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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, 1997
[ ] 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.)
900 N. Franklin Street, Suite 401, Chicago, IL 60610
----------------------------------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number: (312) 642-9200
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Indicate by checkmark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by checkmark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant on March 30, 1998 was: $22,162,830. Number of shares of Common
Stock outstanding on March 30, 1998: 31,718,031.
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") was
incorporated in California in June 1988 under the name Alamar Biosciences, Inc.
Prior to December 29, 1995, the Company was engaged in developing manufacturing
and marketing microbiology products, including alamarBlue(TM) and certain
diagnostic test kits under the name 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, an English registry company
(renamed AccuMed International Limited, and collectively, such businesses are
referred to as "AccuMed, Inc."). On December 29, 1995, AccuMed, Inc. merged with
and into the Company (the "Merger"). The Company changed its name to AccuMed
International, Inc., reincorporated under Delaware law and changed its fiscal
year end from September 30 to December 31 in 1995.
On October 15, 1996, the Company acquired a two-thirds
interest in 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 cancer by measuring the DNA
in cells on microscope slides.
On October 15, 1996, the Company acquired all the outstanding
shares of Common Stock not already owned by the Company of RADCO Ventures, Inc.,
a Delaware corporation ("RADCO"), at which time RADCO became a wholly-owned
subsidiary of the Company. RADCO was formed in March 1996, for the purpose of
developing a diagnostic microbiology test panel and automated reading instrument
known as FluoreTone(TM). RADCO was merged with and into the Company effective
November 15, 1996, at which time RADCO ceased to exist as a separate corporate
entity.
The Company completed an underwritten public offering of its
Common Stock in October of 1996 and received $11.7 million net of expenses. The
proceeds were used for research and development of new products, scale-up of
manufacturing, the Oncometrics and RADCO 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") for a total purchase price
of $6,000,000 in cash. This acquisition consisted of accounts receivable,
inventories, production equipment and a portfolio of rental instruments used to
detect microorganisms in blood cultures. The purchase price was ultimately
funded by an $8,500,000 private placement of convertible debt and warrants to
purchase 850,000 shares of the Company's Common Stock.
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(b) Financial Information About Industry Segments
The Company's operations are in two laboratory market
segments: 1) Microbiology - proprietary disposable products and automated
instruments used to identify infectious microorganisms and determine
susceptibility to antimicrobial agents, and 2) 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 cytology
preparations. Refer to note 19 of the Financial Statements and related footnotes
for industry segment information.
(c) Narrative Description of Business
GENERAL
The Company's primary focus is on the development of
cytopathology products that support the review and analysis of Pap smears and
other cytology preparations in order to improve the quality of cell and specimen
analyses and increase productivity in the clinical diagnostic laboratory. 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-assisted cytology market with a modular, expandable product (the
"AcCell(TM)" systems) that allows customers to upgrade to more fully automated
versions. Given the present health care 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.
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 effectively implemented. The Company is currently developing products for
these applications by combining its AcCell(TM) technology with proprietary
technology to be licensed from Oncometrics for use in connection with the
analysis of these tests in a manner similar to that of Pap smear tests.
The Company also develops, manufactures and markets in vitro
diagnostic clinical microbiology products for the human clinical laboratory,
veterinary and pharmaceutical markets. In March 1997, the Company acquired the
ESP(TM) Product Line to enhance its product offerings. The Company continues to
make significant research, patent and regulatory expenditures in such
microbiology products. 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 cytopatholgy systems and testing
procedures. The Company has received inquiries from parties who have expressed
interest in acquiring the Company's microbiology business. However, currently
there is no agreement to sell the microbiology business.
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 efficiency of laboratory-based diagnoses.
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The Company's goal is to develop cost-effective, accurate,
easy-to-use, and innovative diagnostic 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.
MARKETS AND PRODUCTS
The Company's products and equipment are sold to customers
that operate principally in the diagnostic laboratory segments of the health
care market. For fiscal year 1997 and 1996, sales to this market represented all
of the Company's total sales.
Due in part to a recent trend toward consolidation of
diagnostic 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 their potentials 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
During 1997, the Company marketed its initial product - the
AcCell(TM) Cytopathology System "AcCell(TM) 2000" series, a computer-assisted
microscopy workstation with an automated slide handling and data management
system. In August 1997, the United States Food and Drug Administration (the
"FDA") granted the Company clearance to market the TracCell(TM) 2000 Slide
Mapping System (the "TracCell(TM) 2000") in the United States pursuant to a
pre-market notification under Section 510(k) (a "510(k) Notification") under the
United States Food, Drug and Cosmetic Act (the "FD&C Act"). The TracCell(TM)
2000 is intended as a computer-aided Slide Mapping System integrated to a
computer-aided microscope AcCell(TM) workstation. The TracCell(TM) 2000 is 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 can be used to locate all material of diagnostic relevance.
The cellular material will be included in automatically selected fields-of-view
presented for human screening after TracCell(TM) 2000 guided mapping. A single
TracCell(TM) 2000 is designed to support multiple AcCell(TM) instruments based
on normal laboratory usage.
To extend the functionality of the AcCell(TM) 2000, several
system configuration options are available, and multiple workstations can be
networked together within a laboratory. The AcCell(TM) 2001 includes a robotic
cassette handling subsystem that enables the user to process multiple slides
automatically. The Company is currently developing proprietary telepathology
software which, if developed, would enable the AcCell(TM) workstation to be
operated by remote users.
The Company is developing a second generation specimen
pre-screening and slide mapping product, the TracCell(TM) 3000, to automate the
mapping process further. The TracCell(TM) 3000, if successfully developed,
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will eliminate from presented fields-of-view not only empty space, debris,
scratches, bubbles, artifacts, and other material eliminated by the TracCell(TM)
2000, but will also eliminate certain normal cellular material and modify the
sequence of the presentation of the diagnostic cells to the human screeners. The
Company believes, based on preliminary studies it has conducted, that the
technology embodied in the TracCell(TM) 3000 may be capable of further reducing
the portion of the specimen required to be reviewed by the cytotechnologist and
speed the screening process. Further testing and development and additional
resources are necessary to determine whether a commercially viable TracCell(TM)
3000 instrument can be developed.
CYTOPATHOLOGY EDUCATIONAL AND TRAINING PRODUCTS
The Company has recently advanced the development of the
MacroVision(TM) feature, a specially modified AcCell(TM) product for on-screen
specimen review. This system can also be used by teaching institutions and
laboratories to provide hands-on cytotechnology training through a single
microscope. Using the MacroVision(TM) feature, the teacher or trainer can
display the specimen being reviewed on one or more video monitors. The monitor
can be viewed directly by the student or can be linked with other computers and
monitors to provide remote or even off-site viewing.
BUSINESS OF ONCOMETRICS
Oncometrics is developing a proprietary high resolution image
cytometer that uses an AcCell(TM) workstation, a high-resolution digital camera,
proprietary image processing and analysis software and high-speed computer
processors to capture and 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, which assists the
cytotechnologist in detecting lung cancer in an early more curable stage of
development. Because the presence of cancer cells can cause changes in the
nuclear DNA of non-cancerous cells, in some cases the Oncometrics instrument can
detect cancer even in the absence of cancer cells in the sample.
Oncometrics has demonstrated the feasibility of its technology
as it applies to the detection of early cancer in lung sputum. Oncometrics
believes that its technology may be potentially applied to other types of
cancer, such as cervical cancer.
Oncometrics is currently testing several prototypes of its
instrument with scientists and clinicians at cancer research and patient care
institutions.
MICROBIOLOGY PRODUCTS
The Company offers the microbiology laboratory a variety of
FDA-cleared products, under the trade name Sensititre(TM), for the minimum
inhibitory concentration and identification ("MIC/ID") testing of bacteria
suspected of causing infections and for measuring the susceptibility of such
bacteria to different types and concentrations of antibiotics. The
Sensititre(TM) products incorporate a range of accessories including substrate
strips, dosing heads, broths, and test panels for both susceptibility and
identification applications.
The Sensititre(TM) panels have significant advantages over
competitors, including a two-year shelf life and the ability to be stored at
ambient room temperature. The Sensititre(TM) product line also
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includes four automated instruments, each of which uses compatible technologies,
and allows customers to upgrade without replacing the entire system.
In March 1997, the Company acquired and began offering the
ESP(TM) Culture System II product line consisting of disposables, software and
instruments for the growth and detection of microorganisms in blood cultures,
sterile body fluids and mycobacteria samples. The ESP(TM) Culture System II is
an instrument that automates the process of detecting the growth of
microorganisms using disposable bottles containing proprietary media.
ALAMARBLUE(TM)
The Company licenses and markets alamarBlue(TM), a
proprietary, non-toxic, water-soluble indicator reagent that measures cell
growth for in vitro testing. AlamarBlue(TM) has applications in biological
research, bacteria testing, toxicity testing for consumer products, and
pharmaceutical and therapeutic research. For example, companies that produce
consumer products such as soaps, shampoos, lotions or cosmetics can conduct in
vitro cell culture toxicity tests in lieu of live animal testing.
KB READER
The Company is currently developing a low-cost KB Reader, the
AccuZone(TM), designed to read automatically the results of a Kirby-Bauer method
susceptibility test. Currently, most laboratories interpret the results of a
disk diffusion test visually and manually enter the test result. The Company has
licensed certain software algorithms that are intended to be integrated into the
hardware being developed by the Company. The Company has completed development
of a prototype AccuZone(TM) instrument which is undergoing testing.
SALES AND MARKETING
The Company currently markets its products on an international
basis through exclusive and/or semi-exclusive distributors and a direct sales
force.
CYTOPATHOLOGY
In May 1997, the Company entered into an agreement with Leica
Microscopy and Systems GmbH ("Leica") a leader in precision microscopy and
imaging technology which gives Leica exclusive third-party distribution rights
to the AcCell(TM) 2000 and 2001 Systems outside the Western Hemisphere. Leica
also has a right of first refusal and negotiation to be the exclusive
distributor outside the Western Hemisphere of future cytopathology products
developed by the Company. From May 1996 until September 1997, the Company had
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 and permit Olympus to require the Company to repurchase
at the original purchase price up to six AcCell(TM) systems per month from
Olympus' inventory beginning in October 1997. The Company is now using its
direct sales force primarily in the U.S. market.
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MICROBIOLOGY
The Company's Sensititre(TM) products are marketed in the
pharmaceutical, veterinary laboratory and clinical/hospital reference laboratory
markets. The Company's Sensititre(TM) human clinical microbiology products are
exclusively distributed in the United States by Fisher Scientific ("Fisher")
under a four-year agreement expiring on December 31, 2000. The Company provides
training and technical support to the sales personnel and customers of Fisher.
The Company markets alamarBlue(TM) directly to industrial and research
customers, including the biotechnology industry. Prior to September 1996, the
Company marketed its microbiology products in the United States through a
seven-person direct sales staff and in certain foreign countries through
exclusive diagnostic manufacturers and distributors; such direct sales staff is
currently 14 persons. Most sales to the veterinary and pharmaceutical markets
are through direct sales.
COMPETITION
The Company believes that for both cytopathology and
microbiology products it 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 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.
The market for the Company's current and, if developed,
proposed microbiology products is highly competitive, and the Company competes
with numerous well-established foreign and domestic companies, many of which
possess substantially greater financial, technical, marketing, personnel and
other resources than the Company and have established reputations for success in
the development, sales and service of manual and/or automated in vitro
diagnostic testing products. A significant portion of the MIC/ID testing market
in the United States is controlled by Dade MicroScan and bioMerieux Vitek. These
companies market a range of medically related products and have resources far
greater than those of the Company.
OPERATIONS
The Company assembles and tests its cytopathology products at
its Chicago manufacturing facility. The Company's microbiology products are
manufactured at the Company's FDA Good Manufacturing Practice ("GMP") approved
manufacturing facility in England. The Company purchased and modified the
stage-control mouse for use with the AcCell(TM) 2000 series workstations but is
currently developing a proprietary stage-control mouse which the Company expects
to manufacture along with the AcCell(TM) 2000. During 1997, the Company began to
scale up its manufacturing capacity for the AcCell(TM) 2000 and is currently
developing the manufacturing process for the TracCell(TM) 2000.
In the ESP(TM) Product Line acquisition, the Company acquired
certain pieces of manufacturing equipment which had been used by affiliates of
the seller to manufacture the disposable bottles which comprise part of the
ESP(TM) Product Line. The Company entered into a Manufacturing Agreement with
affiliates of the seller pursuant to which such affiliates will manufacture such
disposable bottles, using such
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equipment, for the Company for a period of two years ending March 1999. Other of
the ESP(TM) assets include molds, robotics and conveyor equipment used to
manufacture a component for the instruments which comprise part of the ESP(TM)
Product Line. Such assets are located at the facilities of a third party
manufacturer. The Company intends that such assets will continue to be used to
manufacture ESP(TM) instruments, directly by the Company or through a third
party, until such time, if ever, as the Company sells the microbiology business.
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.
Under the FD&C 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.
Under current interpretation of FDA regulations, marketing of
the Company's MIC/ID microbiology products in the United States requires FDA
marketing clearance through the 510(k) Notification process. With respect to the
Company's MIC/ID testing products, 510(k) Notifications must be filed and
cleared with respect to each antibiotic used. The Company may submit
applications to add individual antibiotics to those previously cleared as the
market warrants.
Marketing in the United States of the Company's products under
development may require additional FDA clearances. For example, the Company's
proposed next generation automated pre-screening, specimen mapping workstation,
the TracCell(TM) 3000 Series, if developed, may not be sold in the United States
unless and until the Company has obtained FDA marketing clearance, either
through a 510(k) Notification or a PMA. In addition, marketing of the Company's
proposed KB Reader and other
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proposed microbiology products, if developed, is likely to require FDA clearance
through 510(k) Notifications. The Company is currently conducting research and
development with respect to such products and has not yet begun clinical trials.
Sales of medical devices outside the United States are subject
to foreign regulatory requirements that vary from country to country. The time
required to obtain clearance by a foreign country may be longer or shorter than
that required for FDA clearance, and the requirements may differ. Export sales
of certain devices that have not received FDA marketing clearance generally are
subject to both FDA Certificate for Foreign Governments and, in some cases,
general U.S. export regulations. In order to obtain a FDA export permit, 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 intends to seek EN46001 qualification, an
international manufacturing quality standard, and is seeking the "CE" mark for
the AcCell(TM) series and 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.
The Company is subject to certain registration, record-keeping
and Medical Device Record reporting requirements, and certain of the Company's
manufacturing facilities are obligated to follow FDA's Quality System Regulation
and are subject to periodic FDA inspections. Any failure to comply with Quality
System Regulation or any other FDA or other government regulations could have a
material adverse effect on the Company's operations.
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 enhancement of its existing
products. 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, 1997 and 1996, expenditures for research and development were
approximately $5.3 million and $9.1 million respectively. Amounts recorded for
the 1996 fiscal year reflect approximately $6.0 million of non-cash charges
against operations representing the write-off of in-process research and
development acquired in connection with the Merger, the acquisition of RADCO,
and the acquisition of the two-thirds equity interest in Oncometrics.
INTELLECTUAL PROPERTY
The Company relies on a combination of patents, licensing
arrangement, trade names, trademarks, trade secrets, know-how and proprietary
technology and policies and procedures for maintaining the secrecy of trade
secrets, know-how and proprietary technology in order
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to secure and protect its intellectual property rights. Two of the Company's
patent applications have been granted as of the date of this Report, and several
other applications remain pending or are in development.
The Company has been issued a Great Britain patent and has
filed or been assigned 14 U.S. patent applications and eight foreign patent
applications covering certain aspects of its cytopathology products. The Company
has been issued two U.S. patents and has filed or been assigned two U.S. patent
applications, one Japanese patent application and one Canadian patent
application related to its microbiology products. The Company has been assigned
one U.S. patent related to the ESP(TM) Product Line and one U.S. and two
European patent applications related to such issued patent, as well as on
additional U.S. patent application relating to the ESP(TM) Product Line. The
Company holds certain licenses on several U.S. and foreign patents and other
intellectual property rights regarding aspects of the technology embodied in the
Sensititre(TM) product line and is the licensee of certain automated cell
analysis technology. The Company holds a U.S. patent and has received a notice
of intent to grant a related European patent with respect to a portion of the
alamarBlue(TM) microbiology technology. However, subsequently BioMerieux (one of
the Company's competitors) filed an Opposition to the grant of such European
patent. The Company filed its response to such Opposition in November 1997.
There can be no assurance that such Opposition will be overcome and that such
European patent will issue.
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 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 two U.S. trademark registrations for the
trademark "Sensititre", and owns "ESP", "EZ DRAW", and "EZ VIEW" and had filed
U.S. trademark applications for the trademarks "AcCell", "MacCell",
"FluoreTone", "INSIGHT", "SPECIFIND", "Relational Cytopathology Review Guide",
"MacroVision" and "TracCell" and is currently preparing one more trademark
application for filing. The Company may file additional U.S. and foreign
trademark applications in the future.
EMPLOYEES
At March 25, 1998, the Company employed 172 full-time and two
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, and (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
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900 North Franklin Street facility in July 1996. Collectively, the Company's
Chicago, Illinois facilities also house its research and development facilities,
an engineering laboratory and cytopathology product assembly facilities.
The Company also leases a 10,980 square foot facility in
Westlake, Ohio, pursuant to a five-year lease expiring April 1, 2000 which is
renewable by the Company. This facility is used to warehouse and distribute its
microbiology products. From March 1997 until March 31, 1998, the Company leased
a portion of a certain research and development facility from an affiliate of
Difco located in Ann Arbor, Michigan for microbiology research and development
pursuant to the Transition Services and Facilities Agreement between the Company
and such Difco affiliate. AccuMed International Limited leases an 18,000 square
foot microbiology manufacturing facility in East Grinstead, West Sussex,
England, pursuant to a lease expiring in 2009. This facility manufactures the
microbiology product line for distribution in Europe and in the U.S.
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
No Matters were submitted to a vote of security holders during
the fourth quarter ended December 31, 1997.
ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT
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.
NAME AGE POSITION
Paul F. Lavallee 57 Chairman of the Board, Chief Executive Officer and
President
Norman J. Pressman, Ph.D. 49 Senior Vice President of Research and Development and
Chief Scientific Officer
Leonard R. Prange 52 Chief Operating Officer, Chief Financial Officer,
Corporate Vice-President
Joyce L. Wallach, Esq. 37 General Counsel and Secretary
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. Since January 1996,
Mr. Lavallee has been a health care 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,
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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 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.
LEONARD R. PRANGE Mr. Prange has been Chief Financial Officer
of the Company since September 1996, and has been Chief Operating Officer since
March 1997. From September 1996 until March 1997, Mr. Prange served as Corporate
Vice President. Mr. Prange also serves as a consultant to Richardson
Electronics, Ltd., a global distributor and manufacturer of electronic
components. From July 1995 until September 1996, Mr. Prange served as a managing
director of Lovett International, Inc., an international trading and consulting
firm. Mr. Prange served Richardson Electronics, Ltd. as Group Vice President
from June 1994 until July 1995, as Chief Financial Officer and Vice President
from December 1984 until July 1995 and as Treasurer from December 1981 to
December 1984. From March 1976 until December 1981, Mr. Prange served as
Treasurer of Cetron Electronic Corporation, a manufacturer of electronic
components and as Controller from March 1972 until March 1976. Mr. Prange has a
B.S. degree in accounting from DePaul University and is a Certified Public
Accountant.
JOYCE L. WALLACH, ESQ. Ms. Wallach has been General Counsel
and Secretary of the Company since December 1996. From February 1994 until
joining the Company, she was an associate in the Corporate Group of the
Sacramento, California office of Graham & James LLP. From December 1989 until
January 1994, Ms. Wallach was an associate in the Corporate Securities Group in
the Los Angeles office of Sidley & Austin. Ms. Wallach has an A.B. degree in
history from the University of California, Berkeley and a law degree from Boalt
Hall School of Law, University of California, Berkeley.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During 1997, 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 under
the symbol "ACMIC" pursuant to a temporary exception to certain listing
requirements. On March 25, 1998, the last reported sale price of the Common
Stock on The Nasdaq SmallCap Market
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was $1.03 per share. 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.
1996 FISCAL YEAR High Low
First Quarter $6.25 $1.06
Second Quarter 9.38 4.88
Third Quarter 7.00 4.16
Fourth Quarter 5.06 2.25
1997 FISCAL YEAR
First Quarter 4.06 2.47
Second Quarter 4.13 3.00
Third Quarter 3.63 2.25
Fourth Quarter 2.97 1.16
As of March 25, 1998, the Company had approximately 312 record
holders of Common Stock. As of March 25, 1997, the Company estimates that there
are approximately 5,000 beneficial holders of Common Stock, based on preliminary
results of the broker search for the March 23, 1998 record date for the upcoming
stockholders 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
Fiscal years Ended December 31, (1)
(in thousands, except per share data)
----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------ ------ ------
INCOME STATEMENT DATA:
Net Sales 19,110 6,222 515 1,162 419
Gross Profit (loss) 7,259 2,231 (916) (388) (493)
Operating (loss) (13,819) (14,230) (3,707) (3,146) (3,192)
Interest expense,
(income), net 3,584 408 38 (36) (48)
(Loss) before income taxes
(16,919) (11,574) (3,759) (3,112) (3,144)
Income taxes -- -- -- 1 1
Net (loss) (16,919) (11,574) (3,759) (3,113) (3,145)
PER SHARE DATA:
Net (loss) (0.77) (0.68) (0.59) (0.65) (1.00)
Weighted average
shares outstanding (000's)
22,053 16,975 6,376 4,776 3,131
BALANCE SHEET DATA:
Working capital
(deficit) 1,043 3,378 (246) 817 3,531
Total assets 20,549 14,480 2,989 2,049 4,543
Long-term debt 11,455 231 111 184 41
Shareholders' equity 733 10,136 1,098 1,345 4,144
(1) The Company changed from a September 30 fiscal year end to a December
31 fiscal year end effective in 1995. Fiscal years 1995, 1994 and 1993
are September 30 year-end amounts. For the three months ended December
31, 1995, the Company's net loss was $5,742,000, or $0.49 per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is engaged in the development and marketing of
cost effective screening instruments and systems for clinical diagnostic
laboratories, hospitals and others. The Company markets products in two business
segments: 1) Microbiology - proprietary disposable products and automated
instruments used to identify infectious organisms and determine susceptibility
to antimicrobial agents, and 2) Cytopathology - systems made up of multiple
instruments networked via proprietary software that support the review and
analysis of Pap smears.
On December 31, 1995, the Company changed its fiscal year end
from September 30 to December 31. Unless otherwise noted, references to fiscal
1997, 1996 and 1995 relate to the fiscal years ended December 31, 1997,
1996, and September 30, 1995.
OVERVIEW
The Company's primary focus is on the development and
marketing of computer-aided diagnostic imaging systems for the cytopathology and
microbiology laboratory marketplaces. 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 wile
achieving significant improvements in disease detection, diagnostic and
therapeutic monitoring.
In August 1997, the FDA cleared the Company's TracCell(TM)
2000 Slide Mapping System for marketing domestically. The device, which creates
an electronic "map" of a cervical cytology specimen (Pap smear), is an integral
part of the AcCell(TM) Cytopathology System and enables human screeners to focus
time and attention on diagnostically relevant material. The next generation
TracCell(TM) and AcCell(TM) devices are slated for release in 1999. The
TracCell(TM) 3000 is a fully-automated, high volume slide mapping product; the
AcCell(TM) 3000 is a fully-integrated microscopy workstation.
The Company's in vitro diagnostic microbiology products and
systems offer the hospital, clinical reference, veterinary, and pharmaceutical
laboratory markets cost-effective, rapid results and ease of use that
demonstrate efficacy in meeting current clinical market requirements. The
Company announced a new product, the AccuZone automated Kirby-Bauer reader, in
the fourth quarter of 1997, which is undergoing testing. The Company is
continuing research and development in this segment and has several pending FDA
submissions to augment the functionality of these systems.
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, 1,881,910 shares of Common Stock and 126,945 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. The contingency associated with 940,955
shares of Common Stock and 63,473 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.
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The contingency associated with the remaining 940,955 shares
of Common Stock and 63,472 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., 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 cancer by measuring the DNA in
cells on microscope slides. Also on the same date, the Company acquired all the
outstanding shares of Common Stock not already owned by the Company of RADCO
Ventures, Inc., a Delaware corporation ("RADCO"), at which time RADCO became a
wholly-owned subsidiary of the Company. RADCO was formed in March 1996, for the
purpose of developing a diagnostic microbiology test panel and automated reading
instrument known as FluoreTone(TM). RADCO was merged with and into the Company
effective November 15, 1996, at which time RADCO ceased to exist as a separate
corporate entity. 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 and RADCO from the date of acquisition, whereas
results of operations for fiscal year 1997 include the results of these
acquisitions for the entire year.
Effective March 3, 1997, the Company acquired certain assets
and liabilities of Difco Microbiology Systems, Inc. relating to the ESP(TM)
Culture System II Product Line (the "ESP(TM) Product Line") for a total purchase
price of $6,000,000 in cash. The results of operations reflected in the
Company's consolidated statement of operations for fiscal year 1997 include the
results of operations of the ESP(TM) Product Line from the date of the
acquisition, whereas results of operations for fiscal years 1996 and 1995
reflect the operations of the Company exclusive of such acquisition. The ESP(TM)
Product Line is considered part of the Company's microbiology division.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES
Sales revenues for the fiscal year 1997 increased to
$19,110,000, an increase of 307% over sales of $6,222,000 for the fiscal year
ended 1996. This increase is due primarily to additional revenues from the
microbiology division and the addition of the ESP(TM) Product Line. Sales for
the cytopathology division for fiscal 1997 were $1,001,000, compared to
$1,405,000 for fiscal 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. Sales increases were achieved without any
significant price increases.
COST OF SALES
Cost of sales increased from $3,991,000 in the year
ended December 31, 1996 to $11,851,000 in the year ended December 31, 1997,
reflecting the increased unit sales volume in the microbiology product line and
the addition of the ESP(TM) Product Line. Cost of sales for the cytopathology
business of $1,557,000 and $1,389,000 for 1997 and
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1996, respectively.
GROSS MARGINS
Gross margins increased from 35.9% in the year 1996
to 38.0% in the year 1997, reflecting the unit growth in microbiology sales
including the ESP(TM) product line acquisition. Cytopathology recorded an
operating loss of $685,000 reflecting unabsorbed volume variances of the
cytopathology product line. The unabsorbed costs 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
$4,982,000 in the year 1996 to $7,891,000 in 1997, a 60% increase, due primarily
to increases in staffing, office, professional fees, and investor relations
efforts.
Research and development expenses increased from
$3,110,000 in the year 1996 to $5,315,000 in the year 1997, a 71% increase, due
primarily to increased spending as a result of the ESP(TM) acquisition in the
microbiology area.
Sales and marketing expenses increased from
$2,465,000 in the year 1996 to $4,289,000 in the year 1997, a 74% increase, due
to the expansion of the sales staff for the ESP(TM) acquisition.
Interest expense of $3,584,000 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 motes, 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.
OTHER INCOME
The Company realized net other income of $2,700,000
for fiscal year 1996 compared to net other income of $24,000 for fiscal year
1997. The primary reason for the decrease was the recognition of $3,500,000 in
licensing fee income for fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES
Sales revenues for the year ended December 31, 1996
increases to $6,200,000 compared to $515,000 for the year ended September 30,
1995, due primarily to the increase in sales in the microbiology product line
and the initial commercial shipments of newly developed products of the
Company's Cytopathology Division. These increases were offset somewhat by a
decline in the sales of the original Alamar microbiology products.
COST OF SALES
Cost of sales increased from $1,400,000 in fiscal
year 1995 to $4,000,000 in fiscal year 1996, reflecting the expansion of sales
volume and broadening of the microbiology product line. Fiscal 1996 also
reflected costs associated with the ramp-up of cytopathology product line
production and costs related to the transfer of manufacturing certain
microbiology products to a third party.
OPERATING EXPENSES
General and administrative expenses increased from
$2,000,000 in fiscal year 1995 to $4,900,000 in fiscal year 1996, primarily due
to increases in staffing and relocation costs, professional fees, and investor
relations efforts.
Research and development expenses increased from
$387,000 in fiscal year 1995 to $3,100,000 in the year ended December 31, 1996.
This reflected the Company's reinstatement of an active research and
development program in both the cytopathology and microbiology division.
Acquired research and development expenses for
fiscal 1996 were $6,000,000. These expenses represent the write-off of
$3,500,000 of in-process research and development cost which arose from the
Merger and $2,500,000 which arose from the RADCO and Oncometrics acquisitions.
The Company had no comparable expenses in fiscal 1995.
Sales and marketing expenses increased from $309,000
in fiscal 1995 to $2,500,000 in fiscal year 1996. This increase is attributed
to the expansion of sales staffs for both product lines, additional support
staff to service new distribution relationships, and the establishment of a
client service center. In fiscal 1995, the Company had curtailed selling
efforts to focus resources on pursuing patent infringement litigation.
OTHER INCOME
The Company realized net other income of $2,700,000
for fiscal year 1996 compared to net other expenses of $52,000 for fiscal year
1995. The primary reason for the increase was the full recognition of a
$3,500,000 licensing fee. Fiscal year 1996 also reflect the $124,000 on-third
minority interest share in the net operating loss of Oncometrics. The 1996
amounts were somewhat offset by the increase of $412,000 in interest expense
for the period.
THREE MONTHS ENDED DECEMBER 31, 1995
The three months ended December 31, 1995, represents
the transition period resulting from the change in the Company's fiscal year-end
from September 30 to December 31. General and administrative costs primarily
reflect legal expenses related to subsequently resolved litigation, expenses of
relocating the Company's operations, and payments to AccuMed, Inc. for its
services pursuant to manufacturing, distribution and research and development
agreements pending consummation of the Merger. Acquired research and development
expenses of $32,000 reflect the curtailment of programs pending resolution of
the Merger. Acquired research and development expenses for the 1995 period were
$4,000,000 which represented the write-off of the in-process research and
development arising from the Merger of AccuMed, Inc. into the Company in
December, 1995. Sales and marketing expenses decreased to $7,000 in the 1995
period, as the sales and marketing activities were performed by AccuMed, Inc.
prior to the Merger pursuant to a distribution agreement.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for research and
development expenses, including salaries, material and consulting support, to
develop and market new cytopathology products. During fiscal year 1997, the
Company has spent $17,495,000 for research and product development, scale-up of
cytopathology manufacturing capacity, sales and marketing efforts and other
general corporate purposes. The Company anticipates it will have no material
capital expenditures for 1998, and has no commitments outstanding in that
regard.
The microbiology division, including the ESP(TM) Product Line,
provided a positive cash flow from operations of $4,410,000 in fiscal year 1997,
which contributed to the operational cash needs of the cytopathology division.
The operating loss of the cytopathology division of $13,916,000 was also funded
by $1,718,000 from a private placement, $6,300,000 in bank loans and increased
accounts payable financing from its vendors. Management believes that existing
cash balances, internally generated funds and other financing sources will be
sufficient to finance the Company's projected operations through at least the
next 12 months.
Historically, the Company has been substantially dependent on
the private placements of its debt and equity securities and the proceeds of its
public offerings of securities to fund its cash requirements. From the initial
public offering in October 1992 through December 31, 1997, the Company has
raised approximately $43,000,000 in aggregate net proceeds from public offerings
and private placements of securities.
In March 1997, the Company closed a private placement,
resulting in the issuance of $8,500,000 of three year convertible notes bearing
interest at a rate of 12% per year and 850,000 detachable warrants. Of the
private placement proceeds, $6,130,000 (including $130,000 of interest) was used
to repay a $6,000,000 bridge loan used for the ESP(TM) Product Line acquisition
on March 3, 1997, $651,500 was used for issuance costs, and the remaining
$1,718,500 was retained to cover transition costs of the acquired business.
In September 1997, the Company received a $4,500,000 loan
secured by all assets of the Company, which was used to pay operating expenses
and related bridge loans. In October 1997, the Company entered into a one-year
revolving credit facility with the same lender. Under this arrangement, the
Company may borrow up to $4,000,000 on a revolving basis based on the amount of
eligible trade receivables. The proceeds from this were used for operational
expenses of both divisions. The Company had a credit line of $2,094,000 based on
borrowing base calculations at December 31, 1997, of which $220,000 was unused.
During the year 1997, the Company received a total of $668,000
upon the exercise of stock options and warrants and a $100,000 abatement of
investment banking fees. The money was used for cytopathology operating
expenses.
The decrease in net current assets of $2,335,000 as of
December 31, 1997 as compared to December 31, 1996 is due primarily to a
decrease in net current assets of the cytopathology division, partially offset
by an increase in net current assets relating to the Company's acquisition at
March 3, 1997 of the ESP(TM) Product Line.
The non-current warranty reserve liability was recorded as a
result of the acquisition of the ESP(TM) Product Line, and represents estimated
future costs to be borne by the Company to repair and replace equipment sold to
its customers. Management estimates the timing and
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amount of the payments for such repairs will occur principally over the final
years of the equipment leases, which are scheduled to expire in the years 1999
through 2001.
The Company's NT server-based network and software are Year
2000 compliant. The Year 2000 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, invoices or other similar normal business activities. Based on a
recent assessment, the Company has determined that no modifications of its
software are needed for its computer network to properly utilize data beyond
December 31, 1999. As a result, the Company does not anticipate any material
costs for modification of its computer systems in this regard.
In February 1998, the Commission declared effective the
Company's registration statement covering the resale of 3,770,000 shares of
Common Stock. At the time of effectiveness, 25,000 shares were outstanding,
1,025,000 shares were issuable upon exercise of warrants at an exercise price of
$3.125 per share and 2,720,000 shares were issuable upon conversion of the
Convertible Promissory Notes due 2000 ("Convertible Notes"). The Company
received no proceeds as a result of this registration. Subsequent to the
effective date of the registration statement, certain of the Convertible Notes
were exchanged for preferred stock and warrants. Accordingly, the Company will
file an amendment deregistering resale of the underlying shares.
On February 2, 1998, a director/shareholder loaned the Company
$1,000,000 repayable on the earlier of April 2, 1998 or upon the closing of a
securities offering in which the Company receives gross proceeds of at least
$3,000,000. The loan is unsecured and bears an interest rate of 12% per annum.
The Company also issued 100,000 five-year warrants at an exercise price of $1.56
per share (subject to adjustment) in connection with this loan. Pursuant to the
reset provisions of the warrants, the exercise price has been reduced to $0.75
per share. The $1,000,000 principal amount of this loan was exchanged for Common
Stock and warrants of the Company on March 19, 1998 in the private placement
described below.
In February 1998, the Company exchanged $5,275,000 in
principal amount of its Convertible Notes plus accrued interest thereon of
$329,000 for 1,245,000 shares of Series A Convertible Preferred Stock
(convertible into 4,900,000 shares of Common Stock at a conversion price of
$1.125 per share) and five-year warrants exercisable to purchase 1,245,000
shares of Common Stock at $1.125 per share (the "Note Exchange"). As a result of
the Note Exchange, the Company's net tangible assets increased by approximately
$4,700,000 and its interest expense will be reduced by approximately $1,294,000
through March 2000. The balance of $3,225,000 of the Convertible Notes remains
outstanding and unaffected by the Note Exchange.
On March 5, 1998, the Company announced that the Board of
Directors has authorized management to seek buyers for those aspects of the
Company's business that do not contribute to the development and marketing of an
integrated product line of imaging-based cytopathology systems and testing
procedures. The Company has received inquiries from parties who have expressed
interest in acquiring the Company's microbiology business. However there is
currently no agreement for such a sale. The Board and management believe, that
the Company's future depends on the success of the AcCell(TM) Cytopathology
System and directly related technologies. This divestiture would allow the
Company to commit its resources to support and market the cytopathology product
line and build upon the AcCell(TM) platform. On January 30, 1998, the Board
voted not to complete the equity carve-out of the research and
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development portion of its cytopathology business as previously announced.
In March 1998, the Company sold an aggregate of 8,686,666
shares of Common Stock and seven-year warrants to purchase an aggregate of
8,686,666 shares of Common Stock at an exercise price of $0.75 per share, for
gross proceeds of $6,515,000 and net proceeds of approximately $5,910,000, after
payment of fees, commissions and expenses related to the private placement. The
Company issued seven-year warrants to purchase an aggregate of 1,337,333
warrants to finders and the placement agent, exercisable at $0.75 per share.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, regarding computation of Basic and
Diluted earnings per share (EPS) effective December 31, 1997. 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 Company. 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 are anti-dilutive.
SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, requires companies to disclosure information about segments
of an enterprise. The Company adopted SFAS No. 131 effective December 31, 1997,
and has included such information in the Notes to the Financial Statements for
the years ended December 31, 1997 and 1996. The effect of this disclosure 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-22 following the signature page:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Prior to January 15, 1996, Coopers & Lybrand LLP ("C&L") were the
principal accountants for the Company. On such date, C&L's appointment as
principal accountants was terminated and the Company engaged KPMG Peat Marwick
LLP as the Company's principal accountants. The Company's Board of Directors
approved the decision to change accountants. The opinions of C&L on the balance
sheet of AccuMed, Inc. as of December 31, 1994, and the statement of operations,
stockholder's deficit, and cash flows for the period from February 7, 1994
(inception) through December 31, 1994, the balance sheets of Alamar Biosciences,
Inc. as of September 30, 1995 and 1994, and the statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1995, and the balance sheet of Sensititre/Alamar, the
Microbiology Division of AccuMed, Inc. as of December 31, 1994 and the
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statements of net sales, cost of sales, and selling expenses for the eight
months ended December 31, 1994 did not contain any adverse opinions or
disclaimers of opinions, or modifications as to the uncertainty, audit scope or
accounting principles, except that for the opinions related to AccuMed, Inc. and
Alamar Biosciences, Inc.'s ability to continue as a going concern, there were no
disagreements between the Company and C&L on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of C&L, would have
caused it to make reference to the subject matter of the disagreement in
connection with its report.
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
1998 Combined Annual and Special Meeting of Stockholders 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 Reporting Requirements"
in the definitive Proxy Statement for the 1998 Combined Annual and Special
Meeting of Stockholders 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 1998 Combined
Annual and Special Meeting of stockholders 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 1998 Combined Annual and Special Meeting of
Stockholders 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 1998 Combined Annual and Special Meeting of Stockholders to be
filed with the Commission within 120 days following the Company's last fiscal
year end is hereby incorporated herein by reference.
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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-22 following the
signature page:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
(b) REPORTS ON FORM 8-K. The following Current Reports on form 8-K were
filed by the Company with the Securities and Exchange Commission during
the quarter ended December 31, 1997.
1. On October 9, 1997, Amendment No. 3 to Current Report on
Form 8-K/A dated October 15, 1996: Item 2 - Acquisition or
disposal of Assets-reporting the acquisition of Oncometrics
Imaging Corp. and Radco Ventures, Inc. and Item 7 - Financial
Statements and Exhibits, including the following financial
statements:
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED:
Oncometrics Imaging Corp:
1. Independent Auditor's Report
2. Balance Sheets as of August 31,
1995, December 31, 1995, May 31,
1996 and September 30, 1996
(unaudited)
3. Statement of Operations and Deficit
for the 12 months ended August 31,
1995; four months ended December
31, 1995; five months ended May 31,
1996 and the four months ended
September 30, 1996 (unaudited)
4. Statement of Changed in Financial
Position for the 12 months ended
August 31, 1995; the four months
ended December 31, 1995; the five
months ended May 31, 1996 and the
four months ended September 30,
1996 (unaudited)
5. Notes to Financial Statements
Radco Ventures, Inc.:
1. Independent Auditor's Report
2. Balance Sheet as of September 30,
1996
3. Statement of Operations for the
period from March 6, 1996 (date of
incorporation) through September
30, 1996
21
22
4. Statement of Stockholder's Equity
(Deficit) for the period from March
6, 1996 (date of incorporation)
through September 30, 1996
5. Statement of Cash flows for the
period from March 6, 1996 (date of
incorporation) through September
30, 1996
6. Notes to Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION:
AccuMed International, Inc.:
1. Pro Forma Condensed Combining
Balance Sheet as of September 30,
1996.
2. Pro Forma Condensed Combining
Statement of Operations for the 9
months ended September 30, 1996.
3. Pro Forma Condensed Combining
Statement of Operations for the 3
months ended December 31, 1995.
4. Notes to the Pro Forma Condensed
Consolidated Financial Statements.
2. On December 9, 1997, Amendment No. 5 to Current Report on
From 8-K dated March 3, 1997: Item 2 - Acquisition or Disposal of Assets -
reporting the acquisition of the ESP(TM) Culture System II product line, and
Item 7 - Financial Statements and Exhibits, including the following financial
statements:
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED:
Net Assets Sold of Difco Microbiology
Systems, Inc.
1. Independent Auditor's Report
2. Statement of Net Assets Sold as of
December 31, 1996 and December 31,
1995.
3. Statement of Revenues and Expenses
for the year ended December 31,
1996 and December 31, 1995.
4. Statement of Changes in Equity of
Net Assets sold for the year ended
December 31, 1996 and December 31,
1995.
5. Statement of Cash Flows from Net
Assets sold for the year ended
December 31, 1996 and December 31,
1995.
6. Notes to Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION:
AccuMed International, Inc.:
1. Pro Forma Condensed Consolidated
Balance
22
23
Sheet of December 31, 1996.
2. Pro Forma Condensed Consolidated
Statement of Operations for the 12
months ended December 31, 1996.
3. Notes to the Pro Forma Condensed
Consolidated Financial Statements.
(c) EXHIBITS. The following exhibits are filed
herewith.
Exhibit
No. Description of Exhibit
3.1 Certificate of Incorporation of the Registrant. (1)
3.2 Certificate of Amendment to Registrant's Certificate of Incorporation.
(14)
3.3 Certificate of Designation, Rights and Preferences of Series A
Convertible Preferred Stock. (15)
3.4 Certificate of Correction to Certificate of Designation, Rights and
Preferences of Series A Convertible Preferred Stock. (15)
3.5 Bylaws of the Registrant. (1)
3.6 Amendment No. 1 to Bylaws of the Registrant.
4.1 Specimen stock certificate for Common Stock. (1)
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)
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
23
24
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.
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)
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)
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.
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)
24
25
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 Stockholders 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)
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.
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)
25
26
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)
10.50 Sale and Leaseback Agreement between the Registrant and Leasetec, Inc.
(8)
10.51 License Agreement dated July 6, 1994, between the Registrant, Vanellus
AB, and Uppsala Bildbehandlings AB. (1)
10.52 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)
10.53 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)
10.54 O.E.M Supply Agreement between the Registrant and Leica Microscopie und
Systems GmbH dated as of May 26, 1996. (17)
10.55 Manufacturing and Supply Agreement between the Registrant and RELA,
Inc. dated as of May 26, 1997. (17)
10.56 Equipment Loan and Security Agreement dated as of September 23, 1997
between the Registrant and Transamerica Business Credit Corporation.
(17)
10.57 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)
10.58 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)
10.59 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)
10.60 Loan and Security Agreement dated October 24, 1997 between the
Registrant as Borrower and Transamerica Business Credit Corporation as
Lender, and Schedule thereto.
10.61 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.
10.62 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).
10.63 Patent and Trademark Security Agreement dated as of October 24, 1997
between the Registrant and Transamerica Business Credit
26
27
Corporation.
10.64 Security Agreement in Copyrighted Works dated as of October 24, 1997
between the Registrant and Transamerica Business Credit Corporation.
10.65 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.
10.66 Security Agreement dated as of August 18, 1997 between the Registrant
as Debtor and Robert L. Priddy as Secured Party.
10.67 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.
10.68 Promissory Note made February 3, 1998 by the Registrant in favor of
Robert L. Priddy representing indebtedness in the original principal
amount of $1,000,000.
10.69 Security Agreement dated as of February 3, 1998 between the Registrant
as Debtor and Robert L. Priddy as Secured Party.
10.70 Warrant Agreement dated as of February 3, 1998 between the Registrant
and Robert L. Priddy representing warrants to purchase 100,000 shares
of Common Stock.
10.71 Description of Compensation Arrangements effective January 30, 1998 for
Paul F. Lavallee, the Registrant's Chairman, Chief Executive Officer
and President. (4)
10.72 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.
10.73 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)
10.74 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.
10.75 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)
10.76 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.
10.77 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.
10.78 Form of Warrant Certificate representing an aggregate of
27
28
8,686,667 Common Stock purchase Warrants issued to investors in a
private placement in March 1998.
10.79 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.
10.80 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.
10.81 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.
22.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Coopers & Lybrand LLP.
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
27.5 Financial Data Schedule
27.6 Financial Data Schedule
27.7 Financial Data Schedule
27.8 Financial Data Schedule
27.9 Financial Data Schedule
- ----------------
+ 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 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.
28
29
(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 From
10-QSB for the quarter ended June 30, 1997.
(18) Incorporated by reference to Registrant's Quarterly Report on From
10-QSB for the quarter ended September 30, 1997.
(d) FINANCIAL STATEMENT SCHEDULES. The following
financial statement schedule is filed as part of this report as page F-24
following the signature page:
Schedule IX - Valuation and Qualifying Accounts
All other schedules required by Form 10-K Annual
Report have been omitted because they were not applicable, were included in the
notes to be consolidated financial statements, or were otherwise not required
under the instructions contained in Regulation S-X.
29
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Dated: April 3, 1998 ACCUMED INTERNATIONAL, INC.
By: /s/ PAUL F. LAVALLEE
-----------------------------
Paul F. Lavallee, Chairman of
the Board and Chief Executive
Officer
(principal executive officer)
By: /s/ LEONARD R. PRANGE
-----------------------------
Leonard R. Prange, Chief
Financial Officer and Chief
Operating Officer (principal accounting officer)
Pursuant to the requirements of the Securities and Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and the dates so indicated.
Each Director of the registrant whose signature appears below,
hereby appoints Paul F. Lavallee and Leonard R. Prange, 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: April 3, 1998 By: /s/ PAUL F. LAVALLEE
---------------------
Paul F. Lavallee, Chairman
DATED: April 3, 1998 By: /s/ PETER P. GOMBRICH
----------------------
Peter P. Gombrich, Director
DATED: April 3, 1998 By: /s/ JACK H. HALPERIN
----------------------
Jack H. Halperin, Director
DATED: April 3, 1998 By: /s/ JOSEPH W. PLANDOWSKI
-------------------------
Joseph W. Plandowski, Director
DATED: April 3, 1998 By: /s/ LEONARD M. SCHILLER
------------------------
Leonard M. Schiller, Director
30
31
DATED: __________, 1998 By:
---------------------
Robert L. Priddy, Director
DATED: __________, 1998 By:
---------------------
J. Donald Gaines, Director
31
32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ...................................... F-2
Report of Independent Accountants ................................. F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996 ...... F-4
Consolidated Statement of Operations for the Years Ended
December 31, 1997 and 1996, Three Months Ended December 31, 1995
and Year Ended September 30, 1995 ................................. F-5
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1997 and 1996, Three Months Ended December 31, 1995
and Year Ended September 30, 1995 ................................. F-6
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1997 and 1996, Three Months Ended December 31, 1995
and Year Ended September 30, 1995 ................................. F-7
Notes to Consolidated Financial Statements ........................ F-8
F-1
33
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, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended and the three months ended December 31, 1995.
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, 1997 and December 31,
1996, and the results of its operations and its cash flows for the years ended
December 31, 1997 and 1996, and the three months ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Chicago, IL
March 23, 1998
F-2
34
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders
Alamar Biosciences, Inc.
We have audited the accompanying balance sheets of Alamar Biosciences, Inc. as
of September 30, 1995 and 1994, and related statements of operations,
shareholders' equity, and cash flows for the years ended September 30, 1995,
1994, and 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 audits 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 provided a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alamar Biosciences, Inc., at
September 30, 1995 and 1994, and the results of its operations and its cash
flows for the years ended September 30, 1995, 1994 and 1993, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
is involved in litigation and is proposing to merge with another company. The
Company has taken certain actions to meet cash flow requirements, including a
reduction in work force, overhead and product development, until the disputes
can be resolved. There can be no assurance that the Company's efforts related
to the lawsuit will be successful. In addition, there can be no assurance that
combined operations of the proposed merger will produce the necessary cash flow
required. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
/s/ Coopers & Lybrand L.L.P.
Sacramento, California
November 19, 1995
F-3
35
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------
1997 1996
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 469,639 $ 2,801,359
Restricted cash -- 100,000
Accounts receivable, net 4,664,152 2,143,596
Prepaid expenses and deposits 183,817 217,198
Production inventory 3,464,190 1,772,127
------------ ------------
Total current assets 8,781,798 7,034,280
------------ ------------
Fixed assets, net 5,178,528 1,696,071
------------ ------------
Notes receivable 164,199 214,273
Deferred financing costs 640,224 --
Purchased technology 4,950,753 5,340,411
Other assets 833,215 194,507
------------ ------------
$ 20,548,717 $ 14,479,542
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,590,022 $ 3,031,033
Payroll and related accruals 458,794 95,211
Accrued interest 441,100 --
Other current liabilities 660,842 241,301
Notes payable 1,888,273 173,455
Current portion of debt and capital lease obligations 700,000 114,910
------------ ------------
Total current liabilities 7,739,031 3,655,910
------------ ------------
Warranty reserves 467,299 --
Long term debt 11,454,755 230,795
Minority interest 154,560 456,841
------------ ------------
12,076,614 687,636
------------ ------------
Stockholders' equity
Preferred stock, 5,000,000 authorized; 382,500 Series A
8% Cumulative -- --
Common stock, $0.01 par value, 50,000,000 shares
authorized, 22,728,868 shares issued and outstanding
at Dec. 31, 1997, 20,854,157 at December 31, 1996 227,289 208,542
Additional paid-in capital 51,953,823 44,424,646
Cumulative translation adjustment 22,586 32,586
Accumulated deficit (51,253,889) (34,335,313)
Less treasury stock, 37,956 shares at Dec. 31, 1997,
and 31,812 shares at December 31, 1996, respectively (216,737) (194,465)
------------ ------------
Total stockholders' equity 733,072 10,135,996
------------ ------------
Commitments and Contingencies
$ 20,548,717 $ 14,479,542
============ ============
See accompanying notes to the consolidated financial statements.
F-4
36
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended Three Months
December 31, Ended Year Ended
--------------------------------- December 31, September 30,
1997 1996 1995 1995
------------ ------------ ------------ ------------
Sales $ 19,109,661 $ 6,222,449 $ 100,130 $ 514,776
Less cost of sales (11,850,692) (3,991,430) (338,730) (1,431,187)
------------ ------------ ------------ -----------
Gross profit (loss) 7,258,969 2,231,019 (238,600) (916,411)
------------ ------------ ------------ -----------
Operating expenses:
General and administrative 7,891,320 4,927,657 1,418,797 2,094,890
Acquired research and development -- 5,957,927 3,965,000 --
Research and development 5,315,411 3,110,426 32,600 386,882
Asset impairment 3,582,068 -- -- --
Sales and marketing 4,289,447 2,464,668 7,197 309,208
------------ ------------ ------------ -----------
Total operating expenses 21,078,246 16,460,678 5,423,594 2,790,980
------------ ------------ ------------ -----------
Operating income (loss) (13,819,277) (14,229,659) (5,662,194) (3,707,391)
------------ ------------ ------------ -----------
Other income (expense):
Interest income 23,383 50,604 4,748 7,949
Interest expense (3,584,160) (458,214) (10,862) (46,657)
Other income (expense) 24,351 2,939,537 (72,929) (13,211)
Minority interest 437,127 123,919 -- --
------------ ------------ ------------ -----------
Total other income (expense) (3,099,299) 2,655,846 (79,043) (51,919)
------------ ------------ ------------ -----------
Loss before income taxes (16,918,576) (11,573,813) (5,741,237) (3,759,310)
Income tax expense -- -- 800 800
------------ ------------ ------------ -----------
Net loss $(16,918,576) $(11,573,813) $ (5,742,037) $ 3,760,110
============ ============ ============ ===========
Net loss per share - Basic $ (0.77) $ (0.68) $ (0.49) $ (0.59)
============ ============ ============ ===========
Weighted average common shares outstanding 22,052,929 16,975,470 11,742,980 6,375,627
============ ============ ============ ===========
See accompanying notes to the consolidated financial statements.
F-5
37
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
---------------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------------ ------------ ------------ ------------
Balances at September 30, 1994 4,844,294 $ 48,443 $ 14,555,950 $(13,259,353)
------------ ------------ ------------ ------------
Issuances of common stock 6,085,045 60,850 3,309,636 --
Issuances of warrants -- -- 142,500 --
Net loss -- -- -- (3,760,110)
------------ ------------ ------------ ------------
Balances at September 30, 1995 10,929,339 $ 109,293 $ 18,008,086 $(17,019,463)
------------ ------------ ------------ ------------
Issuances of common stock 4,501,845 45,019 4,984,557 --
Issuances of warrants -- -- 308,252 --
Warrants exercised 140,000 1,400 33,600 --
Net loss -- -- -- (5,742,037)
------------ ------------ ------------ ------------
Balances at December 31, 1995 15,571,184 155,712 23,334,495 (22,761,500)
------------ ------------ ------------ ------------
Issuances of common stock 4,280,955 42,810 17,838,083 --
Issuances of warrants -- -- 1,689,464 --
Stock options exercised 578,732 5,787 744,587 --
Warrants exercised 256,700 2,567 741,558 --
Conversion of debt 166,586 1,666 76,459 --
Cumulative translation adjustment -- -- -- --
Shares received in litigation settlement -- -- -- --
Net loss -- -- -- (11,573,813)
------------ ------------ ------------ ------------
Balances at December 31, 1996 20,854,157 208,542 44,424,646 (34,335,313)
------------ ------------ ------------ ------------
Issuances of common stock 71,360 713 205,576 --
Issuances of warrants -- -- 3,187,606 --
Stock options exercised 361,860 3,619 404,942 --
Warrants exercised 500,536 5,005 254,624 --
Refund of stock issuance fees, net -- -- 74,877 --
Cumulative translation adjustment -- -- -- --
Shares received in litigation settlement -- -- -- --
Contingent shares issued 940,955 9,410 3,401,552 --
Net loss -- -- -- (16,918,576)
------------ ------------ ------------ ------------
Balances at December 31, 1997 22,728,868 $ 227,289 $ 51,953,823 $(51,253,889)
============ ============ ============ ============
CUMULATIVE TOTAL
TRANSLATION TREASURY STOCKHOLDERS'
ADJUSTMENT STOCK EQUITY
------------ ------------ ------------
Balances at September 30, 1994 $ -- $ -- $ 1,345,040
------------ ------------ ------------
Issuances of common stock -- -- 3,370,486
Issuances of warrants -- -- 142,500
Net loss -- -- (3,760,110)
------------ ------------ ------------
Balances at September 30, 1995 -- -- 1,097,916
------------ ------------ ------------
Issuances of common stock -- -- 5,029,576
Issuances of warrants -- -- 308,252
Warrants exercised -- -- 35,000
Net loss -- -- (5,742,037)
------------ ------------ ------------
Balances at December 31, 1995 -- -- 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
Shares received in litigation settlement -- (194,465) (194,465)
Net loss -- -- (11,573,813)
------------ ------------ ------------
Balances at December 31, 1996 32,586 (194,465) 10,135,996
------------ ------------ ------------
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)
Shares received in litigation settlement -- (22,272) (22,272)
Contingent shares issued -- -- 3,410,962
Net loss -- -- (16,918,576)
------------ ------------ ------------
Balances at December 31, 1997 $ 22,586 $ (216,737) $ 733,072
============ ============ ============
See accompanying notes to the consolidated financial statements.
F-6
38
ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Three Months
Ended December 31 Ended Year Ended
---------------------------- December 31, September 30,
1997 1996 1995 1995
------------ ------------ ----------- -------------
Cash flows from operating activities:
Net income (loss) $(16,918,576) $(11,573,813) $(5,742,037) $(3,760,110)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,636,836 1,124,475 38,400 235,529
Provision for bad debts 268,728 108,160 -- 11,725
Write-off of debt discount 2,139,000 -- -- --
Write-off of in-process research and development -- 5,957,927 3,965,000 --
Write-off of impaired goodwill 3,582,068 -- -- --
Minority interest (437,127) (123,919) -- --
Expenses paid with issuance of stock or warrants -- 1,441,484 606,750 308,500
Non-cash gain on settlement (22,272) (194,465) -- --
Loss on asset disposals -- 74,706 -- 63,609
Changes in assets and liabilities:
Decrease (Increase) in restricted cash 100,000 263,000 (178,000) (185,000)
Decrease (Increase) in accounts receivable (578,619) (1,377,044) 107,906 259,420
Decrease (Increase) in prepaid expenses and deposits (83,953) (92,362) 1,833 20,035
Decrease (Increase) in production inventory (818,064) (629,007) 64,999 193,796
(Increase) in intangible and other assets (692,948) (33,316) 80,059 (1,525)
Increase in accounts payable 1,364,512 334,908 168,460 766,900
Decrease (Increase) in deferred financing costs (849,124) -- (750,352) (299,650)
Increase in other current liabilities 142,513 (688) 155,941 8,571
Increase (Decrease) in warranty reserves (332,701) -- -- --
Increase (Decrease) in deferred revenue (21,516) (1,307,482) 946,429 470,238
------------ ------------ ----------- -----------
Net cash used in operating activities (10,521,243) (6,027,436) (534,612) (1,907,962)
------------ ------------ ----------- -----------
Cash used in investing activities:
Purchase of fixed assets (1,208,130) (1,479,694) (62,196) (49,834)
Acquisition of business, net (6,000,000) (3,854,737) 48,237 --
------------ ------------ ----------- -----------
Net cash used in investment activities (7,208,130) (5,334,431) (13,959) (49,834)
------------ ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from issuances of common stock, net 743,064 13,976,390 35,000 3,204,486
Notes receivable (issued) collected 50,074 (214,273) -- (700,000)
Payment of capital lease obligation (89,992) (89,907) (22,132) (50,115)
Proceeds from issuance of notes payable 14,994,373 1,025,000 -- --
Proceeds from bridge loan 6,000,000 592,551 -- --
Payment of notes payable and bridge loan (6,289,866) (1,339,629) -- --
------------ ------------ ----------- -----------
Net cash provided by financing activities 15,407,653 13,950,132 12,868 2,454,371
------------ ------------ ----------- -----------
Effect of exchange rate changes on cash (10,000) 32,586 -- --
------------ ------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents (2,331,720) 2,620,851 (535,703) 496,575
Cash and cash equivalents at beginning of period 2,801,359 180,508 716,211 219,636
------------ ------------ ----------- -----------
Cash and cash equivalents at end of period $ 469,639 $ 2,801,359 $ 180,508 $ 716,211
============ ============ =========== ===========
See accompanying notes to consolidated financial statements.
F-7
39
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
AccuMed International, Inc. and subsidiaries ("the Company") (formerly
Alamar Biosciences, Inc.) 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) Microbiology - proprietary disposable
products and automated instruments used to identify infectious organisms and
determine susceptibility to antimicrobial agents, and 2) Cytopathology - systems
made up of multiple instruments networked via proprietary software that support
the review and analysis of Pap smears. In 1995, the Company changed to a fiscal
year ending December 31.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of AccuMed
International, Inc. and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
Contract revenue from research agreements is recorded when earned and
as the related costs are incurred. Payments received related to future
performance are deferred and recognized as revenue when earned over future
performance periods. 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.
Restricted Cash
Restricted cash represents security deposits for letters of credit and
escrow account arrangements. As such, these balances are not immediately
available to fund operations as of the balance sheet date indicated.
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 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
F-8
40
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 carryforwards. 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-9
41
ACCUMED INTERNATIONAL, INC.
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,
1997 and 1996, respectively, the Company's foreign accounts receivable were
about $1,188,000 and $267,000.
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 1996 and 1997, the Company incorporated the following assumptions into
the model: risk free rate - ranging from 6% to 7%, expected volatility - 20% and
expected dividend zero. The risk-free rate is determined based on the interest
rate of U.S. Government treasury obligations with a maturity date 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 and Note 19 for detailed segment information.
Reclassifications
Certain amounts in the 1996 financial statements have been reclassified
to conform to the 1997 presentation.
F-10
42
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable are carried at estimated net realizable value and
include the following at December 31:
1997 1996
----------- -----------
Trade receivables $ 5,058,972 $ 2,269,688
Allowance for doubtful accounts (394,820) (126,092)
----------- -----------
Total $ 4,664,152 $ 2,143,596
----------- -----------
Bad debt expense was $268,728, $108,160 and $11,725 for the years ended
December 31, 1997, 1996 and September 30, 1995, respectively.
4. INVENTORIES
Inventories includes the following at December 31:
1997 1996
---------- ----------
Raw material and packaging supplies $ 999,561 $ 828,985
Work in process 402,269 270,718
Finished goods 2,062,360 672,424
---------- ----------
Total $3,464,190 $1,772,127
---------- ----------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes the following at December 31:
Estimated
Useful Life 1997 1996
------------ ------------ -----------
Equipment 3 - 5 Years $ 7,035,277 $ 2,051,134
Leasehold improvements 5 - 13 Years 964,392 544,892
------------ -----------
7,999,669 2,596,026
Less accumulated depreciation and amortization (2,821,141) (899,955)
------------ -----------
Total $ 5,178,528 $ 1,696,071
------------ -----------
Maintenance and repair expenses for the years ended December 31, 1997,
1996, and September 30, 1995 were $166,720, $106,144 and $78,435 respectively.
There were no material construction commitments outstanding as of December 31,
1997.
F-11
43
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS
Other assets includes the following at December 31:
1997 1996
-------- --------
Patents, net of amortization $590,243 $194,507
Deposits for equipment 126,000 --
Other 116,972 --
-------- --------
Total $833,215 $194,507
-------- --------
7. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following at December 31:
1997 1996
-------- --------
Deferred revenue $125,452 $146,968
Customer deposits 12,924 94,333
Current portion of warranty reserve 130,000 --
Accrued rent 31,000 --
Other 361,466 --
-------- --------
Total $660,842 $241,301
-------- --------
8. NOTES PAYABLE
The Company entered into a revolving line of credit in October 1997,
the balance of which was $1,888,273 at December 31, 1997. 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 expires in October, 1998, and is renewable for
up to three consecutive 1 year periods. 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% (11% at December 31, 1997).
9. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996, respectively, consists of
the following:
1997 1996
----------- --------
14.5% secured note payable in 48 equal monthly installments of principal and $ 4,085,055 $ --
interest of $113,400, through September 2001, with a balloon payment of
$675,000 due October 31, 2001; net of unamortized deferred financing costs of $181,200
12% unsecured convertible notes due March 13, 2000, net of unamortized 7,843,200 --
deferred financing costs of $656,800
Capitalized lease obligation -- 89,810
Non-interest bearing repayable contribution and other 226,500 255,895
----------- --------
Total long-term debt 12,154,755 345,705
Less current installments 700,000 114,910
----------- --------
Long-term debt, excluding current installments $11,454,755 $230,795
----------- --------
F-12
44
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 12 % convertible notes payable are convertible into 2,720,000
shares of common stock, at a conversion price of $3.125 per share at any time
through the maturity date. See Note 20 regarding subsequent events related to
the conversion of a portion of these convertible notes into preferred stock.
The 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.
The repayable contribution was received under a foreign government
program and calls for semi-annual installments based on future sales of product.
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, 1997 are as follows:
1998 $ 700,000
1999 1,041,100
2000 8,845,000
2001 1,568,655
2002 --
Thereafter --
10. STOCKHOLDERS' EQUITY
The Board of Directors is authorized to issue 5,000,000 shares of
preferred stock, the terms and rights to be established upon issuance. Of these
shares, 382,500 have been designated as Series A 8% Cumulative Preferred Stock.
None of these shares have been issued as of December 31, 1997. See Note 20
regarding subsequent events.
Warrants
At December 31, 1997, the Company had outstanding warrants to purchase
shares of Common Stock at any time through the expiration date as follows:
Shares Price Expiration Date
------ ----- ---------------
825,000 $ 3.13 March, 1998
120,000 3.42 March, 1999
367,500 3.87 March, 1999
175,000 5.00 December, 1999
25,275 5.00 April, 2000
249,833 0.63 May, 2000
294,239 0.63 August, 2000
121,596 0.82 August, 2000
121,595 1.64 August, 2000
121,594 2.47 August, 2000
63,500 0.25 September, 2000
F-13
45
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
75,000 1.13 December, 2000
719,000 1.25 December, 2000
100,000 1.25 January, 2001
100,000 2.13 March, 2001
200,000 1.13 March, 2002
50,000 2.50 September, 2002
245,783 2.60 September, 2002
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 - The maximum number of shares that may be issued under the
1995 Plan is 1,668,332 at December 31, 1997. On May 23, 1997 the board of
directors authorized up to 3,200,000 shares of common stock be reserved for the
1997 Plan.
At December 31, 1997, there were 2,605,681 additional shares available
for grant under the Plans.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Stock Option Plans for employees. Accordingly, no
compensation cost has been recorded. Had compensation cost for the Company's
Stock Option Plans been determined consistent with FASB Statement No. 123, the
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below.
Year Ended December 31,
---------------------------------------
1997 1996
-------------- --------------
Net loss, as reported $ (16,918,576) $ (11,573,813)
Net loss, Pro-forma (17,906,072) (12,147,534)
Net loss per share, as reported $ (0.77) $ (0.68)
Net loss per share, Pro-forma (0.81) (0.72)
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.
F-14
46
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1997 and 1996.
Year Ended December 31,
-----------------------
1997 1996
---- ----
Dividend yield 0% 0%
Volatility 20% 20%
Risk free interest rate 7% 7%
Expected term in years 10 10
Stock option activity during the periods indicated was as follows:
Weighted
Number of Average Exercise
Options Price
------- -----
Balance at December 31, 1995 1,586,845 $ 1.23
Granted 909,000 $ 4.99
Exercised (578,732) $ 1.30
Forfeited (182,084) $ 1.13
Expired -- --
---------
Balance at December 31, 1996 1,735,029 $ 3.15
Granted 1,616,398 $ 3.94
Exercised (361,860) $ 1.13
Forfeited (492,060) $ 5.70
Expired -- --
---------
Balance at December 31, 1997 2,497,507 $ 3.45
---------
The fair value of options granted in 1997 and 1996 were $2.56 and
$4.88 per share, respectively. The following table summarizes information
about stock options outstanding as of December 31, 1997:
Options outstanding Options exercisable
------------------------------------------------- --------------------------------
Weighted avg
Remaining Weighted avg Weighted avg
Number Contractual Exercise Number Exercise
Range of exercise prices Outstanding Life Price Exercisable Price
------------------------ ----------- ------------- ------------ ----------- -------------
$0.63 to $1.58 510,294 7.14 $1.12 494,197 $1.12
$1.59 to $3.98 1,845,713 8.89 3.78 302,179 2.94
$3.99 to $8.38 141,500 3.51 7.34 141,500 7.34
--------- -------
$0.63 to $8.38 2,497,507 8.23 3.45 937,876 2.64
--------- -------
F-15
47
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
The net deferred tax assets and liabilities consist of the following at
December 31:
1997 1996
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $12,231,000 $ 8,165,000
Research and development credits 300,000 479,000
Other 745,000 604,000
----------- -----------
Total 13,276,000 9,248,000
Valuation allowance (13,276000) (9,248,000)
----------- -----------
Net deferred tax assets and liabilities $ -- $ --
----------- -----------
At December 31, 1997, the Company had approximately $33,095,000 and
$14,966,000 in net operating losses for federal and state tax purposes,
respectively, available to be carried forward to future periods. The
carryforwards expire from 2004 to 2013 for federal purposes and from 2011 to
2013 for state purposes. The Company also has credits for research and
development of $479,000 available to offset future federal income taxes, which
expire from 2004 to 2012.
The Company has recorded a valuation allowance equal to the deferred
tax assets based on its continuing operating losses.
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 carryforwards 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, 1997 and 1996 was $597,000 and
$30,000, respectively. The estimated current warrant reserve of $130,000 as of
December 31, 1997 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 2009. 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, 1997
and 1996 was $812,000 and $485,000, respectively.
F-16
48
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum annual lease payments under operating leases as of
December 31, 1997 are:
Year Amount
---- ------
1998 $ 701,000
1999 $ 703,000
2000 $ 705,000
2001 $ 672,000
2002 $ 676,000
Thereafter $ 762,000
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash investing and financing activities:
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.
During the year ended December 31, 1996, the Company issued common
stock and warrants valued at $257,094 for the payment of expenses. A shareholder
returned previously issued shares to the Company as compensation for a
litigation settlement, valued at $194,465 and recorded as treasury stock in the
accompanying consolidated balance sheet.
Year Ended December 31,
-----------------------
Cash paid during the year for: 1997 1996
---------- -------
Interest $ 821,719 $76,350
15. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company is obligated to repurchase certain
equipment sold to a former distributor. Terms of the agreement call for maximum
payment of $340,000 to be paid in equal monthly installments over the next 10
months.
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 ("AccuMed"). Pursuant to the terms
of the merger agreement, 1,881,910 shares of Common Stock and 126,945 warrants
were issued to AccuMed 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 940,955 shares of Common Stock and 63,472
warrants was resolved (performance goal achieved) in March 1996 resulting in
contingent consideration of approximately $5,430,000. Such amount has been
allocated to acquired proprietary technology ($1,930,000) and in-process
research and development ($3,500,000). The acquired proprietary technology is
being amortized over the expected period to be benefited of ten years, with the
in-process research and development charged to operations during 1996. The
contingency associated with the remaining 940,955
F-17
49
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shares of Common Stock and 63,472 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 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
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 Note 18).
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 50,000 5-year warrants to
purchase common stock of the Company at an exercise price of $2.50 per share.
The warrants were valued at $39,500 and recorded as interest expense in 1997.
During 1996, the Company issued 100,000 warrants valued at $230,000 to
an individual for consulting services. A major stockholder of the Company
received 687,500 warrants valued at $852,000 for consulting services. Also,
another related party received 85,000 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.
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:
1997 1996
------------ ------------
Sales $ 21,748,783 $ 22,057,183
Net loss $(17,351,585) $(15,371,866)
Net loss per share $ (0.79) $ (0.91)
F-18
50
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 October 1, 1995 are as follows:
Three Months
Year ended Ended
December 31, December 31,
1996 1995
------------ -----------
Sales $ 6,235,892 $ 247,089
Net loss $(12,066,170) $ ( 5,876,285)
Net loss per share $ (0.71) $ (0.50)
19. COMPANY SEGMENT AND RELATED INFORMATION
The Company has two reportable segments: 1) Microbiology - manufactures
and markets proprietary disposable products and automated instruments used to
identify infectious organisms and determine susceptibility to antimicrobial
agents, and 2) Cytopathology - manufactures and markets systems made up of
multiple instruments networked via proprietary software that support the review
and analysis of Pap smears.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on profit of loss from operations before income taxes not
including nonrecurring gains and losses and foreign exchange gains and losses.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different technology and manufacturing processes. Each
business was acquired as a unit, and the management at the time of the
acquisition was retained.
INDUSTRY SEGMENTS 1997 1996
-------------------------------- ------------- ---------------
Revenues from External Customers
Cytopathology $ 1,001,000 $ 1,412,000
Microbiology 18,109,000 4,810,000
F-19
51
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INDUSTRY SEGMENTS 1997 1996
-------------------------------- ------------- ---------------
Intersegment Revenues
Cytopathology -- --
Microbiology -- --
Depreciation and Amortization Expense
Cytopathology 455,000 255,000
Microbiology 1,390,000 90,000
Segment Operating Profit (Loss)
Cytopathology (13,916,000) (12,886,000)
Microbiology 1,982,000 (923,000)
Segment Assets
Cytopathology 10,151,000 11,798,000
Microbiology 10,398,000 2,594,000
Expenditures for Segment Long-lived Assets
Cytopathology 852,000 1,350,000
Microbiology 3,596,000 580,000
Reconciliations of reportable segment items are as follows:
1997 1996
------------ ------------
Revenues
Total revenue for reportable segments $ 19,110,000 $ 6,222,000
Total consolidated revenue $ 19,110,000 $ 6,222,000
Profit or (loss)
Total profit or (loss) for reportable segments $(11,934,000) $ 6,222,000
Other corporate income (expenses) (1,838,000) (2,680,000)
Unallocated amounts
Interest expense (3,584,000) (458,000)
Minority Interest 437,000 124,000
------------ ------------
Income before income taxes $(16,919,000) $(11,574,000)
------------ ------------
Assets
Total assets for reportable segments $ 20,549,000 $ 14,392,000
Other assets -- 88,000
------------ ------------
Consolidated total assets $ 20,549,000 $ 14,480,000
------------ ------------
Other Significant Items
Segment Consolidated
Total Adjustments Total
------------ ------------ ------------
1997 Expenditures for assets $ 4,448,000 $ (3,240,000) $ 1,208,000
F-20
52
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciling item to adjust expenditures for assets is the amount of assets
purchased in the ESP Product Line acquisition reported as part of the
acquisition of business, net in the Consolidated Statement of Cash Flows. None
of the other adjustments are significant.
GEOGRAPHIC INFORMATION 1997 1996
---------------------- ------------- -----------
Net trade sales
United States $ 16,637,000 $ 4,543,000
United Kingdom 2,195,000 1,672,000
Canada 279,000 7,000
Interarea transfers
United States -- --
United Kingdom 1,217,000 1,170,000
Canada -- --
Eliminations (1,217,000) (1,170,000)
------------- -----------
Total $ 19,110,000 $ 6,222,000
------------- -----------
Long - Lived Assets
United States $ 9,379,000 $ 6,598,000
United Kingdom 331,000 268,000
Canada 420,000 170,000
------------- -----------
Total $ 10,130,000 $ 7,036,000
------------- -----------
20. SUBSEQUENT EVENTS
On January 22, 1998, the Company filed a registration statement with
the Securities and Exchange Commission for the sale of 2,720,000 shares of its
Common Stock and 850,000 warrants to purchase shares of its Common Stock at a
price of $3.125 per share. This registration was for the shares underlying its
$8,500,000 12% convertible notes and the related 850,000 detachable warrants.
The Company received no proceeds as a result of this registration.
On February 2, 1998 a director/stockholder loaned the Company
$1,000,000 repayable on the earlier of April 2, 1998 or upon the closing of a
securities offering in which the Company receives gross proceeds of at least
$3,000,000. The loan is unsecured and bears an interest rate of 12% per annum.
The lender also received 100,000 5-year warrants to purchase Common Stock of the
Company at an exercise price of $1.56 per share.
On February 23, 1998, the Company agreed to exchange $5,275,000 in
principal amount of its 12% convertible notes due in March 2000 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
1,245,340 shares of Common Stock at $1.125 per share. The Preferred Stock is
convertible into 4,981,360 shares of the Company's Common Stock at a conversion
price of $1.125 per share. The Company intends to register the Preferred Stock
and underlying Common Stock with the Securities and Exchange Commission during
1998.
F-21
53
ACCUMED INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 23, 1998, the Company sold an aggregate of 8,686,666 shares of
common stock and seven-year warrants to purchase an aggregate of 8,686,888
shares of the Company's common stock at an exercise price of $0.75 per share,
for gross proceeds of $6,515,000 and net proceeds of approximately $5,910,000
after payment of fees, commissions and expenses related to the private
placement. Such offering is to be registered with the Securities and Exchange
Commission. The Company intends to use the net proceeds raised by such offering
for working capital purposes.
F-22
54
Independent Auditors' Report
The Board of Directors and Stockholders
AccuMed International, Inc.:
Under date of March 23, 1998 we reported on the consolidated balance sheet of
AccuMed International, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended and the three months ended December 31,
1995, as contained in the annual report on Form 10-K for the year 1997. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule as listed
in the accompanying index. 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 Peat Marwick LLP
Chicago, IL
March 23, 1998
F-23
55
Accumed International, Inc.
Schedule IX - Valuation and Qualifying Accounts
Additions
Balance at charged to Balance at
Beginning costs and Other end of
Description of period expenses Retirements changes period
----------- --------- -------- ----------- ------- ------
Reserves and allowances deducted
from asset accounts
Allowance for uncollectible
accounts receivable
Year ended September 30, 1995(b)
3 Months Ended December 31, 1995 $ 19,725 $ -- $ (1,793) $ -- $ 17,932
Year Ended December 31, 1996 $ 17,932 $108,160 $ -- $ -- $126,092
Year Ended December 31, 1997 $126,092 $268,728 $ -- $ -- $394,820
Reserves and allowances which support
balance sheet caption reserves
Warranty reserves
Year ended September 30, 1995(b)
3 Months Ended December 31, 1995 $ -- $ -- $ -- $ -- $ --
Year Ended December 31, 1996 $ -- $ 30,000 $ -- $ -- $ 30,000
Year Ended December 31, 1997 $ 30,000 $ -- $(332,701) $900,000(a) $597,299
(a) reserves acquired through ESP product line acquisition on March 3,1997
(b) omitted due to immateriality
F-24
56
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
3.1 Certificate of Incorporation of the Registrant. (1)
3.2 Certificate of Amendment to Registrant's Certificate of Incorporation.
(14)
3.3 Certificate of Designation, Rights and Preferences of Series A
Convertible Preferred Stock. (15)
3.4 Certificate of Correction to Certificate of Designation, Rights and
Preferences of Series A Convertible Preferred Stock. (15)
3.5 Bylaws of the Registrant. (1)
3.6 Amendment No. 1 to Bylaws of the Registrant.
4.1 Specimen stock certificate for Common Stock. (1)
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)
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.
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)
57
10.15 Amendment No. 3 to the 1995 Stock Option Plan. (4)
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)
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 Stockholders named therein dated as of August 15,
1996. (9)
10.33 Distribution Agreement by and between the Registrant and Fisher
58
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)
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.
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)
59
10.49 Base Media License Agreement dated as of March 3, 1997 between the
Registrant and Difco Laboratories Incorporated. (16)
10.50 Sale and Leaseback Agreement between the Registrant and Leasetec, Inc.
(8)
10.51 License Agreement dated July 6, 1994, between the Registrant, Vanellus
AB, and Uppsala Bildbehandlings AB. (1)
10.52 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)
10.53 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)
10.54 O.E.M Supply Agreement between the Registrant and Leica Microscopie und
Systems GmbH dated as of May 26, 1996. (17)
10.55 Manufacturing and Supply Agreement between the Registrant and RELA,
Inc. dated as of May 26, 1997. (17)
10.56 Equipment Loan and Security Agreement dated as of September 23, 1997
between the Registrant and Transamerica Business Credit Corporation.
(17)
10.57 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)
10.58 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)
10.59 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)
10.60 Loan and Security Agreement dated October 24, 1997 between the
Registrant as Borrower and Transamerica Business Credit Corporation as
Lender, and Schedule thereto.
10.61 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.
10.62 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).
10.63 Patent and Trademark Security Agreement dated as of October 24, 1997
between the Registrant and Transamerica Business Credit Corporation.
10.64 Security Agreement in Copyrighted Works dated as of October 24, 1997
between the Registrant and Transamerica Business Credit Corporation.
10.65 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.
10.66 Security Agreement dated as of August 18, 1997 between the
60
Registrant as Debtor and Robert L. Priddy as Secured Party.
10.67 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.
10.68 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.
10.69 Security Agreement dated as of February 2, 1998 between the Registrant
as Debtor and Robert L. Priddy as Secured Party.
10.70 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.
10.71 Description of Compensation Arrangements effective January 30, 1998 for
Paul F. Lavallee, the Registrant's Chairman, Chief Executive Officer
and President. (4)
10.72 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.
10.73 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)
10.74 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.
10.75 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)
10.76 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.
10.77 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.
10.78 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.
10.79 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.
61
10.80 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.
10.81 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.
22.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Coopers & Lybrand LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
27.5 Financial Data Schedule
27.6 Financial Data Schedule
27.7 Financial Data Schedule
27.8 Financial Data Schedule
27.9 Financial Data Schedule
- ----------------
+ 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 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.
62
(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 From
10-QSB for the quarter ended June 30, 1997.
(18) Incorporated by reference to Registrant's Quarterly Report on From
10-QSB for the quarter ended September 30, 1997.