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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
September 30, 1996 0-13154
FCS LABORATORIES, INC.
(Exact name of Registrant as specified in its charter)
ARIZONA 95-2568559
(State of Incorporation) (I.R.S. Employer ID Number)
2330 S. Industrial Park Avenue, Tempe, Arizona 85282
(Address of principal executive offices) (Zip Code)
(602) 966-7248
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock The aggregate market value at December 31, 1996
of the Registrant's voting stock held by non-affiliates was
approximately $511,293. This does not constitute a determination
by the Registrant that the remaining shareholders are affiliates
as defined by 17 CFR 230.405.
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,
and (2) has been subject to such filing requirements for the past
90 days.
(1) Yes / / No /X/
(2) Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers is not
contained herein, and will not be contained, to the best of
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]
Number of shares outstanding as of December 31, 1996
5,841,145 shares of Common Stock, no par value.
_________________________________________________________________
_________________________________________________________________
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PART I
Item 1. Business
1. (a) General Development of Business
The Company was organized as an Arizona corporation in
January 1969 under the name Bruner-Tillman Company. Its name was
changed to Iatric Corporation in October 1969, to FCS Industries,
Inc. in December 1981, and to FCS Laboratories, Inc. in October
1985.
FCS Laboratories, Inc. (hereinafter the "Company" or "FCS")
has primarily developed, manufactured and marketed products and
services designed principally for use by veterinary and human
clinical laboratories and by the primary care physician and
veterinarian. These products and services, which generally have
combined integrated diagnostic kits and laboratory diagnostics,
scientific consultation, therapeutics and response evaluation
have been intended to improve the efficacy and efficiency of
healthcare delivery.
Through its subsidiary, Iatric Corporation ("Iatric"), the
Company developed and in 1982 began manufacturing the AREST
Allergy Management System (TM), which has been marketed by the
Company's subsidiary, Bioproducts for Medicine, Inc.
("Bioproducts"), since 1982. With the development and market
launch of the AREST system, FCS became the first company to
produce and market both in vitro allergy testing services based
on its own test kits and immunological treatment products. This
system allows primary care physicians, including principally
general and family practitioners, pediatricians and osteopathic
doctors, to diagnose and treat their allergy patients without
referring them to specialists in all but the most complex cases.
In 1985, the Company launched, as part of its testing services,
the AREST IMMUNO-EFFICACY (TM) assay developed by Iatric and used
to evaluate patient response to immunological treatment. In 1987
the Company introduced, as part of the system, the AREST Allergy
Patient Identifier which was also developed by Iatric as a quick
and cost effective diagnostic test for pre-screening patients to
identify those that should have a complete work-up.
In 1986, the Company introduced its Patient Management
System concept into the field of veterinary medicine through its
AREST for Canine Allergy Management System which was manufactured
by Iatric and marketed by the Company's subsidiary, Bioproducts
DVM, Inc. ("DVM"). As with the human system, the AREST canine
system provides veterinarians a tandem approach for the diagnosis
and immunological treatment of canine allergies.
In 1991, the Company reformulated its domestic business
plan, designating its subsidiary, Iatric Research Institute, Inc.
("IRI") as a developer and manufacturer of test kits for
companion animals, chartering IRI to market those test kits along
with appropriate treatment products manufactured by Iatric to
companies providing clinical laboratory services, and
recharacterizing Bioproducts DVM as one such provider. The
Company also shifted its emphasis away from human health and to
animal health, an area of medicine in need of more customized
diagnostic products and less influenced by government regulation,
both technical and financial. In animals, allergy problems
manifest themselves not only as respiratory but also as
dermatology and hematology problems. The Company thus targeted
these specialties for broad based development.
The Company has developed, and since 1992 has distributed in
the United States and most of Europe, the Allerzyme (TM) test
strip for allergen-specific IgE, a device intended for use in the
veterinarian's office for screening those canine patients
suspected of having allergies and identifying those that could
likely profit from a definitive allergy work-up. The Company
recently announced that it would soon launch an improved version
of the product designated "RapidVet-E". In 1994, the Company
acquired from DMS Laboratories, Inc. ("DMS") non-exclusive
domestic distribution rights to and launched the RapidVet-D (TM)
screening system for detecting veterinary dermatophytes in dogs,
cats, horses and rabbits. With respect to dogs, RapidVet-D is
positioned as a test to be used by veterinarians in tandem with
Allerzyme as part of the differential diagnosis between allergy
and dermatophyte infection in animals exhibiting dermatological
problems.
In 1993, the Company completed development of and launched
the Elisarest (TM) test kit for allergen-specific IgE in canine
serum for use by reference laboratories for a complete allergy
work-up. In 1994, this was superseded by the faster Canitec (TM)
test kit for allergen-specific IgE and supplemented by the
Canitec test kit for allergen-specific IgG, a second substance
relevant in the diagnosis of allergy. In 1996 the Company
launched Canitec-s, a further refinement of these basic test
kits.
In 1994, the Company obtained a worldwide manufacturing
license and domestic distribution rights to an enzyme-linked
immunosorbent assay (ELISA) for von Willebrands Factor (vWF) - a
molecule critical to proper coagulation processes and also
implicated, when present in excess amounts, in cardiovascular
disease. This test, which is functional across many species of
mammals including dogs, cats, horses and humans, was developed by
the Wadsworth Center for Comparative Hematology of the State of
New York. This led to the launch in 1994 of the Company's vWF
Zymtec (TM) test kit for von Willebrands Factor in canine serum.
The Company also provides a vWF reference laboratory service to
dog breeders. In 1995 the Company acquired non-exclusive
distribution rights to RapidVet-H (Canine 1.1) (TM) and RapidVet-
H (Feline) (TM), blood typing test kits, to broaden its
hematology product line.
In 1994 the Company also completed development of and
launched its Equitec (TM) series of test kits for horses to
assist in the diagnosis of chronic obstructive pulmonary disease
(COPD), urticaria (a dermatological condition) and exercise
induced pulmonary hemorrhage (EIPH), as well as Equirest (TM)
immunotherapy products for treatment of these conditions.
In 1995 the Company entered into a contract with DMS under
which DMS exclusively distributes internationally all of the
Company's veterinary test kits and certain treatment products.
In 1996 the Company launched Felitec AB (TM) test kits for
determining the ratio of allergen-specific IgG/allergen-specific
IgE in cats.
Also in 1996, the Company decided it was now time to sell
most of its animal health service related activities for canine
and during the month of March, the Company sold to an independent
third party, that portion of its business relating to the
provision of canine allergy testing services and immunotherapy
treatment products directly to veterinarians. That portion of
FCS's business involving the sale of diagnostic kits to other
laboratories that provide such testing services and the sale of
immunotherapy treatment to such laboratories and distributors of
such products was not impacted by the transaction. The buyer
also agreed to purchase its requirements of the test kits
necessary to provide such services and of immunotherapy treatment
products from FCS for a period of four years.
During fiscal 1990, the Company, through its subsidiaries in
France, began limited implementation of its strategic objective
to establish relationships with, and sell diagnostic kits and
immunologic treatment products to, veterinary laboratories in
Western Europe. The products were manufactured by IRI on behalf
of the French subsidiaries. During fiscal 1993, European sales
became material to the Company's business and the Company began
devoting significant resources to its expansion. All of the
Company's products were launched in Europe by the end of fiscal
1994. Due to financial limitations, in 1995 DMS assumed
distribution responsibility on behalf of the Company's French
subsidiaries and now does so directly on behalf of IRI.
In 1985, the Company had established facilities in France
and Switzerland for the manufacture in France and the marketing
in Europe of the AREST system for both human and canine allergy.
The Company was unable to timely implement its complete business
plan for human allergy in Europe due to a substantial delay in
receiving certain authorizations for production of immunological
treatment products from the French Ministry of Health. No
further authorizations were required for sale of the complete
AREST canine system. In June 1986, the French Commercial Court
granted the Company's French subsidiaries permission to
reorganize. A plan of reorganization focusing on veterinary
medicine was filed and final approval of the plan was received in
October 1987. As of September 1995, almost all of the enumerated
payments had been made. Nevertheless in order to concentrate its
resources on its primary business plan, the Company decided in
January 1996 to discontinue all operations in France and to cease
making payments to creditors under its reorganization plan. As a
result, Iatric SA, one of the Company's subsidiaries in France,
received notification dated February 15, 1996 that it had been
liquidated by order of the French bankruptcy court. The other
three French subsidiaries were not subject to the liquidation
order. The Company recorded a reserve in an amount equal to the
carrying value of the assets in excess of the liabilities of its
subsidiaries in France. The Company continues to own certain
assets in France, primarily a building and land. During 1989,
the facilities in Switzerland were sold.
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1. (b) Financial Information on Geographic Area Data
Geographical information is set forth below. Those
corporate operating expenses directly traceable to individual
geographic areas were charged to them. Other operating expenses
were allocated to the geographic areas on a reasonable basis.
General corporate expenses were allocated to Domestic Operations.
SALES
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Fiscal Year Ended September 30,
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1996 1995 1994
----------- ----------- -----------
Domestic $ 2,065,956 $ 2,752,810 $ 2,879,712
International 129,415 287,993 261,886
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TOTAL $ 2,195,371 $ 3,040,803 $ 3,141,598
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SUPPLEMENTAL SALES INFORMATION
---------------------------------------
Fiscal Year Ended September 30,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
Human Healthcare $ 1,163,709 $ 1,551,334 $ 1,720,171
Animal Healthcare 1,031,662 1,489,469 1,421,427
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TOTAL $ 2,195,371 $ 3,040,803 $ 3,141,598
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PROFIT (LOSS)
from continuing operations before
extraordinary gain and other income
---------------------------------------
Fiscal Year Ended September 30,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
Domestic Companies $ (90,508) $ (519,860) $ (372,844)
International Companies (95,417) (107,869) (53,544)
----------- ----------- -----------
TOTAL $ (185,925) $ (627,729) $ (426,388)
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DEPRECIATION AND AMORTIZATION EXPENSE
---------------------------------------
Fiscal Year Ended September 30,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
Domestic $ 33,586 $ 40,125 $ 55,579
International 12,460 24,338 26,843
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TOTAL $ 46,046 $ 64,463 $ 82,422
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IDENTIFIABLE ASSETS
---------------------------------------
As of September 30,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
Domestic $ 1,412,475 $ 1,544,168 $ 1,671,634
International 179,827 527,988 514,792
----------- ----------- -----------
TOTAL $ 1,592,302 $ 2,072,156 $ 2,186,426
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PROPERTY, PLANT AND EQUIPMENT ADDITIONS
---------------------------------------
Fiscal Year Ended September 30,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
Domestic $ 892 $ 3,400 $ 2,900
International --- --- 2,081
----------- ----------- -----------
TOTAL $ 892 $ 3,400 $ 4,981
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Item 1. Business -- (Continued)
1. (c) Narrative Description of Business
CONCEPTUAL OVERVIEW OF OPERATIONS
The Company has a group of operating subsidiaries organized
under Western Laboratories, Inc. ("Western") and located in
Tempe, Arizona. Iatric Research Institute, Inc. ("IRI"), also
located in Tempe, Arizona operates separately.
A. IATRIC RESEARCH INSTITUTE, INC.
IRI currently manufactures and/or markets diagnostic test
kits and components thereof for human, canine, feline, and equine
allergen-specific IgE and IgG and for von Willebrands Factor in
canine serum. The latter is currently being extended to the
equine and feline species.
Allergen-specific IgE is a marker for various allergic
conditions, while IgG is a marker for the blocking antibodies
that ameliorate the condition. von Willebrands Factor is an
important factor in blood clotting mechanisms.
The IgE test kits take several forms, the choice of which
depends upon the balance of the degree of sensitivity and
specificity required by and the complexity acceptable to the
customer. Various sizes are also available. The IgG test kits
are designed for reference laboratory use and thus are offered in
only one size and form.
IRI's IgE diagnostic kit program is designed to ease the
ultimate patient into an allergy diagnostic program with maximum
cost/benefit efficacy.
The Allergy Patient Identifier is designed to be run by a
reference laboratory and to yield a Yes/No result on blood
samples sent by the physician or veterinarian. The Allerzyme
test strip is also designed to yield a Yes/No result, but is
simple enough to be run in a private practice. Yes/No results
are provided in 2 groups of allergens: seasonal and perennial.
In either case, a Yes result should be followed up with a
more specific work-up on blood samples sent to the reference
laboratory. The Elisarest, Canitec and Equitec Regional Screens
are used for this more extensive allergy testing. These test
kits are sold primarily to reference laboratories.
The von Willebrands Factor is a protein molecule that is a
major factor in coagulation in a wide variety of mammal species.
Thus it is important to determine whether it is present in normal
amounts prior to surgical procedures. Since vWF abnormalities
are principally genetically determined, breeders of companion
animals are particularly anxious to determine vWF levels in
breeding stock and offspring. This product is now available for
canine and is offered to veterinary reference laboratories as the
vWF Zymtec test kit. A testing service is also available to
those reference laboratories with limited demand for such a test
and who can not justify performing this sophisticated test
themselves.
Production of all of these test kits, which are based on
ELISA techniques, utilize various antibodies that are produced by
rabbits, goats and pigs in response to injections of the purified
substance (i.e. IgE, IgG, vWF, etc.) that is eventually to be
measured. This activity is currently conducted offsite by
subcontractors under the direction of the Company.
Production of allergen-specific IgE and IgG test kit
components utilizes bulk pollen and other allergens. The
allergic components of the pollens are chemically extracted.
The manufacture of these products is not labor intensive.
The skills required are readily available from the university
community in Tempe, Arizona. By having fully integrated
production, gross profit normally has been maintained about 70
percent.
The production facilities (14,700 sq. ft.) are owned by the
Company, as is a corner lot on which an additional 27,000 sq. ft.
tower can be built.
B. WESTERN LABORATORIES, INC.
1. Iatric Corporation
Iatric, founded in 1966 and purchased in 1978, produces
allergy immunotherapy vaccines. There is little compelling
reason for a complete allergy work-up unless an immunotherapy
program designed to elevate IgG blocking antibodies is
contemplated. Iatric manufactures under U.S. Food and Drug
Administration ("FDA") and U.S. Department of Agriculture
("USDA") licenses the IATRIC Immunotherapy Prescription Product
(TM). Immunotherapy is formulated for each individual patient
based on a complete allergy work-up and is administered by the
doctor or veterinarian. In most cases, the reference laboratory
is the focal point for the sales effort for these products. For
a better understanding of such a program, refer to the more
complete description below of the activities elsewhere in the
corporate group. The use of the IgG test kit is also fully
described in those sections.
Production of immunotherapy vaccines utilizes bulk pollen
and other allergens. The allergic components of the pollens are
chemically extracted, then Iatric purifies and tests raw
allergens for concentration, toxicity, absence of contamination
and so-called "safety." Immunotherapy vaccines are then produced
only when orders are received from physicians, since these must
conform to the particular requirements of each patient.
Iatric also manufactures and markets, as a public service,
certain specialized diagnostic test kits for diseases endemic to
Sonoran-type desert regions.
2. Bioproducts for Medicine, Inc.
Bioproducts is primarily an immunology reference laboratory
with allergy products and services currently representing
substantially all of its sales. Bioproducts is one of IRI's
reference laboratory customers and, by far, the largest. Sales
are made directly by Bioproducts to the primary care physician.
Bioproducts' primary product is the Bioproducts Allergy
Management System (TM). The concept of a Patient Management
System is to incorporate diagnostic and therapeutic aspects with
a clinical data base as a consultation bridge that enables the
primary care physician to efficiently manage patients who have
certain diseases without referring these patients to specialists
except in the most complex cases. The components constituting
each system (diagnostics, therapeutics and monitoring of response
to therapy) historically have not been produced or sold by the
same company and thus are not usually well integrated to be
easily and effectively used together.
The term "patient management system" was, in fact, coined by
Bioproducts. The first such system, the AREST Allergy Management
System, was launched in the United States in 1982. This system
combines integrated diagnostics, scientific consultation,
immunotherapeutics and follow-up monitoring of the response to
therapy.
Bioproducts maintains its own laboratory, licensed by the
U.S. Department of Health and Human Services ("HHS"), which is
presently staffed by Iatric personnel. As a result, it has a
large patient data base. In many instances the actual samples
can be retained indefinitely for future analysis as new
methodologies are developed.
Using the basic Allergy Management System, the physician
draws a blood serum sample and sends it to the laboratory for
analysis for allergen-specific IgE. Using ELISA procedures, the
laboratory tests the patient's sensitivity to a group of
offending allergens selected for their botanical and biochemical
relationships to the patient's geographic environment. Based on
the various test kits available from Bioproducts' sister company,
IRI, various levels of diagnostic detail can be generated.
The laboratory results and a computer generated analysis and
interpretation are returned to the physician. In certain cases,
further testing may be required, which is provided to doctors at
an additional charge. Used together with patient history and
clinical observation, the physician can then establish a
diagnosis and prescribe treatment in the form of immunotherapy.
Treatment products, custom produced for each patient as
prescribed by the physician, are purchased from Iatric by
Bioproducts and resold to the physician.
After 6 months of immunotherapy, the physician can send
another blood serum sample to be tested to monitor the patient's
response to treatment through allergen-specific IgG testing
for the IgG blocking antibody using ELISA procedures. The test
compares the then current IgG level with an earlier baseline
level.
A treatment maintenance vial ("refill") is ordered usually
after 6 months of immunotherapy. The formulation may be altered
from the original depending upon the IgG result. Patients who
stay on the system require a refill every 6 months.
Bioproducts markets its system to primary care physicians
using programmed and interactive direct mail, journal advertising
and telemarketing techniques. Contact with the physician is
initiated by exhibiting at medical meetings and mailing brochures
to prospective accounts. This is followed by telephone
discussions by Bioproducts' 4 sales and customer service
representatives who describe the system and its applications. It
has, on average, required approximately 5 months from initial
contact before a physician becomes an active account.
This method of sales, when professionally done, is actually
welcomed by physicians and is efficient for both the Company and
the doctor. By use of a telephone based sales force, the high
fixed costs and high "per call" costs of field sales
representatives can be avoided. Sales and marketing costs are
only about 22 percent of sales compared to higher industry
averages.
Through the end of the 1995 fiscal year, Bioproducts leased
a 7,300 sq. ft. facility in Tempe, Arizona for its predominantly
sales and marketing oriented organization and shared it with its
sister company, DVM. During October 1995, these activities were
consolidated into the 14,700 sq. ft. production facilities owned
by the Company in Tempe, Arizona.
3. Bioproducts DVM, Inc.
Domestic animals also have allergy problems. In dogs they
are manifested by severe dermatologic problems when resulting
from airborne allergens. In horses, in addition to urticaria, a
dermatological problem, allergies are manifested as respiratory
problems (chronic obstructive pulmonary disease) and bleeding
problems (exercise induced pulmonary hemorrhage). In cats asthma
is the usual manifestation. DVM was formed as a canine
dermatology company. Its first product, launched in 1986, was
the AREST for Canine Allergy Management System. DVM is only a
marketing company. Its method of use and the Company's modus
operandi for sales and marketing was and is similar to that for
the human system described above, currently utilizing 1 sales and
customer service representative.
In March of 1996, DVM sold its retail (to veterinarians)
Canine allergy testing services and treatment products business
to an independent third party. DVM continues to market feline
and equine allergy testing services and treatment products to
veterinarians.
Because of the manner in which allergies manifest themselves
in companion animals, such conditions are often confused with
other dermatological, hematological or respiratory conditions.
Thus DVM is pursuing other tests for these conditions. One of
these, RapidVet-D for veterinary dermatophytes in dogs, cats,
horses and rabbits, was launched in 1994.
DETAILED PRODUCT INFORMATION
A. THE AREST ALLERGY MANAGEMENT SYSTEM
1. Background
FCS was the first company to produce and provide to
physicians an integrated system of diagnosing, treating and
monitoring human allergies. Through IRI, the Company developed,
and in 1982 began manufacturing and marketing, the latter through
Bioproducts, a tandem system for the diagnosis and treatment of
allergies known as the AREST Allergy Management System. The
Company subsequently developed and in 1985 introduced the
IMMUNO-EFFICACY assay which allows physicians to evaluate patient
response to treatment. In 1987, the Company launched the AREST
Allergy Patient Identifier, a quick and inexpensive Yes/No test
which allows physicians to pre-screen patients.
Several concurrent trends in healthcare delivery and new
methods of blood analysis combined to create the appeal of the
AREST human system to physicians. The AREST human system
complemented the trend of broadening services by primary care
physicians, including principally general and family
practitioners, pediatricians and osteopathic doctors, allowing
them to complete diagnostics and therapeutics without referral of
allergy patients to specialists in all but the most complex
cases. The IMMUNO-EFFICACY assay gave the physician the added
capability of continually monitoring patient response to
treatment.
The AREST system was particularly attractive to physicians
located in rural areas in which there are shortages of
specialists and to Health Maintenance Organizations ("HMO"),
Preferred Provider Organizations ("PPO") and reference laboratory
chains which are seeking comprehensive quality services at
competitive prices.
After a number of years of growth due to shifting of
emphasis in healthcare delivery toward the primary care
physician, the trend reversed itself due to successful lobbying
by allergists and other specialists. Major insurance companies
and HMOs adopted restrictive reimbursement policies and sales
declined. The new generation of antihistamines launched by major
pharmaceutical companies in the same time frame combined with
those policies to exacerbate the decline. As allergy testing
becomes more routine and less specialized, many physicians are
now sending samples to their own local laboratories for testing,
thus further compounding the problem. Physician customers are
increasingly resistant to splitting allergy samples from other
serum samples sent to their local laboratories for testing.
The Company believes that the AREST system provides cost
effective healthcare and the Company expects to use existing
resources to target new potential allergy customers in an attempt
to minimize this negative sales impact.
2. Utilization
The physician obtains a blood serum sample in the office and
sends it for analysis to the clinical laboratory operated by the
Company. Using this single serum sample, the laboratory performs
a comprehensive series of tests to determine the patient's
sensitivity to a group of offending allergens selected for their
botanical and biochemical relationships to the patient's
geographic environment. A laboratory result analysis and
interpretation are returned to the physician for review and,
together with patient history and clinical observation, the
physician can then request further testing or establish a
diagnosis and prescribe immunological treatment. Immunological
treatment is custom produced for the patient by the Company, as
prescribed by the physician, and sold to the physician through
the laboratory.
The testing methodology used in the AREST human system can
be used to test for a number of allergens simultaneously. There
are 23 botanically diverse regions applicable to the United
States and Canada; several botanical regions have been identified
for Austria, England, France, Germany, Italy, Spain, Switzerland,
Japan and Australia. Each patient's blood is subjected to a
series of tests which encompass the most prevalent and potent
allergens in the geographic region. The analysis is performed to
detect only those allergens which are potentially significant in
the patient's normal environment. In addition, botanically
related allergens are usually grouped in the testing, reducing
the number of necessary tests and the resulting cost to the
patient while attaining accurate results.
The IMMUNO-EFFICACY assay monitors patient response to
immunological treatment through measurement of the IgG blocking
antibodies which normally result from a successful therapeutic
program. The initial assay is performed on the original serum
sample submitted to the laboratory and a baseline is established.
Follow-up testing is performed at intervals of 6 and 12 months
after the commencement of immunotherapy. This procedure allows
the physician to continually monitor and adjust the patient's
treatment according to test results.
Testing is performed by the Company in its HHS licensed
laboratory and immunological treatment is produced in the
Company's manufacturing facilities in accordance with the
Company's product license issued by the FDA.
Currently doctors are charged $25 for each pre-screen and
$145 for each full regional panel per patient in the testing
phase of the AREST human system. Treatment regimens are
purchased for approximately 65 percent of all patients tested and
found allergic, and the Company presently charges $65 for a 4 to
6 month supply of immunotherapy, and $55 for each additional 6
month supply. In addition, doctors are charged $59 for each IgG
baseline analysis. The Company currently sells the AREST human
system to about 3,000 physicians and no single physician
accounted for more than 1 percent of the Company's sales of the
AREST human system for the fiscal year ended September 30, 1996.
B. THE AREST FOR CANINE ALLERGY MANAGEMENT SYSTEM
1. Background
In 1986, the Company introduced the AREST for Canine Allergy
Management System into the field of veterinary medicine. Very
often, canine allergies are manifested as severe dermatologic
conditions. As with the AREST system for humans, the AREST
canine system allows the veterinary practitioner to diagnose and
treat most allergic canine patients without referring them to a
specialist. The testing phase of the system consists of several
regionalized panels which encompass most of the significant
allergens present in the allergic dog's normal geographic
environment.
As a complement to the AREST System, the Company developed
and launched in 1992 the Allerzyme test strip, a semi-
quantitative device for use by veterinarians in screening those
canine patients which are suspected of suffering from allergies.
In March of 1996 the Company sold to Heska Corporation that
part of DVM's domestic retail canine business which constituted
the AREST for Canine Allergy Management System. The Allerzyme
test strips and future improvements thereof were not included in
the sale. As part of the arrangement Heska agreed to purchase
its requirements of the components of the system from the Company
for a period of four years and to purchase a minimum of $168,000
of such components each quarter.
The Company continues to domestically sell components of the
system individually to reference laboratories and/or distributors
and the AREST canine system is being marketed through
distributors to and utilized by veterinary practitioners and
specialists in Canada, Australia and Europe.
2. Utilization
In utilizing the AREST canine system, the veterinarian need
only obtain a blood serum sample from the canine patient. The
sample is then sent for testing to a clinical laboratory that has
acquired the Company's Canitec diagnostic test kits. A
comprehensive report, which includes an individualized analysis
and interpretation of the canine patient's laboratory results, is
sent to the veterinarian. Based on these results and the
clinical diagnosis, the veterinarian can provide the reference
laboratory with a prescription for immunological treatment for
the canine patient which is then custom produced for it by the
Company. Treatment is prepared in the Company's manufacturing
facilities in accordance with its USDA product license.
Currently, the Company charges its domestic customers $750
for a Canitec kit for 30 patients. Canitec is a 5 hour test.
While other sizes are available, the preponderance of kit sales
are in this format. Allerzyme test strips are sold to domestic
distributors for $80 or directly to veterinarians for $160 for a
package of 10 strips. Immunotherapy treatment products are sold
in predominantly two forms: to domestic distributors as a final
product at $37.50 per treatment vial and as an Immunotherapy
Preparation Kit, sufficient for the distributor to prepare
immunotherapy for 20 dogs, for $500. The prices to Heska differ
somewhat from these.
Sales to Heska in 1996 represent 13 percent of the Company's
sales and sales to Heska since the sale of the product line
represent 27 percent of the Company's sales for that period.
C. THE AREST FOR EQUINE ALLERGY MANAGEMENT SYSTEM
In 1994, the Company introduced the AREST for Equine Allergy
Management System. In the horse, allergy takes many forms.
These include chronic obstructive pulmonary disease (COPD), a
condition of chronic bronchiolitis and/or coughing often
associated with molds and dust and pollens from grasses commonly
found in barns and stables; exercise induced pulmonary hemorrhage
(EIPH), an exercise intolerance condition associated with
generally present outdoor allergens such as pollens from grasses,
trees and weeds; and urticaria (hives), a condition that may be
insect induced (primarily by culicoides presence in the dorsal
cervical mane and tail head) or induced by allergenic components
of grass and weeds with which the animal comes in contact in the
field. The presence of allergen-specific IgE antibodies in serum
represents an indicator of some form of allergy involvement.
The Equitec Test Kit for Equine Allergen-Specific IgE
incorporates means for flexible testing for IgE antibodies to a
wide variety of substances, the actual choice in the case of each
patient being made by the veterinarian in consultation with the
veterinary clinical pathologist in light of the medical history,
environmental situation and current symptoms of the horse.
Because of limited initial production, this product group
was first launched in Europe and has not as yet been launched in
North America.
The Company currently charges its domestic distributors
$937.50 for an Equitec test kit for 30 horses. There are
separate kits for each of the disease manifestations (COPD,
urticaria and EIPH). The price of Equirest immunotherapy to
distributors is $95.00 for each 2-vial prescription set.
D. AREST FOR FELINE ALLERGY MANAGEMENT SYSTEM
This product was launched in the last days of the fiscal
year.
E. vWF ZYMTEC TEST KITS FOR VON WILLEBRANDS FACTOR
During 1994 the Company launched its vWF Zymtec test kits.
vWF Zymtec is designed to be used with other tests to identify
those patients likely to be afflicted with von Willebrands
disease (vWD), and as a genetic predictor for identifying
asymptomatic carriers of the vWD trait. vWF Zymtec provides a
quantitative measurement of vWF:Ag (von Willebrands Factor
Antigen) based on the protein's antigenic properties. The
sensitivity of this assay enables it to readily measure extremely
low levels of vWF such as those seen with homozygous type III von
Willebrands Disease. This kit can be used to evaluate large
numbers of plasma samples simultaneously and is therefore well
suited for large-scale screening programs.
vWF Zymtec is a quantitative modified double-sandwich
enzyme-linked immunosorbent assay (ELISA) which was developed and
adapted for Canine vWF:Ag measurements. The assay relies on
chromophore development resulting from an enzyme acting on a
substrate. The amount of enzyme activity is proportional to the
amount of vWF antigen present. After prescribed incubation
periods, the reaction is stopped and an endpoint absorbance
reading is taken of each well at 490nm using a conventional
microplate reader. A standard curve is constructed by plotting
optical density against sample concentration using semi-log paper
to obtain test results expressed as percent vWF:Ag. Standard
quadratic curve fitting techniques may also be employed.
This test can be used to evaluate a wide variety of mammals
including dogs, cats, horses and humans. The only difference
between test kits for these species is the standard included in
the kit to be used to make a comparison to normal values. These
kits were initially launched for canine. Rapid subsequent
introduction for equine and feline are anticipated.
The Company sells vWF Zymtec kits suitable for testing 34
patients at one time or for testing 16 patients when tested in
groups of four patients. It also offers a vWF testing service
for "bridge testing" for laboratories that are still building
their vWF testing to efficient volume levels and for
veterinarians who work closely and directly with breeders.
The Company charges a special introductory price of $250 per
kit to domestic kit customers and $23 per test to its
veterinarian customers for testing services. Other reference
laboratories purchasing bridge testing services pay negotiated
prices that depend on volume.
F. RAPIDVET-D SCREENING SYSTEM FOR VETERINARY DERMATOPHYTES
During 1994 the Company acquired non-exclusive North
American distribution rights to the RapidVet-D Screening System
for veterinary dermatophytes ("ringworm"). These rights were
obtained from DMS Laboratories, Inc. who had jointly developed
the product with Agrolabo S.p.A. The product is manufactured for
DMS by Agrolabo in Italy.
RapidVet-D is for use as part of the differential diagnosis
of dermatological conditions in companion animals: dogs, cats,
rabbits and horses. It is especially designed to provide a
statistically significant indication of the involvement, or
absence, of dermatophytes as a causal factor of the underlying
condition. A positive result in the form of a change in color
from yellow to red can be obtained in as little as 24 hours and a
negative result can be confirmed in 72 hours compared with 14
days for competitive products. The objective is to obtain a
result in the veterinarian's office so that samples need not be
sent to a reference laboratory. The product is positioned for
use in tandem with Allerzyme test strips as part of the
differential diagnosis and is sold by the Company's DVM
subsidiary.
The speed of the result is due to a proprietary formulation
which targets the product at only those dermatophytes present in
veterinary medicine. Competitive products in general are
designed for use in human medicine as well.
The Company sells RapidVet-D to domestic veterinarians at
$57 plus shipping and handling for a 25 test package.
G. OTHER PRODUCTS
Iatric is 1 of only 2 companies licensed by the FDA to
manufacture Coccidioidin (USP), a diagnostic substance used to
detect Coccidioidomycosis (Valley Fever), a serious disease
caused by airborne mold and endemic to Sonoran-type desert
regions including the Southwestern United States, Northern
Mexico, and Afghanistan. Coccidioidin is sold to physicians and
hospitals throughout the United States. Because of the very
specific nature of this product, sales are not expected to
increase dramatically.
H. INTERNATIONAL SALES
DMS Laboratories, Inc., is the exclusive umbrella
distributor of the Company's veterinary diagnostic test kits and
treatment products to international markets. The transfer prices
to DMS are at from 27 percent to 38 percent off the Company's
price to domestic distributors or customers. The resale price
abroad is not under the Company's control.
COMPETITION
A. The Bioproducts Allergy Management System (Human)
After the introduction of the AREST system, the Company
became the industry leader in the integrated testing and
immunological treatment market for allergy.
However, the traditional approach to testing for allergies
remains the skin test, generally performed by the allergist. The
main obstacles to increasing or even maintaining current levels
of revenue is convincing the physician to switch from the
traditional approach of referring patients to a specialist for
skin testing, convincing insurance companies and HMOs to pay for
in vitro testing, and convincing physicians of the value of an
integrated system instead of using their usual full service
clinical laboratory for such testing.
Some of the Company's competitors produce and distribute
test kits and instruments for in vitro allergy testing in the
physician's office and in clinics. In addition, various major
reference laboratory chains perform in vitro allergy testing
using kits. The physician must then seek an alternative source
of treatment for the patient. Some companies who characterize
themselves as "allergy laboratories" have begun assembling and
offering a diagnostic testing/treatment system similar to the
AREST system. The components of these systems are acquired from
various sources.
Because of the vertical integration of diagnosis,
consultation, treatment and therapy monitoring services, the
Company maintains an additional theoretical advantage over other
companies in that it offers immunological treatment and a
response assay which are based on the same allergenic extracts
used in the diagnostic test.
The Company's clinical laboratory has a comprehensive
quality control program which controls each step of the testing
process. The laboratory has consistently achieved favorable
results on the College of American Pathologists proficiency
testing programs in which it has participated. The Company has
its own quality assurance department controlling each step of the
manufacturing process. This includes the 2 week sterility test
performed before shipment of the final therapeutic product.
B. The AREST Allergy Management System (Canine, Feline and
Equine)
The Company launched the AREST Allergy Management System to
allow the general practice veterinarian to diagnose and treat
canine allergies without referring the patient to a veterinary
dermatologist. At the same time, the Company was determined to
become a leader in test kits and decided to market Canitec kits
to all veterinary reference laboratories while offering the Arest
program to veterinarians through DVM. The Company is pursuing
the same strategy with respect to Equine allergy (Equitec) and
Feline allergy (Felitec). As noted earlier the right to sell the
AREST for Canine System directly to veterinarians in the USA was
sold to Heska Corporation during 1996.
There are now a number of specialized "allergy laboratories"
offering management programs to veterinarians, only one of which
has an integrated system of testing and treatment and none of
which have an immune response assay. The Company believes it had
an approximate 35 percent market share in North America at the
time the AREST for Canine System in the USA was sold to Heska.
The Company is the only company to commercially offer in
vitro test kits for allergen-specific IgE or IgG for canine,
feline or equine.
C. VWF Zymtec Test Kits and Testing Services
The Company's objective is to sell VWF Zymtec kits to all
veterinary reference laboratories. Thus its own reference
laboratory is, in theory, in competition with many of its
customers. In fact, the Company only provides testing services
as a means to the end - as "bridge testing" until the other
reference laboratories see sufficient demand to justify
purchasing kits.
vWF Zymtec has a sensitivity capable of detecting vWF
abnormalities that reveal Type III von Willebrands Disease. The
Company knows of no other product that has this capability. vWF
Zymtec is an ELISA methodology and thus is rapid, easy to perform
and subject to automated reading. The competing so-called
Laurell Method has none of these features and is commercially
available only in prototype form. The vWF Zymtec technology is
patented and the Company has an exclusive license under these
patents.
OTHER DETAILED INFORMATION
A. SALES AND MARKETING
1. Sales of Allergy Testing Services and Treatment Products
Direct to Physicians and Veterinarians
The Company's reference laboratory markets its products and
services under the AREST and Bioproducts primary trademarks using
programmed and interactive direct mail and telemarketing
techniques initially developed in 1982 and continually updated
and improved by its subsidiaries, Bioproducts and DVM. Contact
is initiated through mailing of brochures and followed by
telephone discussions by the Company's sales and customer service
representatives who describe the systems and their applications.
Each of the representatives receives instruction in basic
immunology, allergy and other pertinent subjects.
Representatives do not visit the practitioners' offices.
Contacts, initiated by the representatives, continue on a regular
basis after a customer begins using the Company's products and
services. A further staff supports this effort.
The Company attempts to personalize relationships with
customers by having each representative contact only those
practitioners designated as his or her responsibility.
Representatives attend trade shows and conventions to promote
sales and personally meet with physicians. The Company also
advertises in medical and veterinary journals.
Representatives refer certain of the customers' questions
concerning the AREST and Bioproducts testing procedures and other
related technical issues to the Company's staff of medical and
veterinary practitioners. This unique service of immunologic
consultation was developed as part of the AREST and Bioproducts
systems to assist the non-specialist in determining a course of
therapy for the allergic patient. The practitioner is available
to consult on laboratory results and interpretation and to
discuss clinical information and patient history including
seasonal and environmental factors affecting the allergy patient.
In the United States, it has required approximately 10
completed calls on the average, during a period of approximately
5 months, before a physician or veterinarian becomes an "active
account" which the Company defines as any practitioner who has
submitted at least 2 billable allergy patient samples for
evaluation.
The Bioproducts human and AREST canine systems marketed in
this manner and/or components thereof accounted for approximately
76.1 percent, 85.0 percent and 87.6 percent of total sales of the
Company for the fiscal years ended September 30, 1996, 1995 and
1994, respectively. Sales of products for human health/animal
health are represented by the following ratios: 53.0/47.0,
51.0/49.0, and 54.8/45.2 for those fiscal years. Coccidioidin
represented approximately 2 percent of sales for each of those
years.
Since March 18, 1996, the Company sells the components of
AREST for Canine Systems to Heska and Heska sells a system to the
end customer. Thus the ratio of sales of human health to animal
health increased to 53.0 percent for 1996 as a whole and to 59.3
percent in the second half of the final year.
2. Sales of Diagnostic Test Kits
Diagnostic Test Kits are sold directly to clinical reference
laboratories in North America and through DMS to territorily
exclusive distributors in most countries in which the products
are distributed internationally. In the case of international
sales, in some countries the distributor is, in fact, a
distributor of diagnostic test kits to reference clinical
laboratories while in other countries, the distributor is, in
fact, a major clinical reference laboratory. In either case,
each such distributor received a multiyear, exclusive regional or
country territory and, in turn, committed to market and sell both
testing services/test kits and treatment products based
exclusively on products manufactured by the Company.
Approximately 9.5 percent of total sales of the Company for the
fiscal year ended September 30, 1996 were represented by sales
through such distributors.
B. PRODUCTION AND MATERIALS
The primary components of the Company's products
manufactured by it are IgE, IgG, and vWF antibodies and bulk
pollen and other antigens.
The antibodies are produced by rabbits, goats and pigs in
response to substances, proprietary to the Company, that are
injected into them. These animals are maintained by
subcontractors offsite under the Company's direction. A
substantial period of time is required before an individual
animal begins to produce harvestable concentrations of antibody.
Due to this, the ever present risk of death due to disease and
the finite life span of any animal, the Company must maintain
animals at various stages of active production and significant
inventories of harvested antibodies. While the Company has never
experienced a disruption of supply, the risk thereof can not be
eliminated.
Bulk pollen and other allergens including molds, fungi, mite
and house dust are available from many independent sources.
Prior to use, the Company tests raw allergens for concentration
and for purity. The allergenic components of the allergens are
chemically extracted. None of these procedures is proprietary to
the Company. The Company has not had any difficulty satisfying
customer requirements. The preparation of the necessary testing
and treatment materials is not labor intensive and the required
skilled labor is available in the United States from a university
community in proximity to the Company's laboratory and production
facilities in Tempe, Arizona. In general, raw materials required
by the Company are obtainable from various unaffiliated sources
and in the quantities desired.
C. RESEARCH AND DEVELOPMENT
The Research and Development department at Iatric Research
Institute currently consists of 3 degreed professionals. IRI
developed the reagents, materials and procedures for the
Bioproducts human and AREST canine systems and for the Canitec
canine kits, Felitec feline kits and Equitec equine kits. The
group also developed the reagents, materials and procedures for
the Company's IMMUNO-EFFICACY assay used to monitor patient
response to treatment, for the Allergy Patient Identifier used to
pre-screen patient samples in a laboratory, for the Allerzyme
test strip used for in-office pre-screening of patients and
developed the commercial format of the Zymtec kits.
The Company receives for original diagnosis each year in
excess of 4,000 new samples from patients exhibiting allergy
symptoms. These samples can be retained indefinitely for further
analysis. In addition, by virtue of the performance assay, the
Company is capable of monitoring patient response to treatment.
Thus, the Company has what it believes to be the largest existing
data base on human and canine allergy patients, which will be
invaluable for future product development.
The Company has spent $108,143, $175,843 and $131,673 on
research and development for the fiscal years ended September 30,
1996, 1995 and 1994, respectively.
D. EMPLOYEES
As of September 30, 1996, the Company employed 36 full-time
employees, of whom 29 were engaged in the provision of the
Company's products and services and 7 performed management and
administrative functions.
E. PATENTS, TRADEMARKS, REGULATORY LICENSES AND TECHNOLOGY
LICENSES
The Company, through its subsidiaries, owns the rights to
the AREST, IMMUNO-EFFICACY, ELISAREST, Allerzyme, IATRIC,
Bioproducts, Equirest, Canitec, Equitec and Zymtec trademarks
which are used in connection with the manufacture and
distribution of the Company's products.
Through its subsidiaries, the Company holds laboratory,
establishment and product licenses from HHS, FDA and USDA for its
testing and manufacturing facilities in the United States
involved in the testing and production of its products. These
licenses have no set duration. The cost of obtaining the
clinical data and developing the technology to obtain and
maintain these licenses is a barrier to market entry by
competitors.
The Company has a patent and technology license from Health
Research Incorporated ("HRI"), a company which is part of the
Department of Health of the State of New York, under a series of
patents which cover various products and methods for testing for
von Willebrands Factor. Such license is worldwide in scope and
is non-exclusive until the Company meets certain milestones for
product development and market launch at which time the Company
may convert the license to an exclusive one upon reimbursement of
HRI for certain costs of patent procurement.
STATUS OF EUROPEAN OPERATIONS
Through its European subsidiaries, the Company established
manufacturing and marketing facilities in 1985 in France and
Switzerland for exploitation of the Allergy Management Systems
for both humans and canines in Europe. The AREST human and
canine systems were adapted by the Company for use in Europe,
where the Company had made a major commitment to launching these
systems.
Production in Europe of the materials used for both the
diagnostic and therapeutic phase of the human system was begun in
October 1985. Marketing and sales of the diagnostic phase was
also begun at that time and the active selling effort continued
through June 1986. The market launch of the therapeutic phase of
the human system was delayed until certain authorizations were
obtained from the French Ministry of Health to formulate the
final immunological treatment. The Company was ultimately unable
to timely implement its complete business plan in Europe due to a
substantial delay in obtaining these authorizations.
Due to these developments, the Company's subsidiaries in
France received permission to reorganize from the French
Commercial Court in June 1986. A plan of reorganization was
submitted to the Court and was approved in October 1987. The
plan provided for the repayment of certain vendor obligations
over a 5 year period in 10 semi-annual installments commencing in
November 1987.
The first 7 installments, payable from November 1987 through
November 1990, were honored by the Company. Thereafter, the
Company's French subsidiaries petitioned the Court for a
rescheduling of the 3 remaining installments, which represented
50 percent of the total vendor obligation. On July 2, 1992, the
Court granted the requested rescheduling, requiring the balance
to paid semi-annually in 5 equal installments from May 1992
through May 1994.
The Company resumed activity in Europe through Iatric SARL,
as envisioned by the plan, initially through its AREST for Canine
Allergy Management System, which required no further
authorizations. As part of this system, the Company developed a
canine kit for use by independent laboratories or directly by
veterinarians to perform the testing phase of the canine system.
During the third quarter of the 1991 fiscal year, the Company
began selling customized canine kits in commercial quantities to
a major veterinary laboratory in Germany. During fiscal 1991 an
arrangement was established with a major reference laboratory in
England for servicing the United Kingdom. During fiscal 1992 and
1993 the Company negotiated similar relationships with other
laboratories in Western Europe and in Australia. These kits
allow laboratories to offer allergy diagnostic services to their
veterinarian clients using the AREST technology which has been
adapted by the Company for use in the specific geographic
environment. In 1992 the Company launched the Allerzyme test
strip, an allergy pre-screen for in-office use. During fiscal
1994, all of the Company's other products were launched in
Europe.
During 1995 the responsibility for all international
distribution of these products was transferred to DMS
Laboratories, Inc. All the agreements referenced above were
transferred to DMS, which acts as exclusive umbrella distributor.
In January 1996 the Company discontinued all operations in
France. Using funds from the sale of its domestic retail canine
business noted earlier, the Company entered into formal
accommodations with those banks that had provided funding for the
initial French activity, such amounts representing almost all of
the debts remaining in France.
<PAGE>
Item 2. Properties
The following is a description of the principal facilities
of the Company which are owned free and clear of major
encumbrances other than mortgages, except as otherwise noted:
Location and
Approx. Sq. Ft. Principal Operations
_______________ _________________________________________
Tempe, Arizona Domestic administration and corporate
14,700 headquarters; Products and Services
administration, production and research and
development. Products and Services marketing
and sales were consolidated into this
facility during October, 1995.
St. Lubin des This facility is not currently utilized.
Joncherets, France
8,950
Item 3. Legal Proceedings
In June 1986, the Company's French subsidiaries filed for
protection from creditors in the Commercial Court in Dreux,
France, which protection was granted by the Court on June 26,
1986. A plan of reorganization was filed providing for repayment
of all perfected vendor claims without interest in 10 semi-annual
installments over a 5 year period and envisioning reactivation of
some of the marketing effort. Final approval of the plan was
received in a judgment dated October 29, 1987. The first 7
installments, payable from November 1987 through November 1990,
were honored by the Company. Thereafter, the Company's French
subsidiaries petitioned the Court for a rescheduling of the 3
remaining installments, which represented 50 percent of the total
vendor obligation. On July 2, 1992, the Court granted the
requested rescheduling, requiring the balance to be paid
semi-annually in 5 equal installments from May 1992 through May
1994.
As of September 1995, almost all of the enumerated payments
had been made. Nevertheless in order to concentrate its
resources on its primary business plan, the Company decided in
January 1996 to discontinue all operations in France and to cease
making payments to creditors under its reorganization plan. As a
result, Iatric SA, one of the Company's subsidiaries in France,
received notification dated February 15, 1996 that it had been
liquidated by order of the French bankruptcy court. The other
three French subsidiaries were not subject to the liquidation
order. The Company recorded a reserve in an amount equal to the
carrying value of the assets in excess of the liabilities of its
subsidiaries in France. The Company continues to own certain
assets in France, primarily a building and land.
Item 4. Submission of Matters to a Vote of Security Holders
The Company has not submitted any matters to a vote of
shareholders during fiscal 1996.
<PAGE>
PART III
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
FCS Laboratories, Inc. Common Stock was traded on the NASDAQ
system under the symbol FCSI. Effective October 2, 1990, the
Company's securities were deleted from NASDAQ for failure to meet
the capital and surplus requirements of NASD. The Company's
shares are currently quoted in the NASD non-NASDAQ
Over-the-Counter ("OTC") Bulletin Board.
The OTC market quotations cited below reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may
not necessarily reflect actual transactions. Trading began on
March 27, 1984 upon the effective date of the Company's S-18
Registration under the name FCS Industries, Inc.
Trading Data (1) Average
for the Bid Price Volume (2)
Quarter Ended: High Low (000)
- -------------- ------ ----- ----------
December 31, 1994 .150 .010 N/A
March 31, 1995 .150 .017 N/A
June 30, 1995 .150 .020 N/A
September 30, 1995 .077 .020 N/A
December 31, 1995 .046 .043 326
March 31, 1996 .061 .046 359
June 30, 1996 .133 .103 119
September 30, 1996 .104 .085 60
(1) Trading data based on closing bids as obtained
from the National Quotation Bureau and the NASD
non-NASDAQ OTC Bulletin Board.
(2) Volume information is not available for the
1995 fiscal year.
Dividend Policy
The Company has not paid dividends on its Common Stock and
has no plans to do so.
Shareholders
As of December 30, 1996, the Company has approximately 1,300
shareholders of record and pursuant to its security position
listings. The Company will furnish, without charge, upon the
written request of any shareholder, a copy of the Company's
current Annual Report on Form 10-K including the financial
statements and schedules thereto. Shareholders wishing a copy
may present their request to: 2330 South Industrial Park Avenue,
Tempe, Arizona 85282.
<PAGE>
Item 6. Selected Financial Data
Not covered by report of independent auditor
------------------------------------
Fiscal Year Ended September 30,
------------------------------------
1996 1995
----------- --------------
INCOME STATEMENT
INFORMATION
Continuing Operations:
Net Sales $ 2,195,371 $ 3,040,803
Gross Profit 1,361,957 1,855,616
Operating Expenses
before sale of asset 1,547,882 2,483,345
Income (Loss) from
Continuing Operations
before other income (185,925) (627,729)
Extraordinary Gain 1,243,405 ---
Net Income (Loss) $ 1,245,854 $ (627,729)
=========== ===========
Net Income (Loss) per Share:
Loss from Continuing
Operations --- $ (.11)
Extraordinary Gain $ .21 ---
Net Income (Loss) per Share $ .21 $ (.11)
=========== ===========
BALANCE SHEET
INFORMATION
Cash $ 924 $ 6,106
Current Assets 873,542 1,188,234
Current Liabilities 2,229,703 4,228,202
Current Ratio .39 .28
Short-term Debt 510,109 1,628,757
Long-term Debt 88,002 8,900
----------- -----------
Total Debt 598,111 1,637,657
Shareholders' Equity (725,403) (2,164,946)
Debt/Equity Ratio not meaningful not meaningful
Short-term
Debt/Capital Ratio not meaningful not meaningful
Total Assets $ 1,592,302 $ 2,072,156
<PAGE>
Item 6. Selected Financial Data
Not covered by report of independent auditor
-----------------------------------------
Fiscal Year Ended September 30,
-----------------------------------------
1994 1993 1992
------------- ----------- -----------
INCOME STATEMENT
INFORMATION
Continuing Operations:
Net Sales $ 3,141,598 $ 3,426,436 $ 3,507,752
Gross Profit 1,967,898 2,108,650 2,129,696
Operating Expenses
before sale of asset 2,394,286 2,295,275 2,526,764
Income (Loss)
Continuing Operations
before other income (426,388) (186,625) (397,068)
Extraordinary Gain --- 188,098 ---
Net Income (Loss) $ (426,388) $ 1,473 $ (397,068)
=========== =========== ===========
Net Income (Loss) per Share:
Loss from Continuing
Operations $ (.08) $ (.04) $ (.08)
Extraordinary Gain --- $ .04 ---
Net Income (Loss)
per Share $ (.08) $ --- $ (.08)
=========== =========== ===========
BALANCE SHEET
INFORMATION
Cash $ 12,292 $ 18,673 $ 4,563
Current Assets 1,263,638 1,300,776 1,383,786
Current Liabilities 3,697,275 3,357,341 3,522,847
Current Ratio .34 .39 .39
Short-term Debt 1,690,418 1,701,339 1,758,465
Long-term Debt 41,955 37,798 333,162
----------- ----------- -----------
Total Debt 1,732,373 1,739,137 2,091,627
Shareholders' Equity (1,552,804) (1,138,466) (1,253,184)
Debt/Equity Ratio n/m n/m n/m
Short-term
Debt/Capital Ratio n/m n/m n/m
Total Assets $ 2,186,426 $ 2,256,673 $ 2,658,904
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of Fiscal Years 1996 and 1995
Sales
During fiscal 1996 which ended September 30, 1996, sales
decreased $845,432 or 27.8 percent below the same period of the
prior year.
Approximately one half of this sales decline was due to a
decline of products and services for humans, due in large part to
extensive staffing reductions, discussed in more detail below
under "Operating Expenses." Also the restrictive insurance
reimbursement policies of major insurance companies adopted
several years ago, while now in the process of reversal, still
impact sales negatively. The new generation of antihistamines
launched by major pharmaceutical companies in the same time frame
as the reimbursement policies noted above combined with those
policies to exacerbate the decline. As allergy testing becomes
more routine and less specialized, many physicians are now
sending samples to their own local laboratories for testing, thus
further compounding the problem. Physician customers are
increasingly resistant to splitting allergy samples from other
serum samples sent to the local laboratory for testing. The
Company expects to use existing resources to target new potential
allergy customers in an attempt to minimize this negative sales
impact.
In the field of animal health, the Company has serviced in
parallel both the veterinarian, through the provision of
services, as well as the veterinarian's local laboratory, through
the sale of diagnostic kit products. The Company made this
strategic decision so that, to the extent the resistance to
sample splitting becomes a factor in the veterinary field, any
negative impact would be minimized because of its parallel
activities of both performing testing services in its own testing
laboratory, as well as selling kits to other laboratories.
More recently the Company decided to in fact put its primary
emphasis on diagnostic test kits in the field of animal health.
As a result, the Company developed and since 1992 has
manufactured and distributed a test strip for use in the
veterinarian's office for screening canine patients suspected of
having allergies. In 1993 the Company completed development of a
test kit for allergen-specific IgE in canine serum for use in
reference laboratories. In 1994, this was superseded by a faster
test which also included a test for allergen-specific IgG, a
second substance relevant in the diagnosis of allergy. In
addition, in 1994 the Company acquired the rights to a test for a
molecule critical to proper blood coagulation processes, and
began manufacturing and distributing test kits and performing the
test in its own laboratory. Also late in 1994 the Company
obtained distribution rights to and launched a kit for the
detection of dermatophytes in dogs, cats, and horses and began
manufacturing and distributing a series of test kits for horses.
The Company decided to sell most of its "retail" animal
health activities and during March, 1996, the Company sold to an
independent third party, that portion of its business relating to
the provision of canine allergy testing services and
immunotherapy treatment products directly to veterinarians. That
portion of FCS's business involving the sale of diagnostic kits
to other laboratories that provide such testing services and the
sale of immunotherapy treatment to such laboratories and
distributors of such products was not impacted by the
transaction. The buyer also agreed to purchase its requirements
of the test kits necessary to provide such services and of
immunotherapy treatment products from FCS for a period of four
years. The buyer must purchase $168,000 of products from the
Company each quarter.
During the period, sales of products and services for
animals decreased $457,807 or 30.7 percent. Due to the
transactions noted above sales dollars decreased 19.5 percent,
the sales to veterinarians having been replaced since the date of
the transaction by sales to the buyer at a transfer price lower
than that price previously charged veterinarians. The buyer has
greater resources than the Company and thus in future periods the
impact on sales should be positive.
Sales of test kits and other products for animals sold
abroad or through other laboratories other than the buyer
referenced above decreased $133,190, or 37.2 percent compared to
the prior year. Because of the Company's limited resources, it
was determined that the Company could not continue to pursue
international distribution of its products without assistance.
Thus during 1995 the responsibility for all international
distribution of animal healthcare products was transferred to DMS
Laboratories. The transfer prices to DMS are from 27 percent to
38 percent below the Company's price to domestic distributors or
customers. These discounts reduced the dollars of sales below
the level that would otherwise have been reported, reducing sales
in dollars of the veterinary products as well as increasing the
cost of sales percentage. With the introduction of the new
products described earlier, the Company anticipates continued
growth in worldwide sales of kits as well as sales of testing
services and treatment products to veterinarians in the U.S.
Cost of Sales
Cost of sales decreased $351,773 below the year earlier
level and cost of sales as a percentage of sales was 38.0
percent, which was slightly less than the 39.0 percent reported
in the prior year period.
Operating Expenses
Operating expenses decreased $935,463 from the prior year.
Selling, general and administrative expenses were decreased by
$782,199 or 38.1 percent below the year-earlier levels. Late in
1995 the Company implemented major staffing reductions, and
additional reductions were implemented upon the sale of part of
its retail animal health activities. These reductions may impact
the Company's ability to promptly complete its plan of transition
to a predominantly animal healthcare business from a
predominantly human health business, from a predominantly service
business to a predominantly product business and to expand its
technical base beyond allergy and related diseases.
Other Activities
As noted earlier, the Company sold a portion of its business
during the month of March, 1996. As consideration for the sale,
FCS received $500,000 and $250,000 in unconditional and
assignable promissory notes of the buyer. After sale of the
notes at a discount, and closing costs on the transactions, the
Company reported other income of $626,842 in the period from this
transaction.
The Company decided in January 1996 to discontinue all
operations in France and to cease making payments to creditors
under its reorganization plan. As a result, Iatric SA, one of
the Company's subsidiaries in France, received notification dated
February 15, 1996 that it had been liquidated by order of the
French bankruptcy court. The other three French subsidiaries
were not subject to the liquidation order. The Company recorded
a reserve of $342,810 which equals the carrying value of the
assets in excess of the liabilities of its subsidiaries in
France. Because all operations utilizing foreign currencies have
been reserved, the cumulative foreign currency translation
adjustment was liquidated, resulting in a $95,658 write off. The
reserve and the liquidation of the cumulative foreign currency
translation adjustment totaled $438,468 and this amount is
reported in the financial statements partially offsetting the
other income from the sale of a portion of its retail animal
health activities. The Company will continue to own certain
assets in France, primarily a building and land. If in the
future these assets are able to be sold, a gain will be recorded
at that time.
The Company also had loans from CEPME, a French bank. The
proceeds from these loans were used to fund the launch of the
French operations in 1985 and 1986. In March 1996, utilizing
funds from the sale described earlier, the Company and CEPME
reached an agreement to make a one-time payment of $79,177 in
full satisfaction of $601,349, including accrued interest of
$158,540 owed to CEPME. This resulted in an extraordinary gain
of $522,172.
In addition, utilizing the funds from the sale discussed
earlier, the Company reached an accommodation with Swiss Bank
Corporation in which the bank accepted $100,000 in cash and
$100,000 due in December 1998 in full satisfaction of $700,582 of
principal and accrued interest. The note is non-interest bearing
and recorded in the balance sheet discounted for interest at 9
percent. The extraordinary gain resulting from this transaction
equaled $522,383. Also, several providers of materials and
services agreed to a payment in the amount of $23,369 in full
satisfaction of $222,218 of amounts owed resulting in an
extraordinary gain of $198,850.
Other income of $188,374 is comprised of the $626,842 gain
on sale of a portion of its retail animal health activities,
offset by the $342,810 reserves in France and the liquidation of
the cumulative foreign currency translation adjustment in the
amount of $95,658. The extraordinary gains totaling $1,243,405
are comprised of the debt accommodations with CEMPE ($522,172),
Swiss Bank Corporation ($522,383) and several providers of
materials and services ($198,850). The total of the other income
and extraordinary gains is $1,431,779.
Net Income
These factors outlined above resulted in a net income of
$1,245,854 in the current period compared to a net loss of
$627,729 in the year-earlier period.
Comparison of Fiscal Years 1995 and 1994
Sales
Sales decreased $100,795 or 3.2 percent below 1994.
Although sales of products and services for animals increased
$68,042, human products and services decreased $168,837.
Cost of Sales
Cost of sales increased $11,487 above the year-earlier
level. Cost of sales as a percentage of sales increased from
37.4 percent in 1994 to 39.0 percent in 1995.
Operating Expenses
Operating expenses increased $89,059 from the prior year due
to increases in interest expense and development costs. Selling,
general and administrative expenses were decreased slightly by
$10,186 or 0.5 percent below the year-earlier levels. Research
and development expenses increased $44,170 over the prior year
levels as new product development was expanded to complete
several new products. Depreciation and amortization expense
decreased $3,172. Interest expense increased $58,247 due to
increases in interest rates charged by the Company's banks.
Net Income
Due to these factors, the Company reported a net loss of
$627,729 in 1995 compared to a net loss of $426,388 in 1994.
Liquidity and Capital Resources
From 1994 through 1996, cash has remained at very low
levels. Cash was generated by operating activities, but the cash
generated by operations had to be used to reduce indebtedness to
the Company's banks under agreements with them.
In 1994, operations generated $82,068 primarily through
increases in accounts payable and accrued expenses. The cash
generated by operations was used to repay domestic bank debt and
long-term obligations in France.
In 1995, the Company paid $134,606 to reduce domestic bank
debt and long-term obligations to vendors in France. Increases
in accounts payable and accrued expenses provided the funds
necessary to repay the Company's financing sources.
During 1996 funds were provided by the sale of a portion of
the Company's veterinary business. These funds were used to make
payments on accounts payable and accrued expenses, to reduce its
bank debt, and to reach agreement with its foreign banks and
suppliers on discounted payment of amounts owed.
At September 30, 1996 current assets equaled $873,542,
current liabilities equaled $2,229,703 and the current ratio
equaled .39. The Company's total liabilities exceeded total
assets by $725,403.
Management believes that the Company's future success is
dependent upon permanently reversing the sales decline and
increasing sales through the launch of new products and through
the use of new distribution channels and/or raising or generating
additional capital. The Company is aggressively pursuing new
product opportunities within the cash constraints imposed by the
present financial situation of the Company. In addition, the
Company is actively pursuing both debt and equity capital.
However, there can be no assurance of the success of either of
these programs.
The Company had available from Bank of America Arizona lines
of credit for working capital purposes, subject to certain
restrictions based upon the amounts of accounts receivable which
secure such borrowing. As of September 30, 1996, the Company had
borrowed $145,142 under the line of credit and had an additional
$10,396 available. In addition, the Company has $162,982 of term
loans from Bank of America Arizona. The agreement, which covers
both the credit line and term loans, will expire April 30, 1997.
During the fiscal year, certain of the financial ratio
covenants in the agreement with Bank of America Arizona were not
met by the Company. The Company expects that it will continue to
be out of compliance with certain financial covenants until a new
loan agreement is executed.
The Company also has a loan from M&I Thunderbird Bank which
is secured by land and buildings in Arizona. The loan, which
totals $123,235 becomes due in its entirety in July 1997.
All borrowings from these banks will soon be due and
payable. The outstanding amounts total $431,359. The Company
does not possess the financial resources to repay these amounts
at the present time and has made periodic arrangements to extend
such loan agreements in the past. The Company will attempt to
continue to reach periodic arrangements.
Item 8. Financial Statements and Supplementary Data
The Financial Statements are listed under Item 14 in this
report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain information with respect to the Directors and
executive officers of the Company is set forth below.
Nicholas A. Gallo, III 56 Chairman and member
of the Board of
Directors and
President
Gary A. Griffin 59 Director
Edgar J. Huffman 57 Director
Joel Lehrer 56 Director
Richard C. Mayo 49 Director, Treasurer
and Chief Financial
Officer
Denise G. Darmanian 39 Secretary
Mr. Gallo has been Chairman and a member of the Board of
Directors of the Company since May 1978 and President from
November 1981 to May 1986 and from April 1987 to present. Mr.
Gallo's principal occupation is as President of AlpiGlen
International Corp., an investor in healthcare businesses. Mr.
Gallo is President and a director of DMS/Agrolabo Products AG, a
company formed to develop, manufacture and market in-office
veterinary test kits. Mr. Gallo has, since October 1993, been
President of DMS Laboratories, Inc., a company which supplies
several veterinary diagnostic products to the Company and
distributes certain of the Company's reference laboratory
products in international markets. Since 1989, he has served as
President and Chairman of the Board of Directors of Federated
Corporate Services, Inc., an international investor in and
provider of executive management services to healthcare companies
including the Company. From November 1975 to June 1983, he was
President of the Company's international commerce subsidiary, FCS
Commercial Services, Inc. and its predecessors. From 1965
through 1975 Mr. Gallo was employed by Johnson & Johnson, a
diversified healthcare producer, in various legal and executive
positions, most recently as General Manager, Ortho Diagnostic
Instruments.
Mr. Griffin has been a Director of the Company since July
1982. He served as Senior Vice President of the Company from
July 1982 through March 1987 and Treasurer from May 1984 until
April 1987. Since 1985, Mr. Griffin has served as President of
Executrex International, Inc., a management consulting company.
From February 1973 until joining the Company, he was employed by
National Patent Development Corporation, a developer and
manufacturer of high technology products, from December 1981
until July 1982 as Group Vice President - New Technologies and
from March 1977 until December 1981 as Vice President - New
Product Marketing.
Mr. Huffman became a Director of the Company in January
1987. Since December 1984, Mr. Huffman has been a Director,
Chief Executive Officer, Vice President and Secretary of Visa
Industries of Arizona, Inc., an oil and gas explorer and
producer. Mr. Huffman has served as a Director of Basic Earth
Sciences, Inc., an oil and gas producer, since February 1993 and
as Chairman and a member of the Board of Directors of Montessori
Day Schools, Inc., a private educational system, since September
1981. From October 1983 to December 1984, he served as Manager
of Desert Sage Management, Inc., which managed investment funds
for professionals. Mr. Huffman also served as Vice President
Corporate Planning of Valley National Corporation, the parent
company of Valley National Bank, from 1981 to October 1983.
Mr. Lehrer, an attorney and certified public accountant, has
been a Director of the Company since July 1992. He has served as
a grading reviewer for the Advisory Grading Service of the
American Institute of Certified Public Accountants from 1987 to
1993. He was previously employed by Merrill Lynch & Co., a
provider of financial services, as a Manager of Tax Compliance
from 1977 to 1985 and as Vice President from 1982 to 1985.
Mr. Mayo has served as a Director of the Company since May
1991, as Treasurer since April 1987 and as Chief Financial
Officer since joining the Company in August 1986. From 1984 to
1986 he was Vice President, Secretary and Treasurer of Thesys
Memory Products Corporation, a provider of computer hardware and
software. From 1971 through 1983 Mr. Mayo was employed by Bell &
Howell Co., a provider of information systems and educational
services, in a variety of financial functions including, from
1979 through 1983, Vice President and Controller of Bell & Howell
Education Group, Inc.
Ms. Darmanian has been Secretary of the Company since
October 1985. She joined the Legal Department of the Company in
February 1983 after graduating from law school and has served as
General Counsel of the Company from October 1985 through
September 1991. Since 1985 Ms. Darmanian has served as an
officer and Director of Sita, Inc., an international management
consulting firm.
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
Name and Fiscal Cash Compensation Stock
Principal Position Year or Charges Options
- ------------------ ------ ----------------------- -------
Nicholas A. Gallo, III 1996 $ 86,000 (1) N/A (2)
Chairman and member of 1995 $ 122,000 N/A
the Board of Directors 1994 $ 136,000 N/A
and President of the
Company.
Richard C. Mayo 1996 $ 85,000 0 (3)
Director, Treasurer and 1995 $ 78,000 0
Chief Financial Officer 1994 $ 78,000 0
of the Company and
Director, Treasurer and
Vice President of
Western Laboratories, Inc.
____________________
(1) During the 1993 fiscal year, the Company entered into
a 1 year service arrangement with Fed Corporate Services AG with
respect to Mr. Gallo, effective October 1, 1993. Pursuant to
this arrangement, Mr. Gallo served subject to election, as
President and Chairman and a member of the Board of Directors of
the Company and devoted half or more of his time to the affairs
of the Company. Such services were, and continue to be, rendered
from facilities and through clerical personnel provided directly
or indirectly at Mr. Gallo's expense. Total charges was fixed at
the rate of $146,000 per annum. This agreement has been extended
under its "evergreen" clause. At various times in order to
accommodate the Company's limited financial resources, its needs
for senior management and other demands on his time, Mr. Gallo
has informed the Company that he would for a period of time
commit various lesser percentages of his time to the Company's
affairs with a prorated reduction in compensation. The Company
has acquiesed in these changes . Thus compensation for various
fiscal years aggregated less than $146,000. As at January 1,
1997, the original time allocation and compensation is in effect.
(2) Mr. Gallo is not eligible to receive options under the
Company's Incentive Stock Option Plan.
(3) See Fiscal Year-End Option Values table.
<PAGE>
Option Grants in Last Fiscal Year
Number of Percentage of
Securities Total Options
Underlying Granted to Exercise
Options Employees Price Date Expiration
Name Granted In Fiscal Year ($/Share) of Grant* Date*
R.C. Mayo 50,000 45% $ 0.125 06/10/96 06/10/02
*See description of Option Plan below regarding the
exercisability of option grants.
Aggregated Option Exercises in Last Fiscal Year
None
Fiscal Year-End Option Values
Value of
Number of unexercised
Date unexercised in-the-money
of options at options at
Name Grant fiscal year-end fiscal year-end
--------------- --------------
Exercisable/ Exercisable/
Unexercisable Unexercisable
- --------- -------- --------------- --------------
R.C. Mayo 07/31/92 30,000 / 10,000 0 / 0
06/10/96 0 / 50,000 0 / 0
Options are granted pursuant to the Company's 1988
Incentive Stock Option Plan ("Plan") which was adopted in
principle by the Board of Directors on December 16, 1987 and
approved by the Company's shareholders on March 24, 1988.
Options covering a total of 400,000 shares of the Company's
Common Stock may be granted under the Plan to key employees
(including non-employees who are officers but excluding
non-employee Directors). Individuals who own or control 10
percent or more of the issued and outstanding shares of Common
Stock or who would do so after the exercise of any options
granted or to be granted are not eligible under the Plan. Stock
Appreciation Rights ("SARs") are not available under the Plan.
The Plan is administered by a committee of the Board of Directors
which is comprised of outside Directors ineligible under the
Plan.
Options may be granted under the Plan at any time up to
February 25, 1998. The exercise price, which is fixed by the
committee, may not be less than the fair market value of the
Common Stock at the date of grant. Options are exercisable from
time to time as specified by the committee, except that no stock
option will be exercisable within 2 years immediately following
the date of the grant. During the third, fourth, fifth and sixth
years after the grant, a holder of an option may exercise up to
25, 50, 75 and 100 percent, respectively, of the total number of
options granted. Options terminate 6 years after grant. Normal
provisions are included for phased termination of the grant upon
termination of employment, death or disability.
During the fiscal year ended September 30, 1996, 110,000
options were granted, none were exercised, and 20,000 were
canceled. As of September 30, 1996, options covering a total of
180,000 shares of Common Stock were outstanding and held by a
total of 2 eligible persons. The per share exercise price of
these options ranged from $0.125 to $0.20, which price was not
less than the market value of the securities on the date of
grant.
Long-Term Incentive Plans/Awards in Last Fiscal Year
None
Compensation of Directors
Directors of the Company who are not officers or employees
of the Company received compensation at the rate of $10,000 per
annum for all services as a Director including committee
participation and special assignments. In July 1989, the Board
of Directors of the Company adopted a Director fee conversion
program whereby Directors could elect, at certain pre-fixed
periods during the year, to convert future Director fees to
restricted stock in the Company. The conversion price was 50
percent of the average between the bid and ask price of the
Company's stock on the day of election. For the fiscal year
ended September 30, 1991, a total of 32,820 shares were acquired
by conversion in lieu of $3,334 of fees.
During fiscal 1992 the fee conversion program was replaced
with a program allowing each outside Director to elect to receive
fees in the form of either: (a) cash, in the amount of $10,000
per annum; (b) a combination of stock and cash at the rate of
15,000 shares per annum and $300 cash per month; or (c) all stock
in the amount of 25,000 shares per annum, with earned shares to
be issued on January 1 and July 1 of each year. Among the
Company's 3 eligible Directors, 2 selected the all stock
alternative while the third chose the cash option. No shares
were issued under the fee conversion program in fiscal 1992.
During fiscal 1993, 45,834 shares were acquired by conversion in
lieu of $18,334 of fees. A total of 25,000 shares were acquired
by conversion in lieu of $10,000 of fees in fiscal 1994, 75,000
shares were acquired by conversion in lieu of $30,000 of fees in
fiscal 1995, and 25,000 shares were acquired by conversion in
lieu of $10,000 of fees in fiscal 1996.
Shares acquired by Directors through the fee conversion
program are subject to piggyback registration rights.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth, as of January 3, 1996, the
security ownership of certain beneficial owners and management of
the Company.
Name and address Shares Percentage of
of owner owned Common Stock
- --------------------------- ----------- -------------
Renaissance VI, Ltd. 405,226 (1) 6.9
8080 N. Central Expressway
Suite 210, Lock Box 59
Dallas, TX 75206-1857
Barry W. Blank 915,183 15.6
P.O. Box 32056
Phoenix, AZ 85064
AlpiGlen International Corp. 943,024 (2) 16.1
Vordergasse 30
8213 Nuenkirch Switzerland
Nicholas A. Gallo, III 72,730 (3) 1.2
2 Darts Mill Road
Flemington, NJ 08822
Gary A. Griffin 22,307 (4) 0.4
100 Jersey Ave., Suite D-9
New Brunswick, NJ 08901
Edgar J. Huffman 232,713 3.9
9201 N. 7th Avenue
Phoenix, AZ 85021
Richard C. Mayo 115,473 (5) 1.9
2330 S. Industrial Park Ave.
Tempe, AZ 85282
Joel Lehrer 304,417 5.2
2330 S. Industrial Park Ave.
Tempe, AZ 85282
All Directors and officers as
a group (6 persons) 1,869,937 32.0
- ---------------------
(1) Based on amendment number 2 to a Schedule 13D filed
pursuant to the Securities Exchange Act of 1934, dated December
28, 1989.
(2) Based on amendment 1 to a Schedule 13D filed pursuant
to the Securities and Exchange Act of 1934 dated January 26, 1993
and filed by AlpiGlen International Corporation and
amendment 2 dated December 15, 1994 filed by AlpiGlen
International AG, et. al., a company which could be deemed
controlled by Mr. Gallo as a result of the offices he holds in
it.
(3) Does not include 57,907 shares owned by Federated
Corporate Services, Inc., a company which could be deemed
controlled by Mr. Gallo as a result of the offices he holds in
it. Based on amendment 6 to a Schedule 13D filed pursuant to the
Securities and Exchange Act of 1934 and dated March 1, 1995, Mr.
Gallo has sole voting and dispositive power only with respect to
72,730 shares.
(4) Includes 5,000 shares owned by Jacqueline Griffin, Mr.
Griffin's wife, in which Mr. Griffin disclaims any interest.
(5) Does not include 30,000 shares which Mr. Mayo has the
right to acquire within 60 days pursuant to the exercise of an
incentive stock option.
Item 13. Certain Relationships and Related Transactions
All arrangements relating to the provision of services in
the nature of employment, that is, a fixed fee independent of the
amount of time spent, where such fee exceeds $60,000 per annum,
are approved by the Compensation Committee of the Board of
Directors of the Company.
The consulting firm of Sita, Inc., of which Denise G.
Darmanian is an officer and director, accrued fees of
approximately $41,000 to the Company for legal and paralegal
choreography services to the Company and its subsidiaries and
management services relating to Iatric SARL and Western
Laboratories, Inc. during the fiscal year ended September 30,
1996. In addition, the firm of Gallo & Darmanian, of which
Nicholas A. Gallo and Denise G. Darmanian are principals,
provided legal services to the Company relating to the Heska
transaction for fees totaling $50,000. The predominance of the
work was performed by Denise G. Darmanian.
DMS Laboratories, Inc., a company of which Nicholas A.
Gallo, President and Chairman of the Company is an officer,
manufactures and supplies the Company with RapidVet-D test kits
for contract distribution in North America, coordinates
international distribution of the Company's vWF Zymtec test kits
and, except for Canada, all other veterinary test kits and
treatment products under a long-term contract with the Company.
The Board of Directors of the Company has reviewed these
arrangements and has determined that because of the Company's
limited resources, it could not continue to pursue international
distribution of its products without the assistance of DMS and
that, in any event, the arrangements are on normal commercial
terms that are fair to the Company. DMS is a 100 percent owned
subsidiary of Fed Corporate Services AG ("FED"), a company of
which Mr. Gallo is a shareholder.
The Company does not permit its Directors and officers to
engage in any business competing with the Company. A committee
of the Board of Directors, composed of outside Directors, is
charged with the responsibility of defining competition and
evaluating such definition periodically to reflect the Company's
activities.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
a. The following documents are filed as part of this report:
1. Registrant's Statement of Audit Status
Unaudited Financial Statements:
Consolidated Balance Sheets at
September 30, 1996 and 1995
Consolidated Statements of Operations -
Years Ended September 30, 1996,
1995, and 1994
Consolidated Statements of Changes in
Shareholders' Equity (Deficit) -
Years Ended September 30, 1996,
1995, and 1994
Consolidated Statements of Cash Flows -
Years Ended September 30, 1996,
1995, and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule V - Property, Plant and Equipment
Schedule VI - Accumulated Depreciation,
Depletion and Amortization of
Property, Plant and Equipment
Schedule VIII - Valuation and Qualifying Accounts
Schedule IX - Short-term Borrowings
Schedule X - Supplementary Income
Statement Information
Schedules other than those above have been omitted because
they are not applicable or the required information is shown in
the financial statements or notes thereto.
3. Exhibits (numbers below reference the Exhibit Table
of Item 601 of Regulation S-K)
3. Articles of Incorporation and By-laws,
as amended * N/A
4. Specimen Common Stock Certificates ** N/A
11. Earnings per Share Calculation
12. Calculation of Operating Ratios
22. Subsidiaries of Registrant
28. Other Matters
b. No reports on Form 8-K were filed during the last quarter
covered by this report.
* The exhibits required by item 3 are incorporated herein by
reference to Form 10-K for the year ended September 30, 1988.
** The exhibit required by item 4 is incorporated herein by
reference to Commission File Number 2-88979 NY, exhibits of
corresponding number.
<PAGE>
Signatures
Pursuant to the requirements of Sections 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.
FCS Laboratories, Inc.
By: /s/ Nicholas A. Gallo, III
-------------------------
Nicholas A. Gallo, III
Chairman and member of
the Board of Directors
and President
Date: February 28, 1997
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below be the following
persons on behalf of the Registrant and in the capabilities and
on the dates indicated.
NAME Title and Function
/s/ Nicholas A. Gallo, III
- -------------------------- Chairman and member of
Nicholas A. Gallo, III the Board of Directors
Date: February 28, 1997 and President
/s/ Gary A. Griffin
- -------------------------- Director
Gary A. Griffin
Date: February 28, 1997
- -------------------------- Director
Edgar J. Huffman
Date: February 28, 1997
/s/ Richard C. Mayo
- -------------------------- Treasurer and
Richard C. Mayo Chief Financial Officer
Date: February 28, 1997 and Director
/s/ Joel Lehrer
- -------------------------- Director
Joel Lehrer
Date: February 28, 1997
<PAGE>
REGISTRANT'S STATEMENT OF AUDIT STATUS
The financial information presented herein is not covered by
the report and consent of the Company's auditors. Due to
financial constraints, the Company has been unable to submit its
fiscal 1993, 1994, 1995 and 1996 financial statements to an
audit. The Company currently expects to undergo a combined audit
for the 1993, 1994, 1995 and 1996 fiscal years when the financial
situation permits. When obtained, the auditor's report and
consent will be filed by the Company by amendment.
There are no disagreements with the Company's auditors
concerning financial reporting or disclosure.
<PAGE>
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30,
---------------------------
1996 1995
----------- -----------
Current Assets:
Cash $ 924 $ 6,106
Acounts receivable, net of
allowance for doubtful
accounts of $23,854
and $28,565, respectively
(Notes 5 and 14) 227,316 350,236
Inventories (Notes 3 and 5) 626,786 757,569
Other current assets 18,516 74,323
----------- -----------
Total Current Assets 873,542 1,188,234
Property, Plant and Equipment,
net (Notes 4, 5 and 6) 692,542 837,625
Deferred Costs and Other Assets,
net of Amortization of
$9,990 and $5,994,
respectively 26,218 46,297
----------- -----------
Total Assets $ 1,592,302 $ 2,072,156
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
September 30,
---------------------------
1996 1995
----------- -----------
Current Liabilities:
Accounts payable $ 860,572 $ 1,507,334
Accrued expenses 859,022 1,092,111
Short-term debt
(Notes 5 and 13) 366,447 932,331
Current portion of long-term
debt (Notes 6, 13 and 15) 143,662 696,426
----------- -----------
Total Current Liabilities 2,229,703 4,228,202
Other Liabilities:
Long-term debt (Notes 6 and 13) 88,002 8,900
----------- -----------
Total Liabilities 2,317,705 4,237,102
Commitments and Contingencies
(Notes 8 and 13)
Shareholders' Equity (Deficit)
Common Stock, no par value:
6,000,000 shares authorized;
5,836,145 and 5,811,145 shares
issued and outstanding,
respectively (Note 9) 4,060,163 3,960,610
Cumulative foreign
currency translation
adjustment (Note 15) --- (94,136)
Accumulated deficit (4,785,566) (6,031,420)
----------- -----------
Total Shareholders'
Equity (Deficit) (725,403) (2,164,946)
----------- -----------
Total Liabilities and
Shareholders' Equity
(Deficit) $ 1,592,302 $ 2,072,156
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Fiscal Year Ended September 30,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Sales $ 2,195,371 $ 3,040,803 $ 3,141,598
Cost of Sales 833,414 1,185,187 1,173,700
----------- ---------- -----------
Gross profit 1,361,957 1,855,616 1,967,898
Selling, General and
Administrative Expense 1,268,839 2,051,038 2,061,224
Research and Development
(Note 11) 108,143 175,843 131,673
Depreciation and
Amortization Expense 19,600 34,657 37,829
Interest Expense 151,300 221,807 163,560
Other Income (Note 15) 188,374 --- ---
----------- ---------- ----------
Income (Loss) from
Continuing Operations 2,449 (627,729) (426,388)
Extraordinary Gain on Debt
Accommodation (Note 15) 1,243,405 --- ---
----------- ----------- -----------
Net Income (Loss) $ 1,245,854 $ (627,729) $ (426,388)
=========== =========== ===========
Net Income (Loss) per Share:
Net Income (Loss) from
Continuing Operations $ --- $ (.11) $ (.08)
Extraordinary Gain on
Debt Accommodation .21 --- ---
----------- ----------- -----------
Net Income (Loss)
per Share $ .21 $ (.11) $ (.08)
=========== =========== ===========
Weighted Average Shares
Outstanding 5,829,861 5,577,924 5,359,951
See accompanying notes to consolidated financial statements.
<PAGE>
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the years ended September 30, 1996, 1995 and 1994
(UNAUDITED)
Common Stock Cumulative
-------------------- Foreign
Currency
Shares Accumulated Translation
Issued Amount Deficit Adjustment
--------- --------- ------------ -----------
Balance at
September 30,
1993 5,294,088 $3,903,806 $(4,977,303) $ (64,969)
Foreign currency
translation
adjustment --- --- --- (8,680)
Shares issued 239,584 20,730 --- ---
Net loss for
the period --- --- (426,388) ---
Balance at
September 30, --------- ---------- ----------- ---------
1994 5,533,672 3,924,536 (5,403,691) (73,649)
Foreign currency
translation
adjustment --- --- --- (20,487)
Shares issued 277,473 36,074 --- ---
Net loss for
the period --- --- (627,729) ---
Balance at
September 30, --------- ---------- ----------- ---------
1995 5,811,145 3,960,610 (6,031,420) (94,136)
Foreign currency
translation
adjustment --- --- --- 94,136
Shares issued 25,000 10,000 --- ---
Net income for
the period --- --- 1,245,854 ---
Balance at
September 30, --------- ---------- ----------- ---------
1996 5,836,145 3,970,610 (4,785,566) ---
Shares to be
issued 250,000 89,553 --- ---
Adjusted balance at
September 30, --------- ---------- ----------- ---------
1996 6,086,145 $4,060,163 $(4,785,566) $ ---
========= ========== =========== =========
See accompanying notes to consolidated financial statements.
<PAGE> FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Fiscal Year Ended September 30,
-----------------------------------
1996 1995 1994
---------- ---------- ----------
Cash Flows from Operating
Activities:
Net Income (Loss) $1,245,854 $ (627,729) $ (426,388)
---------- ---------- ----------
Adjustments to reconcile
net loss to net cash
provided by operating
activities
Extraordinary gain on
debt accommodation
(Note 15) (1,243,405) --- ---
Sale of a portion of
business (Note 15) (626,842) --- ---
Valuation reserve on
French assets (Note 15) 342,810 --- ---
Liquidation of foreign
currency translation
adjustment (Note 15) 95,658 --- ---
Depreciation and
amortization 42,050 60,465 80,425
Amortization of
intangible assets 3,996 3,996 1,998
Provision for losses on
accounts receivable 16,600 13,600 10,900
Issuance of common stock
in lieu of cash payments 99,553 36,074 20,730
Change in assets and
liabilities:
Decrease in accounts
receivable 95,413 15,393 45,390
Decrease (increase) in
inventories (24,103) 44,395 (8,979)
Decrease (increase) in
other current assets (6,454) 11,134 (501)
Decrease (increase) in
other assets 9,331 (171) (20,460)
Increase (decrease) in
accounts payable (289,586) 200,396 106,076
Increase (decrease) in
accrued expenses (29,384) 374,267 272,877
--------- -------- --------
Total adjustments (1,514,363) 759,549 508,456
Net cash provided by
operating activities (268,509) 131,820 82,068
-continued-
<PAGE>
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Fiscal Year Ended September 30,
------------------------------------
1996 1995 1994
---------- ---------- ----------
Cash Flows from Investing
Activities:
Sale of a portion of
business (Note 15) 626,842 --- ---
Purchases of property,
plant and equipment (892) (3,400) (4,981)
Net cash provided by
(used) in investing ---------- ------ ------
activities 625,950 (3,400) (4,981)
Cash Flows from Financing
Activities:
Net borrowings (repayments)
of short-term debt (68,996) (38,564) (6,944)
Retirement of short-term
debt (Note 15) (178,200) --- ---
Proceeds from issuance of
long-term debt (Note 15) 82,037 --- 15,565
Payments on long-term debt (197,323) (85,910) (48,391)
Payments on accounts payable
in France (Note 12) --- (10,132) (43,698)
Net cash used in -------- -------- --------
financing activities (362,482) (134,606) (83,468)
Effect of Exchange Rate Changes
on Cash (141) --- ---
-------- -------- --------
Increase (Decrease) in Cash (5,182) (6,186) (6,381)
Cash at Beginning of Year 6,106 12,292 18,673
--------- --------- ---------
Cash at End of Year $ 924 $ 6,106 $ 12,292
========= ========= =========
Supplemental Cash Flow
Disclosures:
Cash Paid for Interest $ 106,332 $ 121,901 $ 106,973
See accompanying notes to consolidated financial statements.
<PAGE> FCS LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Nature of Business
FCS Laboratories, Inc. is in the business of developing,
manufacturing and marketing laboratory testing kits and services,
and therapeutic products.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 1994 and 1995 financial
statements to conform to the 1996 financial statement
presentation.
Inventories: Inventories are valued at the lower of cost
(first-in, first-out) or market. The components of inventories
are principally raw materials and work in process.
Property, Plant and Equipment: Depreciation is computed
using primarily the straight-line method. Estimated useful lives
are as follows:
Building 30 years
Leasehold improvements 5 years
Machinery and equipment 5-10 years
Furniture and fixtures 10 years
The cost of maintenance and repairs is charged to expense as
incurred. Significant additions and improvements, which increase
the useful lives of the related assets, are capitalized.
Earnings per Share: Earnings per share of Common Stock are
based on the weighted average number of shares outstanding during
each year. Stock options are not included in the calculation as
they are antidilutive.
Deferred Costs: Costs incurred relating to the entry into
new markets of the Company's business are capitalized and are
amortized over periods ranging from 2 to 5 years on a
straight-line basis.
Accounting for Income Taxes: Statement of Financial
Accounting Standard Number 96, "Accounting for Income Taxes", was
issued by the Financial Accounting Standards Board in 1987.
Statement 96 was revised and replaced in February 1992 by
Statement 109. Both Statement 96 and Statement 109 require a
change from the deferred method to the asset and liability method
for accounting for income taxes.
<PAGE>
Under the asset and liability method, deferred income taxes
are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable
to future years to differences between the financial statement
carrying amount and the tax basis of existing assets and
liabilities. The Company elected early adoption of Statement 96
in 1989, and subsequently elected early adoption of Statement 109
in 1992. There was no effect on the financial statements due to
the adoption of either Statement 96 or 109.
General business credits are recorded as a reduction of
Federal income taxes in the year realized.
Note 3: Inventories
The components of inventories are as follows:
September 30,
--------------------------
1996 1995
----------- -----------
Raw materials $ 52,406 $ 82,125
Work in process 574,380 675,444
----------- -----------
Total $ 626,786 $ 757,569
=========== ===========
Note 4: Property, Plant and Equipment
Property, plant and equipment at cost consists of the
following:
September 30,
--------------------------
1996 1995
----------- -----------
Land $ 96,265 $ 96,265
Buildings 1,476,589 1,477,554
Leasehold improvements 3,199 41,440
Machinery and equipment 745,334 745,176
Furniture and fixtures 624,305 624,209
----------- -----------
$ 2,945,692 $ 2,984,644
Less accumulated depreciation
and amortization (2,253,150) (2,147,019)
----------- -----------
Total $ 692,542 $ 837,625
=========== ===========
<PAGE>
Note 5: Short-term Debt
Short-term debt consists primarily of bank lines of credit
through Bank of America Arizona and is comprised of the
following:
September 30,
------------------------
1996 1995
---------- ----------
Note payable, interest at prime plus
6.5 percent (14.75 percent at
September 30, 1996) secured by
certain of the Company's domestic
accounts receivable and inventory
totaling $834,143 at
September 30, 1996. $ 145,142 $ 201,116
Note payable, interest at 11.75
percent at September 30, 1995
secured by certain domestic
accounts receivable and
inventory and a security interest
in the shares of Western
Laboratories, Inc. --- 496,888
Notes payable, interest at prime
plus 6.5 percent (14.75 percent
at September 30, 1996) secured
by certain of the Company's
equipment, land and buildings
located in Arizona. 162,982 208,019
Note payable, interest at 8.0 percent
at September 30, 1996 secured by
certain accounts receivable. 55,064 18,049
Obligations payable to three individuals
affiliated with FCS Laboratories,
Inc., $3,259 of which is secured
by 5,000 shares of treasury stock. 3,259 8,259
---------- ----------
Total $ 366,447 $ 932,331
========== ==========
<PAGE>
Note 6: Long-term Debt
Long-term debt, secured as noted, is comprised of the
following obligations:
September 30,
------------------------
1996 1995
---------- ----------
Original bank borrowing of $422,178,
increased to $600,000 during 1985,
bearing interest at the SBA peg rate
plus 2 percent (8.0 percent at
September 30, 1996) and repayable
in monthly installments of principal
and interest of varying amounts
through July 1997, at which time the
remaining principal balance will be
due. The borrowing is secured by
land and buildings located in Arizona,
with a carrying value of $500,724. $ 123,235 $ 209,335
Note payable, secured by certain domestic
accounts receivable and inventory and
a security interest in the shares of
Western Laboratories, Inc., due
December 15, 1998. 82,037 ---
Original bank borrowing of FF 2,000,000,
bearing interest at 9.25 percent,
originally repayable in equal
quarterly installments. --- 303,325
Original bank borrowing of FF 1,200,000,
bearing interest at 11.5 percent,
originally repayable in equal
quarterly installments. --- 134,228
Capitalized lease obligations of
$32,333, secured by equipment
located in Arizona. 577 3,323
Obligation bearing interest at 20
percent convertible into the
Company's shares at $.25 per share. --- 18,500
-continued-
<PAGE>
Note 6: Long-term Debt -- (Continued)
September 30,
------------------------
1996 1995
---------- ----------
Unsecured obligations payable
to four individuals currently
or formerly affiliated with FCS
Laboratories, Inc., average
interest at 5.8 percent. 25,815 36,615
---------- ----------
Total $ 231,664 $ 705,326
---------- ----------
Less: current portion (143,662) (696,426)
---------- ----------
Non-current portion of long-term debt $ 88,002 $ 8,900
========== ==========
Maturities of long-term debt are as follows:
Year Ending
September 30,
-------------
1997 $ 143,662
1998 2,400
1999 84,437
2000 1,165
Note 7: Income Tax
At September 30, 1996, the Company had net operating loss
carryforwards of approximately $3.3 million for financial
reporting and Federal income tax purposes, which expire from 2001
to 2009.
During each of the years presented in the consolidated
statements of operations, there has been no current tax liability
as the result of the operating losses in each year. In
conformity with the Financial Accounting Standard Board Statement
109, Deferred Tax Assets would total $1.2 million at September
30, 1996, which would represent the future tax benefit from
utilization of the Net Operating Loss carryforwards discussed
above. These Deferred Tax Assets have been offset in their
entirety by a valuation allowance, resulting in no net Deferred
Tax Asset on the consolidated balance sheets for each time period
presented.
Note 8: Commitments
The total expense under operating leases having an initial
noncancellable term of more than one year was $18,900, $51,047
and $47,781 for the years ended September 30, 1996, 1995 and
1994, respectively. Lease commitments are primarily for office
equipment and office space for selling and administrative
functions.
Minimum annual rentals for future years under these
operating leases are payable as follows:
Year Ending
September 30, Total
------------- ---------
1997 $ 8,069
1998 3,780
1999 945
2000 ---
Note 9: Shareholders' Equity
Fee Conversion Program
In 1989, the Board of Directors of the Company adopted a
Director fee conversion program whereby Directors can elect to
convert Director fees to restricted stock in the Company. The
conversion price was 50 percent of the average of the bid and
asking price on the day of election. During 1990, $15,833 of
fees was exchanged for 152,888 shares of stock, with 53,334 of
these shares issued after the balance sheet date. During 1991,
32,820 shares of stock were issued in lieu of $3,334 of fees.
During 1992, the fee conversion program was replaced with a
program allowing each outside Director to elect to receive fees
in the form of either: (a) cash, in the amount of $10,000 per
annum; (b) a combination of stock and cash at the rate of 15,000
shares per annum and $300 cash per month; or (c) all stock in the
amount of 25,000 shares per annum. Among the Company's 3
eligible Directors, 2 selected the all stock alternative while
the third chose the cash option. Under this program, 45,834
shares of stock were issued in 1993 in lieu of $18,334 in fees,
25,000 shares of stock were issued in 1994 in lieu of $10,000 in
fees, 75,000 shares of stock were issued in 1995 in lieu of
$30,000 in fees, and in 1996 there were 25,000 shares of stock
issued in lieu of $10,000 in fees.
During 1992 the Board of Directors of the Company also
adopted a fee conversion program whereby one consultant to the
Company could elect to convert his outstanding fees into
restricted stock in the Company. During fiscal 1993, 93,750
shares were issued under the program in lieu of fees due June 1,
1991 through November 30, 1992. He elected to convert additional
fees for the period from December 1, 1992 through November 30,
1993 into 62,500 shares. He also elected to convert fees for the
period from December 1, 1993 through September 30, 1994 into
52,083 shares, and elected an additional conversion totaling
62,500 shares through September 30, 1995.
During 1994 the Board of Directors of the Company adopted a
stock compensation program under which eight employees and
consultants to the Company received 10 percent of their
compensation in restricted stock in the Company. Under this
program 100,001 shares of stock were issued in 1994 in lieu of
$40,002 of compensation or fees. The program was extended by the
Board of Directors under which 139,973 shares of stock were
issued in 1995 in lieu of $55,989 of compensation or fees.
1988 Incentive Stock Option Plan:
The Company's 1988 Incentive Stock Option Plan was approved
by shareholders on March 24, 1988. Under this Plan the Company
has reserved 400,000 shares of Common Stock for issue to key
employees of the Company, except for individuals who own or
control 10 percent or more of the Company's Common Stock. Such
options are to be granted at a price no less than the fair market
value of the stock at the date of grant. Options cannot be
exercised for two years after grant and terminate six years after
grant. To date, no options have been exercised, and options for
52,500 shares were eligible to be exercised at September 30,
1996. Summarized transactions relating to the 1988 Incentive
Stock Option Plan follow:
Number of Exercise
Shares Price
Under Plan Per Share
---------- -------------
Outstanding - September 30, 1993 205,000 $ .20 to $ .31
Granted ---
Canceled ---
---------
Outstanding - September 30, 1994 205,000 $ .20 to $ .31
Granted ---
Canceled 115,000 $ .20 to $ .31
---------
Outstanding - September 30, 1995 90,000 $ .20 to $ .31
Granted 110,000 $ .125
Canceled 20,000 $ .31
---------
Outstanding - September 30, 1996 180,000 $ .125 to $.20
=========
Note 10: Business Segments
The Company is in the single industry segment of human and
animal healthcare products and services. For required
geographical data, and supplemental data on human and animal
healthcare sales, refer to "Business -- Financial Information on
Geographic Area Data".
Note 11: Operating Expense Detail
Research and development costs are charged to operations as
incurred and amounted to $108,143, $175,843 and $131,673 for the
years ended September 30, 1996, 1995 and 1994, respectively.
Note 12: European Operations
In 1985, the Company, through its French subsidiaries,
established facilities for the manufacture in France and the
marketing in Europe of the AREST system for both human and canine
allergy.
Production in France of the materials used in both the
diagnostic and therapeutic phases of the AREST human system was
begun in October 1985. Marketing and sales of the kits necessary
for the diagnostic phase was also begun at that time. However,
sales of the immunotherapy products constituting the therapeutic
phase of the AREST human system were delayed due to a substantial
delay in receiving certain authorizations from the French
Ministry of Health to sell such products.
For these reasons, the Company sharply reduced French
operations and discontinued sales in the third quarter of 1986
and, in June 1986, the Company's French subsidiaries filed for
protection from creditors in the Commercial Court in Dreux,
France, which protection was granted by the Court on June 26,
1986. In accordance with the Court's order, a plan of
reorganization was filed providing for a 5-year repayment
schedule by the Company's French subsidiaries, without interest,
of certain perfected vendor obligations totaling $311,285. Final
approval of the plan was granted on October 29, 1987. On July 2,
1992, the Court granted a rescheduling through May 1994, of the
remaining vendor obligations.
The Company, in 1990, resumed limited activity in Europe
through Iatric SARL, as envisioned by the plan, involving its
AREST for Canine Allergy Management System, the sale of which
required no further authorizations. Selected clinical
laboratories and others were appointed as long-term, exclusive
distributors of the system within defined territories, usually
for a given country. These distributors purchased diagnostic
kits from the Company and performed the tests for their
veterinarian customers and/or sold them to selected other
laboratories that do so. Immunotherapy treatment products were
thereafter produced by the Company and sold to the distributor
who, in turn, sold them to the veterinarian. The distributors
agreed to purchase their requirements of such products
exclusively from the Company and to use reasonable efforts to
sell them.
Distributors were appointed on behalf of Iatric SARL in
Germany, the United Kingdom, Italy, Switzerland, Austria and
Spain. During 1995, the responsibility for all international
distribution of these products was transferred to DMS
Laboratories, Inc. All the agreements referenced above were
transferred from Iatric SARL to DMS, which acts as exclusive
umbrella distributor.
In January 1996 the Company discontinued all operations in
France. Using funds from the sale of its domestic retail canine
business noted earlier, the Company entered into formal
accommodations with those banks that had provided funding for the
initial French activity, such amounts representing almost all of
the debts remaining in France.
Note 13: Uncertainties
During the years presented in the financial statements, the
Company has sustained recurring losses. As a result, the
Company's financial position has weakened and current liabilities
exceed current assets by $1,356,161.
The $123,235 bank borrowing through M & I Thunderbird Bank
secured by land and buildings in Arizona will become payable in
July 1997. It is anticipated that this loan will be refinanced,
but there is no assurance that acceptable arrangements can be
reached. In addition, loans through Bank of America Arizona
totaling $308,124 will mature April 30, 1997.
Expense reductions have been selectively implemented by
management during these periods. However, management believes
that the Company's future success is dependent upon reversing the
sales decline through the introduction of new products and/or
raising additional capital. The Company is aggressively pursuing
new product opportunities within the cost constraints imposed by
its present financial situation. In addition, the Company is
actively pursuing both debt and equity capital. However, there
is no assurance of the success of either of these programs.
Note 14: Credit Risk
The Company's products and services for both humans and
animals are sold throughout the United States. Products and
services for canines are also sold in Canada, and products for
animals are sold in Europe and in Australia. The Company grants
a limited amount of unsecured credit to most customers,
consisting of a geographically dispersed base of approximately
3,000 physicians and veterinarians. Heska Corporation is the
only customer which accounts for a significant percentage of
sales, equaling 27 percent of the sales of the Company during the
six month period following the transaction described in Note 15.
Note 15: Other Activites
During March 1996, the Company sold a portion of its
veterinary business and completed transactions restructuring its
bank debt and some vendor payables, which resulted in other
income and extraordinary gains totaling $1,431,779. The Company
sold to an independent third party, that portion of its business
relating to the provision of canine allergy testing services and
immunotherapy treatment products directly to veterinarians. That
portion of FCS's business involving the sale of diagnostic kits
to other laboratories that provide such testing services and the
sale of immunotherapy treatment to such laboratories and
distributors of such products was not impacted by the
transaction. The buyer also agreed to purchase its requirements
of the test kits necessary to provide such services and of
immunotherapy treatment products from FCS for a period of four
years. The buyer must purchase $168,000 of products from the
Company quarterly. As consideration for the sale, FCS received
$500,000 and $250,000 in unconditional and assignable promissory
notes of the buyer. After sale of the notes at a discount, and
closing costs on the transactions, the Company reported other
income of $626,842 in the period.
The Company decided in January 1996 to discontinue all
operations in France and to cease making payments to creditors
under its reorganization plan. As a result, Iatric SA, one the
Company's subsidiaries in France, received notification dated
February 15, 1996 that it had been liquidated by order of the
French bankruptcy court. The other three French subsidiaries
were not subject to the liquidation order. The Company recorded
a reserve of $342,810 which equals the carrying value of the
assets in excess of the liabilities of its subsidiaries in
France. Because all operations utilizing foreign currencies have
been reserved, the cumulative foreign currency translation
adjustment was liquidated, resulting in a $95,658 write off. The
reserve and the liquidation of the cumulative foreign currency
translation adjustment totaled $438,468 and this amount is
reported in the financial statements partially offsetting the
other income from the sale of a portion of its retail animal
health activities. The Company will continue to own certain
assets in France, primarily a building and land. If in the
future these assets are able to be sold, a gain will be recorded
at that time.
The Company also had loans from CEPME, a French bank. The
proceeds from these loans were used to fund the launch of the
French operations in 1985 and 1986. In March 1996, utilizing
funds from the sale described earlier, the Company and CEPME
reached an agreement to make a one-time payment of $79,177 in
full satisfaction of $601,349, including accrued interest of
$158,540 owed to CEPME. This resulted in an extraordinary gain
of $522,172.
In addition, utilizing the funds from the sale discussed
earlier the Company reached an accommodation with Swiss
Bank Corporation in which the bank accepted $100,000 in cash and
$100,000 due in December 1998 in full satisfaction of $700,582 of
principal and accrued interest. The note is non-interest bearing
and recorded in the balance sheet discounted for interest at 9
percent. The extraordinary gain resulting from this transation
equalled $522,383. Also, several providers of materials and
services agreed to a payment in the amount of $23,369 in full
satisfaction of $222,218 of amounts owed resulting in an
extraordinary gain of $198,850.
Other income of $188,374 is comprised of the $626,842 gain
on the sale of a portion of its retail animal health activities,
offset by the $342,810 reserves in France and the liquidation of
the cumulative foreign currency translation adjustment in the
amount of $95,658. The extraordinary gains totaling $1,243,405
are comprised of the debt accommodations with CEPME ($522,172),
Swiss Bank Corporation ($522,383) and several providers of
materials and services ($198,850). The total of other income and
extraordinary gains is $1,431,779.
<PAGE>
FCS LABORATORIES, INC. AND SUBSIDIARIES
Schedule V
Property, Plant and Equipment
Land Buildings Equipment Total
-------- ---------- ---------- ----------
Balance at
September 30, 1993 $ 96,265 $1,442,992 $1,311,275 $2,850,532
-------- ---------- ---------- ----------
Additions at Cost --- --- 4,981 4,981
Retirements and Sales --- --- --- ---
Currency Adjustments --- 38,928 25,393 64,321
Balance at -------- ---------- ---------- ----------
September 30, 1994 $ 96,265 $1,481,920 $1,341,649 $2,919,834
-------- ---------- ---------- ----------
Additions at Cost --- --- 3,400 3,400
Retirements and Sales --- --- --- ---
Currency Adjustments --- 37,074 24,336 61,410
Balance at -------- ---------- ---------- ----------
September 30, 1995 $ 96,265 $1,518,994 $1,369,385 $2,984,644
-------- ---------- ---------- ----------
Additions at Cost --- --- 892 892
Retirements and Sales --- (38,235) --- (38,235)
Currency Adjustments --- (971) (638) (1,609)
Balance at -------- ---------- ---------- ----------
September 30, 1996 $ 96,265 $1,479,788 $1,369,639 $2,945,692
======== ========== ========== ==========
Currency Adjustments includes changes in value resulting
from fluctuations in foreign currency exchange rates.
<PAGE>
FCS LABORATORIES, INC. AND SUBSIDIARIES
Schedule VI - Accumulated Depreciation, Depletion
and Amortization of Property, Plant and Equipment
Buildings Equipment Total
---------- ----------- ------------
Balance at
September 30, 1993 $ 689,574 $ 1,235,780 $ 1,925,354
---------- ----------- ------------
Additions Charged to
Costs and Expenses 36,623 43,801 80,424
Retirements and Sales --- --- ---
Currency Adjustments 16,893 24,038 40,931
Balance at ---------- ----------- ------------
September 30, 1994 $ 743,090 $ 1,303,619 $ 2,046,709
---------- ----------- ------------
Additions Charged to
Costs and Expenses 37,519 22,948 60,467
Retirements and Sales --- --- ---
Currency Adjustments 16,273 23,570 39,843
---------- ----------- ------------
Balance at
September 30, 1995 $ 796,882 $ 1,350,137 $ 2,147,019
---------- ----------- ------------
Additions Charged to
Costs and Expenses 137,305 8,142 145,447
Retirements and Sales (38,235) --- (38,235)
Currency Adjustments (450) (631) (1,081)
Balance at ---------- ----------- ------------
September 30, 1996 $ 895,502 $ 1,357,648 $ 2,253,150
========== =========== ============
Currency Adjustments includes changes in values resulting
from fluctuations in foreign currency exchange rates.
<PAGE>
FCS LABORATORIES, INC. AND SUBSIDIARIES
Schedule VIII - Valuation and Qualifying Accounts
Allowances for Accounts Receivable and Sales Returns
1996 1995 1994
------ ------ ------
Balance at
Beginning of Year $ 28,565 $ 23,171 $ 20,705
Provisions Charged
to Income 16,600 13,600 10,900
Amounts Written Off,
Net of Collections (21,311) (8,206) (8,434)
--------- --------- ---------
Balance at End
of Year $ 23,854 $ 28,565 $ 23,171
========= ========= =========
<PAGE>
FCS LABORATORIES, INC. AND SUBSIDIARIES
Schedule IX - Short-Term Borrowings
Years Ended September 30, 1996, 1995 and 1994
1996 1995 1994
------ ------ ------
Balance at End
of Year $ 366,447 $ 932,331 $ 970,895
Weighted Average Interest
Rate at Year-End (percent) 15.4 13.3 11.1
Maximum Amount Outstanding
During the Year 947,514 1,000,997 1,021,953
Average Amount Outstanding
During the Year 610,948 970,360 971,482
Weighted Average
Interest Rate During
the Year (percent) 16.9 14.7 10.5
Notes payable to banks represent obligations payable under
several credit agreements to various banks. Borrowings are
arranged on an as-needed basis at various banks.
The average amount outstanding during the year represents
the average daily principal balances outstanding during the year.
The weighted average interest rates during the year were
computed by dividing the actual interest incurred on short-term
borrowings by the average short-term borrowings.
<PAGE>
FCS LABORATORIES, INC. AND SUBSIDIARIES
Schedule X - Supplementary Income Statement Information
Amortization of Intangible Assets amounted to $3,996, $3,996
and $1,998, for the years ended September 30, 1996, 1995 and
1994, respectively.
Amounts for Advertising Costs, Royalties, Maintenance and
Repairs, and for Taxes other than payroll and income taxes were
inapplicable or less than 1 percent of Sales.
<PAGE> Exhibit 11
FCS LABORATORIES, INC. AND SUBSIDIARIES
Earnings Per Share Calculation
Earnings per share is calculated
by dividing net income $ 1,245,854
by weighted average shares
outstanding 5,829,861
to yield net income
per share $ .21
Exhibit 12
FCS LABORATORIES, INC. AND SUBSIDIARIES
Calculation of Operating Ratios
Ratio 1996 1995
------ ------
Current Ratio is calculated
by dividing current assets $ 873,542 $ 1,188,234
by current liabilities 2,229,703 4,228,202
yielding .39 .28
=========== ===========
Debit/Equity Ratio is calculated
by adding short-term debt to $ 366,447 $ 932,331
notes (current portion) 143,662 696,426
and long-term debt 88,002 8,900
----------- -----------
to yield total debt $ 598,111 $ 1,637,657
----------- -----------
and dividing by shareholders' $ (725,403) $(2,164,946)
equity to yield n/m n/m
=========== ===========
Short-term Debt/Capital Ratio
is calculated by adding
short-term debt to $ 366,447 $ 932,331
notes (current portion) 143,662 696,426
----------- -----------
to yield total short-term debt $ 510,109 $ 1,628,757
----------- -----------
by adding long-term debt $ 88,002 $ 8,900
to shareholders' equity (725,403) (2,164,946)
----------- ------------
to yield total capital $ (637,401) $(2,156,046)
----------- ------------
and dividing short-term debt $ 510,109 $ 1,628,757
by total capital (637,401) (2,156,046)
to yield n/m n/m
============ ===========
Note: n/m indicates that the ratio calculation is not meaningful
<PAGE>
Exhibit 22
FCS LABORATORIES, INC.
List of Active and/or Significant Subsidiaries*
Percent of Jurisdiction
Name Ownership of Incorporation
- ---------------------------- ---------- ---------------
Western Laboratories, Inc. 100 New Jersey
Iatric Corporation 100 Arizona
Bioproducts for Medicine, Inc. 100 New Jersey
Bioproducts DVM, Inc. 100 New Jersey
Iatric Research Institute, Inc. 100 Delaware
Iatric SA (liquidated) 100 France
Iatric Centre de Recherche
et de Developpement Europe SARL 100 France
FCS (France) SARL 100 France
Societe Civile Immobiliere SARL 100 France
* Omitted active subsidiaries, if any, are in the aggregate
not significant subsidiaries.
<PAGE>
Exhibit 28
FCS LABORATORIES, INC. AND SUBSIDIARIES
Other Matters
The financial information presented herein is not covered by
the report and consent of the Company's auditors. Due to
financial constraints, the Company has been unable to submit its
fiscal 1993, 1994, 1995 and 1996 financial statements to an
audit. The Company currently expects to undergo a combined audit
for the 1993, 1994, 1995 and 1996 fiscal years when the financial
situation permits. When obtained, the auditor's report and
consent will be filed by the Company by amendment.
There are no disagreements with the Company's auditors
concerning financial reporting or disclosure.
<PAGE>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-1-1995
<PERIOD-END> SEP-30-1996
<CASH> 924
<SECURITIES> 0
<RECEIVABLES> 227316
<ALLOWANCES> 23854
<INVENTORY> 626786
<CURRENT-ASSETS> 873542
<PP&E> 2945692
<DEPRECIATION> 2253150
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<CURRENT-LIABILITIES> 2229703
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0
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<COMMON> 4060163
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<SALES> 2195371
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<LOSS-PROVISION> 16600
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<INCOME-TAX> 0
<INCOME-CONTINUING> 2449
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<EXTRAORDINARY> 1243405
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