<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
Commission File Number: 0-11647
HYCOR BIOMEDICAL INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1437178
------------------------------- ------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
7272 Chapman Avenue, Garden Grove, California 92841
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 933-3000
No Change
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at October 31, 1998
---------------------------- -------------------------------
<S> <C>
Common Stock, $.01 Par Value 7,252,999
</TABLE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------------ ------------
CURRENT ASSETS: (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 879,014 $ 814,908
Investments 1,276,367 1,490,192
Accounts receivable, net of allowance for
doubtful accounts of $258,399 and $120,684 3,206,512 3,312,857
Income tax receivable 1,032,047 713,251
Inventories (Note 2) 4,097,552 3,772,777
Prepaid expenses and other current assets 519,445 562,879
Deferred income tax benefit 1,272,797 1,012,541
------------ ------------
Total current assets 12,283,734 11,679,405
------------ ------------
PROPERTY AND EQUIPMENT, at cost 11,852,858 12,602,155
Less accumulated depreciation (7,388,051) (7,358,809)
------------ ------------
4,464,807 5,243,346
------------ ------------
GOODWILL AND OTHER INTANGIBLES, net of
amortization of $1,342,363 and $1,101,528 4,266,277 4,363,971
DEFERRED INCOME TAX BENEFIT 854,162 854,000
OTHER ASSETS 108,066 160,174
------------ ------------
Total assets $ 21,977,046 $ 22,300,896
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,107,849 $ 1,247,642
Accrued liabilities 1,412,497 774,177
Accrued payroll expenses 523,958 613,698
Current portion - debt (Notes 4 & 5) 621,579 611,159
------------ ------------
Total current liabilities 3,665,883 3,246,676
------------ ------------
Long-Term Debt (Notes 4 & 5) 1,910,891 2,240,240
------------ ------------
Total Liabilities 5,576,774 5,486,916
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 72,530 71,570
Paid-in capital 12,393,718 12,271,207
Retained earnings 4,125,483 4,978,890
Accumulated other comprehensive income (loss) (191,459) (507,687)
------------ ------------
Total stockholders' equity 16,400,272 16,813,980
------------ ------------
Total liabilities and stockholders' equity $ 21,977,046 $ 22,300,896
============ ============
</TABLE>
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HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 4,401,513 $ 4,679,354 $ 13,745,478 $ 14,126,566
COST OF SALES 2,225,242 2,207,826 6,842,157 6,484,235
------------ ------------ ------------ ------------
Gross profit 2,176,271 2,471,528 6,903,321 7,642,331
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 2,204,554 2,263,600 6,460,658 6,538,894
Research and development 620,049 775,042 1,806,709 2,112,540
Acquired in-process research and development -- 3,300,000 -- 3,300,000
------------ ------------ ------------ ------------
2,824,603 6,338,642 8,267,367 11,951,434
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (648,332) (3,867,114) (1,364,046) (4,309,103)
INTEREST EXPENSE (Note 4) 40,355 38,311 131,738 38,472
INTEREST INCOME 34,493 51,103 91,866 195,406
FOREIGN EXCHANGE G/(L) 17,948 (4,326) 10,875 (6,324)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (636,246) (3,858,648) (1,393,043) (4,158,493)
PROVISION (BENEFIT) FOR INCOME TAXES (202,706) (247,342) (539,636) (349,818)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (433,540) $ (3,611,306) $ (853,407) $ (3,808,675)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE $ (0.06) $ (0.50) $ (0.12) $ (0.53)
============ ============ ============ ============
AVE. COMMON SHARES OUTSTANDING 7,245,794 7,148,077 7,207,646 7,169,388
</TABLE>
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HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (853,407) $(3,808,675)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,272,613 1,209,702
Deferred income tax provision (226,714) (273,829)
(Gain) Loss on foreign currency transactions -- --
(Gain) Loss on sale of assets (462,407) 68,950
Acquired In-Process R&D -- 3,300,000
Change in assets and liabilities, net of effects of
foreign currency adjustments
Accounts receivable 120,479 434,521
Income tax receivable (318,852) (120,199)
Inventories (266,893) (255,882)
Prepaid expenses and other current assets 61,984 (4,843)
Accounts payable (155,944) (759,411)
Accrued liabilities 627,666 (631,181)
Accrued payroll expenses (100,027) 88,785
----------- -----------
Total adjustments 551,905 3,056,613
----------- -----------
Net cash provided by (used in) operating activities (301,502) (752,062)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 205,247 2,689,537
Purchases of intangible assets (39,950) (39,407)
Purchases of property, plant and equipment (889,213) (1,311,709)
Business acquisitions, net of cash acquired -- (1,391,515)
Direct costs of acquisition (12,850) (224,646)
Proceeds from sale of property and equipment 1,243,073 60,453
Proceeds from collection of notes receivable 62,073 179,667
----------- -----------
Net cash provided by (used in) investing activities 568,380 (37,620)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 49,372 1,240,042
Principal payments on long-term debt (373,772) (7,648)
Proceeds from issuance of common stock 123,472 73,159
Purchases of Hycor common stock -- (467,580)
----------- -----------
Net cash provided by (used in) financing activities (200,928) 837,973
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,844) (17,130)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 64,106 31,161
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 814,908 631,404
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 879,014 $ 662,565
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year - interest 155,325 17,927
- income taxes $ 13,470 $ 58,553
</TABLE>
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HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited financial
statements include all adjustments necessary to present fairly the
financial position as of September 30, 1998 and December 31, 1997, the
results of operations and the cash flows for the three and nine-month
periods ended September 30, 1998 and 1997.
These statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and do not include
all the information and note disclosures required by generally accepted
accounting principles for complete financial statements and may be subject
to year-end adjustments.
The consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in
the Company's 1997 annual report on Form 10-K as filed with the Securities
and Exchange Commission. Certain items in the 1997 consolidated financial
statements have been reclassified to conform with the 1998 presentation.
The results of operations for any interim period are not necessarily
indicative of results to be expected for the full year.
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding. Common stock equivalents
have been excluded from the calculation of diluted EPS in loss periods as
the impact is anti-dilutive.
2. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out
method) or market. Cost includes material, direct labor and manufacturing
overhead. Inventories at September 30, 1998 and December 31, 1997 consist
of:
<TABLE>
<CAPTION>
9/30/98 12/31/97
---------- ----------
<S> <C> <C>
Raw materials $1,106,381 $1,141,205
Work in process 1,362,650 1,280,960
Finished goods 1,628,521 1,350,612
---------- ----------
$4,097,552 $3,772,777
========== ==========
</TABLE>
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3. COMPREHENSIVE INCOME (LOSS)
In June of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130 "Reporting
Comprehensive Income." The statement, which the company adopted in the
first quarter of 1998, establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is summarized as follows:
Statement of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------- ---------
1998 1997
--------- ---------
<S> <C> <C>
Net loss $(433,540) $(242,380)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 333,918 (13,404)
Unrealized gains on securities 2,907 14,772
--------- ---------
Other comprehensive income 336,825 1,368
--------- ---------
Comprehensive Income (loss) $ (96,715) $(241,012)
========= =========
</TABLE>
Statement of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net loss $(853,407) $(439,747)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 310,295 (471,022)
Unrealized gains on securities 5,933 26,037
--------- ---------
Other comprehensive income (loss) 316,228 (444,985)
--------- ---------
Comprehensive Income (loss) $(537,179) $(884,732)
========= =========
</TABLE>
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4. ACQUISITION
On July 21, 1997, the Company acquired from unrelated third parties
all of the outstanding stock of Cogent Diagnostics Limited ("Cogent") for
approximately $1,453,000 in cash and $1,574,000 in three year notes to the
seller group.
The acquisition was accounted for using the purchase method of
accounting, and Cogent's operating results have been included in the
accompanying consolidated statements of operations from the date of
acquisition. Cogent is based in Edinburgh, Scotland and develops,
manufactures and markets a broad line of test kits for diagnosis of
autoimmune disease.
5. LONG TERM DEBT
The Company has a line of credit which provides for borrowings up to
$2,000,000 and expires in July, 1999. The loan is collateralized by the
Company's accounts receivable, inventories, and property, plant and
equipment. At September 30, 1998, $1,000,000 was outstanding. Advances
under the line bear interest at the prime rate or at LIBOR plus 2%,
payable monthly, with the principal due at maturity. At September 30, 1998
the Company's interest rate was 7.68%.
The line of credit contains restrictive covenants, the most
significant of which relate to the maintenance of minimum tangible net
worth, debt-to-tangible net worth requirements and liquid assets plus
accounts receivable-to-current liabilities requirements. At September 30,
1998, the Company was in compliance with such covenants.
The Company has outstanding notes in the amount of $1,265,000. These
notes were issued to the seller group in executing the acquisition of
Cogent Diagnostics LTD (Cogent). Interest on the notes accrues at a rate
of 6.85% and is payable quarterly. Principal payments are due in three
equal annual installments which commenced in July, 1998. In addition, one
of the Company's foreign subsidiaries has long term debt, payable to
financial institutions, aggregating $218,000 with weighted average
interest rate of approximately 9%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Except for historical information contained herein, the matters discussed
in this report are forward-looking statements which involve risk and
uncertainties that could cause actual results to differ materially from the
results anticipated in the forward looking statements. These risks and
uncertainties include, but are not limited to, economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
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<PAGE> 8
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company is
currently engaged in a comprehensive project to upgrade its information,
technology, and manufacturing computer software to programs that will
consistently and properly recognize the year 2000. Many of the Company's systems
include new hardware and packaged software recently purchased from vendors who
have represented that these systems are already Year 2000 compliant. The Company
is in the process of obtaining assurances from vendors that timely updates will
be made available to make all remaining purchased software Year 2000 compliant,
and the Company expects to complete the project in early 1999. Management
believes that the year 2000 issue will not pose significant operational problems
or have a material adverse impact on the Company's financial position or results
of operations.
On July 21, 1997, the Company acquired from unrelated third parties all of
the outstanding stock of Cogent Diagnostics Limited for approximately $1,453,000
in cash and $1,574,000 in three year notes to the seller group. The acquisition
was accounted for using the purchase method of accounting, and Cogent's
operating results have been included in the accompanying consolidated statements
of operations from the date of acquisition. Cogent is based in Edinburgh,
Scotland and develops, manufactures and markets a broad line of test kits for
diagnosis of autoimmune disease.
On August 17, 1998, the Company sold its Portland Maine facility for
approximately $953,000 net of selling expenses. This building was the previous
manufacturing and administrative location for Ventrex Laboratories Inc.
("Ventrex") which was acquired by the Company in August 1991. In December 1993,
Ventrex was merged into the Company and operations were integrated into the
Company's Garden Grove, CA facility. The Maine facility was leased to third
parties during this period while the Company sought out potential buyers.
In July 1998, the Company relocated its administrative offices from its
Irvine, CA facility to its Garden Grove, CA facility. The Irvine facility was
sub-leased for the remainder of the lease term and will have no material net
impact to continuing operating results. The overall net effect of this
consolidation of operations is expected to result in annual cost savings to the
Company of about $310,000.
Liquidity
The Company has adequate working capital and sources of capital to carry
on its current business and to meet its existing and expected future capital
requirements. The Company increased its working capital $185,000 as of September
30, 1998, compared to December 31, 1997. This increase is due primarily to the
proceeds from the sale of the Portland, Maine facility ($953,000) partially
offset by purchases of HY-TEC(TM) equipment in support of the "reagent rental"
sales program ($280,000); investment in facility modifications necessary to
consolidate the Irvine office into the Garden Grove facility ($400,000) and
other normal operational requirements of about $88,000.
The Company's principal capital commitments are for lease payments under
non-cancelable operating leases and note payments related to the acquisition of
Cogent. Additionally, the HY-TEC business requires the purchase of instruments
which in many cases are placed in use in laboratories of the Company's direct
customers and paid for over an
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agreed contract period by the purchase of test reagents. This "reagent rental"
sales program, common to the diagnostic market, creates negative cash flows in
the initial years.
Results of Operations
During the three and nine-month periods ended September 30, 1998, sales
decreased 6% and 3%, respectively, compared to the same periods last year.
Revenue declines were due primarily to the trailing effect of discontinued and
non-clinical immunology products. Sales for the discontinued and non-clinical
immunology products for the three and nine-month periods decreased $482,000 and
$1,149,000, respectively, compared to the same periods last year. This more than
offset the growth in the primary clinical immunology product lines which had
increases for the three and nine-month periods of $243,000 and $828,000,
respectively, compared to the same periods last year. In addition, the launch of
the HY-TEC 288 instrument system was delayed from an original second quarter
1998 targeted launch date to an actual launch date of September 1998.
Gross profit as a percentage of product sales decreased for the three and
nine-month periods from approximately 53% to 49% and 54% to 50%, respectively,
compared to the same periods last year. The decrease in gross profit percentage
for the three and nine-month periods is due primarily to the effects of
reconfiguring the Allergy and Autoimmune product lines to accommodate the HY-TEC
288 launch as well as the effect of HY-TEC instrument sales to our distributor
partners which generate a very low gross margin.
Selling, general and administrative expenses for the three and nine-month
periods decreased approximately 3% and 1%, respectively, when compared to the
same periods last year. These decreases were primarily due to savings from the
postponement of certain marketing and sales expenses related to the delay of the
HY-TEC 288 launch and other cost containment efforts estimated at about $570,000
and $620,000 for the three and nine-month periods offset by the costs of the
negotiated separation of the Company's prior president and chief executive
officer during the third quarter of over $500,000.
Research and development costs for the three and nine-month periods
decreased approximately 20% and 14%, respectively, compared to the same periods
last year. The decrease in research and development is primarily due to the
completion of several projects related to the HY-TEC 288 instrument system as it
approached its commercial launch.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On July 17, 1998, J. David Tholen assumed the duties of President and
Chief Executive Officer of the Company replacing Dr. Richard D. Hamill who has
chosen to retire. Also effective on July 17, 1998, Samual D. Anderson was
elected to serve as Chairman of the Board. Dr. Hamill has resigned from the
Board of Directors but will be available as needed for consultation.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 : Financial Data Schedule
(b) Reports on Form 8-K : None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYCOR BIOMEDICAL INC.
Date: November 10, 1998 By: /s/ ARMANDO CORREA
------------------------------------
Armando Correa, Director of Finance
(Mr. Correa is the Principal
Accounting Officer and has been duly
authorized to sign on behalf of the
registrant.)
Page 10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 879,014
<SECURITIES> 1,276,367
<RECEIVABLES> 3,464,911
<ALLOWANCES> 258,399
<INVENTORY> 4,097,552
<CURRENT-ASSETS> 12,283,734
<PP&E> 11,852,858
<DEPRECIATION> (7,388,051)
<TOTAL-ASSETS> 21,977,046
<CURRENT-LIABILITIES> 3,665,883
<BONDS> 0
0
0
<COMMON> 72,530
<OTHER-SE> 16,400,272
<TOTAL-LIABILITY-AND-EQUITY> 21,977,046
<SALES> 13,745,478
<TOTAL-REVENUES> 13,745,478
<CGS> 6,842,157
<TOTAL-COSTS> 6,842,157
<OTHER-EXPENSES> 8,267,367
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,738
<INCOME-PRETAX> (1,393,043)
<INCOME-TAX> (539,636)
<INCOME-CONTINUING> (853,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (853,407)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
