rate - 6%, expected volatility - 20%, and expected dividend
- - zero. The risk-free rate is determined based
<PAGE> 8
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.
6. Private Placement
During March 1998, the Company consummated a private placement of 1,447,778
shares of Common Stock and 7-year warrants to purchase an aggregate of 1,447,778
shares of Common Stock at an exercise price of $4.50 per share for gross
proceeds of $6,515,000, including $1,000,000 in notes payable converted into
Common Stock, and net proceeds of $5,864,000 after payment of fees, commissions
and expenses related thereto.
Such securities were sold in units (the "Units"), each Unit consisting of
22,223 shares of Common Stock, and seven-year warrants to purchase 22,223 shares
of Common Stock at an exercise price of $4.50 per share (the "Unit Warrants").
The Company has registered the resale of the outstanding Common Stock and the
Common Stock underlying the Unit Warrants with the Securities and Exchange
Commission.
If the Common Stock is delisted from The Nasdaq SmallCap Stock Market at
any time on or prior to December 31, 1998, original purchasers of the Units will
be entitled to receive, at their option, in exchange for the Units, units (the
"Alternate Units"), each Alternate Unit consisting of (i) shares of Series B
Convertible Preferred Stock, par value $0.01 per share of the Company (the
"Series B Preferred"), having an aggregate stated value of $100,000 (the "Series
B Stated Value"), convertible into shares of Common Stock at an initial
conversion price of $4.50 per share (the "Series B Conversion Price"), and (ii)
warrants (the "Alternate Warrants") exercisable to purchase the number of shares
of Common Stock issuable upon exercise of the Unit Warrants at the same initial
Unit Warrant exercise price.
The Series B Preferred, if issued, will be immediately convertible at the
option of the holder into shares of Common Stock at the Series B Conversion
Price.
7. Acquisition
On June 29, 1998, the Company acquired the remaining 33% of the
outstanding capital stock of Oncometrics Imaging Corp. ("Oncometrics") it did
not already own. The Company paid $342,000 in cash and $342,000 in a convertible
18-month note bearing interest at a rate of 2% over the Canadian prime rate in
exchange for the stock and a loan payoff to the seller of $154,000. The note is
convertible, in whole or in part, into Common Stock of the Company at a price of
$1.79 per share.
The acquisition was accounted for using the purchase method of accounting
with the purchase price allocated to the net assets acquired based on their
estimated fair values at the date of acquisition. The excess purchase price
consists of $700,000 of purchased technology recorded on the condensed
consolidated balance sheet in the second quarter. The operating results of
Oncometrics have been included in the statement of operations from the date of
acquisition.
<PAGE> 9
Oncometrics was formed in 1995 and is currently developing an automated
instrument, using the Company's AcCellTM workstation, designed for use in the
detection, diagnosis and prognosis of early-stage cancer by measuring the DNA in
cells on microscope slides. Prototypes of the instrument are currently being
tested with scientists at cancer research and patient care institutions.
8. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
9 Months ended September 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Interest paid $ 1,024,918 $ 655,632
NON-CASH INVESTING AND FINANCING ACTIVITIES
Deposit reclassified to fixed assets $ 140,000 --
</TABLE>
The Company extinguished debt with a carrying value of $4,818,800 through
the issuance of preferred stock and warrants with a fair value of $5,986,880
including transaction fees, resulting in an extraordinary loss of $1,168,000.
The Company satisfied its obligation under a $1,000,000 note payable
through the issuance of 222,223 shares of Common Stock and seven-year warrants
to purchase 222,223 shares of Common Stock.
<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is engaged in the development and marketing of cost effective
screening instruments and systems for clinical diagnostic laboratories,
hospitals and others. The Company's operations are in two business segments: 1)
Cytopathology - systems made up of instruments and proprietary software that
support the review and analysis of Pap smears and DNA for early cancer
detection, and 2) Microbiology - proprietary disposable products and automated
instruments used to identify infectious organisms and determine susceptibility
to antimicrobial agents.
OVERVIEW
The Company's primary focus is on the development of computer-aided
diagnostic imaging systems for the cytopathology laboratory marketplace. The
Company's integrated systems use reliable, accurate and innovative products and
methods to provide laboratories with comprehensive solutions that improve
efficiency and reduce costs while achieving significant improvements in disease
detection.
On 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. Since June
1998, the Company has been negotiating with a third party to sell the
microbiology division under a plan subject to shareholder approval. The Board
and management believe that the Company's future depends on the success of the
cytopathology product line and directly related technology. The divestiture
would allow the Company to commit resources to support and market the
cytopathology product line.
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.
RESULTS OF OPERATIONS
Sales revenues for the quarter ended September 30, 1998 of $4,917,000 were
flat compared to $4,914,000 for the quarter ended September 30, 1997. This is
due to additional sales of microbiology consumables offset by decreases in
instrument sales. The cytopathology product line did not have a significant
impact in either the 1998 or 1997 quarters.
<PAGE> 11
Cost of sales decreased from $3,332,000 in the third quarter of 1997 to
$2,785,000 in the third quarter of 1998, reflecting a change in the sales mix to
higher margin microbiology consumable products as opposed to instruments.
General and administrative expenses decreased 9%, declining from
$1,834,000 in the third quarter of 1997 to $1,667,000 in the comparable 1998
quarter. The decrease is due to continued staff reductions and streamlining
efforts in the cytopathology division.
Research and development expenses decreased 42% from $1,340,000 in the
third quarter of 1997 to $767,000 in the third quarter of 1998 due primarily to
decreased spending in the microbiology product line.
Sales and marketing expenses decreased 22% from $1,125,000 in the third
quarter of 1997 to $872,000 in the third quarter of 1998 due to decreased
marketing efforts in both the microbiology and cytopathology product lines.
Interest expense of $472,000 in the third quarter of 1997 reflected
amounts accrued on the $8.5 million Convertible Notes issued in March 1997 to
fund the ESP product line acquisition. The interest expense for the third
quarter of 1998 of $343,000 reflected interest on the Company's equipment
loan, revolving line of credit, and the $3,250,000 in Convertible Notes which
were not converted into Series A Preferred Stock in February of 1998.
The third quarter of 1998 also reflects $500,000 of other income,
representing minimum guaranteed licensing fees for proprietary technology
licensed to a third party. The third quarter of 1997 had no comparable
transaction.
Net loss decreased from $3,088,000 for the third quarter of 1997 to
$968,000 for the third quarter of 1998, due to increased gross margins,
decreased operating and interest expenses, and other income. Net loss per share
for the quarter ended September 30, 1998 was $0.18 compared to a net loss per
share of $0.82 for the quarter ending September 30, 1997. The loss per share for
the current quarter was about $0.08 per share less due to the increase in the
weighted average shares outstanding for 1998.
Sales revenues for the nine months ended September 30, 1998 of $15,451,000
were up 9% compared to $14,157,000 for the nine months ended September 30, 1997.
This increase reflects a full nine months of sales for the ESP product line,
acquired in March 1997, offset by decreases in instrument sales.
Cost of sales decreased from $8,906,000 for the nine months ended September
30, 1997 to $8,826,000 for the nine months ended September 30, 1998, reflecting
a change in the sales mix to higher margin microbiology consumable products as
opposed to instruments.
General and administrative expenses decreased 21%, declining from
$6,281,000 for the nine months ended September 30, 1997 to $4,928,000 in the
comparable 1998 period. The decrease is due to continued staff reductions and
streamlining efforts in the cytopathology division.
Research and development expenses decreased 18% from $3,640,000 for the
nine months ended September 30, 1997 to $2,622,000 for the nine months ended
September 30, 1998 due primarily to decreased spending in the microbiology
product line.
Sales and marketing expenses decreased 20% from $3,216,000 for the nine
months ended September 30, 1997 to $2,560,000 for the nine months ended
September 30, 1998 due to decreased marketing efforts in both the microbiology
and cytopathology products lines.
For the nine month period ended September 30, 1998, the Company incurred a
$1,168,000 extraordinary loss related to the conversion of par value $5,275,000
of Convertible Notes and $329,030 in accrued interest thereon into 1,245,340
shares of Series A Convertible Preferred Stock. Of the total expense, $193,000
represented cash fees and expenses.
The $3,582,000 goodwill write-off in the first nine months of 1997 is due
to contingent consideration associated with the AccuMed, Inc. merger into the
Company in December 1995 written off as an impaired asset.
Net loss decreased from $14,085,000 for the nine month period ended
September 30, 1997 to $5,124,000 for the comparable 1998 period. The reduced
loss is due primarily to a decrease in
<PAGE> 12
operational expenses and interest expense totaling $8,301,000, increased gross
margins of $1,374,000, and an extraordinary loss of in 1998 of $1,168,000.
The net loss per share for the first nine months of 1998 was $1.04
compared to $3.92 for the 1997 period. The loss per share for the current
nine-month period was about $0.38 per share less due to the increase in the
weighted average shares outstanding for 1998.
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 the first nine months of 1998, the Company
has used operating cash flow from its microbiology product line, together with
debt and equity financing, to fund such activities.
The Company's cash balance at September 30, 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 potential sale of the Company's microbiology product line, will be
sufficient to finance the Company's projected operations through at least the
next 12 months.
The increased inventory levels at September 30, 1998 as compared to
December 31, 1997 reflect a build up of cytopathology products to service the
Company's "try-buy" program announced in the third quarter. This program allows
potential customers to use the Company's cytopathology systems on their premises
for up to three months before committing to purchase the systems.
Current liabilities are lower at September 30, 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 private placement of Common Stock in March 1998. Long-term debt
was reduced as a result of the debt conversion in February 1998.
Investing Activities
On June 29, 1998, the Company acquired the remaining one-third of the
outstanding stock of Oncometrics Imaging Corp. ("Oncometrics") that it did not
already own. The Company paid $342,000 in cash and $342,000 in a convertible
18-month note with a rate of 2% over the Canadian prime rate in exchange for the
stock and a loan payoff to the seller of $156,000.
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
<PAGE> 13
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 remains
outstanding and unaffected by this exchange.
The Company's most recent private placement, closed in March 1998, raised
gross cash proceeds of $5,515,000 and net cash proceeds of $4,804,000 after
payment of fees and commissions. It resulted from the issuance of 1,447,778
shares of Common Stock and seven-year warrants to purchase 1,447,778 shares of
Common Stock at an exercise price of $6.75 per share. During the first nine
months of 1998, the Company also received an aggregate of $48,000 upon the
exercise of stock options and warrants.
At September 30, 1998, the Company's long term debt consists principally
of: 1) $3,118,000 of unsecured 12% Convertible Notes, net of a discount of
$107,000 due March, 2000, and 2) a $3,456,000 secured note payable, net of a
discount of $125,000, 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
one-year revolving credit facility 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 $1,842,000 based on borrowing base calculations at September 30,
1998, of which $304,000 was unused. The interest rate on the credit line is the
higher of the highest prime rate plus 2.5% or 9% (11% at September 30, 1998).
The Company currently has no commitments with respect to sources of
additional financing. The failure of the Company to obtain adequate additional
financing may require the Company to delay, curtail or scale back some or all of
its research, development, and marketing activities and, potentially, to cease
its operations. Any additional equity financing may involve substantial dilution
to the Company's then-existing stockholders.
YEAR 2000 COMPLIANCE
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 disruptions of
operations, including, but not limited to, a temporary inability to process
transactions, including invoices or other similar normal business activities.
State of Readiness
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 or replacement of imbedded technology
should not have a significant impact on the Company's operations. The Company
has received representation 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's cytopathology division 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 microbiology
division has significant suppliers and customers but does not have significant
interdependence with third party computer systems.
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.
Costs 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.
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 how 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 hoc basis as the need for such plans
arise.
<PAGE> 14
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed herewith:
27.1 Financial Data Schedule
(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by the
Company with the Securities and Exchange Commission during the quarter ended
September 30, 1998.
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
ACCUMED INTERNATIONAL, INC.
/s/ Gary A. Newberry
-----------------------------------
Gary A. Newberry
Chief Financial Officer
Date: January 11, 1999
<PAGE> 16
Index to Exhibits
Exhibit No Description of Exhibit
-------------- ----------------------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 114
<SECURITIES> 0
<RECEIVABLES> 4,290
<ALLOWANCES> 0
<INVENTORY> 5,195
<CURRENT-ASSETS> 9,919
<PP&E> 3,655
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,992
<CURRENT-LIABILITIES> 5,928
<BONDS> 6,289
0
4,329
<COMMON> 59,594
<OTHER-SE> (56,580)
<TOTAL-LIABILITY-AND-EQUITY> 19,992
<SALES> 15,451
<TOTAL-REVENUES> 15,451
<CGS> 8,826
<TOTAL-COSTS> 8,826
<OTHER-EXPENSES> 10,110
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,268
<INCOME-PRETAX> (3,956)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,956)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,168)
<CHANGES> 0
<NET-INCOME> (5,124)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
