10-Q 1 v67081e10-q.txt FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the --- Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000. OR [ ] Transition report pursuant to Section 13 or 15(d) of the --- Securities Exchange Act of 1934 For the transition period from __________ to ________ Commission file number: 0-20652 ACCUMED INTERNATIONAL, INC. -------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-4054899 ------------------------------- ---------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 920 N. Franklin St., Suite 402, Chicago, IL 60610 (Address of principal executive offices) (312) 642-9200 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The registrant had 5,712,292 shares of common stock outstanding as of November 7, 2000. 2 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY INDEX

3 1 PART I - FINANCIAL INFORMATION ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements. -1- 4 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

See accompanying notes to consolidated financial statements -2- 5 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30,

See accompanying notes to consolidated financial statements. -3- 6 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS In the opinion of the management of AccuMed International, Inc. and its wholly-owned subsidiary, the accompanying unaudited condensed consolidated financial statements include all normal adjustments considered necessary to present fairly AccuMed's financial position as of September 30, 2000, and its results of operations for the three-month and nine-month periods ended September 30, 2000 and 1999 and cash flows for the nine-month periods ended September 30, 2000 and 1999. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in AccuMed's audited consolidated financial statements and notes there to for the fiscal year ended December 31, 1999 as filed with the Securities and Exchange Commission on Form 10-K. 2. BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of AccuMed and its wholly-owned subsidiary. All significant intercompany balances, transactions and stockholdings have been eliminated. On December 22, 1998, (the measurement date), AccuMed received shareholder approval to sell its microbiology division under a sales agreement negotiated by management under the approval of the Board of Directors. On January 29, 1999, AccuMed closed the sale of the microbiology division for proceeds of $15,150,000 in cash. AccuMed recognized a gain of $8,357,000, net of income taxes of $140,000 and after working capital adjustments, on the disposal of the microbiology division. Accordingly, the microbiology division is accounted for as a discontinued operation in the accompanying condensed consolidated balance sheets, statements of operations and statements of cash flows. -4- 7 3. OTHER COMPREHENSIVE INCOME (LOSS)

4. INVENTORIES Inventories are summarized as follows:

5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

6. SALE OF AVAILABLE-FOR-SALE SECURITY In February 2000, AccuMed sold 85,776 of shares it held in Ampersand Medical Corporation (Ampersand) on the open market for proceeds of $326,844. In August 2000, AccuMed sold an additional 1,976 shares of Ampersand stock for proceeds of $4,730. A realized gain on the sale of these shares of $331,574 has been recorded for the nine months ended September 30, 2000. -5- 8 7. NOTES RECEIVABLE On March 31, 2000, AccuMed received $417,747, including interest, in full satisfaction of amounts advanced to Microsulis Corporation (Microsulis) under a line of credit. AccuMed has no obligation to make further advances to Microsulis. Under an amendment to AccuMed's patent and technology license agreement with Ampersand, AccuMed received a $100,000 convertible promissory note from Ampersand. The note is due on March 29, 2001 and earns interest at a rate of 11.0% per annum. Until the note has been repaid, AccuMed may at anytime convert all or a portion of the principal amount of the note into shares of common stock of Ampersand at a price of $3.50 per share. 8. PROPOSED MERGER On September 22, 2000, AccuMed signed a letter of intent to merge with Ampersand. AccuMed would issue new shares of AccuMed common stock to the Ampersand shareholders in exchange for their Ampersand common stock. As a result, the Ampersand shareholders would acquire significant majority control of AccuMed. The combined company will operate under Ampersand management and the Ampersand corporate name. Completing the merger is subject to the completion of a definitive merger agreement, and approval by regulatory agencies and the shareholders of both companies. Upon signing of the letter of intent, AccuMed received $300,000 from Ampersand in the form of a note payable. The note bears interest at a rate of prime, plus 2.5%, per annum. The note is payable upon the earlier of (1) the signing of a definitive merger agreement, (2) the termination of the contemplated merger transaction, or (3) December 31, 2000. Upon the signing of a definitive merger agreement, the note will be replaced by a new $2.0 million note, with essentially the same terms, that would be due upon termination of the merger agreement or cancelled upon consummation of the merger and require a first priority lien on all of the assets of AccuMed. 9. LICENSE AGREEMENTS On March 24, 2000, AccuMed entered into a license and development agreement with Ventana Medical Systems, Inc. (Ventana), whereby AccuMed agreed to license its patents and proprietary information and rights to Ventana for certain medical applications. Under the terms of the agreement, AccuMed has received and deferred an up-front licensing fee, advance royalty payment, and development funds. Additional development funds will be received over the next six months for contract research. The agreement also provides for the sale of AcCell(TM) Systems to Ventana and royalties to be received in the future on the sale of covered products by Ventana. The deferred up-front licensing fee is being recognized as revenue systematically over the 36-month term of the agreement. The advance royalty payment will be recognized as revenue during the period that the royalties are earned on the sale of covered products. AccuMed is required under the agreement to complete certain development obligations. Qualifying development costs incurred during the development process will be charged against the deferred -6- 9 development funds received. The excess amount of development funds, if any, over the amount of qualifying costs incurred will be recognized in income upon the completion of the development process. AccuMed does not anticipate that any excess development funds will be material. On March 29, 2000, the Company entered into a patent and technology license agreement with BCAM International, Inc., renamed CellMetrix, Inc. (CellMetrix), whereby AccuMed agreed to license its patents and proprietary information and rights to CellMetrix for certain medical applications. Under the terms of the agreement, AccuMed received a guaranteed license fee upon signing of the agreement. The amount of the guaranteed license fee received was deferred and being amortized over the 60-month term of the agreement. Effective September 1, 2000, AccuMed and CellMetrix mutually agreed to terminate the license agreement. As a result of the termination, the remaining portion of the deferred licensing fees of $229,000 was recorded as other income during the three months ended September 30, 2000. AccuMed is not required to refund any portion of the guaranteed license fee it received. On March 29, 2000, AccuMed entered into a letter agreement to reinstate and amend its September 4, 1998 patent and technology license agreement with Ampersand. Upon signing of the letter agreement, AccuMed received an up-front license fee. On June 9, 2000, AccuMed signed a formal amendment to the agreement and received an advance royalty in the form of cash. AccuMed also received a $100,000 convertible note and 128,571 shares of Ampersand common stock as an additional advance royalty. AccuMed has deferred the amount of the up-front license fee it received. This fee is being recognized as revenue systematically over the remaining 41-month term of the agreement. The advance royalties are being recognized as revenue during the period that the royalties are earned on the sale of covered products. -7- 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL AccuMed is engaged in marketing and developing cost effective screening instruments and systems for clinical diagnostic laboratories, hospitals and others. AccuMed's integrated systems use reliable, accurate and innovative products and methods to provide laboratories with comprehensive solutions that are intended to improve efficiency and reduce costs while achieving significant improvements in disease detection. AccuMed currently is developing cytology computer-aided image cytometry instruments and systems that support early detection and diagnosis programs for screening high-risk individuals for cellular diseases, such as lung cancer. During 1998, AccuMed received shareholder approval to sell its microbiology business. Accordingly, the results of the microbiology business are reported as a discontinued operation in the accompanying condensed consolidated financial statements. On January 29, 1999, AccuMed closed the sale of the microbiology business for net proceeds of $14,400,000. The following management discussion and analysis of financial condition and results of operations relate only to the cytopathology business, AccuMed's only business line. Also, AccuMed is committed to its research and development program. Accordingly, AccuMed expects to incur additional operating losses over at least the next twelve months due to continued spending for product development, prototype construction and testing. OVERVIEW On September 22, 2000, AccuMed signed a letter of intent to merge with Ampersand Medical Corporation (Ampersand). As a result of the merger, the Ampersand shareholders would acquire significant majority control of AccuMed. Completion of the merger is subject to the completion of a definitive merger agreement, and approval by regulatory agencies and the shareholders of both companies. On March 24, 2000, AccuMed entered into a license and development agreement with Ventana Medical Systems, Inc. (Ventana), whereby AccuMed agreed to license its patents and proprietary information and rights to Ventana for certain medical applications. Under the terms of the agreement, AccuMed received an up-front licensing fee, advance royalty payment, and development funds. Additional funds will be received over the next six months for contract research. The agreement also provides for the sale of AcCell(TM) Systems to Ventana and royalties to be received in the future on the sale of covered products by Ventana. On March 29, 2000, the Company entered into a patent and technology license agreement with BCAM International, Inc., renamed CellMetrix, Inc. (CellMetrix), whereby AccuMed agreed to license its patents and proprietary information and rights to CellMetrix for certain medical applications. Under the terms of the agreement, AccuMed received a guaranteed license fee upon -8- 11 signing of the agreement. Effective September 1, 2000, AccuMed and CellMetrix mutually agreed to terminate the license agreement. AccuMed is not required to refund any portion of the guaranteed license fee it received. On March 29, 2000, AccuMed entered into a letter agreement to reinstate and amend its September 4, 1998 patent and technology license agreement with Ampersand Medical Corporation (Ampersand). AccuMed received an up-front license fee upon signing the letter agreement. On June 9, 2000, AccuMed signed a formal amendment to the agreement and received an advance royalty in the form of cash. AccuMed also received a convertible note and will receive shares of Ampersand common stock as an additional advance royalty. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 REVENUES AND COST OF SALES AccuMed's net revenues were $117,000 for the three months ended September 30, 2000 compared to zero for the three months ended September 30, 1999. Net revenues for the 2000 period reflect the sale of five AcCell(TM) units and licensing fees and royalties earned on our license agreements with Ampersand, CellMetrix, and Ventana. There were no units of product sold or any licensing fees or royalties earned during the 1999 period. Cost of sales represents the cost of products sold. We anticipate our future product sales will be made on a build to order or contract manufacturing basis. OPERATING EXPENSES General and administrative expenses decreased by $214,000, or 30.9%, from $692,000 in the 1999 period to $479,000 in the 2000 period. The decrease in expense is a result of reduced corporate level activities, including a decline in employees, travel, and insurance related costs. The 2000 period also reflects the application of qualifying costs to development funds received under our development obligation with Ventana. Research and development expenses decreased by $207,000, or 44.1%, from $470,000 in 1999 to $263,000 in 2000. The decrease in these expenses is a result of the application of qualifying costs to development funds received under our development obligation with Ventana. Current research and development expenses represent ongoing efforts to develop the Savant(TM) medical technologies' next generation products. Sales and marketing expenses decreased to $21,000 for the three months ended September 30, 2000 compared to $54,000 for the 1999 period. The decrease is a result of the application of qualifying costs to development funds received under our development obligation with Ventana. AccuMed continues to market its products on a limited basis in certain laboratory market -9- 12 segments. AccuMed anticipates that its third party licensees will assume a large portion of the marketing effort. OTHER INCOME, NET Other income for the three months ended September 30, 2000 substantially represents $229,000 of income recorded upon the termination of our patent and technology license agreement with CellMetrix. The amount recognized as income is the remaining balance of deferred licensing fees at the date of termination. Other income for the three months ended September 30, 1999, primarily represents interest income and non-refundable licensing fees of $100,000 recognized as income upon the termination of a patent and technology license agreement. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 REVENUES AND COST OF SALES AccuMed's net revenues were $356,000 for the nine months ended September 30, 2000 compared to $11,000 for the nine months ended September 30, 1999. Net revenues for the 2000 period reflect the sale of AcCell(TM) and AcCell-Savant(TM) units and licensing fees and royalties earned on our license agreements with Ampersand, CellMetrix, and Ventana, which were signed in 2000. Net revenues for the 1999 period represent sales of consumables and computer support equipment. Cost of sales represents the cost of products sold. OPERATING EXPENSES General and administrative expenses decreased by $259,000, or 11.2%, from $2,308,000 in the 1999 period to $2,048,000 in the 2000 period. The decrease in these expenses is a result of reduced corporate level activity due to the sale of the microbiology business, less administrative cost following our 1999 consolidation of AccuMed's operations, and to a lesser extent, the application of qualifying costs to development funds received under our development obligation with Ventana. Research and development expenses decreased by $593,000, or 41.2%, from $1,439,000 in 1999 to $845,000 in 2000. The decrease in these expenses is a result of the application of qualifying costs to development funds received under our development obligation with Ventana, and benefits achieved from the consolidation of our research and development activities along with the 1999 consolidation of our operations. Sales and marketing expenses were $109,000 for the nine months ended September 30, 2000 compared to $199,000 for the 1999 period. The decrease in these expenses is primarily a result of personnel reductions, reduced spending on consultants, and the application of qualifying costs to development funds received under our development obligation with Ventana. -10- 13 INTEREST EXPENSE Interest expense for the period ended September 30, 2000 was $23,000 compared to $486,000 for the 1999 period. The decline in interest expense is a result of the repayment in January 1999 of AccuMed's 14.5% secured note payable and 12.0% unsecured convertible notes with proceeds from our sale of the microbiology division. Interest expense for the 1999 period also includes $370,000 from a non-cash write-off of deferred financing costs and debt discounts related to the repayment of these notes. OTHER INCOME, NET Other income for the nine months ended September 30, 2000 substantially represents interest income and $229,000 of income recorded upon the termination of our patent and technology license agreement with CellMetrix. The amount recognized as income is the remaining balance of deferred licensing fees at the date of termination. Other income for the three months ended September 30, 1999, primarily represents interest income and non-refundable licensing fees of $100,000 recognized as income upon the termination of a patent and technology license agreement. DISCONTINUED OPERATIONS AccuMed's loss of $158,000 in 1999 from discontinued operations reflects the results of operations of AccuMed's microbiology business before its sale in January 1999. In 1999, we recorded a gain of $8,357,000, net of income taxes of $140,000, on the disposal of the microbiology business. LIQUIDITY AND CAPITAL RESOURCES AccuMed's primary cash requirements are for research and development and general corporate and marketing expenses, including salaries, materials and consulting support, to develop and market AccuMed's cytopathology products and technology. We anticipate that the receipt of funds under our agreement with Ventana, our available cash and marketable securities on hand, and our receipt of an additional $1.7 million upon the signing of a definitive merger agreement with Ampersand will provide the necessary liquidity to finance AccuMed's projected operations and financing obligations through the closing of our potential merger with Ampersand. We expect our merger with Ampersand will be consummated by the end of the 2001 first quarter. At September 30, 2000, AccuMed has long-term debt, including the current portion, of $630,000. The long-term debt consists of a Canadian dollar note ($143,000 U.S. dollars), a non-interest bearing repayable contribution of $187,000, and a $300,000 note payable to Ampersand. The Canadian dollar note is due on demand, or in the event not called, principal payments are required at a rate of $25,000 U.S. dollars per month, plus interest at a rate of 6.0% over the Canadian prime rate. The Canadian note is convertible into shares of AccuMed's common stock at a price of $1.43 per share. The repayable contribution was received under a Canadian government -11- 14 program and calls for semi-annual installments based on future sales of product and available funds, as defined. Upon signing of the letter of intent to merge with Ampersand, AccuMed received $300,000 from Ampersand in the form of a note payable. The note bears interest at a rate of prime, plus 2.5%, per annum and is payable upon the earlier of (1) the signing of a definitive merger agreement, (2) the termination of the contemplated merger transaction, or (3) December 31, 2000. Upon the signing of a definitive merger agreement, the note will be replaced by a new $2.0 million note, with essentially the same terms, that would be due upon termination of the merger agreement or cancelled upon consummation of the merger and require a first priority lien on all of the assets of AccuMed. OPERATING ACTIVITIES For the nine months ended September 30, 2000 and 1999, AccuMed used $823,000 and $4,069,000, respectively, of cash in operations. The decrease in the use of cash in operations in 2000 compared to 1999 is primarily a result of a decrease in operating expenses of $970,000, the receipt of $1,850,000 under AccuMed's agreements with Ventana, CellMetrix, and Ampersand, and other working capital changes. INVESTING ACTIVITIES Investing activities generated $704,000 in cash for the nine months ended September 30, 2000 compared to $14,400,000 provided by investing activities for the 1999 period. In 2000, AccuMed received $332,000 from the sale of shares it held in Ampersand and collected $400,000 from the repayment by Microsulis of loans made by AccuMed under outstanding notes receivable. In 1999, AccuMed received $14,400,000 in proceeds, net of expenses incurred, from the sale of AccuMed's microbiology business. To date in 2000, we have spent $28,000 on capital expenditures. We do not anticipate material capital expenditures during the remainder of 2000. FINANCING ACTIVITIES AccuMed generated $100,000 of cash from financing activities during the nine months ended September 30, 2000 compared to the use of $8,498,000 in cash during the 1999 period. In 2000, we received $300,000 from the issuance of a note payable by Ampersand upon signing the letter of intent to merge with Ampersand. We used $200,000 in 2000 for the repayment of AccuMed's Canadian dollar note payable. In 1999, we repaid all of our outstanding 14.5% secured notes and 12% unsecured convertible notes with proceeds from the sale of AccuMed's microbiology division. AccuMed currently has no commitments with respect to sources of additional financing other than with respect to funds to be received under our agreements with Ventana and Ampersand. -12- 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AccuMed holds shares of common stock of Ampersand Medical Corporation, a publicly traded company. As a result, our financial results could be significantly affected by changes in the traded market price of this security. AccuMed has debt instruments that are denominated in Canadian dollars. The interest rate for one of the Canadian dollar denominated debt instruments is variable based on changes in the Canadian prime rate of interest. AccuMed also has a note payable with an interest rate that varies based on the U.S. prime rate of interest. As a result, our financial results could be significantly affected by changes in the exchange rate for Canadian dollars and to changes in the U.S. and Canadian prime rates of interest. Management does not actively employ strategies to minimize AccuMed's risks to these exposures. The following table presents information about the shares we hold in Ampersand as of September 30, 2000.

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

-13- 16 FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. When used in this Report, the words "may," "will," "expects," "anticipates," "believe," "estimates," "intends" and similar expressions are intended to identify forward-looking statements. These statements describe our beliefs concerning the future based on currently available information. Our actual results could differ materially from those contained in the forward-looking statements due to a number of risks and uncertainties. We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. -14- 17 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The following exhibits are filed herewith: 27.1 Financial Data Schedule (b) No reports on Form 8-K were filed during the three-month period ended September 30, 2000. -15- 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. ACCUMED INTERNATIONAL, INC. /s/ PAUL F. LAVALLEE -------------------------------------- Paul F. Lavallee Chairman of the Board and Chief Executive Officer (Principal Accounting Officer) Date: November 14, 2000 -16- 19 Index to Exhibits Exhibit No. Description of Exhibit ----------- ---------------------- 27.1 Financial Data Schedule -17-

ACCUMED INTERNATIONAL INC 10-Q