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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-11647
HYCOR BIOMEDICAL INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-1437178
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7272 Chapman Avenue, Garden Grove, California 92841
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 933-3000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
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(Title of class)
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 [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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]
As of March 16, 1999, the aggregate market value of the voting stock
held by non-affiliates of the registrant (based on the closing sale price of
such stock on such date) was approximately $11,143,120.
The number of shares of common stock of the registrant outstanding at
March 16, 1999 was 7,252,999.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's definitive Proxy Statement to be filed
not later than 120 days after December 31, 1998 in connection with the Annual
Meeting of Stockholders to be held in 1999 are incorporated by reference into
Part III in this report on Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Hycor Biomedical Inc. ("Hycor" or the "Company") was incorporated as a
Delaware corporation on April 7, 1981. Hycor is engaged in the research,
development, manufacturing, and marketing of medical diagnostic products
throughout the United States and many foreign countries.
The Company operates a wholly owned subsidiary, Hycor Biomedical GmbH
("Hycor GmbH"), located in Kassel, Germany. Hycor GmbH primarily manufactures
and sells allergy diagnostic products in Europe.
On September 30, 1996, the Company formed Hycor Biomedical SAS ("Hycor
SAS") as a wholly owned subsidiary. Located in Paris, France, Hycor SAS markets
allergy diagnostic products in France. Business activity commenced during the
third quarter of 1997.
On July 21, 1997, the Company acquired from unrelated third parties all
of the outstanding stock of Cogent Diagnostics Limited ("Cogent"). Located in
Edinburgh, Scotland, Cogent develops, manufactures and markets a broad line of
test kits for the diagnosis of autoimmune disease.
PRODUCTS
The Company engages in business activity in only one operating segment
which entails the development, manufacture, and sale of medical and diagnostic
products with a focus on allergy and autoimmune testing and urinalyis products.
While the Company offers a wide range of items for sale, many are manufactured
at common production facilities.
As part of a strategic redirection taken in 1995, the Company focused a
great deal of effort on the development of its HY-TEC(TM) automated immunoassay
system. The system includes an instrument, software, and test reagents. The
"reagent rental" business, common to the diagnostic market, requires the
placement of an instrument in laboratories of customers that pay for the system
over an agreed contract period by the purchase of test reagents. The Company's
HY-TEC reagent rental program is similar in that instruments are placed in use
with direct customers and paid for over an agreed contract period by the
purchase of test reagents, but also includes the sale of instruments to
distributors. The instruments which are sold to distributors are sold with a
minimal gross profit to assist them with their instrument placements. The HY-TEC
288 instrument was launched in Europe in October 1998, in the U.S. in February
1999 and is expected to increase the Company's capital requirements in the
future as the HY-TEC business continues to grow.
The Company's allergy diagnostic product line, which accounted for
approximately 31%, 29%, and 29% of revenues for 1998, 1997, and 1996,
respectively, includes tests for general
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screening for the diagnosis of allergy as well as a complete line of RIA
("radioimmunoassay") and EIA ("enzymatic immunoassays") procedures to test for
specific allergies to more than 900 different allergens such as grasses, weeds,
trees, epidermals (i.e. animal hair), dust, dust mites, molds, and foods. Unlike
the traditional prick puncture and intradermal testing methods of diagnosing
allergies, the Company's products permit a physician to diagnose allergies by
testing a sample of the patient's blood for the presence of the specific IgE or
IgG antibody which reacts with the corresponding allergen. This method has many
advantages over the traditional methods of allergy diagnosis, not the least of
which is patient comfort. Additionally, the Company markets the HY-TEC 480 and
HY-TEC 288 automated diagnostic systems. The HY-TEC instruments provide clinical
laboratories with significant productivity capabilities.
The KOVA(TM) Microscopic Urinalysis System is the Company's largest
product line accounting for approximately 48%, 46%, and 46% of revenues for
1998, 1997, and 1996, respectively. The KOVA System provides laboratories with
the capability to perform reliable, uniform microscopic analyses of urine
specimens. It is composed of plastic collection containers, tubes and pipettes,
patented microscopic slides, and human urine-based control materials.
The Company's Autoimmune diagnostic product line, which accounted for
approximately 8%, 4%, and 0% of revenues in 1998, 1997, and 1996, respectively,
includes tests utilized for the diagnosing and monitoring of autoimmune
disorders such as rheumatoid arthritis and systemic lupus erythematosus among
others. Autoimmune diseases may be systemic or organ-specific and the need for
this type of diagnostic testing is expected to increase as the population ages
and primary care physicians are educated about autoimmune diseases. The
Company's tests are based on enzyme immunoassay technology in a microplate
format, which can be automated in the clinical laboratory, unlike traditional
methods like immunofluorescence, which requires a dedicated and highly trained
technologist to read slides manually through a microscope one at a time.
Hematology controls, which represented approximately 4%, 10%, and 7% of
revenues for 1998, 1997, and 1996, respectively, are a group of chemistry
controls which are part of the quality control system required to be in place in
all clinical laboratories to ensure that the methodology being used is correct
and the results are accurate, precise, and reproducible. During 1998, changes in
the market place, the introduction of new technologies by competitors and the
loss of the Company's sole distributor in the fourth quarter caused a
significant decrease in revenues compared to recent trends. The Company has
re-instituted a direct sales approach focused on telemarketing pending an
evaluation of other distribution alternatives.
SALES AND MARKETING
The Company's products are used primarily by clinical laboratories and
certain specialty physicians. In the United States, the Company's product lines
are generally sold through both independent and clinical laboratory
distributors. The majority of sales in the United States are to two major U.S.
distributors, Allegiance Healthcare Corporation and Fisher Scientific. The
allergy product line is sold directly to the end user through the Company's
direct sales force.
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In foreign countries the Company's products are sold primarily through
a network of independent distributors. The Company sells its allergy products to
the German and French market through a direct sales force.
Export sales (all to unaffiliated customers) accounted for
approximately $2,363,000, $2,782,000, and $3,319,000 in 1998, 1997, and 1996,
respectively, which represents approximately 13%, 14%, and 17% of total
consolidated sales for each of the respective years. The primary geographical
area was Europe, which, including sales by the Company and its foreign
subsidiaries, accounted for sales of $6,328,000, $5,843,000, and $5,660,000 in
1998, 1997, and 1996, respectively. (See Note 11 to the Consolidated Financial
Statements.)
The Company's two largest distributors, Allegiance Healthcare
Corporation and Fisher Scientific, accounted for 19% and 12% of net product
sales in 1998; 18% and 12% of net product sales in 1997; and 19% and 15% in
1996. A loss of one or both of these distributors could significantly affect
sales. However, there are other national, regional and foreign clinical
laboratory products distributors, as well as the Company's sales force, that
could market the Company's products.
The Company did not have a significant backlog of orders at December
31, 1998 and December 31, 1997. Because of the short time between order receipt
and expected delivery, the Company, consistent with industry practice, carries a
large inventory to meet the expected flow of orders. Backlog is not a
significant factor in the Company's business.
The Company's business is not considered seasonal in nature but is
slightly affected in the third quarter by the general slowdown in Europe during
the traditional vacation months.
RAW MATERIALS
Although a substantial amount of the Company's total purchases for raw
materials and finished products were from a limited number of suppliers during
the last fiscal year, a number of alternative sources are available to the
Company should they be required.
RESEARCH AND DEVELOPMENT
The Company maintains an ongoing research and development effort. The
purpose of this effort is to evaluate new technologies, improve the Company's
current product lines, and develop new products. Current projects in progress
are focused on programs to support and enhance the HY-TEC diagnostic system and
develop new urinalysis, allergy and autoimmune diagnostic products.
Total research and development expenditures were $2,392,000,
$2,889,000, and $2,729,000 for 1998, 1997, and 1996, respectively.
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GOVERNMENT REGULATIONS
The Company is registered as a manufacturer of medical devices and a
licensed biological manufacturer with the Food and Drug Administration ("FDA").
To comply with FDA requirements, the Company must manufacture its products in
conformance with the FDA's medical device Good Manufacturing Practice
regulations. The Company's existing products are also subject to certain
pre-market notification requirements of the FDA.
The receipt, use and disposal of radioactive materials is subject to
licensing requirements of the Nuclear Regulatory Commission ("NRC"). The Company
holds a radioactive materials license from the NRC for its radioactive labeling
activities and its facilities are inspected periodically by the NRC.
The Company would be adversely affected if it were unable to maintain
its governmental licenses or continue to comply with applicable federal and
state regulations, but the Company does not expect this to occur. The Company
cannot predict whether future changes in government regulations might
substantially increase compliance costs, adversely affect the time required to
develop and introduce products, or limit or preclude the sale of its new
products.
In September 1992, regulations implementing the Clinical Laboratories
Improvement Amendments of 1988 (CLIA), providing for certification procedures
and requirements for laboratories, became fully effective. The impact of CLIA
has reduced the domestic sales of the Company's allergy diagnostic products to
physician office laboratories, as the testing has shifted toward the larger
clinical laboratory. The HY-TEC automated diagnostic system was designed to meet
the needs of these larger laboratories.
Compliance with federal, state, and local regulations relating to
environmental matters is not expected to have a material effect upon capital
expenditures, earnings or the competitive position of the Company.
COMPETITION
The Company's product lines have several different competitors. The
KOVA Microscopic Urinalysis System has significant competition from at least two
national diagnostic product manufacturing and distribution companies that market
supplies that perform similar functions. Management believes that the Company is
the leading supplier of standardized microscopic urinalysis systems. The
hematology line of controls and calibrators has four primary competitors.
Pharmacia and Upjohn, Inc. and Diagnostic Product Corporation have
products that compete with the Company's allergy diagnostic products.
A substantial number of the Company's competitors are larger and have
greater resources than the Company. The Company competes on the basis of price,
promotion, quality of products, design of product, strength of the Company's
relationship with dealers, and other methods relevant to the business.
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PATENTS
The Company has maintained an aggressive patent policy and currently
holds a number of domestic and foreign patents. While these patents offer some
protection to its product lines and related technology, management believes that
continued improvements to the product lines are more important for the
protection of its market position. The most recent patent was issued in January
1999.
EMPLOYEES
As of February 28, 1999, the Company had approximately 170 employees.
None of the employees are covered by collective bargaining agreements and
management believes that the Company's relations with its employees are
satisfactory.
ITEM 2. PROPERTIES
At December 31, 1998, the Company had three separate facilities.
1) The Company's corporate headquarters, principal administrative, and
manufacturing facility is located in a leased 76,000 square foot two-story
freestanding facility at 7272 Chapman Avenue, Garden Grove, California. The
lease has a ten-year term ending December 31, 2007. The Company has the option
to extend the lease term for an additional five-year period.
2) The Company leases a free standing building located at Otto-Hahn Strabe
16, 34123 Kassel, Germany. The lease has a ten year term ending March 31, 2005.
The Company has the option to extend the term of the lease for an additional
five years. The Company uses this facility for the laboratory, manufacturing,
warehousing, distribution, and administrative functions of its wholly owned
subsidiary, Hycor Biomedical GmbH.
3) The Company leases the 7000 square foot ground floor of a two story building
located at Pentlands Science Park, Bush Loan Penicuik, EH26 OPL Scotland. The
lease has a five year term ending September 30, 2001. The Company has the option
to extend the term of the lease for an additional five years. The Company uses
this facility for the laboratory, manufacturing, warehousing, distribution, and
administrative functions of its wholly owned subsidiary, Cogent Diagnostics LTD.
In July 1998, the Company relocated its administrative and marketing
offices from its Irvine, California, facility and incorporated them into its
Garden Grove, California, facility. The Irvine facility lease has a seven and
one-half year term ending December 31, 2000, and the building was subleased by
the Company for the remainder of the lease term.
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.
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In management's opinion, in general, its plant and equipment are
adequately maintained, in good operating condition and adequate for the
Company's present needs. The Company upgrades and modernizes its facilities and
equipment and expands its facilities as necessary to meet customer requirements.
ITEM 3. LEGAL PROCEEDINGS
To the best of management's knowledge, there are no material pending
legal proceedings to which the Company is a party or to which the Company's
property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1998,
there were no matters submitted to a vote of security holders.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE OF COMMON STOCK
Hycor Biomedical Inc.'s common stock trades on The Nasdaq Stock Market
under the symbol HYBD. The following table sets forth the range of high and low
trading prices for the common stock for the periods indicated as reported. The
prices do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Year Ended High Low
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<S> <C> <C>
December 31, 1997
1st Quarter 3-1/2 2-1/4
2nd Quarter 2-3/4 1-3/8
3rd Quarter 2-1/2 1-7/8
4th Quarter 2-1/2 1-3/8
December 31, 1998
1st Quarter 2-5/16 1-9/16
2nd Quarter 2-1/2 1-5/8
3rd Quarter 2-3/8 1-3/8
4th Quarter 1-7/8 7/8
</TABLE>
There were 1,036 shareholders of record as of March 20, 1999. No dividends have
been paid to stockholders since the Company was founded and the Company has no
current intentions of paying cash dividends in the foreseeable future. The
Company's new bank line of credit also precludes the payment of dividends.
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ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998(a) 1997(b) 1996 1995(c) 1994
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<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $ 18,410 $ 19,289 $ 20,084 $ 25,185 $ 25,897
Net (loss) income $ (6,600) $ (4,254) $ 17 $ 131 $ 2,833
Basic and diluted
earnings per share $ (0.91) $ (0.60) $ 0.00 $ 0.02 $ 0.34
FINANCIAL POSITION
Working capital $ 5,011 $ 8,433 $ 11,458 $ 13,615 $ 13,322
Net property and equipment $ 4,239 $ 5,243 $ 4,908 $ 4,727 $ 6,419
Total assets $ 15,983 $ 22,301 $ 24,278 $ 27,575 $ 29,000
Long-term debt $ 678 $ 2,240 $ -- $ -- $ --
Total Stockholders' equity $ 10,677 $ 16,814 $ 21,918 $ 24,339 $ 26,169
</TABLE>
(a) 1998 results include the $2,248,000 write-off of goodwill related to the
acquisition of Medical Specialties International Inc. In addition, the
Company recognized an increase in the valuation allowance against
deferred taxes of $3,189,000. See Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes 8 and 12 to the
Consolidated Financial Statements.
(b) 1997 results included the acquired in-process research and development
write-off of $3,300,000 related to the acquisition of Cogent. See
Management's Discussion and Analysis of Financial Condition and Results
of Operations and Note 3 to the Consolidated Financial Statements.
(c) 1995 results include net costs of implementing the Company's
Restructuring Plan amounting to $1,734,000.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
This Section and this entire Annual 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; and changes in
government laws and regulations, including taxes.
GENERAL
Management believes the Company's adverse financial performance for the
periods ending 1998, 1997, and 1996 was influenced primarily by a longer than
expected ramp-up period under the new strategic direction as defined in the
Company's 1995 restructuring plan (the "Plan"). The Plan focused the Company on
the clinical immunology market with an emphasis on allergy and autoimmune
testing as the areas for development and revenue growth while maintaining a
position in urinalysis and hematology. Associated with the implementation of the
Plan, the Company recorded net costs in 1995 of $1,734,000, which arose from the
divestiture and discontinuance of several product lines outside the new
strategic direction. The Plan anticipated:
o A phase-out of discontinued products with a related loss of revenues.
Total revenues related to the divested or discontinued product lines
accounted for approximately 0%, 5%, and 14% of the Company's total
revenues for 1998, 1997, and 1996, respectively.
o A decline in allergy sales within the Company's existing manual and
semi-automated diagnostic system-based products due to competition,
emerging technologies, and in the USA, the effects of the Clinical
Laboratories Improvement Amendments of 1988, which became fully
effective in 1992 and caused a market shift from physician office
laboratories toward larger clinical laboratories.
o Increased spending levels to develop and market a new generation of
products, in particular, the HY-TEC automated diagnostic system and
related products which were designed to meet the needs of the larger
laboratories.
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In response to the foregoing, management has implemented, or is
planning, certain actions as described below:
o Maintain focus on clinical immunology revenue growth. While total
Company sales have declined by approximately 4.6%, 4.0%, and 20.3% in
1998, 1997, and 1996, respectively, sales in the core clinical
immunology products have increased by 6.7%, 2.3%, and 0.2% over the
same periods. In addition, within the core clinical immunology
products, new products acquired or developed for the HY-TEC automated
instrument platform and the autoimmune market have increased by
approximately 46.0%, 90.4%, and 74.0% in 1998, 1997, and 1996,
respectively, which more than offset the declines in the pre-existing
manual and semi-automated equipment-based products. Sales and marketing
efforts will be supported in 1999 by the addition of the HY-TEC 288
instrument, which was launched in Europe in October 1998 and in the USA
in February 1999.
o Work force reductions related to: consolidation of facilities,
completed development projects, and general organizational
re-engineering have reduced the Company's headcount by approximately 7%
from December 31, 1997 to December 31, 1998. The Company expects these
actions to reduce expenses by approximately $600,000 per year.
o During 1998, the Company consolidated its California operations into
its Garden Grove facility. The annual savings in rent expense and
related taxes for the closed facility are approximately $325,000, net
of depreciation expense on leasehold improvements made to accommodate
the consolidation.
ACQUISITIONS
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 which
are secured by individual Shares Pledge agreements wherein an aggregate of
85,499 shares of Cogent stock are pledged as security for the debt. The shares
pledged as security against the three year notes represent approximately 95% of
the total outstanding shares of Cogent. The cash portion of the Cogent
acquisition was partially financed through bank borrowings of $1,000,000. The
Company also incurred direct costs of approximately $244,000 related to the
acquisition.
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.
The pro-forma results of operations computed as if Cogent had been
purchased January 1, 1996 would not be materially different from actual reported
results of operations.
In 1994, the Company acquired MSI and recorded total goodwill resulting
from the acquisition of approximately $2,829,000. During 1998, changes in the
market place, the introduction of new technologies by competitors, and the loss
of the Company's sole distributor of the MSI product line caused the goodwill
related to the acquisition to be considered impaired. As
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a result of this impairment, the Company recorded a non-cash pre-tax charge of
$2,248,000 relating to MSI goodwill. This writedown eliminates all remaining
goodwill related to this acquisition. (See Note 12 to the Consolidated Financial
Statements.)
RESULTS OF OPERATIONS
1998 COMPARED TO 1997 Overall, 1998 sales decreased 4.6% compared to 1997.
Revenue declines were due primarily to the trailing effect of discontinued and
non-core products which decreased $1,914,000 compared to 1997. This was
partially offset by the growth in the core clinical immunology product lines
which had increases of $1,035,000 compared to 1997. The delay in the launch of
the HY-TEC 288 instrument system from an original second quarter 1998 target
launch date to an actual launch date of October 1998 also negatively impacted
revenues for the 1998 year. Additionally, the Company's revenue is affected by
continued pressures in the health care industry for cost controls and the
Company anticipates that these pricing pressures will continue in the future.
Gross profit as a percentage of sales decreased from 51.9% in 1997 to
50.3% in 1998 due primarily to the increased costs related to the reconfiguring
of the allergy and autoimmune product lines to accommodate the HY-TEC 288 launch
as well as the effect of the HY-TEC instrument sales to our distributor
partners, which are sold at reduced prices in order to facilitate instrument
placements. Continued pricing pressures in the health care industry also
contributed to the decrease in gross profit.
Selling, general, and administration expenses decreased $314,000 in
1998 over 1997 primarily as a result of cost containment efforts which included
the consolidation of the Irvine operations into the Company's Garden Grove
facility. The Irvine facility closure resulted in savings of approximately
$272,000 from reduced rent and related expenses and gains realized from the sale
of redundant assets. In addition, headcount reductions, postponements in filling
certain open positions, and other cost containment efforts reduced expenses by a
further $311,000. The Company also realized a gain on the sale of its Portland,
Maine facility of approximately $231,000. These cost savings were partially
offset by 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 decreased $498,000 (15% of sales in 1997
versus 13% in 1998) primarily due to the completion of several projects related
to the HY-TEC 288 instrument system as it approached its commercial launch.
Interest income decreased $111,000 over prior year due to lower average
monthly balances in cash and investments during the year as compared to 1997.
Interest expense related to the debt incurred for the purchase of Cogent was
$171,000 in 1998 as compared to $86,000 in 1997.
The provision (benefit) for income taxes increased substantially from
($685,000) to $2,618,000 due to a non-cash charge of $3,189,000 in 1998 related
to the increase of the deferred tax valuation allowance thereby eliminating the
carrying value of deferred tax assets from the balance sheet. (See Note 8 to the
Consolidated Financial Statements.)
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1997 COMPARED TO 1996 Overall, 1997 sales decreased 4% compared to 1996. Revenue
declines were due to loss of sales resulting from discontinued product lines.
1997 sales of these products were $842,000 compared to $2,785,000 in 1996. These
revenue losses were partially offset by $768,000 of revenues generated by Cogent
since the 1997 date of acquisition and growth in the other continuing product
lines.
Gross profit as a percentage of sales decreased from 54.5% in 1996 to
51.9% in 1997 due primarily to the lower margins of our German operation and
continued pricing pressures from our customers.
Selling, general and administration expenses increased $257,000 in 1997
over 1996 due primarily to the inclusion of approximately $433,000 of these
costs at Cogent since its acquisition in July 1997, and at the Company's new
subsidiary in France.
Research and development costs increased $161,000 (14% of sales in 1996
versus 15% in 1997) primarily due to the direct costs incurred for the HY-TEC
288 instrument development program. As part of the acquisition of Cogent, the
Company allocated a significant portion of the purchase price to acquired
in-process research and development which it charged against current operations
in 1997. (See Note 3 to the Consolidated Financial Statements.)
Interest income decreased $167,000 over prior year due to lower average
monthly balances in cash and investments during the year as compared to 1996.
Interest expense was $86,000 in 1997 as the Company incurred debt for the
purchase of Cogent.
The benefit from income taxes increased substantially from $6,000 to
$685,000 due to higher losses in 1997. The acquired in-process R&D expense
write-off of $3,300,000 was not tax deductible.
FINANCIAL CONDITION
The Company's working capital decreased $3,421,000 from December 31,
1997 to December 31, 1998. The decrease was due primarily to the non-cash
transactions involving the increase of the deferred tax asset valuation
allowance for current deferred taxes (See note 8 to the consolidated financial
statements) and the increase to the current portion of long term debt. In
addition, the company utilized working capital on purchases of HY-TEC equipment
in support of the "reagent rental" sales program ($1,253,000) and in facility
modifications necessary to consolidate the Irvine office into the Garden Grove
facility ($400,000). These decreases were partially offset by the proceeds from
the sale of the Portland, Maine, facility ($953,000) and proceeds from the sales
of redundant assets arising from the consolidation of the Irvine and Garden
Grove facilities ($250,000).
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 agreed contract period by the purchase of test
reagents. This "reagent rental" sales program, common to the diagnostic market,
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creates negative cash flows in the initial years. Working capital, operating
results, and the available line of credit are expected to be sufficient to
satisfy these commitments and the needs of operations for the foreseeable
future.
The Company has a line of credit which provides for borrowings of 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 December 31, 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 December 31, 1998, the Company's interest rate was
7.26%.
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 ("Other Ratio"). At December 31,
1998, the Company was not in compliance with the minimum tangible net worth
requirement nor the Other Ratio requirement and obtained waivers from the bank.
Subsequent to December 31, 1998, the bank modified the restrictive covenants
bringing the Company into full compliance. The Company believes it will be able
to meet the modified requirements through the remainder of the credit term. The
Company intends upon renewing its line of credit on substantially consistent
terms with the bank upon maturity of the line in July 1999.
In addition, the Company has outstanding notes in the amount of
$1,270,000. These notes were issued to the seller group in executing the
acquisition of Cogent. The notes are secured by individual Shares Pledge
agreements wherein an aggregate of 85,499 shares of Cogent stock are pledged as
security for the debt. 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. (See Note 3 to Consolidated Financial Statements.)
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 products, assess risk, take any
required corrective actions, test and certify compliance. In addition, the
Company is in 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,
14
<PAGE> 15
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 certain Non-IT applications such as the telephone
switchboard system and the internal communications network. Upgrades currently
in process are the general ledger, fixed asset, and payroll administration
applications.
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.
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
15
<PAGE> 16
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 October 31, 1999. In addition, the
Company is forming a rapid response team as part of its IT group that will
respond to any operational problems during the Year 2000 date change period.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133"). This Statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company has not yet determined the impact,
if any, of adopting this new standard. The accounting and disclosures prescribed
by SFAS No. 133 are effective for fiscal years beginning after June 15, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including foreign
currency fluctuations and changes in interest rates affecting its debt.
FOREIGN CURRENCY
Approximately 28% of the Company's net sales in fiscal 1998 was
generated by the Company's foreign subsidiaries ("Foreign Subs"). The financial
position and results of operations of the Foreign Subs are measured using the
local currency as the functional currency. The Foreign Subs sell product in
various European currencies which are collected at future dates and purchase raw
materials and finished goods in both U.S. Dollars and other European currencies.
Accordingly, the Company is exposed to transaction gains and losses that could
result from changes in foreign currency exchange rates. Realized gains and
losses from foreign currency transactions are included in operations as
incurred. In addition, the Company has outstanding notes in the amount of
$1,270,000 which were issued to acquire Cogent Diagnostics LTD in 1997. These
notes are payable in British Pounds and therefore create a foreign exchange
risk. The Company has hedged this firm commitment with a forward exchange
contract. Gains and losses related to hedges of firmly committed transactions
are deferred and recognized when the hedged transactions occurs.
For financial reporting purposes, the Foreign Subs' statements of
operations are translated from the local currency into U.S. Dollars at the
exchange rates in effect during the reporting
16
<PAGE> 17
period. When the local currency strengthens compared to the U.S. Dollar, there
is a positive effect on the Foreign Subs' results as reported in the Company's
Consolidated Financial Statements. Conversely, when the U.S. Dollar strengthens,
there is a negative effect. In fiscal 1998, the net impact to the Company's
reported sales from the effect of exchange rate fluctuations was immaterial.
Certain countries in which the Company operates adopted the Euro as a
legal currency effective January 1, 1999. Euro notes and coins are expected to
begin circulation after a three-year transition period on January 1, 2002. The
Company's information systems are capable of processing transactions in Euros.
In addition, the Company is planning to upgrade its information systems through
fiscal 2000 to enhance its capability to process transactions and keep records
in Euros. While the Company is uncertain as to the ultimate impact of the
conversion, the Company does not expect costs in connection with the Euro
conversion to be material.
INTEREST RATES
At December 31, 1998, $1,000,000 was outstanding on the Company's line
of credit. Advances under the line bear interest at the prime rate or at LIBOR
plus 2%. The weighted average interest rate for the year ended December 31, 1998
was 8.09%. If rates were to increase by 10%, the estimated impact on the
Company's Consolidated Financial Statements would be to reduce net income by
approximately $8,000 before taxes based on amounts outstanding and rates in
effect at December 31, 1998.
17
<PAGE> 18
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Independent Auditors' Report 19
Consolidated Balance Sheets as of 20-21
December 31, 1998 and 1997
Consolidated Statements of Operations and 22
Comprehensive Operations for the years
ended December 31, 1998, 1997, and 1996
Consolidated Statements of Stockholders' 23
Equity for the years ended December 31,
1998, 1997, and 1996
Consolidated Statements of Cash 24-25
Flows for the years ended December 31,
1998, 1997, and 1996
Notes to Consolidated Financial Statements 26-38
</TABLE>
18
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hycor Biomedical Inc.
Garden Grove, California
We have audited the accompanying consolidated balance sheets of Hycor Biomedical
Inc. and subsidiaries (the Company) as of December 31, 1998 and 1997, and the
related consolidated statements of operations, comprehensive operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the index at Item 14(a)(2). These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hycor Biomedical Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 19, 1999
19
<PAGE> 20
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS (Note 6):
Cash and cash equivalents $ 655,716 $ 814,908
Investments (Note 4) 1,266,935 1,490,192
Accounts receivable, net of allowance for
doubtful accounts of $211,482 and
$120,684 in 1998 and 1997, respectively 3,022,618 3,312,857
Inventories (Note 5) 4,268,949 3,772,777
Prepaid expenses and other current assets 424,597 562,671
Deferred income tax asset (Note 8) -- 1,726,000
------------ ------------
Total current assets 9,638,815 11,679,405
------------ ------------
PROPERTY AND EQUIPMENT, at cost (Note 6) :
Land and buildings -- 1,432,639
Leasehold improvements 2,085,298 1,706,625
Machinery and equipment 6,382,511 7,128,263
Furniture, fixtures, and office equipment 2,054,648 2,334,628
------------ ------------
10,522,457 12,602,155
Accumulated depreciation and amortization (6,283,497) (7,358,809)
------------ ------------
Property and equipment, net 4,238,960 5,243,346
------------ ------------
GOODWILL AND OTHER INTANGIBLE ASSETS, net of
accumulated amortization of $858,678 and
$1,101,528 in 1998 and 1997, respectively (Notes 3 and 12) 2,012,348 4,363,971
DEFERRED INCOME TAX ASSET (Note 8) -- 854,000
OTHER ASSETS 92,586 160,174
------------ ------------
Total assets $ 15,982,709 $ 22,300,896
============ ============
</TABLE>
See notes to consolidated financial statements
20
<PAGE> 21
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,101,879 $ 1,247,642
Accrued liabilities 1,321,329 774,177
Accrued payroll expenses 377,609 613,698
Current portion of long-term debt 1,826,706 611,159
------------ ------------
Total current liabilities 4,627,523 3,246,676
------------ ------------
Long-term debt (Note 6) 678,491 2,240,240
------------ ------------
Total Liabilities 5,306,014 5,486,916
------------ ------------
COMMITMENTS (Note 10)
STOCKHOLDERS' EQUITY (Note 7):
Preferred stock, $.01 par value;
authorized - 3,000,000 shares;
none outstanding -- --
Common stock, $.01 par value;
authorized - 20,000,000 shares;
issued and outstanding: 7,283,456
shares in 1998 and 7,156,954 shares in 1997 72,835 71,570
Paid-in capital 12,420,520 12,271,207
Retained earnings (accumulated deficit) (1,621,204) 4,978,890
Accumulated other comprehensive loss (195,456) (507,687)
------------ ------------
Total stockholders' equity 10,676,695 16,813,980
------------ ------------
Total liabilities and stockholders' equity $ 15,982,709 $ 22,300,896
============ ============
</TABLE>
See notes to consolidated financial statements
21
<PAGE> 22
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 18,410,255 $ 19,288,537 $ 20,083,610
COST OF SALES 9,150,505 9,286,564 9,145,300
------------ ------------ ------------
Gross profit 9,259,750 10,001,973 10,938,310
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general, and administrative 8,572,099 8,885,984 8,628,939
Research and development 2,391,893 2,889,393 2,728,796
Acquired In-process research and development (Note 3) -- 3,300,000 --
Impairment loss on long-lived assets (Note 12) 2,247,861 -- --
------------ ------------ ------------
13,211,853 15,075,377 11,357,735
------------ ------------ ------------
OPERATING LOSS (3,952,103) (5,073,404) (419,425)
INTEREST EXPENSE (171,010) (85,796) --
INTEREST INCOME 124,742 236,000 403,314
GAIN (LOSS) ON FOREIGN CURRENCY TRANSACTIONS 16,277 (15,451) 26,663
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAX PROVISION (BENEFIT) (3,982,094) (4,938,651) 10,552
INCOME TAX PROVISION (BENEFIT) (Note 8) 2,618,000 (685,000) (6,000)
------------ ------------ ------------
NET (LOSS) INCOME $ (6,600,094) $ (4,253,651) $ 16,552
============ ============ ============
BASIC AND DILUTED EARNINGS PER SHARE (Note 2) $ (0.91) $ (0.60) $ 0.00
============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
NET (LOSS) INCOME $ (6,600,094) $ (4,253,651) $ 16,552
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Foreign currency translation adjustments 309,075 (539,079) (223,170)
Unrealized gains (losses) on securities:
Unrealized gains (losses) on securities 2,833 (725) (18,396)
Plus: reclassification adjustment for losses
included in net income 323 24,517 9,678
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX 312,231 (515,287) (231,888)
------------ ------------ ------------
COMPREHENSIVE LOSS $ (6,287,863) $ (4,768,938) $ (215,336)
============ ============ ============
</TABLE>
See notes to consolidated financial statements
22
<PAGE> 23
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Common Stock Retained Accumulated
--------------------- Earnings Other
Number of Par Paid-in (Accumulated Comprehensive
Shares Value Capital Deficit) Income (Loss) Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 7,730,291 $ 77,303 $ 14,806,686 $ 9,215,989 $ 239,488 $ 24,339,466
ISSUANCE OF COMMON STOCK,
PRINCIPALLY UNDER EMPLOYEE
BENEFIT PLANS, including related
income tax benefits (Note 9) 76,672 767 178,452 -- -- 179,219
COMMON STOCK PURCHASED (588,900) (5,889) (2,379,502) -- -- (2,385,391)
NET INCOME -- -- -- 16,552 -- 16,552
OTHER COMPREHENSIVE LOSS -- -- -- -- (231,888) (231,888)
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 7,218,063 72,181 12,605,636 9,232,541 7,600 21,917,958
ISSUANCE OF COMMON STOCK,
PRINCIPALLY UNDER EMPLOYEE
BENEFIT PLANS, including related
income tax benefits (Note 9) 95,291 953 131,587 -- -- 132,540
COMMON STOCK PURCHASED (156,400) (1,564) (466,016) -- -- (467,580)
NET LOSS -- -- -- (4,253,651) -- (4,253,651)
OTHER COMPREHENSIVE LOSS -- -- -- -- (515,287) (515,287)
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 7,156,954 71,570 12,271,207 4,978,890 (507,687) 16,813,980
ISSUANCE OF COMMON STOCK,
PRINCIPALLY UNDER EMPLOYEE
BENEFIT PLANS, including related
income tax benefits (Note 9) 126,502 1,265 149,313 -- -- 150,578
NET LOSS -- -- -- (6,600,094) -- (6,600,094)
OTHER COMPREHENSIVE INCOME -- -- -- -- 312,231 312,231
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 7,283,456 $ 72,835 $ 12,420,520 $ (1,621,204) $ (195,456) $ 10,676,695
======================================================================================
</TABLE>
See notes to consolidated financial statements
23
<PAGE> 24
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(6,600,094) $(4,253,651) $ 16,552
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,701,642 1,626,731 1,765,099
Provision for doubtful accounts receivable 162,174 (15,641) (20,815)
Deferred income tax provision 2,580,000 (318,000) 676,000
Noncash gain on foreign currency transactions -- -- (26,663)
Acquired in-process research and development write-off -- 3,300,000 --
Impairment loss on long-lived assets 2,247,861 -- --
Change in assets and liabilities, net of effects of
acquisitions, dispositions and foreign currency adjustments:
Accounts receivable 127,203 152,631 626,849
Income tax receivable -- (409,317) (352,792)
Inventories (446,028) 264,986 (4,128)
Prepaid expenses and other current assets 147,128 (177,356) 82,697
Other assets 12,146 169,199 11,050
Accounts payable (155,427) (427,346) 89,246
Accrued liabilities 555,175 (546,274) (512,684)
Accrued payroll expenses (243,105) 29,755 (418,744)
----------- ----------- -----------
Total adjustments 6,688,769 3,649,368 1,915,115
----------- ----------- -----------
Net cash provided by (used in) operating activities 88,675 (604,283) 1,931,667
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 205,247 3,200,842 1,543,046
Purchases of property and equipment (1,507,811) (1,578,892) (1,655,492)
Purchases of intangible assets (92,566) (118,167) (33,344)
Proceeds from sales of property and equipment 1,247,395 38,650 32,300
Direct costs of acquisition -- (244,066) (38,666)
Proceeds from collection of notes receivable 95,193 207,839 27,308
Business acquisitions, net of cash acquired -- (1,391,515) --
----------- ----------- -----------
Net cash (used in) provided by investing activities (52,542) 114,691 (124,848)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 49,370 1,000,000 --
Principal payments on long-term debt (398,565) (23,168) --
Proceeds from issuance of common stock 150,578 132,540 179,219
Purchases of Hycor common stock -- (467,580) (2,385,391)
----------- ----------- -----------
Net cash (used in) provided by financing activities (198,617) 641,792 (2,206,172)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,292 31,304 (2,702)
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (159,192) 183,504 (402,055)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 814,908 631,404 1,033,459
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 655,716 $ 814,908 $ 631,404
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
24
<PAGE> 25
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-
Cash paid during the year - interest $ 177,701 $ 64,908 --
- income taxes $ 18,221 $ 63,832 $ 330,650
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS-
During 1997, the Company acquired certain businesses in
transactions summarized as follows:
Fair value of assets acquired $ -- $ 1,214,776 $ --
Acquired in-process research and development -- 3,300,000 --
Issuance of notes payable to previous owners -- (1,573,779) --
Cash paid, net of cash acquired -- (1,391,515) --
----------- ----------- -----------
Liabilities assumed, including costs of acquisition $ -- $ 1,549,482 $ --
=========== =========== ===========
Reduction of goodwill and accrued income taxes payable due
to utilization of Ventrex acquired net operating losses,
credit carryforwards, and other timing differences $ -- $ -- $ 57,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
25
<PAGE> 26
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE 1: DESCRIPTION OF BUSINESS AND MANAGEMENT PLANS
DESCRIPTION OF BUSINESS Hycor Biomedical Inc. ("Hycor" or the "Company") is
engaged in developing, manufacturing, and marketing medical and diagnostic
products. The Company's products are primarily used in the clinical laboratory
and specialty physician markets in the United States and Europe. The majority of
sales are through independent and clinical laboratory distributors.
MANAGEMENT PLANS Management believes the Company's adverse financial performance
for the periods ending 1998, 1997, and 1996 was influenced primarily by a longer
than expected ramp-up period under the new strategic direction as defined in the
Company's 1995 restructuring plan (the "Plan"). The Plan focused the Company on
the clinical immunology market with an emphasis on allergy and autoimmune
testing as the areas for development and revenue growth while maintaining a
position in urinalysis and hematology. Associated with the implementation of the
Plan, the Company recorded net costs in 1995 of $1,734,000, which arose from the
divestiture and discontinuance of several product lines outside the new
strategic direction. The Plan anticipated:
o A phase-out of discontinued products with a related loss of revenues.
Total revenues related to the divested or discontinued product lines
accounted for approximately 0%, 5%, and 14% of the Company's total
revenues for 1998, 1997, and 1996, respectively.
o A decline in allergy sales within the Company's existing manual and
semi-automated diagnostic system-based products due to competition,
emerging technologies, and in the USA, the effects of the Clinical
Laboratories Improvement Amendments of 1988, which became fully
effective in 1992 and caused a market shift from physician office
laboratories toward larger clinical laboratories.
o Increased spending levels to develop and market a new generation of
products, in particular, the HY-TEC automated diagnostic system and
related products which were designed to meet the needs of the larger
laboratories.
In response to the foregoing, management has implemented, or is planning,
certain actions as described below:
o Maintain focus on clinical immunology revenue growth. While total
Company sales have declined by approximately 4.6%, 4.0%, and 20.3% in
1998, 1997, and 1996, respectively, sales in the core clinical
immunology products have increased by 6.7%, 2.3%, and 0.2% over the
same periods. In addition, within the core clinical immunology
products, new products acquired or developed for the HY-TEC automated
instrument platform and the autoimmnue market have increased by
approximately 46.0%, 90.4%, and 74.0% in 1998, 1997, and 1996,
respectively, which more than offset the declines in the pre-existing
manual and semi-automated equipment-based products. Sales and marketing
efforts will be supported in 1999
26
<PAGE> 27
by the addition of the HY-TEC 288 instrument, which was launched in
Europe in October 1998 and in the USA in February 1999.
o Work force reductions related to: consolidation of facilities,
completed development projects, and general organizational
re-engineering have reduced the Company's headcount by approximately 7%
from December 31, 1997 to December 31, 1998. The Company expects these
actions to reduce expenses by approximately $600,000 per year.
o During 1998, the Company consolidated its California operations into
its Garden Grove facility. The annual savings in rent expense and
related taxes for the closed facility are approximately $325,000, net
of depreciation expense on leasehold improvements made to accommodate
the consolidation.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION The consolidated financial statements include the accounts of
Hycor Biomedical Inc. and its wholly-owned subsidiaries. All material
intercompany amounts and transactions have been eliminated.
FOREIGN CURRENCY The financial position and results of operations of the
Company's foreign subsidiaries are measured using the local currency as the
functional currency. Assets and liabilities of the subsidiaries are translated
at the exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from differences in exchange rates from period
to period are included in the accumulated other comprehensive loss account in
stockholders' equity. Realized gains or losses from foreign currency
transactions are included in operations as incurred.
DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are used by
the Company in the management of its foreign currency exposures on firm
commitments. The Company has entered into forward exchange contracts to hedge
its outstanding notes, issued in 1997 in the acquisition of Cogent Diagnostics
LTD, which are payable in British pounds. Gains and losses on foreign currency
firm commitment hedges are deferred and included in the basis of the
transactions underlying the commitments.
CASH EQUIVALENTS Cash equivalents are deemed to be highly liquid investments
with an original maturity of three months or less.
INVESTMENTS The Company accounts for investments pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." At December 31, 1998 and 1997,
marketable equity and debt securities have been categorized as available for
sale and, as a result, are stated at fair value. Marketable equity and debt
securities available for current operations are classified in the balance sheet
as current assets. Unrealized holding gains and losses are included as a
component of accumulated other comprehensive income (loss), net of tax, until
realized.
CREDIT RISK Most of the Company's business activity is with medical products
distributors that are primarily located in the United States and Europe. The
Company grants normal trade credit
27
<PAGE> 28
to customers without requiring collateral or other security. The Company
maintains reserves for potential credit losses, and those losses have been
within management's expectations.
INVENTORIES Inventories are valued at the lower of cost (first-in, first-out
method) or market. Cost includes material, direct labor, and manufacturing
overhead.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation
is computed using the straight-line method over the assets' estimated useful
lives which range from three to twenty years. Leasehold improvements are
amortized over the life of the lease. Maintenance, repairs, and minor renewals
are charged to expense as incurred. Additions and improvements are capitalized.
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of purchase
price over the fair market value of tangible assets resulting from business
acquisitions. Other intangible assets include patents, trademarks, and license
fees which are recorded at cost. Goodwill is amortized over 10 to 15 years on a
straight-line basis. Other intangible assets are amortized on a straight-line
basis over the assets' estimated useful lives which range from 5 to 15 years.
The Company assesses the recoverability of its goodwill on an annual basis or
whenever adverse events occur or changes in circumstances or business climate
indicate that expected undiscounted future operating cash flows may not be
sufficient to support recorded goodwill. If expected undiscounted operating cash
flows are not sufficient to support the recorded asset, an impairment is
recognized to reduce the carrying value of the goodwill. (See Note 12).
OTHER ASSETS Other assets consist primarily of notes receivable and long-term
deposits.
LONG-LIVED ASSETS The Company accounts for the impairment and disposition of
long-lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." In
accordance with SFAS No. 121, long-lived assets are reviewed for events or
changes in circumstances, which indicate that their carrying value may not be
recoverable.
STOCK-BASED COMPENSATION The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees."
INCOME TAXES The Company accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes." Accordingly, income taxes are provided for the
tax effects of transactions reported in the financial statements and consist of
taxes currently due plus deferred taxes related primarily to operating losses
that are available to offset future taxable income and tax credits that are
available to offset future income taxes. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes also are recognized for differences between the bases of
assets and liabilities for financial and tax reporting purposes. A valuation
allowance reduces deferred tax assets when it is "more likely than not" that
some portion or all of the deferred tax assets will not be realized.
28
<PAGE> 29
REVENUE RECOGNITION Revenue on product sales is recognized when products are
shipped.
EARNINGS PER SHARE As of December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share" ("EPS"). SFAS No. 128 requires the Company to report Basic
EPS, as defined therein, which excludes all common share equivalents from the
earnings per share computation, and Diluted EPS, as defined therein, which is
calculated similar to the Company's historical earnings per share computation.
Earnings per share amounts for all periods presented have been restated to
conform to the requirements of SFAS No. 128. Common stock equivalents have been
excluded from the calculation of diluted EPS in loss years as the impact is
anti-dilutive. Basic earnings per share approximates diluted earnings per share
for each period represented. The numbers of shares used in computing earnings
per share are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average number
of shares outstanding 7,217,928 7,134,077 7,598,969
Common stock equivalents N/A N/A 124,386
- ------------------------------------------------------------------------------
7,217,928 7,134,077 7,723,355
==============================================================================
</TABLE>
COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income." This statement establishes standards for
the reporting of comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements. The Company has shown the computation of other comprehensive income
(loss), net of tax. The tax effects of each component of other comprehensive
income (loss) for each of the years presented was insignificant.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS Certain items in the 1997 and 1996 consolidated financial
statements have been reclassified to conform with the 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company has not yet determined the impact, if any, of adopting this new
standard. The accounting and disclosures prescribed by SFAS No. 133 are
effective for fiscal years beginning after June 15, 1999.
29
<PAGE> 30
NOTE 3: 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. Such notes are secured by a majority of the outstanding shares of
Cogent. The cash portion of the Cogent acquisition was partially financed
through bank borrowings of $1,000,000. The Company also incurred direct costs of
approximately $244,000 related to the acquisition.
The Company obtained an independent valuation of the net assets
acquired in the purchase transaction which resulted in the allocation of the
purchase price less net book value acquired to $254,000 of identified intangible
assets, $3,300,000 of acquired in-process research and development, and $138,000
of goodwill. As the technological feasibility of the in-process research and
development had not been established and such technology had no alternative
future use, the acquired in-process research and development was expensed in
accordance with Interpretation 4 of APB Opinion No. 16 "Business Combinations."
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.
The pro-forma results of operations computed as if Cogent had been
purchased January 1, 1996, would not be materially different from actual
reported results of operations.
NOTE 4: INVESTMENTS
Investments consist principally of corporate debt securities,
categorized as available for sale, with scheduled maturities all within one to
two years. As of December 31, 1998, such investments cost and fair value were
$1,261,479 and $1,266,935, respectively. As of December 31, 1997, the cost and
fair value were $1,489,999 and $1,490,192, respectively.
Gross unrealized holding gains at December 31, 1998 and 1997, were
$5,832 and $1,974, offset by unrealized holding losses of $376 and $1,781,
respectively. For the purpose of determining gross realized gains and losses,
the cost of securities sold is based on specific identification. During 1998,
the Company sold investments with an aggregate book value of $205,785 for total
cash proceeds of $205,247, resulting in a net realized loss of $538. During
1997, the Company sold investments with an aggregate book value of $3,241,033
for total cash proceeds of $3,200,842, resulting in a net realized loss of
$40,191.
30
<PAGE> 31
NOTE 5: INVENTORIES
Inventories at December 31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Raw materials $1,040,529 $1,141,205
Work-in-process 1,420,231 1,280,960
Finished goods 1,808,189 1,350,612
- --------------------------------------------------------------------------
$4,268,949 $3,772,777
==========================================================================
</TABLE>
NOTE 6: 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
December 31, 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 December 31, 1998, the Company's interest rate was
based upon LIBOR and was 7.26%.
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 December 31, 1998, the
Company was either in compliance with such covenants or had obtained applicable
waivers.
The Company has outstanding notes in the amount of $1,270,000. These
notes were issued to the seller group in executing the acquisition of Cogent.
The notes are secured by individual Shares Pledge agreements wherein an
aggregate of 85,499 shares of Cogent stock are pledged as security for the debt.
Interest on the notes accrues at a rate of 6.85% and is payable quarterly. The
note provides for principal payments which are due in three equal annual
installments which commenced in July 1998. In addition, the Company and one of
its foreign subsidiaries has long-term debt, payable to financial institutions,
aggregating $235,000 with a weighted average interest rate of approximately 9%.
Principal payments on long-term debt are due approximately as follows:
<TABLE>
<CAPTION>
Year Amount
- ------------------------------------------------------------------------------
<S> <C>
1999 $1,826,706
2000 587,712
2001 58,429
2002 29,323
2003 3,027
Thereafter --
- ------------------------------------------------------------------------------
$2,505,197
==============================================================================
</TABLE>
31
<PAGE> 32
NOTE 7: STOCKHOLDERS' EQUITY
In December 1998, the Company granted warrants to purchase 150,000
shares of the Company's common stock at $1.44 per share, which was equal to the
fair market value of the stock at the date of grant, to certain consultants of
the Company.
The Company will record compensation expense equivalent to the fair
value of the warrants, totaling $80,386, over the two-year vesting period
commencing in fiscal 1999.
NOTE 8: INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ 70,000 $ (351,000)
State 38,000 (54,000) 4,000
Foreign -- (383,000) (335,000)
- --------------------------------------------------------------------------------
Total 38,000 (367,000) (682,000)
Deferred:
Federal 1,576,000 (276,000) 648,000
State 437,000 (42,000) (44,000)
Foreign 567,000 -- 72,000
- --------------------------------------------------------------------------------
Total 2,580,000 (318,000) 676,000
- --------------------------------------------------------------------------------
$ 2,618,000 $ (685,000) $ (6,000)
================================================================================
</TABLE>
32
<PAGE> 33
A reconciliation of the Company's effective tax rate compared to the
federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision computed at federal
statutory rate $(1,393,000) $(1,728,000) $ 4,000
Increase (decrease) resulting from:
State taxes, net 62,000 (63,000) (26,000)
In-Process research and development -- 1,155,000 --
Foreign tax rate differential -- (52,000) (2,000)
Research and development credits -- (110,000) (75,000)
Foreign sales corporation -- (12,000) (35,000)
Intangibles 774,000 49,000 46,000
Meals and entertainment 9,000 17,000 15,000
Other (23,000) 59,000 67,000
Valuation Allowance 3,189,000 -- --
- -----------------------------------------------------------------------------------------------
$ 2,618,000 $ (685,000) $ (6,000)
===============================================================================================
</TABLE>
The components of the Company's deferred income tax benefit as of
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Allowance for doubtful accounts $ 78,000 $ 21,000
Inventory reserves 157,000 104,000
Depreciation (128,000) (264,000)
Accrued payroll 191,000 53,000
Tax credits 791,000 507,000
Net operating loss carryforwards 3,391,000 3,607,000
Deferred state taxes 2,000 (122,000)
Capital loss carryforwards 24,000 17,000
Unrealized foreign exchange gain (65,000) (65,000)
Other 53,000 27,000
- --------------------------------------------------------------------------------
Subtotal 4,494,000 3,885,000
Valuation allowance (4,494,000) (1,305,000)
- --------------------------------------------------------------------------------
Total $ -- $ 2,580,000
================================================================================
</TABLE>
The Company evaluates a variety of factors in determining the amount of
deferred income assets to be recognized pursuant to SFAS No. 109. During 1998,
the Company determined that a valuation allowance for the entire net deferred
tax asset is required.
33
<PAGE> 34
As of December 31, 1998, the Company has approximately $9.0 million and
$4.8 million of federal and state domestic net operating loss carryforwards,
respectively, currently expiring on an annual basis through 2018. In addition,
the Company has foreign net operating loss carryforwards of approximately $1.6
million currently expiring on an annual basis through 2003. Utilization of a
portion the net operating losses has been limited, due to a change in ownership,
to approximately $892,000 per year by Internal Revenue Code Section 382.
NOTE 9: EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS At December 31, 1998, the Company had reserved 1,538,434
shares of common stock for issuance to employees and directors under five stock
option plans. Options are generally granted at fair market value and become
exercisable over periods of up to 10 years. These options generally expire 10
years from the date of grant.
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, January 1, 1996 1,098,816 $ 3.77
Granted (weighted average fair value of $1.88) 635,500 4.63
Exercised 49,000 1.56
Canceled 211,500 2.69
---------
Outstanding, December 31, 1996 (728,607 1,473,816 4.37
exercisable at a weighted average price
of $4.13)
Granted (weighted average fair value of $1.06) 125,000 2.66
Exercised 62,000 1.57
Canceled 188,500 4.34
---------
Outstanding, December 31, 1997 (677,066 1,348,316 4.34
exercisable at a weighted average price
of $4.33)
Granted (weighted average fair value of $0.80) 597,500 1.72
Exercised 80,549 1.31
Canceled 602,333 4.58
---------
Outstanding, December 31, 1998 1,262,934 $ 3.18
=========
</TABLE>
34
<PAGE> 35
Additional information regarding options outstanding as of December 31,
1998, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------------
Weighted Avg.
Remaining Weighted Avg. Weighted Avg.
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (Yrs) Price Exercisable Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.13 - 3.00 684,500 8.8 $1.80 59,000 $2.27
3.41 - 4.50 78,934 4.8 4.11 72,684 4.10
4.63 - 4.89 421,000 5.9 4.68 174,917 4.76
5.75 - 6.63 78,500 2.6 6.24 78,500 6.24
- -------------------------------------------------------------------------------------------------------
$1.13 - 6.63 1,262,934 7.2 $3.18 385,101 $4.56
======================================================================================================
</TABLE>
At December 31, 1998, 275,500 shares were available for grant.
STOCK PURCHASE PLAN The Company has reserved 138,233 shares of its common stock
for issuance to employees under an employee stock purchase plan. The plan allows
eligible employees to have salary withholdings to purchase shares of common
stock at a price equal to 85% of the lower of the market value of the stock at
the beginning or end of each six-month offer period, subject to an annual
limitation. Stock issued under the plan was 53,147, 46,384, and 22,724 shares in
1998, 1997, and 1996 at weighted average prices of $1.20, $1.50, and $3.57,
respectively.
ADDITIONAL STOCK PLAN INFORMATION As discussed in Note 2, the Company continues
to account for its stock-based awards using the intrinsic value method in
accordance with APB Opinion No. 25, and its related interpretations.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) and net income (loss) per share had
the Company adopted the fair value method as of the beginning of fiscal 1995.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations were made using
the Black-Scholes option-pricing model with the following weighted average
assumptions: expected life, 72 months following vesting; stock volatility, 37%
in 1998, 32% in 1997, and 28% in 1996; risk free interest rates, 5.6% in 1998,
5.8% in 1997, and 6.1% in 1996; and no dividends during the expected term. The
Company's calculations are based on a single option valuation approach, and
forfeitures are recognized as they occur. If the computed fair values of the
1998, 1997, and 1996 awards had been amortized to expense over the vesting
period of the awards, pro forma net income (loss) would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Pro-forma net loss $(6,683,000) $(4,442,000) $ (157,000)
Pro-forma basic and diluted loss per share $ (1.05) $ (0.62) $ (0.02)
</TABLE>
35
<PAGE> 36
401(K) PLAN The Company has established a profit sharing plan under Internal
Revenue Code Section 401(k). The 401(k) plan allows employees to contribute up
to fifteen percent of their salary to the plan. The Company matches 50 percent
of the first two percent of an employee's contribution and 100 percent of the
next one percent of contribution. A portion of the Company's contribution is
made in the Company's common stock. The Company issued 5,912, 7,512, and 4,948
shares of its common stock under this plan in 1998, 1997, and 1996,
respectively. Compensation expense related to these plans was $107,860,
$130,750, and $188,525 in 1998, 1997, and 1996, respectively.
NOTE 10: COMMITMENTS
OPERATING LEASES The Company leases office, laboratory, and warehouse space and
laboratory equipment under noncancelable operating leases. In addition, prior to
the sale of its Portland, Maine, facility on August 17, 1998, the Company leased
the facility to a third party. Lease income for the years ended December 31,
1998, 1997, and 1996 was approximately $140,000, $183,000, and $155,000,
respectively. Also, the Company relocated its administrative offices from its
Irvine, California, facility to its Garden Grove, California, facility. The
Irvine facility was subleased for the remainder of the lease term and will have
no material net impact on continuing operating results.
Rental expense under operating leases for the years ended December 31, 1998,
1997, and 1996 was approximately $895,000 (net of sublease income of $154,000),
$961,000, and $895,000, respectively. Future annual minimum lease payments, net
of minimum sublease income, under the noncancelable operating leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Gross
Minimum Minimum
Lease Sublease Total
Year Payment Income Amount
- --------------------------------------------------------------------
<S> <C> <C> <C>
1999 $ 1,143,000 $353,000 $ 790,000
2000 1,143,000 373,000 770,000
2001 725,000 -- 725,000
2002 638,000 -- 638,000
2003 638,000 -- 638,000
Thereafter 2,150,000 -- 2,150,000
- --------------------------------------------------------------------
$6,437,000 $726,000 $5,711,000
====================================================================
</TABLE>
LITIGATION The Company is involved in litigation which is incidental to its
business. The Company believes that the ultimate outcome of the litigation will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
NOTE 11: SEGMENT INFORMATION
The Company engages in business activity in only one operating segment
which entails the development, manufacture, and sale of medical and diagnostic
products with a focus on allergy and autoimmune testing and urinalyis products.
While the Company offers a wide range of items for sale, many are manufactured
at common production facilities. In addition, the Company's
36
<PAGE> 37
products are marketed through a common sales organization and are sold to a
similar customer base made up primarily of clinical laboratories and specialty
physician offices.
The Company sells its products primarily through distributors. Sales to
the Company's two largest distributors accounted for 19% and 12% of net product
sales in 1998; 18% and 12% in 1997; and 19% and 15% in 1996. A decision by a
significant customer to substantially decrease or delay purchases from the
Company or the Company's inability to collect receivables from these customers
could have a material adverse effect on the Company's financial condition and
results of operations.
In addition to its United States operations, the Company has
subsidiaries in Scotland, France, and Germany. Information about the Company's
products and operations in different geographic locations is shown below.
<TABLE>
<CAPTION>
Revenues by Product Line: 1998 % 1997 % 1996 %
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Urinalysis $ 9,309 51% $ 9,095 47% $ 9,306 46%
Allergy 5,737 31% 5,637 29% 5,747 29%
Autoimmune 1,432 8% 711 4% 39 0%
Hematology 792 4% 1,838 10% 1,344 7%
Other (a) 1,140 6% 2,008 10% 3,648 18%
-----------------------------------------------------------
$18,410 100% $19,289 100% $20,084 100%
===========================================================
</TABLE>
a = Other revenues include revenues from discontinued products $842 and $2,785
for 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Geographical Information: 1998 % 1997 % 1996 %
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues (b)
United States $13,264 72% $15,010 78% $16,657 83%
Foreign:
Germany 3,234 18% 3,511 18% 3,427 17%
Scotland 1,912 10% 768 4% -- 0%
-----------------------------------------------------------
Subtotal-Foreign 5,146 28% 4,279 22% 3,427 17%
-----------------------------------------------------------
Total Revenues $18,410 100% $19,289 100% $20,084 100%
===========================================================
</TABLE>
b = Revenues are allocated to countries based on the source of the product.
<TABLE>
<CAPTION>
Long-Lived Assets (Net): 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
United States $3,343 $6,671
Foreign:
Germany 2,596 2,650
Scotland 405 447
-----------------
Subtotal-Foreign 3,001 3,097
-----------------
Total Long-Lived Assets $6,344 $9,768
=================
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
Deferred Tax Assets 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
United States $ 3,915 $ 3,590
Foreign:
France 143 50
Germany 257 50
Scotland 175 195
---------------------------------
Subtotal-Foreign 575 295
---------------------------------
Subtotal 4,490 3,885
---------------------------------
Valuation Allowance (4,490) (1,305)
---------------------------------
Total Deferred Tax Assets $ -- $ 2,580
=================================
</TABLE>
NOTE 12: IMPAIRMENT LOSS ON LONG-LIVED ASSETS
In 1994, the Company acquired Medical Specialties International Inc.
(MSI) and recorded total goodwill resulting from the acquisition of
approximately $2,829,000. During 1998, changes in the market place, the
introduction of new technologies and the loss of the Company's sole distributor
of the MSI product line caused the goodwill related to the acquisition to be
considered impaired. Impairment of goodwill was determined based on the
Company's expected inability to generate positive future operating cash flows to
support the recorded value of goodwill. The Company, in accordance with SFAS No.
121 and APB Opinion No. 17 "Intangible Assets", recorded a noncash pre-tax
charge of $2,248,000 relating to MSI goodwill and other assets. This write down
eliminates all remaining goodwill related to this acquisition.
NOTE 13: FINANCIAL INSTRUMENTS
A summary of forward exchange contracts is as follows :
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------------- --------------------------------------
US Dollar Fair US Dollar Fair
Equivalent Maturity Value Equivalent Maturity Value
---------- -------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
British Pounds $1,015,625 July 1999 $1,037,175 $1,520,156 July 1998 $1,547,541
</TABLE>
The Company is exposed to credit losses in the event of nonperformance
by the counterparties to its forward exchange contracts but has no off-balance
sheet credit risk of accounting loss. The Company anticipates, however, that the
counterparties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to support
the forward exchange contracts subject to credit risk but monitors the credit
standing of the counterparties.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the captions
"Election of Directors," "Executive Officers," and "Executive Compensation -
Compliance with Section 16(a) of the Exchange Act" of the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders and is incorporated herein
by reference.
38
<PAGE> 39
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation" of the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders and is incorporated herein by reference; provided,
however, that the Compensation Committee Report on Executive Compensation and
the Performance Graph (i) shall not be deemed incorporated by reference in this
Annual Report on Form 10-K and (ii) shall not otherwise be deemed "filed" as
part of this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the caption
"Stock Ownership of Management and Certain Beneficial Owners" of the Company's
Proxy Statement for the 1999 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
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. FINANCIAL STATEMENT SCHEDULES
The following financial schedule is filed as part of this
Report:
<TABLE>
<CAPTION>
Schedule Page
Number Description Number
------ ----------- ------
<S> <C> <C>
II Valuation and Qualifying Accounts S-1
</TABLE>
Schedules other than those listed above have been omitted
because they are not applicable or the required information is
included in the financial statements or notes thereto.
2. EXHIBITS
3(1). Restated Certificate of Incorporation of Hycor
Biomedical Inc., previously filed with the Secretary
of State of Delaware on December 29, 1993, previously
filed as Exhibit 3(1). to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31,
1993, and incorporated herein by reference.
39
<PAGE> 40
3(2). By-Laws of Hycor Biomedical Inc. as amended,
previously filed as Exhibit 3(2). to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, and incorporated herein by
reference.
MATERIAL CONTRACTS - RELATING TO MANAGEMENT COMPENSATION PLANS
OR ARRANGEMENTS
10(1). Employment Agreement of J. David Tholen, dated
January 4, 1999.
10(2). Employment Agreement of Mary Jo Deal, dated September
1, 1997, previously filed as Exhibit 10(2). to the
Company's 10-Q for September 1997, and incorporated
herein by reference.
10(3). Employment Agreement of Reginald P. Jones, dated June
20, 1997, previously filed as Exhibit 10(3). to the
Company's 10-Q for September 1997, and incorporated
herein by reference.
10(4). Employment Agreement of Thomas M. Li, dated June 20,
1997, previously filed as Exhibit 10(4). to the
Company's 10-Q for September 1997, and incorporated
herein by reference.
10(5). Employment Agreement of Nelson F. Thune, dated June
20, 1997, previously filed as Exhibit 10(5). to the
Company's 10-Q for September 1997, and incorporated
herein by reference.
10(6). Employment Agreement of Richard D. Hamill, dated June
20, 1997, previously filed as Exhibit 10(1). to the
Company's 10-Q for September 1997, and incorporated
herein by reference.
10(7). Severance Agreement of Richard D. Hamill, dated
October 19, 1998.
10(10). 1981 Incentive Stock Option Plan, as amended,
previously filed as Exhibit 4(1). to the Company's
Registration Statements on Form S-8 (No. 33-25429 and
No. 33-32767), and incorporated herein by reference.
10(12). 1984 Nonqualified Stock Option Plan, as amended,
previously filed as Exhibit 4(1). to the Company's
Registration Statement on Form S-8 (No. 33-25428),
and incorporated herein by reference.
40
<PAGE> 41
10(13). 1988 Employee Stock Purchase Plan, previously filed
as Exhibit 4(1). to the Company's Registration
Statement on Form S-8 (No. 33-25427), and
incorporated herein by reference.
10(14). Hycor Biomedical Incentive Profit Sharing Plan,
previously filed as Exhibit 4(1). to the Company's
Registration Statement on Form S-8 (No. 33-25430),
and incorporated herein by reference.
10(15). Long Term Executive Incentive Plan - 1988, previously
filed as Exhibit 4(1). to the Company's Registration
Statement on Form S-8 (No. 33-43280) and incorporated
herein by reference.
10(17). 1992 Incentive Stock Plan, previously filed as
Exhibit 10(17). to the Company's 10-Q for June 30,
1992, and incorporated herein by reference.
10(18). Nonqualified Stock Option Plan for Non-Employee
Directors, previously filed as Exhibit 10(18). to the
Company's 10-Q for June 30, 1992, and incorporated
herein by reference.
OTHER MATERIAL CONTRACTS
10(21). Lease Agreement for the Company's Garden Grove,
California facility dated December 1, 1990,
previously filed as Exhibit 10(8). to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, and incorporated herein by
reference.
10(22). Lease Agreement for the Company's Irvine, California
facility, dated November 11, 1992, previously filed
as Exhibit 10(22). to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1992, and incorporated herein by reference.
10(23). Share Purchase Agreement between the Vendors (as
defined therein) and Hycor Biomedical Inc., dated
July 21, 1997, previously filed as Exhibit 10(01). to
the Company's Current Report on Form 8-K dated July
21, 1997, and incorporated herein by reference.
10(24). Form of Secured Loan Notes issued by Hycor Biomedical
Inc., dated July 21, 1997, previously filed as
Exhibit 10(02). to the Company's Current Report on
Form 8-K dated July 21, 1997, and incorporated herein
by reference.
10(25). Form of Shares Pledged by Hycor Biomedical Inc. in
favor of the selling shareholders, dated July 21,
1997, previously filed as Exhibit 10(03). to the
Company's Current Report on Form 8-K dated July 21,
1997, and incorporated herein by reference.
41
<PAGE> 42
10(26). Lease agreement for the Company's Kassel, Germany
facility, dated January 13, 1994, previously filed as
Exhibit 10(26). to the Company's Annual Report on
10-K for fiscal year ended December 31, 1994, and
incorporated herein by reference.
10(27). Business Loan Agreement between Hycor Biomedical Inc.
and Tokai Bank of California, dated July 11, 1997,
previously filed as Exhibit 10.01 to the Company's
10-Q for June 30, 1997, and incorporated herein by
reference.
10(28). Investment Banking Agreement by and between Hycor
Biomedical Inc. and Schneider Securities, Inc. dated
December 3, 1998.
21. Subsidiaries of Hycor Biomedical Inc.
23. Consent of Deloitte & Touche LLP, dated March 26,
1999.
27. Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Hycor Biomedical Inc.
(Registrant)
Date: 3/25/99 By: /s/ J. David Tholen
-------------------------------------
J. David Tholen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: 3/25/99 By: /s/ J. David Tholen
-------------------------------------
J. David Tholen
President and Chief Executive Officer
Date: 3/25/99 By: /s/ Samuel D. Anderson
-------------------------------------
Samuel D. Anderson
Chairman
Date: 3/25/99 By: /s/ David S. Gordon
-------------------------------------
David S. Gordon
Director
Date: 3/25/99 By: /s/ Reginald P. Jones
-------------------------------------
Reginald P. Jones
Senior Vice President, Chief
Financial Officer,
Date: 3/25/99 By: /s/ James R. Phelps
-------------------------------------
James R. Phelps
Director
Date: 3/25/99 By: /s/ Richard E. Schmidt
-------------------------------------
Richard E. Schmidt
Director
Date: 3/25/99 By: /s/ David A. Thompson
-------------------------------------
David A. Thompson
Director
Date: 3/25/99 By: /s/ Armando Correa
-------------------------------------
Armando Correa
Director, Finance and
Principal Accounting Officer
43
<PAGE> 44
SCHEDULE II
HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS (1)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(1)
Acquired
Balance at and or Charged to
Beginning Divested Costs and Balance at
of Year Allowance Expenses Deductions End of Year
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts receivable
1996 $ 136,604 $ -- $(20,815) $ 14,598 $ 101,191
1997 101,191 53,721 (15,641) 18,587 120,684
1998 120,684 -- 162,174 71,376 211,482
Allowance for excess, obsolete,
and short-dated inventory
balance sheet
1996 $1,939,502 $ -- $400,774 $ 974,465 $1,365,811
1997 1,365,811 58,343 254,966 1,297,694 381,426
1998 381,426 -- 200,760 165,136 417,050
</TABLE>
(1) Cogent Diagnostics Limited acquired on July 21, 1997
S-1
<PAGE> 45
EXHIBIT LIST
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
- ----------- ---------------
<C> <S>
10(1). Employment Agreement of J. David Tholen
10(7). Severance Agreement of Richard D. Hamill
10(28). Investment Banking Agreement Between Hycor Biomedical Inc. and
Schneider Securities
21. Subsidiaries of Hycor Biomedical Inc.
23. Consent of Deloitte & Touche LLP, dated March 26, 1999.
27. Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10(1)
Employment Agreement of J. David Tholen
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into by
HYCOR BIOMEDICAL INC., a Delaware corporation ("Company"), and J. DAVID THOLEN
("Tholen").
WHEREAS, the Company desires to promote Tholen from Executive Vice
President to President and Chief Executive Officer, Tholen desires to accept
such employment, and the parties desire to memorialize the terms and conditions
of their employment relationship,
NOW, THEREFORE, in consideration of the promises and covenants set
forth in this Agreement and for other valuable consideration, the parties agree
as follows:
1. Prior Agreement: This Agreement supercedes and replaces in its
entirety the Employment Agreement executed January 12, 1998 and re-executed as
of December 10, 1998 between Tholen and the Company.
2. Employment: Tholen shall be employed as President and Chief
Executive Officer of the Company reporting to the Chairman, and shall faithfully
and diligently perform all duties and responsibilities required of such position
based upon the general direction of the Board of Directors from time to time,
including service on behalf of the Company's subsidiary and affiliated
companies. The Board's current direction is as follows: to improve overall
performance leading to increased stock price.
3. Term. This Agreement and Tholen's employment as President and
Chief Executive Officer shall be for a term of two (2) years commencing on June
17, 1998, and expiring on June 16, 2000. Thereafter, the parties may renew this
Agreement upon mutually agreeable terms and conditions.
4. Compensation: In consideration for all services to be
performed under this Agreement, Tholen shall receive the following compensation:
a. Salary: Tholen shall be paid base salary at the rate of
One Hundred Eighty-Five Thousand Dollars ($185,000) per year until his first
regular review in January, 1999 and annually thereafter, at which time the Board
of Directors shall review Tholen's performance with a view toward increasing his
salary commensurate with such performance.
b. Bonus: Tholen shall annually submit, within ten (10) days
prior to the commencement of a new fiscal year, a Bonus Plan to the Compensation
<PAGE> 2
Committee of the Board of Directors for approval, under which Tholen shall
participate, based upon obtaining the agreed upon revenue, profit and stock
price milestones. Nothing herein or in said plan shall constitute a guarantee of
Tholen's employment by the Company, or a limitation on the Company's rights
under this Agreement, or limitation on the Company's rights to amend or
terminate such plan.
c. Employee Benefit Plans: Tholen shall be entitled to
participate in all employee benefit plans, including group medical, dental,
visual, and life insurance, pension, profit sharing, group and individual
disability income, stock option, and other benefit plans, on terms commensurate
with the benefits awarded management personnel of comparable status with the
Company or any affiliate of the Company, but subject, on any termination, to
Section 5E below.
d. Expense Reimbursement:
(a) Relocation Expenses. The Company shall reimburse
Tholen on a monthly basis for his monthly lease obligations for rent and
utilities (not to exceed $2,500/month) for a furnished apartment in Southern
California for up to two (2) years provided that Tholen remains employed
hereunder. In the event Tholen relocates in connection with his continued
employment with the Company, the Company shall pay directly or shall reimburse
Tholen for his reasonable relocation expenses upon satisfactory proof thereof,
up to a maximum of $50,000.
(b) Regular Expenses. The Company shall reimburse
Tholen for all reasonable expenses that he necessarily incurs in connection with
his employment and for which he presents adequate documentation in accordance
with Company policies in effect from time to time.
5. Termination: This Agreement and Tholen's employment are
subject to immediate termination at any time as follows:
a. Death: This Agreement shall terminate immediately upon
Tholen's death, in which event the Company's only obligations shall be (i) to
pay all compensation owing for services rendered by Tholen prior to the date of
his death; (ii) to continue paying Tholen's base salary to his estate for a
period of thirty (30) days after his death; and (iii) to make periodic
recoverable advances to Tholen's estate equivalent to Tholen's base salary for
ninety (90) days after said thirty (30) day period has lapsed, with such
advances to be repaid when insurance proceeds from a policy on Tholen's life
become available.
b. Disability: In the event that Tholen is disabled from
performing his assigned duties under this Agreement due to illness or injury for
a period in excess of one hundred eighty (180) days, the Company may place
Tholen on an unpaid leave of absence for a period not to exceed six (6) months,
in which case the Company's only obligation shall be (i) to continue Tholen's
group medical and life insurance for the duration of the leave; (ii) to pay the
bonus, if any, that Tholen would
<PAGE> 3
be entitled to under the terms of the bonus plans referred to in Section 4B of
this Agreement; and (iii) to allow Tholen to continue receiving benefits under
the disability insurance and other employee benefit plans in effect at the time
of his disability in accordance with the terms and conditions of such plans. The
granting of a leave of absence does not guarantee that Tholen will be returned
to employment, and the Company reserves the right to replace Tholen or to take
other action in his absence due to business necessity. If Tholen is certified to
return to work before his leave of absence expires, and desires to do so, the
following provisions shall apply: (i) the Company will attempt to return Tholen
to his same or similar position, provided this does not result in undue hardship
to the Company; and (ii) if the Company is unable to reinstate Tholen because
his position has been filled, then as a special severance benefit, the Company
shall pay a lump-sum severance payment equal to twelve (12) months of Tholen's
base salary as in effect immediately prior to the commencement of Tholen's leave
of absence. If Tholen is not certified to return to work before his leave of
absence expires, or does not desire to return, his employment and this Agreement
shall terminate upon the expiration of his leave of absence.
c. Termination For Cause: The Company may terminate this
Agreement for cause immediately upon written notice to Tholen in the event
Tholen (i) in the course of his duties engages in misconduct which has a
material adverse effect on the Company or its business, willfully breaches this
Agreement in any material respect or consistently or habitually neglects his
duties as a Company officer, or (ii) is finally convicted of a felony. In either
event, the Company's sole obligation to Tholen in lieu of all claims for
compensation or damages shall be to pay all compensation owing for services
rendered by Tholen prior to the date of termination under this subsection.
d. Termination Without Cause: The Company in its sole
discretion may terminate this Agreement without cause or prior warning
immediately upon written notice to Tholen. For purposes of this Section 5D, any
resignation following a substantial reduction in Tholen's salary, benefits
(including the failure of Company to include Tholen as a participant in its
executive or management bonus plans), duties or responsibilities shall
constitute an involuntary termination without cause. In the event of a
termination under this Section 5D, the Company shall pay all compensation owing
for services rendered by Tholen prior to the date of termination, shall pay a
lump-sum severance benefit equal to (i) the number of months remaining of the
term of this Agreement or (ii) twelve (12) months, whichever is less, of
Tholen's base salary at the time of termination, and shall continue to provide
Tholen at Company expense all medical, disability and insurance benefits
available to him at the time of termination for the same number of months as
used to calculate the lump-sum severance benefit. As an additional severance
payment, if the Company has in effect at the time of any termination without
cause under this Section 5D any bonus or incentive plan which provides for
awards in cash and is based on the Company's revenues or results of operations
for a fiscal year, Tholen shall be entitled to an amount equal to a pro rata
award based on the period of the fiscal year for which he was employed if a
termination under this Section 5D occurs after the completion of three fiscal
quarters. Such severance shall be payable at the same time, and computed on the
same terms, as
<PAGE> 4
awards under the plan in question, except for periods of service. Such payments
and benefits shall not entitle Tholen to any other benefits or compensation
program available to Company employees.
e. Termination Following Change In Control: If either the
Company elects to terminate Tholen without cause pursuant to Section 5D within
ninety (90) days before or twenty four (24) months after a change in control or
Tholen elects to resign with good reason within twenty four (24) months after a
change in control of the Company, then as a severance benefit and in lieu of all
compensation or damages the Company shall (i) pay Tholen a lump sum equal to
200% of the average of the annual base salary plus bonuses paid to Tholen during
each year of service with the Company prior to the time of such termination or
resignation (or if Tholen has been employed for less than three (3) years at
such time, 200% of the average annual salary plus bonus paid during the term of
employment, assuming for any uncompleted year that a bonus at least equal to the
prior year bonus would be paid); (ii) continue to provide Tholen at Company
expense all medical, disability and insurance benefits available to him at the
time of such termination or resignation for a period of twenty four (24) months
after such termination or resignation, or, if shorter, the maximum period
allowed under the Company's policies as then in effect or under applicable law,
(iii) accelerate the vesting of all unvested stock options granted to Tholen
under the Company's stock option or other benefit plans so that all such stock
options will vest and be fully exercisable on the date of such termination or
resignation, and (iv) extend the post-termination exercise period for all stock
options granted to Tholen under the Company's stock option and other benefit
plans so that all such stock options will be exercisable for a period of three
months after the date of such termination or resignation (except that with
respect to any stock options having a post-termination exercise period in excess
of three months, such longer post-termination exercise period shall remain in
effect).
For purposes of this subsection, the term "change in
control" shall mean any change in control that the Company would be required to
report in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Without limiting the foregoing, a change in control shall also be deemed to have
occurred if (i) any "person" as defined in Section 13(d) and 14(d) of the
Exchange Act is or becomes, directly or indirectly, the "beneficial owner" as
defined in Rule 13 (d-3) under the Exchange Act of securities of the Company
which represent 25% or more of the combined voting power of the Company's then
outstanding securities; or (ii) during any period of two consecutive years,
individuals who at the beginning of said two year period constituted the Board
of Directors of the Company cease for any reason to constitute at least a
majority of the Board unless the election or nomination of each new director was
approved by a vote of at least two-thirds of the directors who were in office at
the beginning of said two year period.
For purposes of this subsection, Tholen shall be deemed
to have resigned "with good reason" if he does so following a change in control
as a
<PAGE> 5
result of the Company having done any or all of the following without Tholen's
express written consent: (i) assigned Tholen different duties or made changes in
his reporting responsibilities, title, or office that are substantially
inconsistent with Tholen's duties, responsibilities, titles, or offices
immediately prior to the change in control; (ii) reduced Tholen's base salary
from that in effect at the time of the change in control; (iii) failed to
continue any bonus plan in substantially the same form as it existed prior to
the change in control; (iv) required Tholen to be based more than fifty (50)
miles from his present office location, except for required travel consistent
with Tholen's present business travel obligations; (v) failed to continue any
plan or program for compensation, employee benefits, stock purchase or
ownership, life insurance, group medical, disability, or vacation in
substantially the same form as immediately prior to the change in control, or
otherwise made any material reduction in Tholen's fringe benefits, or (vi)
failed to obtain the assumption of this Agreement by any successor to the
Company.
Tholen shall not be entitled to the benefits of this
Section 5(E) if this Agreement and his employment are terminated pursuant to
Section 5(A), (B) or (C).
f. Company's Obligations Under This Agreement Exclusive: The
benefits set forth in subsections A through E above (which benefits, in the
event of termination pursuant to subsections A, C, D or E, include payment for
services rendered prior to termination as provided in such subsections), as
applicable, constitute the sole obligations of the Company to Tholen upon a
termination and are in lieu of any damages or other compensation that Tholen may
claim under other Company policies in connection with this Agreement. The
benefits on termination in this Agreement are in substitution for any severance
or termination benefits otherwise available under Company policies of general
application. Tholen expressly acknowledges that certain Company benefit or
incentive plans provide for vesting in, or award of, benefits based on
employment on or through particular dates and that nothing in this Agreement
entitles him to partial vesting or partial awards under such plans. Any payments
under Section 5D relating to any incentive or bonus plan are expressly
acknowledged to be benefits under this Agreement and not an interpretation or
modification of any such plan.
g. Resignation As Officer: In the event of any termination
pursuant to this Section 5, Tholen shall be deemed to have resigned as an
officer of the Company if he was serving in such capacity at the time of
termination.
6. Confidentiality: Tholen acknowledges and agrees that he has
been and will continue to be entrusted with certain trade and proprietary
information regarding the products, processes, methods of manufacture and
delivery, know-how, designs, formula, work in progress, research and
development, computer software and data bases, copyrights, trademarks, patents,
marketing techniques, and future business plans, as well as customer lists and
information concerning the identity, needs, and desires of actual and potential
customers of the Company and its subsidiaries, joint
<PAGE> 6
venturers, partners, and other affiliated persons and entities, all of which
derive significant economic value from not being generally known to others
outside the Company ("Confidential Information").
a. During the entire term of his employment with the Company
and for two years thereafter, Tholen shall not disclose or exploit any
Confidential Information except for the sole benefit of the Company or with its
express written consent.
b. During the entire term of his employment by the Company
and for one year thereafter, Tholen shall not directly or indirectly solicit any
person or company known by Tholen to be an actual or actively sought customer of
the Company or its subsidiary and affiliated companies for any business is known
by Tholen to be conducted or under development by the Company, except for the
sole benefit of the Company or with its express written consent.
c. During the entire term of his employment by the Company
and for one year thereafter, Tholen shall not induce or attempt to induce any
employee of the Company to leave the Company's employ except for the sole
benefit of the Company or with its express written consent.
d. In the event any provision in this Section 6 is more
restrictive than allowed by the law of any jurisdiction in which the Company
seeks enforcement, such provision shall be deemed amended and shall then be
fully enforceable to the extent permitted by such law.
e. Tholen acknowledges and agrees that any violation of this
Section 6 would cause immediate irreparable damage to the Company, and that it
would be extremely difficult or impossible to determine the amount of damage
caused to the Company. Tholen therefore agrees that the Company's remedies at
law are inadequate, and hereby consents to issuance of a temporary restraining
order, preliminary and permanent injunction, and other appropriate relief to
restrain any actual or threatened violation of this Section, without limiting
any remedies the Company may have at law or in equity.
7. Inventions: Any and all patents, copyrights, trademarks,
inventions, discoveries, developments, or trade secrets developed or perfected
by Tholen during or as the result of his employment with the Company shall
constitute the sole and exclusive property of the Company. Tholen shall disclose
all such matters to the Company, assign all right, title and interest he may
have in them, and cooperate with the Company in obtaining and perfecting any
patent, copyright, trademark, or other legal protection. This Section 7 shall
not apply to any invention which qualifies fully under California Labor Code
Section 2870, a true copy of which is attached to this Agreement as Exhibit A.
<PAGE> 7
8. Conflict Of Interest: During the term of this Agreement,
Tholen shall devote his time, ability, and attention to the business of the
Company, and shall not accept other employment or engage in any other outside
business activity which interferes with the performance of his duties and
responsibilities under this Agreement or which involves actual or potential
competition with the business of the Company, except with the express written
consent of the President.
9. Employee Benefit Plans: All of the employee benefit plans
referred to or contemplated by this Agreement shall be governed solely by the
terms of the underlying plan documents and by applicable law. Nothing in this
Agreement shall impair the Company's right to amend, modify, replace and
terminate any and all such plans in its sole discretion as provided by law, or
to terminate this Agreement in accordance with its terms. This Agreement is for
the sole benefit of Tholen and the Company, and is not intended to create an
employee benefit plan or to modify the term of existing plans.
10. Parachute Limitation: The payments and benefits Tholen is
entitled to under this Agreement and all other contracts, arrangements, or
programs shall not, in the aggregate, exceed the maximum amount that may be paid
to Tholen without triggering golden parachute penalties under Section 280G and
related provisions of the Internal Revenue Code, as determined in good faith by
the Company's independent auditors. If Tholen's benefits must be cut back to
avoid triggering such penalties, Tholen's benefits shall be cut back in the
priority order designated by Tholen or, if Tholen fails promptly to designate an
order, in the priority order designated by the Company. If an amount in excess
of the limit set forth in this Section is paid to Tholen, Tholen must repay the
excess amount to the Company upon demand, with interest at the rate provided for
in Internal Revenue Code Section 1274(b)(2)(B). Tholen and the Company agree
reasonably to cooperate with each other in connection with any administrative or
judicial proceedings concerning the existence or amount of golden parachute
penalties with respect to payments or benefits Tholen receives. No part of this
Agreement is made in contemplation of, or anticipates any presently impending
change in, ownership or control. Further, no payment to be made to Tholen in
accordance with any provision of this Agreement, except Paragraph 4E entitled
"Termination Following Change in Control", is contingent upon a change in
ownership or control of the Company. This Agreement does not provide for
payments to Tholen which are significantly different in amount, timing, terms,
or conditions from those provided under contracts entered into by the Company
and individuals performing comparable services.
11. Assignment: This Agreement may not be assigned by Tholen, but
may be assigned by the Company to any successor in interest to its business. In
the event the Company does not survive any merger, acquisition, or other
reorganization, it shall make a reasonable effort to obtain an assumption of
this Agreement by the surviving entity in such merger, acquisition, or other
reorganization, but the failure to obtain such assumption shall not prevent or
delay such merger, acquisition, or other reorganization or relieve the Company
of its other obligations under this Agreement.
<PAGE> 8
This Agreement shall bind and inure to the benefit of the Company's successors
and assigns, as well as Tholen's heirs, executors, administrators, and legal
representatives.
12. Notices: All notices required by this Agreement may be
delivered by first class mail at the following addresses:
To the Company: Hycor Biomedical Inc.
7272 Chapman Avenue
Garden Grove, CA 92814-2103
To Tholen: J. David Tholen
2080 Spalding Drive
Atlanta, GA 30350
13. Amendment. This Agreement may be modified only by written
agreement signed by the party against whom any amendment is to be enforced.
14. Choice Of Law: This Agreement shall be governed by the laws
of the State of California.
15. Partial Invalidity: In the event any provision of this
Agreement is void or unenforceable, the remaining provisions shall continue in
full force and effect.
16. Waiver: No waiver of any breach of this Agreement shall
constitute a waiver of any subsequent breach.
"Company"
HYCOR BIOMEDICAL INC.
Dated: December 27, 1998 By: /s/ Samuel D. Anderson
----------------------
Name: Samuel D. Anderson
Title: Chairman of the Board
"Tholen"
J. DAVID THOLEN
Dated: January 4, 1999 /s/ J. David Tholen
---------------------
J. David Tholen
<PAGE> 9
EXHIBIT A
CALIFORNIA LABOR CODE SECTION 2870
EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RENTS
(a) Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports
to require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<PAGE> 1
EXHIBIT 10(7)
Severance Agreement of Richard D. Hamill
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT ("Agreement") is made by and between HYCOR
BIOMEDICAL INC., Delaware corporation ("Company"), and RICHARD D. HAMILL, PH.D.
("Executive") (together, the "Parties;" each, a "Party").
W I T N E S S E T H:
WHEREAS, the Parties have entered into an Employment Agreement dated as
of June 20, 1997 (the "Employment Agreement") whereby Executive holds the
offices of President and Chief Executive Officer of the Company; and
WHEREAS, the Parties wish to terminate their several relationships;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the sufficiency of
which is hereby acknowledged, the Parties, intending to be legally bound,
covenant and agree as follows:
1. VOLUNTARY TERMINATION OF EMPLOYMENT. Executive's employment with the
Company terminated voluntarily as of the close of business on July 17,
1998 (the "Termination Date"), at which time Executive resigned as an
employee and officer of the Company. Executive will no longer serve in
the capacities of President or Chief Executive Officer of the Company.
Concurrently with his resignation of employment, Executive resigned
from all directorships held with the Company and its subsidiaries.
Should any employer or prospective employer inquire of the Company
Executive's reason for leaving the employment of the Company "voluntary
resignation" will be given as the reason.
2. BENEFITS TO EXECUTIVE. In exchange for his resignation of his positions
as an employee, officer, and director of the Company, and
notwithstanding any provisions to the contrary in the Employment
Agreement, the Company will provide Executive with the following
benefits:
a. Notwithstanding his voluntary resignation from the Company,
Executive shall be provided with an amount equal to the salary
payments specified in Section 4(D) of the Employment
Agreement, namely twenty (20) months' salary at the rate of
$250,000 per annum, totaling $416,667, paid on the Company's
normal payroll dates, subject to applicable withholding;
provided that, on or after January 1, 1999, the Company at its
sole discretion shall have the option of paying any and all
remaining amounts due to him under this subparagraph a. in one
lump sum payment rather that in installments.
b. Executive shall be entitled to reimbursements for all
reasonable business expenses incurred prior to the Termination
Date.
<PAGE> 2
c. Executive shall be entitled to convert the Company's
membership in the Center Club to an individual membership in
his name, and shall be solely responsible for any and all fees
and costs imposed by the Center Club for such transfer.
d. Executive shall be allowed to retain the concert ticket series
at the Orange County Performing Arts Center that were
purchased in his name by the Company.
e. Pursuant to Paragraphs 4, 5, and 6 below, the Executive will
be allowed to repay his debt obligations to the Company by the
use of the insurance premiums for life and disability
insurance that otherwise would have been paid on his behalf
under the terms of Section 4(D) of the Employment Agreement.
3. MEDICAL BENEFITS. The Company will continue to provide health benefits
to Executive for an additional twenty (20) months following the
Termination Date, and will continue to pay for Executive's COBRA
premiums during that time.
4. LIFE INSURANCE. As of the Termination Date, the Company will transfer
to Executive ownership of all life insurance policies held in
Executive's name. Benefits under such policies may be continued at
Executive's expense.
5. DISABILITY SUPPLEMENT. As of the Termination Date, the Company will
transfer to Executive ownership of all disability insurance policies
held in Executive's name. Benefits under such policies may be continued
at Executive's expense.
6. DEBT SETTLEMENT. Executive releases the Company from its obligation to
pay $23,968.90, the cost of the premiums for the policies described in
Paragraphs 4 and 5, which company was otherwise obliged to pay, in
return for the cancellation of an equal principal amount of executive's
debt to the Company. The balance of this debt, $26,031.08, will be
deducted from the severance payments due pursuant to Paragraph 2, in
installments of $591.62 each payroll period.
7. ENTIRE OBLIGATION. The amounts paid to Executive by the Company
pursuant to Paragraphs 2 and 3 above represent the entire obligation of
the Company to Executive under this Agreement and the Employment
Agreement, and any amendments or supplements thereto, and Executive has
no entitlement under this Agreement and the Employment Agreement, or
any amendments or supplements thereto, to additional compensation from
the Company.
8. VOLUNTARINESS OF AGREEMENT. Executive acknowledge and agrees that he is
entering into this Agreement voluntarily, and with a full understanding
of its terms, for the purpose of being allowed voluntarily to resign
his positions as director, officer, and employee of the Company and in
consideration for the other benefits provided to him under Paragraph 2
above. Executive further acknowledges that such benefits are adequate
and sufficient consideration for the promises and representations made
by him in this Agreement.
9. WAIVER OF RIGHTS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT.
Executive represents and agrees that this Agreement includes a waiver
of any and all rights executive has or may have under the Age
Discrimination in Employment Act. Executive is hereby advised (a) to
consult with an attorney prior to signing this Agreement and (b) that
he has 21 days
<PAGE> 3
in which to consider and accept this Agreement by signing and returning
this Agreement to the Company c/o Reginald P. Jones. In addition,
Executive has a period of seven (7) days following his execution of
this Agreement in which he may revoke this Agreement. If Executive does
not advise the Company (by a writing received by Reginald P. Jones
within such seven (7) day period) of his intent to revoke the
Agreement, the Agreement will become effective and enforceable. If
Executive revokes the Agreement, then no amounts will be paid to him
under Paragraph 2 above, or otherwise.
10. MUTUAL RELEASE. The Parties acknowledge and agree that, as a condition
of this settlement, each of the Parties expressly releases all rights
and claims that such parties know about as well as those such parties
may not know about. Each of the Parties expressly waives all rights
under Section 1542 of the Civil Code of the State of California, which
reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Notwithstanding the provisions of Section 1542, and for the purpose of
implementing a full and complete release and discharge of each and all
of the Releasees, each of the Parties expressly acknowledges that this
Agreement is intended to include and does include in its effect,
without limitation, all Claims which such parties do not know or
suspect to exist in such party's favor at the time of execution of this
Agreement and that this settlement expressly contemplates the
extinguishment of all such Claims.
In connection with the above waiver, each Party represents and warrants
that such Party has not assigned or transferred, and will not assign or
transfer, any Claim or any interest in any Claim which such Party may
have against the other Party to this Agreement or any of its
representatives.
Nothing in this Agreement shall waive Executive's rights, if any, to
indemnification from the Company under the California Corporations
and/or Labor Codes in the event that any legal proceedings are brought
against Executive arising out of his employment with or service as a
director of the Company.
11. ARBITRATION. The Parties hereto agree that any dispute between the
Parties regarding the formation, interpretation, effect, enforceability
or alleged breach of this Agreement, or regarding any other dispute
arising out Executive's employment with the Company, shall be submitted
to final and binding arbitration in lieu of litigation. Notwithstanding
the foregoing, the Parties specifically agree that either of them may
seek injunctive relief in order to enforce the confidentiality,
nonsolicitation, and other obligations set forth in the Employment
Agreement, provided, however, that the underlying claims or disputes
shall be resolved through arbitration. Either Party may initiate
arbitration proceedings by written notice to the other Party. Any such
arbitration proceedings shall be subject to the employment disputes
arbitration rules of the American Arbitration and shall be held in
<PAGE> 4
Orange County before a single arbitrator selected by the Parties from
the American Arbitration Association employment disputes panel, unless
the Parties agree otherwise in writing. The arbitrator shall apply the
substantive laws of the State of California (excluding choice-of-law
principles that might call for the application of some other state's
law). The arbitrator will not have the power to add to or ignore any of
the terms and conditions of this Agreement or the Employment Agreement,
and his or her decision shall not go beyond what is necessary for the
interpretation and application of this Agreement and obligations of the
Parties under this Agreement. If any claim or dispute is submitted to
arbitration in accordance with this Section, the Parties agree that the
arbitrator's decision shall be final and legally binding on both
Parties. The prevailing party, as determined by the arbitrator, shall
be entitled to its reasonable attorneys' fees and costs. The
arbitration provisions of this Section shall be governed by the
provisions of the Federal Arbitration Act.
12. CHOICE OF LAW. This Agreement will be interpreted in accordance with
the laws of the State of California.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the Parties with respect to the termination of Executive's employment
with the Company, and supersedes any earlier written, oral or implied
understandings or agreements between the Parties. Except as modified by
this Agreement, the Employment Agreement remains in effect.
14. AMENDMENT. This Agreement shall not be released, discharged or modified
in any manner whatsoever, except by an instrument signed by the parties
hereto.
15. SEVERABILITY. The provisions of this Agreement are severable, and if
any provision is ever found to be unenforceable, all other provisions
shall remain fully valid and enforceable.
16. NOTICE. All notices or other communications required or permitted
hereunder shall be given in writing and shall be delivered or sent as
follows by registered or certified mail, postage prepaid or by
facsimile with confirmation of successful transmission:
If to Executive: Richard D. Hamill, Ph.D.
22686 Ledana
Mission Viejo, CA 92691
with a copy to: Robert Gerard, Esq.
Pillsbury Madison & Sutro LLP
650 Town Center Drive, Seventh Floor
Costa Mesa, CA 92626-7122
If to Company: Hycor Biomedical Inc.
Attention: Reginald P. Jones
7272 Chapman Avenue
Garden Grove, CA 92841
<PAGE> 5
With a copy to: Paul, Hastings, Janofsky & Walker LLP
Attention: Peter J. Tennyson, Esq.
695 Town Center Drive, 17th Floor
Costa Mesa, CA 92626-1926
Any party may change its address for purposes of notice by giving
notice in accordance with the provisions of this Section 16. Any such
notice will be deemed to be given when received, if personally
delivered or sent by telecopy, and, if mailed, five days after deposit
in the United States mail, properly addressed, with proper postage
affixed or by facsimile with confirmation of successful transmission.
17. COUNTERPARTS; WAIVER. This Agreement may be executed in counterparts,
all of which taken together will constitute one instrument. The failure
of any party to insist upon strict performance of any of the terms or
conditions of this Agreement will not constitute a waiver of any of its
rights hereunder.
[Signature Page Follows]
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
"Company"
HYCOR BIOMEDICAL INC.,
a Delaware corporation
By: /s/ Reg Jones 10/20/98
------------------------------------
Its: Senior Vice President
"Executive"
/s/ Richard D Hamill 10/19/98
------------------------------------
Richard D. Hamill, Ph.D
<PAGE> 1
EXHIBIT 10(28)
Investment Banking Agreement Between
Hycor Biomedical Inc. and Schneider Securities
FINANCIAL CONSULTING AND INVESTMENT BANKING AGREEMENT
THIS AGREEMENT is made this 3rd day of December, 1998, by and between
HYCOR BIOMEDICAL INC., a Delaware corporation having its principal office at
7272 Chapman Avenue, Garden Grove, California 92841 (the "Company"), and
SCHNEIDER SECURITIES, INC., a Colorado corporation having an office at 1120
Lincoln Street, Suite 900, Denver, Colorado 80203 ("SSI").
In consideration of the mutual premises contained herein and on the
terms and conditions hereinafter set forth, the Company and SSI agree as
follows:
1. PROVISION OF SERVICES. The Company hereby retains SSI to perform
non-exclusive consulting services related to corporate finance and investment
banking matters, and SSI hereby accepts such retention and shall undertake
reasonable efforts to perform for the Company the duties described herein. In
this regard, SSI shall devote such time and attention to the business of the
Company as shall be determined by SSI, in its sole discretion.
(a) SSI agrees, to the extent reasonably required in the conduct of the
business of the Company, and at the Company's written request to SSI's Senior
Vice President of Corporate Finance (or such other person designated by SSI), to
place at the disposal of the Company its judgment and experience and to provide
business development services to the Company including the following:
(i) advice with regard to stockholder relations and public
relations matters, and
(ii) evaluation of financial matters and assistance in financial
arrangements and/or transactions.
(b) SSI agrees to prepare and disseminate, or cause the preparation and
dissemination of, a "Corporate Profile" and/or "Research" report in compliance
with applicable state and federal securities laws, within ninety (90) days of
the date hereof. SSI shall, at its sole discretion, use reasonable efforts to
keep the Corporate Profile current for two years.
(c) At SSI's request, the Company will provide "due diligence"
presentations to Registered Representatives of SSI and other brokerage firms.
SSI agrees to use reasonable efforts to arrange such meetings.
(d) Notwithstanding the foregoing, SSI shall provide services to the
Company in connection with mergers, acquisitions, consolidations, joint ventures
and similar corporate finance transactions; however, for each such transaction
or transactions, SSI and the Company will formalize their arrangement in a
separate agreement at the time service is provided.
<PAGE> 2
(e) SSI shall use reasonable efforts in furnishing advice
recommendations, and for this purpose SSI shall at all times maintain or keep
and make available qualified personnel or a network of qualified outside
professionals for the performance of its obligations under this Agreement. To
the extent reasonably practicable, SSI shall so use its own personnel rather
than outside professionals.
2. TERM. SSI's retention hereunder shall be for a term of two (2) years
commencing on the date of this Agreement. Except as provided for in paragraph 8
below, this Agreement may be terminated by either party upon sixty (60) days
prior written notice.
3. COMPENSATION. In consideration for the services provided by SSI hereunder,
the Company shall pay to SSI the sum of $25,000 in cash or readily available
funds and shall issue to SSI a warrant (the "Warrant") to purchase up to 150,000
shares of the common stock of the Company (the "Underlying Common Stock") at a
per share price of $1.4375 (the "Strike Price"). The Warrant, which shall be
transferable upon notice of exercise, shall be issued to SSI in the form of a
warrant agreement (the "Warrant Agreement") which shall be in form and content
satisfactory to SSI and the Company. The Warrant Agreement shall provide, among
other provisions, that the Warrant shall be immediately exercisable by SSI,
subject to the following conditions and limitations:
(a) The Warrant shall expire four (4) years from the date of this
Agreement (the "Expiration Date").
(b) SSI shall be permitted to exercise the Warrant and purchase up to
75,000 shares of the Underlying Common Stock once the closing market price for
the Company's common stock has achieved a per share price of $4.00 or higher for
five (5) consecutive trading days.
(c) SSI shall be permitted to exercise the Warrant and purchase an
additional 75,000 shares of the Underlying Common Stock once the closing market
price for the Company's common stock has achieved a per share price of $5.00 or
higher for five (5) consecutive trading days.
(d) In the event that the per share price of the Company's common stock
does not reach $4.00 or higher for five (5) consecutive trading days prior to
the second anniversary date of the Warrant Agreement, then the Warrant shall
expire and SSI shall have no right to exercise the Warrant thereafter. In the
event that the per share price of the Company's common stock reaches $4.00, but
does not reach $5.00 or higher for five (5) consecutive trading days prior to
the second anniversary date of the Warrant Agreement, then the Warrant Agreement
shall remain in effect until the Expiration Date; however, SSI shall only be
entitled to exercise the Warrant up to a maximum of 75,000 shares.
(e) Anti-dilution provisions for stock dividends, splits, mergers, sale
of substantially all of the Company's assets, sale of stock at below the then
current exercise price of the Warrant, except for sale of stock pursuant to the
Company's Stock Option Plan(s).
(f) In lieu of any cash payment required by SSI in connection with the
exercise of the Warrant, the holder(s) of the Warrant shall have the right at
any time and from time to time, to
<PAGE> 3
exercise the Warrant in full or in part by surrendering the Warrant Agreement
and/or Certificates as payment of the aggregated Strike Price. The number of
shares of Underlying Common Stock to be issued upon exercise shall be determined
by multiplying the number of the shares of common stock within the Warrant to be
exercised by an amount equal to the market price per share less the Strike
Price, and then dividing the product thereof by the market price per share.
Solely for the purposes of this paragraph, market price shall be calculated as
the average of the market prices for each of the five (5) trading days preceding
the date notice is given that the holder(s) intend(s) to exercise the Warrant.
(g) The Company will reserve and at all times have available a
sufficient number of shares of its common stock to be issued upon the exercise
of the Warrant. Furthermore, the Company shall instruct its transfer agent to
accept a customary Rule 144 opinion letter from any attorney (not just an
opinion from the Company's counsel), with knowledge and experience in securities
matters, representing SSI or any of its employees or agents that are holders of
the Warrant.
(h) During the term of the Warrant Agreement, the Company shall,
subject to the conditions listed below, grant "piggy back" registration rights
to include the shares of the Underlying Common Stock in any registration
statement filed by the Company under the Securities Act of 1933 relating to an
underwriting of the sale of shares of common stock or other security of the
Company. In the event that the Company grants registration rights to any other
stockholder on terms and conditions that SSI deems to be more favorable than
those granted hereunder, the Company shall grant the same rights to SSI.
Furthermore, in the event that the Company grants registration rights to any
other stockholder, the Company shall issue written notice thereof to SSI at
least ten (10) business days prior to the date that the Company files any such
registration statement.
4. EXPENSES. The Company agrees to reimburse SSI for reasonable out of pocket
expenses incurred by SSI in connection with the services rendered by SSI
hereunder, including but not limited to SSI's due diligence activities with
respect to the Company. Any such expenses exceeding $1,000 shall require the
prior approval of the Company.
5. INDEMNIFICATION. The Company agree to indemnify and hold harmless SSI and its
affiliates, the respective directors, officers, partners, agents and employees
and each other person, if any, controlling SSI or any of its affiliates
(collectively the "SSI Parties") from all losses, claims, damages, liabilities
and expenses incurred by them (including attorney's fees and disbursements) that
result from any violations of securities laws or rules or any untrue statements
made or any statements omitted to be made in connection with securities related
matters by the Company, its agents or employees. SSI will indemnify and hold
harmless the Company and the respective directors, officers, agents and
employees of the Company (the "Company Parties") from and against all losses,
claims, damages, liabilities and expenses that result from malfeasance, or gross
negligence in the performance of SSI's duties hereunder. Each person or entity
seeking indemnification hereunder shall promptly notify the Company, or SSI as
applicable, of any loss, claim, damage or expense for which the Company or SSI
as applicable, may become liable pursuant to this Section 5. Neither party shall
pay, settle or acknowledge liability under any such claim without the written
consent of the party liable for indemnification, and shall permit the Company or
SSI as applicable a reasonable opportunity to cure any underlying problem or to
<PAGE> 4
mitigate damages. The scope of this indemnification between SSI and the Company
shall be limited to, and pertain only to certain transactions contemplated or
entered into pursuant only to this Agreement.
The Company or SSI, as applicable, shall have the opportunity to defend any
claim for which it may be liable hereunder, provided it notifies the party
claiming the right to indemnification within fifteen (I5) days of notice of the
claim.
STATUS OF SSI AS CONSULTANT AND CONFIDENTIALITY OBLIGATIONS. SSI shall at all
times be an independent contractor of the Company and, except as expressly
provided or authorized in this Agreement, shall have no authority to act for or
represent the Company. Any information obtained by SSI from the Company during
the term of this Agreement, which information is not readily available from
other sources, shall be maintained by SSI on a confidential basis and shall not
be disclosed to third parties, without the prior written consent of the Company.
For purposes of this Agreement, third parties are defined to exclude all
officers, directors, employees, agents and/or contractors of SSI.
7. OTHER ACTIVITIES OF SSI. The Company recognizes that SSI now renders and may
continue to render financial consulting, management, investment banking and
other services to other companies that may or may not conduct business and
activities similar to those of the Company. SSI shall be free to render such
advice and other services and the Company hereby consents thereto. SSI shall not
be required to devote its full time and attention to the performance of its
duties under this Agreement, but shall devote only so much of its time and
attention as it deems reasonable or necessary for such purposes, in its sole
discretion.
8. OTHER COVENANTS OF THE COMPANY. The Company covenants, promises and agrees
that:
(a) it shall, for a period of at least two (2) years from the date of
this Agreement, provide SSI at least thirty (30) days prior written notice of
the proposed sale of any securities of the Company in a "Regulation S" or
"Regulation D" offering. Such notice shall specify the type of securities to be
offered, the purchase price thereof, the terms and conditions of the offering
and the proposed offering date. SSI shall be entitled to immediately terminate
this Agreement and retain all of the compensation set forth herein, including
the Warrants which shall immediately vest and become exercisable without regard
to the provisions set forth in paragraph 3(b)-(d) above, without offset and with
no further liability to the Company, in the event that, during the term of this
Agreement, the Company completes a sale of its securities pursuant to a
Regulation D or S offering, without SSI's prior written consent thereto; and
(b) during the term of this Agreement, the Company shall furnish SSI
with copies of its annual, quarterly and proxy filings with the SEC, immediately
upon the Company's completion thereof.
9. CONTROL. Nothing contained herein shall be deemed to require the Company to
take any action contrary to its Certificate of Incorporation or By-Laws, or any
applicable statute or regulation, or to deprive its Board of Directors of their
responsibility for any control of the affairs of the Company.
<PAGE> 5
10. PUBLIC DISCLOSURE REQUIREMENT. Within ten (10) business days of the final
execution of this Agreement, the Company shall cause the release of a public
announcement which sets forth, in pertinent part, a description of this
Agreement, including without limitation, the name of SSI, the nature of the
services to be provided hereunder by SSI and the compensation paid to it in
connection herewith. Additionally, for so long as this Agreement is in effect,
the Company shall include a description of this Agreement in its quarterly
and/or annual filings with the Securities and Exchange Commission. At least
three (3) business days prior to the dissemination of any such public
announcement or filing containing the above required description, the Company
shall submit to SSI, for its review and comment, the proposed public
announcement or description. SSI shall thereafter have three (3) business days
within which to submit its editions or amendments to the public announcement
and/or description for inclusion therein, which editions and amendments shall be
incorporated in the final version disseminated by the Company, unless, in the
reasonable judgment of counsel to the Company, such editions or amendments
cannot be incorporated.
11. NOTICES. Any notices hereunder shall be sent to the Company and SSI at their
respective addresses above set forth. Any notice shall be given by registered or
certified mail, postage prepaid, and shall be deemed to have been given when
deposited in the United States mail. Either party may designate any other
address to which notice shall be given, by giving written notice to the other of
such change of address in the manner herein provided.
12. ENTIRE AGREEMENT. This Agreement contains the entire agreement and
understanding between the parties with respect to its subject matter and
supersedes all prior discussion, agreements and understandings between them with
respect thereto. This Agreement may not be modified except in a writing signed
by the parties.
13. JURISDICTION AND VENUE. This Agreement has been made in the State of
Colorado and shall be governed by and construed in accordance with the laws
thereof without regard to principles of conflict of laws. Any proceeding
commenced by either party to enforce or interpret any provision of this
Agreement shall be brought in the City and County of Denver, Colorado. The
Company hereby submits to the jurisdiction of the courts of the State of
Colorado, including the federal courts, for such purposes.
14. NO ASSIGNMENT. Neither this Agreement nor the rights of either party
hereunder shall be assigned by either party without the prior written consent of
the other party.
15. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
16. NON-COMPLIANCE. If any provision of this Agreement conflicts with any law,
rule or regulation of any federal, state or self-regulatory organization,
including the Securities and Exchange Commission, the blue-sky laws of any
state, the National Association of Securities Dealers, Inc., or any other
governmental authority having jurisdiction over the activities or services
described herein, then in that event, the Company and SSI shall amend this
Agreement to bring any affected provision into compliance with such regulations.
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
the day and year first above written.
SCHNEIDER SECURITIES, INC. HYCOR BIOMEDICAL INC.
/s/ Thomas J. O'Rourke /s/ J. David Tholen
- ----------------------- ------------------------
By: Thomas J. O'Rourke By: J. David Tholen
Its: President Its: President and Chief
Executive Officer
<PAGE> 1
EXHIBIT 21
Subsidiaries of Hycor Biomedical Inc.
<TABLE>
<CAPTION>
State of
Name Incorporation
---- -------------
<S> <C>
Hycor Biomedical GmbH Germany
Hycor Biomedical SAS France
Cogent Diagnostics Limited Scotland
Hycor International Inc. US Virgin Islands
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Hycor Biomedical Inc. and subsidiaries on Form S-8 Nos. 33-25427, 33-25428,
33-25429, 33-25430, 33-32767, 33-43280, 33-63798 and 33-63800 of our report
dated February 19, 1999, appearing in this Annual Report on Form 10-K of Hycor
Biomedical Inc. and subsidiaries for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
Costa Mesa, California
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 655,716
<SECURITIES> 1,266,935
<RECEIVABLES> 3,234,100
<ALLOWANCES> 211,482
<INVENTORY> 4,268,949
<CURRENT-ASSETS> 9,638,815
<PP&E> 10,522,457
<DEPRECIATION> 6,283,497
<TOTAL-ASSETS> 15,982,709
<CURRENT-LIABILITIES> 4,627,523
<BONDS> 0
0
0
<COMMON> 72,835
<OTHER-SE> 10,603,860
<TOTAL-LIABILITY-AND-EQUITY> 15,982,709
<SALES> 18,410,255
<TOTAL-REVENUES> 18,410,255
<CGS> 9,150,505
<TOTAL-COSTS> 9,150,505
<OTHER-EXPENSES> 13,211,853
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 171,010
<INCOME-PRETAX> (3,982,094)
<INCOME-TAX> 2,618,000
<INCOME-CONTINUING> (6,600,094)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,600,094)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
