<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, 1999
[ ] 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.
Class Outstanding at October 31, 1999
----- -------------------------------
Common Stock, $.01 Par Value 7,312,206
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,766,746 $ 655,716
Investments 300,093 1,266,935
Accounts receivable, net of allowance for
doubtful accounts of $294,076 and $211,482 3,227,236 3,022,618
Inventories (Note 2) 4,210,666 4,268,949
Prepaid expenses and other current assets 267,439 424,597
------------ ------------
Total current assets 9,772,180 9,638,815
------------ ------------
PROPERTY AND EQUIPMENT, at cost 10,624,257 10,522,457
Less accumulated depreciation (6,938,086) (6,283,497)
------------ ------------
3,686,171 4,238,960
------------ ------------
GOODWILL AND OTHER INTANGIBLE ASSETS, net of
accumulated amortization of $920,648 and $858,678 1,461,968 2,012,348
OTHER ASSETS 60,598 92,586
------------ ------------
Total assets $ 14,980,917 $ 15,982,709
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 883,323 $ 1,101,879
Accrued liabilities 1,294,780 1,321,329
Accrued payroll expenses 700,758 377,609
Current portion of long-term debt (Note 3) 1,588,494 1,826,706
------------ ------------
Total current liabilities 4,467,355 4,627,523
------------ ------------
Long-term debt (Note 3) 106,090 678,491
------------ ------------
Total Liabilities 4,573,445 5,306,014
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 73,122 72,835
Paid-in capital 12,447,660 12,420,520
Accumulated deficit (1,621,204) (1,621,204)
Accumulated other comprehensive loss (492,106) (195,456)
------------ ------------
Total stockholders' equity 10,407,472 10,676,695
------------ ------------
Total liabilities and stockholders' equity $ 14,980,917 $ 15,982,709
============ ============
</TABLE>
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<PAGE> 3
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 4,352,865 $ 4,401,513 $ 13,755,699 $ 13,745,478
COST OF SALES 2,093,887 2,225,242 6,715,112 6,842,157
----------- ----------- ------------ ------------
Gross profit 2,258,978 2,176,271 7,040,587 6,903,321
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Selling, general, and administrative 1,731,643 2,204,554 5,513,624 6,460,658
Research and development 629,052 620,049 1,745,128 1,806,709
----------- ----------- ------------ ------------
2,360,695 2,824,603 7,258,752 8,267,367
----------- ----------- ------------ ------------
OPERATING LOSS (101,717) (648,332) (218,165) (1,364,046)
OTHER INCOME AND (EXPENSE) (19,752) 12,086 (42,508) (28,997)
GAIN ON SALES OF PATENTS 320,864 -- 320,864 --
----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT) 199,395 (636,246) 60,191 (1,393,043)
INCOME TAX PROVISION (BENEFIT) -- (202,706) 14,000 (539,636)
----------- ----------- ------------ ------------
NET INCOME (LOSS) $ 199,395 $ (433,540) $ 46,191 $ (853,407)
=========== =========== ============ ============
BASIC AND DILUTED EARNINGS PER SHARE $ 0.03 $ (0.06) $ 0.01 $ (0.12)
=========== =========== ============ ============
AVERAGE COMMON SHARES OUTSTANDING 7,311,417 7,245,436 7,297,139 7,206,238
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
Net Income (Loss) $ 199,395 $ (433,540) $ 46,191 $ (853,407)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Foreign currency translation adjustments 149,240 333,918 (338,930) 310,295
Unrealized (losses) gains on securities:
Unrealized (losses) gains on securities (1,281) 2,907 (3,911) 5,610
Plus: reclassification adjustment for gains
included in net income -- -- -- 323
----------- ----------- ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX 147,959 336,825 (342,841) 316,228
----------- ----------- ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 347,354 $ (96,715) $ (296,650) $ (537,179)
=========== =========== ============ ============
</TABLE>
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<PAGE> 4
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 46,191 $ (853,407)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,006,233 1,272,613
Deferred income tax provision -- (226,714)
Provision for doubtful accounts receivable 92,200 5,127
(Gain) loss on sale of assets (823,603) (462,407)
Change in assets and liabilities, net of effects of foreign
currency adjustments:
Accounts receivable (347,023) 115,352
Income tax receivable -- (318,852)
Inventories (3,756) (266,893)
Prepaid expenses and other current assets 152,747 61,984
Accounts payable (211,664) (155,944)
Accrued liabilities (42,656) 627,666
Accrued payroll expenses 329,335 (100,027)
----------- -----------
Total adjustments 151,813 551,905
----------- -----------
Net cash provided by (used in) operating activities 198,004 (301,502)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 950,000 205,247
Purchases of intangible assets (25,878) (39,950)
Direct costs of acquisition -- (12,850)
Purchases of property, plant and equipment (467,939) (889,213)
Proceeds from sales of property and equipment 1,052,500 1,243,073
Proceeds from collection of notes receivable 45,090 62,073
----------- -----------
Net cash provided by (used in) investing activities 1,553,773 568,380
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 49,372
Principal payments on long-term debt (668,423) (373,772)
Proceeds from issuance of common stock 27,427 123,472
----------- -----------
Net cash (used in) provided by financing activities (640,996) (200,928)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 249 (1,844)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 1,111,030 64,106
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 655,716 814,908
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,766,746 $ 879,014
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the year - interest $ 112,001 $ 155,325
- income taxes $ 16,906 $ 13,470
</TABLE>
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HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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, 1999 and December 31, 1998,
the results of operations and the cash flows for the three and
nine-month periods ended September 30, 1999 and 1998.
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 1998 annual report on Form 10-K as filed with
the Securities and Exchange Commission. Certain items in the 1998
consolidated financial statements have been reclassified to conform with
the 1999 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, 1999 and December
31, 1998 consist of:
9/30/99 12/31/98
---------- ----------
Raw materials $1,125,511 $1,040,529
Work in process 1,459,829 1,420,231
Finished goods 1,625,326 1,808,189
---------- ----------
$4,210,666 $4,268,949
========== ==========
3. LONG TERM DEBT
The Company has a line of credit which provides for borrowings up
to $2,000,000 and expires on July 31, 2001. The loan is collateralized
by the Company's accounts receivable, inventories, and property, plant,
and equipment. At September 30, 1999, $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, 1999 the Company's interest rate was 7.45%.
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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,
1999, the Company was in compliance with such covenants.
The Company has outstanding notes in the amount of $525,000. These
notes were issued to the seller group in executing the acquisition of
Cogent Diagnostics LTD in July 1997. 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 with the
latest payment being made this quarter. In addition, the Company and one
of the Company's foreign subsidiaries has other debt, payable to
financial institutions, aggregating $170,000 with weighted average
interest rate of approximately 9%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
This Section and this entire report contain forward-looking statements
and include assumptions concerning the Company's operations, future results and
prospects. These forward-looking statements are based on current expectations
and are subject to a number of risks, uncertainties, and other factors. In
connection with the Private Securities Litigation Reform Act of 1995, the
Company provides the following cautionary statements identifying important
factors which, among other things, could cause the actual results and events to
differ materially from those set forth in or implied by the forward-looking
statements and related assumptions contained in this Section and in this entire
Report.
Such factors include, but are not limited to, product demand and market
acceptance risks; the effect of economic conditions; the impact of competitive
products and pricing; product development; commercialization and technological
difficulties; capacity and supply constraints or difficulties; availability of
capital resources; general business and economic conditions, including currency
risks based on the relative strength or weakness of the U.S. dollar, euro
conversions, and Year 2000 issues; and changes in government laws and
regulations, including taxes.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. If the computer
systems cannot distinguish between the year 1900 and the year 2000, system
failures or other computer errors could result. The potential for failures and
errors spans all aspects of our business, including information technology
("IT") systems: computer hardware and software, voice and data networks;
non-information technology ("Non-IT") related systems: copiers and fax machines,
security and building infrastructure support systems; third party
considerations; and products.
State of Readiness. The Company has appointed a Year 2000 Corporate
Compliance Team, which has prepared a compliance program for the Company and is
responsible for coordinating and inspecting compliance activities in all
business units. The compliance program requires all business units and locations
to inventory potentially affected systems and
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products, assess risk, take any required corrective actions, test and certify
compliance. In addition, the Company is continuing the process of identifying,
prioritizing, and communicating with critical suppliers, distributors, and
customers to determine the extent to which the Company may be vulnerable in the
event those parties fail to properly identify and remediate their own Year 2000
issues. Detailed evaluations of the most critical third parties have been
initiated through questionnaires, interviews, and other available means. The
Company intends to monitor the progress made by those parties, test critical
system interfaces, and formulate appropriate contingency and business
continuation plans to address third-party issues identified through its
evaluations and assessments.
Based upon its identification and assessment efforts to date, the
Company presently 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. However, certain of its computer
equipment, software and non-information technology related equipment will
require replacement or modification. System upgrades completed to date include
the Company's information systems primary operating software and hardware; the
primary business applications which include the manufacturing, inventory, and
billing modules, and the payroll administration software. Also updated were
certain Non-IT applications such as the telephone switchboard system and the
internal communications network.
The Company presently believes that its planned modifications or
replacements of certain existing computer equipment and software will be
completed on a timely basis so as to avoid any of the potential Year
2000-related disruptions or malfunctions of its computer equipment and software
that it has identified. In addition, in the ordinary course of business, the
Company periodically replaces computer equipment and software, and in so doing,
seeks to acquire only Year 2000 compliant software and hardware.
Costs. The Company will primarily use internal resources to reprogram
or replace, test and implement its IT and non-IT systems for Year 2000
modifications. The Company does not separately track the internal costs incurred
on the Year 2000 project. Such costs are principally payroll and related costs
for its internal IT personnel. The total cost of the Year 2000 project,
excluding these internal costs, is estimated at $100,000 and is being funded
through operating cash flows.
Risks. The company currently believes that the most reasonably likely
worst case scenario with respect to the Year 2000 issue is the failure of a
supplier, including utility suppliers, to become Year 2000 compliant, which
could result in the temporary interruption of the supply of necessary products
or services to a manufacturing facility. This could result in interruptions in
production for a period of time, which in turn could result in potential lost
sales and profits. Additionally, marketing and administrative expense could
increase if automated functions would need to be performed manually.
Additionally, many of the Company's customers are directly or indirectly
dependent on insurance or entitlement programs for reimbursement on products or
services provided. The Company's cash flow could be adversely impacted as a
result of its customer's experiencing a slow down of reimbursements due to a
failure on the part of the insurance carriers or entitlement program
administrators to become Year 2000 compliant.
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<PAGE> 8
The costs of the Year 2000 project and the dates on which the company
believes it will complete the Year 2000 modifications and testing are based on
management's best estimates, which were derived utilizing numerous assumptions
regarding future events, including the continued availability of certain
resources, third party modification plans, and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
differ materially from those currently anticipated. Examples of factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and embedded technology, and similar
uncertainties. In addition, there can be no guarantee that the systems or
products of other entities, or that a failure to convert by another company, or
a conversion that is incompatible with the company's systems, would not have a
material adverse effect on the company.
Contingency Plans. The Company's Guidelines require that contingency
plans be developed and validated in the event that any critical system cannot be
corrected and certified before the system's failure date. These plans could
include, but are not limited to, material banking, use of alternate suppliers,
and development of alternate means to process orders. The Company expects to
have its contingency plans in place by November 30, 1999. In addition, the
Company has formed a rapid response team as part of its IT group that will
respond to any operational problems during the Year 2000 date change period.
LIQUIDITY
The purchase agreement related to the acquisition of Cogent Diagnostics
LTD in July 1997 provided for a post-closing adjustment to the purchase price
based upon the final valuation of the acquired assets and assumed liabilities
which occurred in 1999. The determination of the final fair values resulted in
adjustments consisting of changes from initially determined values as of July
1997 amounting to a decrease in goodwill and debt of approximately $115,000.
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 $343,000 as of September
30, 1999, compared to December 31, 1998 as a result of normal operations, the
reduction to current debt from the post-closing adjustments related to the
Cogent acquisition, and the cash received from the sale of patents offset by the
payment of the Cogent acquisition notes described above.
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(TM) 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 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.
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RESULTS OF OPERATIONS
During the three and nine-month periods ended September 30, 1999, sales
remained essentially flat when compared to the same periods last year. Sales of
discontinued and non-core products for the three and nine-month periods ended
September 30, 1999 decreased $7,000 or 2% and $519,000 or 35%, respectively,
compared to the same periods last year. Sales of core clinical immunology
product lines for the three month period ended September 30, 1999 decreased
$41,000 or 1% and increased $529,000 or 4% for the nine month period ended
September 30, 1999, compared to the same periods last year. The non-core
products accounted for approximately 7% of sales in the three month period ended
September 30, 1999 versus 7% of sales in the same period last year. In the nine
month period ended September 30, 1999, the non-core products accounted for
approximately 7% of sales versus 11% of sales in the same periods last year.
Gross profit as a percentage of product sales increased for three and
nine-month periods ended September 30, 1999 from approximately 49% to 52% and
50% to 51%, respectively, when compared to the same periods last year due
primarily to changes in the product mix.
Selling, general and administrative expenses decreased for the three and
nine-month periods ended September 30, 1999 approximately $473,000 or 21% and
$947,000 or 15%, respectively, compared to the same periods last year. Included
in the expenses for the third quarter 1998 were the costs of the negotiated
separation of the Company's prior president and chief executive officer of over
$500,000. Other year-to-date decreases were due primarily to headcount
reductions and other cost containment efforts which included the consolidation
of the Irvine operation into the Company's Garden Grove facility in July of last
year.
Research and development costs increased for the three month period
ended September 30, 1999 approximately $9,000 or 1% when compared to the same
period last year. The Company continues to devote resources to expand and
enhance its product offering. Expenses in the nine month period ended September
30, 1999 decreased approximately $62,000 or 3% when compared to the same period
last year. This decrease in expenses is primarily due to the completion of
several projects related to the development of the new HY-TEC 288 instrument.
Effective with the fourth quarter of 1998, the Company adopted a
position wherein a 100% valuation allowance was taken against all deferred tax
assets. The tax provision for the nine-month period ended September 30, 1999 of
$14,000 reflects the provision for estimated tax liabilities that are not offset
by operating losses.
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PART II. OTHER INFORMATION
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, 1999 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.)
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<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,766,746
<SECURITIES> 300,093
<RECEIVABLES> 3,521,312
<ALLOWANCES> 294,076
<INVENTORY> 4,210,666
<CURRENT-ASSETS> 9,772,180
<PP&E> 10,624,257
<DEPRECIATION> (6,938,086)
<TOTAL-ASSETS> 14,980,917
<CURRENT-LIABILITIES> 4,467,355
<BONDS> 0
0
0
<COMMON> 73,122
<OTHER-SE> 10,334,350
<TOTAL-LIABILITY-AND-EQUITY> 14,980,917
<SALES> 13,755,699
<TOTAL-REVENUES> 13,755,699
<CGS> 6,715,112
<TOTAL-COSTS> 6,715,112
<OTHER-EXPENSES> 7,258,752
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,919
<INCOME-PRETAX> 60,191
<INCOME-TAX> 14,000
<INCOME-CONTINUING> 46,191
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,191
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
