Accumed International (ACMI) 10-Q 2001 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2001.

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 of incorporation or organization)	(IRS Employer Identification No.)

920 N. Franklin St., Suite 402, 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 5,739,838 shares of common stock outstanding as of August 8, 2001.

ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY

INDEX

		Page
		Number
PART I.	Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000		1
	Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2001 and 2000 (unaudited) and for the Six Months Ended June 30, 2001 and 2000 (unaudited)		2
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 (unaudited)		3
	Notes to Condensed Consolidated Financial Statements (unaudited)		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		6
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		11
PART II.	Other Information
Item 1.	Legal Proceedings		13
Item 6.	Exhibits and Reports on Form 8-K		13
SIGNATURES			14

PART I — FINANCIAL INFORMATION
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

			Unaudited
			June 30, 2001			December 31, 2000
ASSETS
Current Assets
	Cash and cash equivalents		$	165,615		$	462
	Accounts receivable			42,640			19,600
	Prepaid expenses and other current assets			17,262			18,984
	Available-for-sale security			234,347			195,085
	Notes receivable			—			492,772
	Inventories			597,704			639,220
		Total current assets		1,057,568			1,366,123
Property and equipment, net				216,618			385,372
Purchased technology, net				3,192,864			3,523,866
Patents, net				742,770			775,416
			$	5,209,820		$	6,050,777
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
	Current portion of debt		$	1,772,038		$	668,288
	Accounts payable			188,033			330,168
	Accrued interest			63,406			13,161
	Deferred revenues, current portion			314,935			419,739
	Other current liabilities			533,912			747,020
		Total current liabilities		2,872,324			2,178,376
Deferred revenues				988,868			1,487,973
Stockholders’ equity
	Preferred stock, Series A convertible			2,576,185			2,655,893
	Common stock, $0.01 par value			57,398			57,280
	Additional paid-in capital			61,290,333			61,210,743
	Accumulated other comprehensive income (loss)			(153,336	)		(190,939	)
	Accumulated deficit			(62,205,215	)		(61,131,812	)
	Treasury stock			(216,737	)		(216,737	)
		Total stockholders’ equity		1,348,628			2,384,428
			$	5,209,820		$	6,050,777

See accompanying notes to condensed consolidated financial statements.

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ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

			Three Months Ended June 30,						Six Months Ended June 30,
			2001			2000			2001			2000
Net sales			$	43,002			13,500		$	43,002		$	168,463
Licensing fees and royalties				132,424			70,628			715,959			70,628
	Total net revenues			175,426			84,128			758,961			239,091
Operating expenses:
	Cost of sales			34,516			6,149			34,516			49,830
	Cost of revenues			—			—			12,712			—
	General and administrative			511,649			781,513			1,391,749			1,569,681
	Research and development			172,357			230,512			354,499			582,880
	Sales and marketing			6,250			15,555			43,917			88,144
		Total operating expenses		724,772			1,033,729			1,837,393			2,290,535
Operating loss				(549,346	)		(949,601	)		(1,078,432	)		(2,051,444	)
Other income (expense):
	Interest expense			(37,614	)		(7,500	)		(60,994	)		(15,000	)
	Realized gain on available-for-sale security			—			—			—			326,844
	Other income, net			33,699			12,992			66,023			28,327
		Total other income (expense)		(3,915	)		5,492			5,029			340,171
Loss before income taxes				(553,261	)		(944,109	)		(1,073,403	)		(1,711,273	)
Income taxes				—			—			—			—
Net loss			$	(553,261	)	$	(944,109	)	$	(1,073,403	)	$	(1,711,273	)
Basic and diluted net loss per share			$	(0.10	)	$	(0.17	)	$	(0.19	)	$	(0.31	)
Weighted average common shares outstanding				5,739,838			5,663,657			5,738,272			5,600,360

See accompanying notes to condensed consolidated financial statements

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ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,

			Unaudited
			2001			2000
Operating activities:
	Net loss		$	(1,073,403	)	$	(1,711,273	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization		508,919			527,971
		Realized gain on sale of available-for-sale security		—			(326,844	)
		Gain on sale of property and equipment		(26,386	)		—
		Gain on settlement of litigation		(29,549	)		—
		(Decrease) increase in deferred revenues		(602,150	)		1,590,157
		Changes in other operating assets and liabilities		236,377			(191,724	)
Cash used in operating activities				(986,192	)		(111,713	)
Investing activities:
	Proceeds from repayment of note receivable			—			400,000
	Proceeds from sale of available-for-sale security			—			326,844
	Capital expenditures			—			(27,755	)
	Proceeds from sale of property and equipment			49,025			—
Cash provided by investing activities				49,025			699,089
Financing activities:
	Proceeds from notes payable			1,170,000			—
	Repayment of notes payable			(66,250	)		(125,000	)
Cash provided by (used in) financing activities				1,103,750			(125,000	)
Effect of exchange rates on cash				(1,430	)		(2,445	)
Net increase in cash and cash equivalents				165,153			459,931
Cash and cash equivalents at beginning of period				462			196,303
Cash and cash equivalents at end of period			$	165,615		$	656,234

See accompanying notes to condensed consolidated financial statements.

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ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Preparation of Interim Financial Statements

     In our opinion, the accompanying unaudited condensed consolidated financial statements include all normal adjustments considered necessary to present fairly our financial position as of June 30, 2001, and our results of operations for the three-month and the six-month periods ended June 30, 2001 and 2000 and our cash flows for the six-month periods ended June 30, 2001 and 2000. Our interim results are not necessarily indicative of the results we expect for the 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 our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2000 as filed with the Securities and Exchange Commission on Form 10-K/A.

2. Basis of Presentation

     The condensed consolidated financial statements include the accounts of AccuMed and its wholly-owned subsidiary, Oncometrics Imaging Corp. All significant intercompany balances, transactions and stockholdings have been eliminated.

3. Comprehensive Loss

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2001			2000			2001			2000
Net loss		$	(553,261	)	$	(944,109	)	$	(1,073,403	)	$	(1,711,273	)
Other comprehensive income (loss)
	Reclassification of realized gain included in net income		—			—			—			(326,844	)
	Change fair value of available-for-sale security		(59,778	)		(28,565	)		39,262			442,955
	Foreign currency translation adjustments		1,867			4,738			(1,659	)		4,031
Comprehensive loss		$	(611,172	)	$	(967,936	)	$	(1,035,800	)	$	(1,591,131	)

4. Inventories

     Inventories are summarized as follows:

	June 30,		December 31,
	2001		2000
Raw material	$	538,235	$	539,944
Work in process		—		—
Finished goods		59,469		99,276
Total inventories	$	597,704	$	639,220

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5. Supplemental Disclosure of Cash Flow Information

		Six Months Ended June 30,
		2001		2000
Operating Activities:
	Interest paid	$	10,749	$	12,686
Non-Cash Investing and Financing Activities:
	Preferred stock converted to common stock	$	79,708	$	1,381,316

6. MonoGen Agreements

     On April 10, 2001, AccuMed and Oncometrics assigned to MonoGen, Inc. all of our rights under our contracts with the Cooperative Research Centre for Sensor Signal and Information Processing, Sakura Finetechnical Co., Ltd., and Tokyo Medical University for $35,000. This amount was recognized as licensing revenue in the second quarter of 2001. We have no continuing obligations under these contracts.

     On December 29, 2000, we entered into license agreements with Monogen and received $500,000 of notes receivable as consideration for the license fees due under the agreements. In the first quarter of 2001, we collected the balance due under these notes in full. Since we completed all of our obligations under the agreements, we recognized as revenue in the first quarter of 2001 the total amount of the license fees received of $491,012, net of interest imputed on the notes.

7. Settlement of Merrill Corporation Litigation

     In June 1997, Merrill Corporation filed a complaint against AccuMed in the Circuit Court of Cook County, Illinois. The complaint alleged that AccuMed entered into a contract for printing services and failed to pay for the services rendered. AccuMed alleged that the invoices submitted to it were inaccurate and excessive, and that Merrill did not perform all of the services for which it purported to charge AccuMed. Merrill sought an award of $430,033, plus interest, attorneys’ fees and costs.

     On May 10, 2001, a settlement was reached with Merrill. AccuMed agreed to pay Merrill an aggregate of $312,000 in cash in twelve installments of $26,000 per month from May 2001 through April 2002, with interest at a rate of 10% due with the final installment. In the second quarter of 2001, we adjusted our accrued liability for this contingency and recorded a gain of $30,000 on the settlement, which is included in other income in the statement of operations.

8. Pending Merger

     On February 7, 2001, we signed an agreement to merge with Ampersand Medical Corporation. Under the terms of the agreement, holders of our common stock will receive 0.6552 of a share (subject to adjustment) of Ampersand common stock for each share of AccuMed common stock held. Each share of our Series A convertible preferred stock will be exchanged for one share of Ampersand’s preferred stock that will be convertible into Ampersand’s common stock. Consummation of the merger is subject to customary closing conditions, including the approval of AccuMed’s stockholders, and the registration of the Ampersand common stock with the Securities and Exchange Commission. The termination date for the merger was automatically extended to September 30, 2001. We expect the merger to close in the third quarter of 2001.

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     Through June 30, 2001, we have received an aggregate of $1,500,000 of working capital advances from Ampersand. The notes for these advances bear interest at prime plus 2.5% and are secured by our inventory and certain customer contracts. These notes will be dissolved upon consummation of the merger or will be due and payable upon the termination of the merger agreement. The due date of the notes may be extended upon mutual agreement of the parties.

9. Subsequent Events

     On July 5, 2001 and August 8, 2001, AccuMed received additional advances of $100,000 each from Ampersand. The notes for these advances are on terms consistent with the previous Ampersand advances.

     On July 27, 2001, AccuMed advanced $100,000 to Ampersand for a note receivable. The note, plus interest, was originally due on August 3, 2001 and earns interest at the rate of 12% per annum. The parties agreed to extend the maturity date of the note to August 28, 2001. As consideration for the extension, Ampersand agreed that if it fails to repay the principal and interest when due, Ampersand will release its security interest in twenty-five AcCell instruments to permit the sale of such instruments by AccuMed. As additional consideration for the note, Ampersand agreed to pay a note origination fee of $10,000 which is due and payable on August 31, 2001. Any amount that Ampersand fails to pay AccuMed in the form of principal, interest, or note origination fee when due will be offset against amounts owed by AccuMed to Ampersand under a February 7, 2001 secured promissory note.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

General

     AccuMed markets and develops cost effective screening instruments and systems for clinical diagnostic laboratories, hospitals and others. Our integrated systems use reliable, accurate and innovative products and methods to provide laboratories with comprehensive solutions that are intended to improve efficiency and reduce costs while significantly improving disease detection. We are currently 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. We expect to incur additional operating losses over at least the next 12 months primarily as a result of expenditures for corporate overhead and development.

Overview

     On February 7, 2001, we signed an agreement to merge with Ampersand Medical Corporation. Under the terms of the agreement, holders of our common stock will receive 0.6552 of a share (subject to adjustment) of Ampersand common stock for each share of AccuMed common stock held. Each share of our Series A convertible preferred stock will be exchanged for one share of Ampersand’s preferred stock that will be convertible into Ampersand’s common stock. Consummation of the merger is subject to customary closing conditions, including the approval of AccuMed’s stockholders, and the registration of the Ampersand common stock with the Securities and Exchange Commission. The termination date for the merger was automatically extended to September 30, 2001. We expect the merger to close in the third quarter of 2001.

     Through June 30, 2001, we have received an aggregate of $1,500,000 of working capital advances from Ampersand. On July 5, 2001 and August 8, 2001, we received additional advances of $100,000 each from Ampersand. The notes for these advances bear interest at prime, plus 2.5%, and are secured by our inventory and certain customer contracts. These notes will be dissolved upon consummation of the merger or will be due and payable upon the termination of the merger agreement. The due date of the notes may be extended upon mutual agreement of the parties.

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     On April 10, 2001, AccuMed and Oncometrics assigned to MonoGen, Inc. all of our rights under our contracts with the Cooperative Research Centre for Sensor Signal and Information Processing, Sakura Finetechnical Co., Ltd., and Tokyo Medical University for $35,000. This amount was recognized as licensing revenue in the second quarter of 2001. We have no continuing obligations under these contracts.

     On July 27, 2001, AccuMed advanced $100,000 to Ampersand for a note receivable. The note, plus interest, was originally due on August 3, 2001 and earns interest at the rate of 12% per annum. The parties agreed to extend the maturity date of the note to August 28, 2001. As consideration for the extension, Ampersand agreed that if it fails to repay the principal and interest when due, Ampersand will release its security interest in twenty-five AcCell instruments to permit the sale of such instruments by AccuMed. As additional consideration for the note, Ampersand agreed to pay a note origination fee of $10,000 which is due and payable on August 31, 2001. Any amount that Ampersand fails to pay AccuMed in the form of principal, interest, or note origination fee when due will be offset against amounts owed by AccuMed to Ampersand under a February 7, 2001 secured promissory note.

Results of Operations

Three Months Ended June 30, 2001 Compared With Three Months Ended June 30, 2000

     Revenues and Cost of Sales

     Our net revenues were $175,000 for the three months ended June 30, 2001 compared to $84,000 for the three months ended June 30, 2000. Net sales increased by $30,000 as a result of the sale of four AcCell units in 2001 compared to one unit sold in the 2000 period. Licensing fees and royalties increased by $62,000. Licensing fees and royalties increased as a result of (1) fees earned under a per-use contract that was signed in 2000 but is not reflected in the prior year revenues and (2) one-time fees earned from the sale of certain customer contracts to MonoGen, Inc. Cost of sales represents the cost of units sold during the period. Although we are not actively marketing our AcCell products, we expect to continue to sell a limited number of units on a periodic basis.

     Operating Expenses

     General and administrative expenses decreased by $270,000, or 34.5% from $782,000 in the 2000 period to $512,000 in the 2001 period. The decrease in these expenses is a result of our efforts to reduce corporate expenditures, in particular legal fees, rent, and investor relations costs, and the one-time effect in 2000 of a payment to settle certain benefits owed to AccuMed’s previous chief executive officer that resulted from an amendment to our patent and technology license agreement with Ampersand. General and administrative expenses for the 2000 period does not include $28,000 of qualifying costs applied to development funds received under our obligation with Ventana. General and administrative expenses total $810,000 for 2000 when the qualifying costs that were applied to development funds are included.

     Research and development expenses decreased by $58,000, or 25.2%, from $231,000 in 2000 to $172,000 in 2001. The decrease in these expenses is substantially a result of reducing personnel and scaling back our research and development efforts. Research and development expenses in the 2000 period does not include $128,000 of qualifying costs applied to development funds received under our development obligation with Ventana. Research and development expenses total $359,000 for 2000 when the qualifying costs that were applied to development funds are included.

     Sales and marketing expenses were $6,000 for the three months ended June 30, 2001 compared to $16,000 for the 2000 period. Our expenses decreased primarily as result of personnel reductions, offset by the effects of $23,000 of qualifying costs in 2000 that were applied to development funds received under our development obligation with Ventana. Sales and marketing expenses total $39,000 for 2000 when the qualifying costs that were applied to development funds are included.

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     Other Income and Expense

     Interest expense for the three months ended June 30, 2001 was $38,000 compared to $8,000 for the 2000 period. The increase in interest expense is a result of receiving a total of $1,500,000 of advances from Ampersand pending the completion of our merger with Ampersand.

     Other income for the three months ended June 30, 2001 was $34,000 compared to $13,000 for the 2000 period. The increase is a result of a gain of $30,000 in 2001 on the settlement of our litigation with Merrill Corporation.

Six Months Ended June 30, 2001 Compared With Six Months Ended June 30, 2000

     Our net revenues were $759,000 for the six months ended June 30, 2001 compared to $239,000 for the six months ended June 30, 2000. Net sales decreased by $125,000 as result of the sale of four AcCell units in 2001 compared to the sale of five AcCell units and one AcCell-Savant unit in the 2000 period. Licensing fees and royalties increased by $645,000. Licensing fees and royalties for 2001 include one-time licensing fees of $491,000 recognized under our agreements with Monogen that we signed late in the fourth quarter of 2000. The 2001 period also includes fees earned under a per-use contract that we signed in 2000 that are not reflected in the prior year revenues and a full six months of revenues under licensing agreements we signed with Ventana and Ampersand late in the first quarter of 2000. Cost of sales represents the cost of units sold during the period. Cost of revenues in 2001 represents the cost of one unit installed under our per-use contract.

     Operating Expenses

     General and administrative expenses decreased by $178,000, or 11.3% from $1,570,000 in the 2000 period to $1,392,000 in the 2001 period. The decrease in these expenses is a result of our efforts to reduce corporate expenditures, in particular legal and consulting fees, rent, and investor relations costs. This decrease is offset by a one-time charge in 2001 of $227,000 related to the termination of our professional services agreement with our chief executive officer, Paul Lavallee, as required under our merger agreement with Ampersand. Mr. Lavallee will continue to serve as our chief executive officer through the closing of the merger. The 2000 period also includes a one-time payment to settle certain benefits owed to AccuMed’s previous chief executive officer that resulted from an amendment to our patent and technology license agreement with Ampersand. General and administrative expenses for the 2000 period does not include $28,000 of qualifying costs applied to development funds received under our obligation with Ventana. General and administrative expenses total $1,598,000 for 2000 when the qualifying costs that were applied to development funds are included.

     Research and development expenses decreased by $228,000, or 39.2%, from $583,000 in 2000 to $354,000 in 2001. The decrease in these expenses is substantially a result of reducing personnel and scaling back our research and development efforts. Research and development expenses in the 2000 period does not include $128,000 of qualifying costs applied to development funds received under our development obligation with Ventana. Research and development expenses total $711,000 for 2000 when the qualifying costs that were applied to development funds are included.

     Sales and marketing expenses were $44,000 for the six months ended June 30, 2001 compared to $88,000 for the 2000 period. Our expenses decreased primarily as a result of personnel reductions and reduced discretionary spending. Sales and marketing expenses in the 2000 period does not include $23,000 of qualifying costs that were applied to development funds received under our development

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obligation with Ventana. Sales and marketing expenses total $111,000 for 2000 when the qualifying costs that were applied to development funds are included.

     Other Income and Expense

     Interest expense for the six months ended June 30, 2001 was $61,000 compared to $15,000 for the 2000 period. The increase in interest expense is a result of receiving a total of $1,500,000 of advances from Ampersand pending the completion of our merger with Ampersand.

     In the 2000 period, we sold a total of 85,776 of our Ampersand common shares on the open market for proceeds of $326,844. A realized gain on the sale of these shares of $326,844 was recorded.

     Other income for the six months ended June 30, 2001 primarily represents a gain of $30,000 on the settlement of our litigation with Merrill Corporation and gains aggregating $26,000 on the sale of property and equipment. Other income for the six months ended June 30, 2000 primarily represents interest income.

Liquidity and Capital Resources

     AccuMed has incurred, and continues to incur, losses from operations and has a working capital deficiency. For the years ended December 31, 2000 and 1999, AccuMed incurred net losses from continuing operations of $3,098,000 and $6,803,000, respectively. For the six months ended June 30, 2001, our net loss was $1,073,000. At June 30, 2001, we have a working capital deficiency of $1,815,000, and our available resources are not presently sufficient to fund our expected cash requirements through 2001 and beyond. These conditions raise substantial doubt about AccuMed’s ability to continue as a going concern.

     In 2000 and 2001, we implemented strategies to reduce losses from operations and cash used in operating activities. These strategies include reducing personnel, curtailing certain research and development efforts, and cutting discretionary expenditures. As a result of our signing of the merger agreement with Ampersand, we have received in 2001 an aggregate of $1,370,000 in advances from Ampersand to be used for working capital purposes. The merger agreement requires an additional monthly advance from Ampersand on September 1, 2001, unless the merger is consummated prior to then, of $100,000 automatically or up to $225,000, if AccuMed demonstrates in writing its need for additional funds to Ampersand’s satisfaction. The Ampersand advances will be dissolved upon consummation of the merger or will be due and payable upon the termination of the merger agreement. The due date for repayment of these advances may be extended upon mutual agreement of AccuMed and Ampersand. Through March 31, 2001, we collected the full $500,000 of notes due from MonoGen. We expect to receive development milestone payments aggregating $200,000 in 2001 from Ventana under our license and development agreement with Ventana. In addition, we expect to begin shipping licensed product to Ventana beginning in the first quarter of 2002.

     We expect our merger agreement with Ampersand to be consummated in the third quarter of 2001. If we are not able to consummate the merger agreement, or if Ventana does not meet its payment obligations, or the development timetable with Ventana is not met or is substantially delayed, we would be required to pursue other strategies to maintain our liquidity. Our strategies would include substantially curtailing our development and marketing efforts, liquidating our inventories and technology portfolio and ceasing operations. This would materially and adversely affect AccuMed’s business, financial condition, results of operations, and cash flows.

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     At June 30, 2001, AccuMed has current debt of $1,772,000. Our debt consists of a Canadian dollar note of $U.S.85,000 ($122,000 in Canadian dollars), a non-interest bearing repayable contribution of $187,000, and $1,500,000 of notes payable to Ampersand. The Canadian dollar note is due on demand, or in the event not called, principal payments are required at a rate of $25,000 U.S. dollars per month, plus interest at a rate of 6.0% over the Canadian prime rate. The Canadian dollar note is convertible into shares of AccuMed’s common stock at a price of $1.43 per share. The repayable contribution was received under a Canadian government program and calls for semi-annual installments based on future sales of product and available funds, as defined. AccuMed is currently past due in making certain of its payment obligations under this program. As a result, AccuMed’s repayment obligation is callable. The Ampersand notes bear interest at prime plus 2.5%, are secured by our inventory and certain customer contracts, and are due upon the earliest of September 30, 2001 or termination of the merger agreement. The due date of the notes may be extended upon mutual agreement of the parties.

     As a result of reaching a settlement of our litigation with Merrill Corporation, we are required to pay Merrill an aggregate of $312,000 in cash in twelve installments of $26,000 per month from May 2001 through April 2002, with interest at a rate of 10% due with the final installment. As of June 30, 2001, we have made three of the installment payments.

     Operating Activities

     For the six months ended June 30, 2001, we used $986,000 of cash for operating activities compared to the use of $112,000 of cash in operations in 2000. The increase in the use of cash in operations reflects the receipt in 2001 of $535,000 in licensing fees compared to 2000 when we received $1,850,000 of licensing fees, advance royalties, and development funds. The effect of this increase is offset by our efforts to reduce expenditures and other working capital changes.

     Investing Activities

     During the six months ended June 30, 2001, we sold certain property and equipment for proceeds of $49,000. In 2000, we collected $400,000 from the repayment of a note receivable with Microsulis Corp. as a result of our failed merger with Microsulis and received $327,000 of proceeds from the sale of our shares of Ampersand common stock. We used $28,000 in 2000 for capital expenditures. We do not anticipate material capital expenditures during 2001.

     Financing Activities

     We received $1,170,000 in working capital advances from Ampersand during the six months ended June 30, 2001. In 2001 and 2000, we repaid $66,000 and $125,000, respectively, of our notes payable.

     We currently have no commitments with respect to sources of additional financing other than with respect to funds to be received under our agreements with Ampersand and Ventana.

Recently Issued Accounting Standards

     On June 29, 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141,Business Combinations, and No. 142,Goodwill and Other Intangible Assets. Statement 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. Statement 141 changes the criteria to recognize intangible assets apart from goodwill. The requirements

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of Statement 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under Statement 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Separable intangible assets that have finite lives will continue to be amortized over their useful lives. The amortization provisions of Statement 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the amortization provisions of Statement 142 are effective upon adoption of Statement 142. We are required to adopt Statement 142 on January 1, 2002. We are in the process of evaluating the impact of adopting Statement 142 and have not yet determined whether its adoption will have a material impact on our financial statements or our operations.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

     We hold shares of common stock of Ampersand Medical Corporation, a publicly traded company. As a result, our financial results could be significantly affected by changes in the traded market price of this security. We have debt instruments that are denominated in Canadian dollars. The interest rate for one of the Canadian dollar denominated debt instruments is variable based on changes in the Canadian prime rate of interest. Our notes payable with Ampersand have a variable interest rate based on the U.S. prime rate. As a result, our financial results could be significantly affected by changes in the exchange rate for Canadian dollars and to changes in the U.S. and Canadian prime rates of interest. We do not actively employ strategies to minimize our risks to these exposures.

     The following table presents information about the shares we hold in Ampersand as of June 30, 2001.

	Shares		Fair
	Held		Value
Ampersand Medical Corporation		192,088	$	234,347

     The following tables present information about our debt instruments that are subject to foreign currency and interest rate risk. The table presents principal cash flows, related weighted-average interest rate by expected maturity, and the applicable average Canadian to U.S. dollar exchange rate.

									Fair
		2001			2002		Total		Value
Foreign currency risk:
	Principal	$	272,038		$	—	$	272,038	$	272,038
	Average interest rate		3.8	%		—
	Exchange rate		1.5175			—

									Fair
		2001			2002		Total		Value
Interest rate risk:
	Principal	$	1,585,038		$	—	$	1,585,038	$	1,585,038
	Average interest rate		9.4	%		—

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FORWARD-LOOKING STATEMENTS

     This report contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. When used in this Report, the words “may,” “will,” “expects,” “anticipates,” “believe,” “estimates,” “intends” and similar expressions are intended to identify forward-looking statements. These statements describe our beliefs concerning the future based on currently available information. Our actual results could differ materially from those contained in the forward-looking statements due to a number of risks and uncertainties. We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

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PART II.
OTHER INFORMATION

Item 1. Legal Proceedings

     Except as described below, AccuMed is not currently a party to any material litigation and is not aware of any pending or threatened litigation against AccuMed that could have a material adverse effect upon AccuMed’s business, operating results or financial condition.

     In June 1997, Merrill Corporation filed a complaint against AccuMed in the Circuit Court of Cook County, Illinois. The complaint alleged that AccuMed entered into a contract for printing services and failed to pay for the services rendered. AccuMed alleged that the invoices submitted to it were inaccurate and excessive, and that Merrill did not perform all of the services for which it purported to charge AccuMed. Merrill sought an award of $430,033, plus interest, attorneys’ fees and costs.

     On May 10, 2001, we reached a settlement with Merrill. AccuMed agreed to pay Merrill an aggregate of $312,000 in cash in twelve installments of $26,000 per month from May 2001 through April 2002, with interest at a rate of 10% due with the final installment. A stipulated judgment stating these terms was entered by the court on May 22, 2001.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits. The following exhibits are filed herewith:

Exhibit
Number	Description of Exhibit
10.1	Secured Promissory Note made June 1, 2001 by AccuMed in favor of Ampersand Medical Corporation in the original principal amount of $100,000.
10.2	Secured Promissory Note made July 5, 2001 by AccuMed in favor of Ampersand Medical Corporation in the original principal amount of $100,000.
10.3	Promissory Note made July 27, 2001 by Ampersand Medical Corporation in favor of AccuMed in the original principal amount of $100,000.
10.4	Stipulated Judgement entered May 22, 2001 between AccuMed and Merrill Corporation.
10.5	Secured Promissory Note made August 8, 2001 by AccuMed in favor of Ampersand Medical Corporation in the original principal amount of $100,000.
10.6	Amendment No. 1 to Promissory Note dated August 13, 2001 amending a promissory note made July 27, 2001 in the original principal amount of $100,000 by Ampersand in favor of AccuMed.

(b) No reports on Form 8-K were filed during the three-month period ended June 30, 2001.

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SIGNATURES

Pursuant to the requirements 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.

ACCUMED INTERNATIONAL, INC.

/s/ PAUL F. LAVALLEE

Paul F. Lavallee

   Chairman of the Board and
   Chief Executive Officer
   (Principal Accounting Officer)

Date: August 14, 2001

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Index to Exhibits

Exhibit
Number	Description of Exhibit
10.1	Secured Promissory Note made June 1, 2001 by AccuMed in favor of Ampersand Medical Corporation in the original principal amount of $100,000.
10.2	Secured Promissory Note made July 5, 2001 by AccuMed in favor of Ampersand Medical Corporation in the original principal amount of $100,000.
10.3	Promissory Note made July 27, 2001 by Ampersand Medical Corporation in favor of AccuMed in the original principal amount of $100,000.
10.4	Stipulated Judgement entered on May 22, 2001 between AccuMed and Merrill Corporation.
10.5	Secured Promissory Note made August 8, 2001 by AccuMed in favor of Ampersand Medical Corporation in the original principal amount of $100,000.
10.6	Amendment No. 1 to Promissory Note dated August 13, 2001 amending a promissory note made July 27, 2001 in the original principal amount of $100,000 by Ampersand in favor of AccuMed.

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