SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1998
Commission file number 1-11700
HEMAGEN DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2869857
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
34-40 Bear Hill Road, Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)
(781) 890-3766
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
on which registered Name of each exchange
- ------------------- ---------------------
Common Stock Boston Stock Exchange
Common Stock Warrants NASDAQ Stock Exchange
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 60 days.
Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B 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-KSB or any amendment to this Form 10-KSB. [X]
The registrant had revenues of $12,327,352 in its most recent fiscal
year. The aggregate market value of the voting stock held by non-affiliates
of the registrant on December 14, 1998 was $5,260,377. As of December 14,
1998, 7,851,890 shares of Common Stock, $.01 par value per share and
2,695,255 of registered Common Stock Warrants, were outstanding.
Certain items of Part III of this Form 10-KSB incorporate by reference
certain portions of the registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission in connection with the
registrant's 1999 Annual Meeting of Stockholders.
This report contains certain forward-looking statements that are
subject to risks and uncertainties, including but not limited to those
discussed herein in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and those
discussed in the section entitled "Risk Factors" in the Prospectus contained
in the Company's Registration Statements on Form S-3, File Nos. 333-6147 and
33-80009 (which section is hereby incorporated by reference herein). These
risks and uncertainties may cause the Company's actual results in future
periods to differ materially from its historical results, and from any
opinions or statements expressed in forward-looking statements. Such
forward-looking statements speak only as of the date of this report, and the
registrant cautions readers not to place undue reliance on these statements.
Item 1. Business.
General
Hemagen Diagnostics, Inc. (the "Company") develops, manufactures and
markets proprietary medical diagnostic test kits, or "assays," used to aid
in the diagnosis of autoimmune and infectious diseases, in general health
assessment and for research purposes. The Company also develops,
manufactures and markets materials for the manufacture of such diagnostic
test kits. The Company generally focuses on markets which it believes offer
significant growth potential. In addition to the internal development of
products, the Company has sought to enter high growth markets via the
acquisition of synergistic companies, products and assets.
The Company's most recent acquisition was the September 1, 1998
acquisition of the Analyst automated clinical chemistry system (The
"Analyst") from Dade Behring, Inc. ("Dade"). This acquisition positions the
Company for growth in the $1.6 billion point of care market as well as the
physician office laboratory and veterinary diagnostic markets. The Analyst
is a patent protected, low cost, bench top clinical chemistry instrument and
reagent system. It is the only general chemistry system to offer both
profile and single test capability and it is cleared by the United States
Food and Drug Administration ("FDA") for marketing in the United States.
The Company has signed a separate contract with Dade to continue to
manufacture Analyst equipment and reagents for a period of one to three
years. After this period Reagents Applications, Inc. ("RAI"), Hemagen's
clinical chemistry unit will produce the reagents for the Analyst, while
Hemagen's facility in Columbia, Maryland will assemble the unit's rotors and
ship completed products.
On November 1, 1996, the Company completed the purchase of
substantially all the assets of Cellular Products, Inc., now known as 872
Main Street Corporation. 872 Main Street Corporation was operating under
the provisions of Chapter 11 of the United States Bankruptcy Code. The
Company continues to operate the facility located in Buffalo, New York
through its wholly owned subsidiary, Cellular Products, Inc. ("CPI"). CPI
manufactures biotechnology materials and assays for research and for the
manufacture of clinical diagnostic test kits. CPI's principal focus is on
infectious diseases, particularly retroviruses such as HIV and HTLV. Its
products are used in the growth and testing of these viruses and as raw
materials by manufacturers of clinical diagnostic assays for HIV and HTLV.
The product mix includes enzyme oligonucleotide assays, monoclonal
antibodies, recombinant growth factors, viral lysates and bulk raw
materials. CPI presently manufactures a significant amount of material for
use in the Company's clinical diagnostic tests.
On March 1, 1996, the Company acquired RAI from Kone Holdings, Inc.
RAI manufactures and markets a complete line of clinical chemistry reagents
and diagnostic products for in vitro diagnostic use in hospitals, clinics
and laboratories. These products are sold under the RAICHEM(R) label
directly and through a network of over 30 distributors located in the United
States and international markets. RAI also produces private label reagents
for domestic and international customers. Most RAI reagents can be used in
both automated and manual analyzers. Certain of the reagents used for the
Analyst are currently, and will continue to be manufactured by RAI. RAI's
leading product lines include blood chemistry assays used to aid the
monitoring and measurement of health profiles, such as cholesterol, blood
urea nitrogen (BUN), triglycerides, glucose and uric acid.
In July 1995, the Company completed the acquisition of a line of
diagnostic test kits using immunofluorescence, from Schiapparelli
Biosystems, Inc. (The "VIRGO Acquisition"). These acquired assays are sold
under the registered trademark VIRGO(R). VIRGO(R) kits are considered
among the most reliable in the industry. Hemagen's VIRGO(R) kits are often
used to confirm a diagnosis achieved by other methods.
Prior to July 1995, the Company's products were based primarily on two
diagnostic technologies, hemagglutination and enzyme-linked immunosorbence
("ELISA" or "EIA"). The Company owns a proprietary technique for preserving
red blood cells, a key component of the Company's hemagglutination assays.
This technology enables the Company to manufacture products which have a
shelf life of up to 24 months (compared to a typical shelf life of 30 to 60
days for traditional hemagglutination processes), provides quick and
accurate results, requires no special laboratory equipment to perform and
are more reliable than previously available hemagglutination assays. The
extended shelf life and improvements in the consistency of these assays
substantially eliminate limitations previously encountered in the use of
hemagglutination assays.
The Company offers approximately 135 test kits that have been cleared
by the FDA for sale in the United States. The Company markets and sells its
brand name products worldwide, directly through an international sales force
and through national and international distributors and manufacturers'
representatives. The Company markets its products in South America through
its majority owned subsidiary, Hemagen Diagnosticos Comercio, Importacao e
Exportacao, Ltd., a Brazilian limited liability company ("HDC"). In
addition, the Company sells certain of its products on a private-label basis
to multinational distributors of medical diagnostics.
In December 1994 the Company entered into a five-year agreement (the
"Carter-Wallace Agreement") with Carter-Wallace, Inc. ("Carter-Wallace") to
manufacture approximately 14 diagnostic test kits for the Wampole division
of Carter-Wallace. The test kits, which had previously been manufactured by
Carter-Wallace, are used to aid in the diagnosis of diseases such as
rheumatoid arthritis, mononucleosis, strep throat and rubella, as well as to
detect pregnancy. Carter-Wallace has agreed to purchase its requirements for
these test kits from the Company during the term of the Agreement, subject
to the Company maintaining certain quality standards. The test kits are
sold by Carter-Wallace to clinical laboratories and physicians' office
laboratories both domestically and abroad. This contract expires in
December 1999. The Company is currently negotiating an extension of the
Carter-Wallace Agreement.
The Company markets and sells certain of its products through third
parties, including Olympus America, Inc. ("Olympus"), an affiliate of
Olympus Optical Co., Ltd. of Japan, Sigma Diagnostics, Inc. ("Sigma"), a
subsidiary of Sigma-Aldrich Corp and Boehringer Mannheim, GmbH ("Boehringer"
or "BM"). See "Business - Distribution and Marketing"
The Company owns a 51% interest in HDC, a Brazilian limited liability
company. HDC distributes most of the Company's products throughout South
America. HDC also completes light assembly of certain of the Company's
products. Unless the context otherwise requires, the term "Company"
includes HDC, RAI, CPI and the Virgo Acquisition.
Recent Developments
Analyst Purchase
On September 1, 1998 the Company purchased certain assets from Dade
related to a product line sold under the registered tradename Analyst. The
Analyst product line consists of both the Analyst bench top clinical
chemistry system and all the related consumables which are used in that
bench top system. The assets included accounts receivable, inventory,
equipment, and certain intellectual property. The Company agreed to assume
certain of Dade's liabilities including accounts payable, service contracts
and warranty obligations. Pursuant to the purchase and the related
agreements, Dade will continue to manufacture the products under a separate
manufacturing agreement for a period of up to thirty-six months while the
Company transitions the manufacturing operations to its facilities located
in Columbia, Maryland and San Diego, California. With 90 days written
notice to Dade, this agreement may be terminated without cause by the
Company. The Company intends to have the instruments manufactured by Dade
or some other suitable third party in the foreseeable future.
Under the purchase agreement, at the closing, the Company paid
$3,500,000 in cash and issued a subordinated non-interest bearing promissory
note to Dade (the "Note") in the amount of $1,250,000. The Company agrees
to pay Dade in full on or before September 1, 2000. The Note and the
purchase price are subject to adjustment due to changes in working capital
transferred at the close of the purchase agreement. The Company has also
agreed to pay Dade a royalty on the sale of certain consumables for use with
the Analyst instrument.
The Company financed the acquisition using $3,500,000 in proceeds from
a $5,000,000 revolving credit line from BankBoston, N.A., which is secured
by all the assets of the Company and its subsidiaries.
The Analyst system uses a patent protected rotor based technology that
is currently capable of producing results of up to 14 different clinical
chemistry tests in under 10 minutes. The rotor contains dry prepackaged
reagents in tablet form, which include tests such as cholesterol,
triglycerides, glucose and total protein. The Analyst is sold in point of
care settings such as physician office laboratories and veterinary office
laboratories.
R&D Antibodies Joint Venture
In December, 1997, the Company entered into a Joint Venture with R & D
Antibodies ("R & D"), a private biotechnology company located in California.
R & D owns proprietary antibodies to the inducible form of the enzyme,
nitric oxide synthase ("iNOS"). Using these antibodies, the joint venture
is developing an early detection assay for signaling the onset of sepsis and
septicemia primarily in patients who are in non-cardiac intensive care units
throughout the world. The Company estimates a minimum of 300,000 deaths
occur in the United States due to this disease annually.
Distribution Agreements
During the fiscal year ended September 30, 1998 the Company entered
into several distribution agreements for distribution of its products in
Greece, Italy, Korea, Mexico, the United Kingdom and the United States.
Certain of these agreements include minimum purchases, however the Company
cannot insure that these minimum purchase volumes will be attained.
Technology
The presence and concentration of certain antibodies in the blood of
an individual can assist physicians in the diagnosis of certain diseases.
The Company's assays are in vitro (outside of a patient's body) diagnostic
tests that are used to measure specific substances, either antigens or
antibodies, in blood or other body fluids. An antigen is a substance that
reacts with a particular antibody in a manner which, in the proper
environment, is detectable either by the naked eye or with the aid of a
laboratory technique which amplifies the reaction so that it is rendered
visible. The Company's hemagglutination, ELISA and immunofluorescence
assays are three examples of such an amplification. The Company's blood
chemistry and Analyst system assays are used to aid the monitoring and
measurement of health profiles (in humans and animals), such as cholesterol,
blood urea nitrogen (BUN), triglycerides, glucose and uric acid.
The Company relies upon proprietary or patent-protected technologies
in the manufacture of its kits. These technologies include a lyophilization
(freeze drying) technique which substantially extends the shelf life of the
Company's hemagglutination assays, and proprietary methods to prepare
antigens for its ELISA assays. The Company has recently acquired an
exclusive worldwide license to a patent protected rotor based technology for
use in the Analyst.
ELISA
ELISA (or EIA) tests employ small plastic vessels (microfilter plates)
coated with particular antigens. The test process involves introducing the
patient's serum into the vessel to allow a reaction to occur. If the
antibody being tested for is present, it will bind to the antigens on the
inner surface of the vessel. After the vessel is rinsed, the specifically
bound antibody will remain while any non-specific antibodies will be washed
away. To detect the quantity of the specific antibody, other compounds are
added which will cause a color change in the vessel, the intensity of which
is proportionate to the quantity of the specific antibody bound. If no
color is noted, this indicates that the patient's serum did not contain
detectable quantities of the specific antibody.
Immunofluorescence
The Company's immunofluorescence tests utilize a fluorescent
microscope. Mammalian cells grown on microscope slides are treated with
disease-producing organisms (viral or bacterial). Serum from a patient is
placed in contact with the infected cells. If a patient has antibodies to
the organism causing the disease, the antibodies will bind to the organism.
A chemical is added to the slide which binds to the organism and the
antibody, if present. When the slide is illuminated with light at a
specific wavelength in the microscope, the chemically-treated cells will
appear fluorescent, indicating a positive test result. If the patient did
not have the appropriate antibody, no fluorescence will appear and the test
result will be deemed negative.
Clinical Chemistries
The Company produces a line of general clinical chemistry reagents
utilizing colorimetric, turbidometric and enzymatic procedures. These
chemistry reagents are those most commonly performed in clinical
laboratories as general health screening tests and in the identifications of
diseases. These tests can be performed using a broad range of automated
and semi-automated instruments typically used by clinical laboratories.
Hemaggglutination
Hemagglutination is the agglutination or "clumping" of red blood cells
("RBCs"). Many substances, including certain antibodies, when placed in
contact with RBCs, will cause agglutination.
Under the appropriate conditions, human RBCs may be modified or
sensitized by binding specific foreign antigens to their surface. These
sensitized RBCs will agglutinate when placed in contact with a specific
antibody to the foreign antigen. The presence of certain antibodies in an
individual's serum (blood from which clotted red blood cells have been
removed) can indicate certain diseases. By sensitizing RBCs with an antigen
that specifically reacts with a particular antibody, the simple visible
observation of the agglutination reaction will indicate the presence of the
disease-produced antibody. The use of RBCs instead of other particles can
allow for simple visual observation of the agglutination reaction in the
proper environment, and reduces the non-specific reactions seen in
artificial systems such as those that utilize latex particles.
To perform the Company's hemagglutination test, a technician combines
the Company's sensitized RBCs with a patient's serum in a small well with a
V-shaped bottom according to a set of directions included with the Company's
test kits. If no agglutination takes place, the RBCs will settle to the
bottom of the well, resulting in a clearly visible red dot which indicates
that the test is negative.
In contrast, if the particular antibody is present in the patient's
blood, the RBCs will agglutinate, which prevents the RBCs from settling to
the bottom of the well. Instead of the small red dot, the substance will
appear as a diffuse red, which indicates a positive reaction.
Automated Clinical Chemistry Instrument System
The Analyst is a bench top centrifugal clinical chemistry analyzer.
The Analyst uses as a consumable a small rotor which contains dry
prepackaged reagents. The Analyst spins the rotor mixing the patient sample
with the dry reagents producing a result in under ten minutes. Five types
of rotors providing a variety of clinical chemistry tests, all cleared for
marketing by the FDA, are currently being marketed and sold by the Company
and certain distributors. The Analyst instrument has been designated by the
FDA as moderately complex, and is therefore suitable for the point of care,
physician and veterinary office laboratory markets.
Acute Phase Reactants and Apolipoproteins
The Company has developed a new application for its ELISA technology
to detect cardiovascular risk factors (apolipoproteins) and inflammatory
signals (acute phase reactants), the latter of which are present in a
patient's blood prior to the clinical manifestation of infection or
inflammation. If successful, these technologies could lead to earlier
detection and prevention of cardiovascular disease, the imminent rejection
of transplanted organs, or the onset of infections, than is possible with
techniques now commercially available. Such earlier detection could enable
physicians to better plan appropriate treatment of patients with these
conditions. The Company currently markets two test kits to detect
inflammatory signals. Product sales for these tests were approximately
$203,000, and $224,000 in fiscal 1998 and 1997, respectively.
Current Products
ELISA Assays
The Company develops and markets ELISA tests for the detection of
disease markers. As with corresponding hemagglutination tests produced by
the Company, most of the Company's ELISA assays test for elevated levels of
antibodies, which are useful indicators of certain diseases. ELISA tests are
widely used by large laboratories because these tests adapt easily to
automated diagnostic testing equipment. The Company's FDA cleared ELISA
test kits aid in the diagnosis of the following diseases:
SLE (lupus) polymyositis
mixed connective tissue disease dermatomyositis
Sjogren's syndrome connective tissue diseases
scleroderma (systemic sclerosis) Primary Biliary Cirrhosis
cytomegalovirus infections Chagas' disease
Rheumatoid arthritis Wegener's disease
Certain of the Company's ELISA tests are also used to monitor the
acute phase response to infection and inflammation in diseases such as lupus
and rheumatoid arthritis. Several of the Company's ELISA tests are now
available in both lyophilized and all liquid formats.
The Company's ELISA and hemagglutination kits (see below) include
screen tests in which up to six different diagnostic indices are monitored
at the same time, which is useful in the rapid initial screening of
patients. If the screen test is positive, individual kits are available to
identify which of these six indices is present.
Immunofluorescence ("IFA") Products
The Company's immunofluorescence products consist primarily of
diagnostic assays for infectious diseases. Immunofluorescence kits are used
as primary or confirmatory tests in many large clinical laboratories in the
United States. There are currently 15 kits sold in the immunofluorescence
format.
The Company's immunofluorescence products are used to aid in the
diagnosis of the following:
cytomegalovirus infections herpes simplex
SLE (lupus) german measles
connective tissue diseases chicken pox
primary bilary cirrhosis infections with Epstein-Barr virus
toxoplasmosis chlamydial infections
syphilis measles
primary RSV infections mumps infections
Autoimmune diseases
Hemagglutination Assays
The Company believes that it manufactures and markets the only
commercially available hemagglutination kits which test for antibodies to
antigens present in the nucleus of a cell ("extractable nuclear antigens,"
or "ENAs") which are markers of certain autoimmune diseases. Each of the
Company's hemagglutination assays is based on the Company's proprietary
technique to lyophilize, or "freeze dry," the RBCs which form the central
component of a hemagglutination assay. The Company's proprietary
lyophilization technique for the preservation of RBCs permits the production
of standardized, easy-to-use and accurate hemagglutination tests with an
extended shelf life, most of which are attributes previously unavailable
using hemagglutination assays. The shelf-life of the lyophilized RBCs before
reconstitution may be up to 24 months. A technician reconstitutes the
powdered cells in a water-based solution prior to introducing the patient's
serum.
Each hemagglutination test also requires a specific formula to
sensitize the RBCs prior to lyophilization such that they will react to a
specific antibody. For each of its tests, the Company uses a proprietary
formula to combine antigens and other reagents with RBCs in a manner that
allows for standard, sensitive and specific agglutination reactions. Results
from the Company's test kits are generally available within two hours. The
Company's hemagglutination test kits aid in the diagnosis of the following
diseases:
SLE (lupus) dermatomyositis
mixed connective tissue disease polymyositis
Sjogren's syndrome rheumatoid arthritis
scleroderma (systemic sclerosis) Chagas' disease
cytomegalovirus infections
RAI Products
The Company's general chemistry products, sold under the trade name
RAICHEM(R) consist of a broad range of assays used on automated and semi-
automated clinical chemistry analysis systems. Many of the RAICHEM(R)
assays are used in profiling general health conditions and as specific
indications of possible disease states. The most widely recognized general
chemistry tests made by the Company include those for blood levels of
glucose, cholesterol, triglycerides, uric acid, urea nitrogen and total
protein. In all, more than 60 of the Company's clinical chemistry products
have been cleared by the FDA for sale in the United States. This includes a
line of serum protein immuno assay products, ("SPIA" products). SPIA
products are liquid reagents which measure levels of sub-particles of
protein in serum. These tests are used to diagnose various types of
infectious diseases and cardiac risk factors and autoimmune diseases.
CPI Products
The Company's wholly owned subsidiary, CPI, manufactures and markets
biotechnology materials and assays for research and for the manufacture of
clinical diagnostic test kits. CPI's product line focuses on two target
markets within the bioreagents marketplace. The first is the research
product market which includes T Cell Growth Factors, Retro-Tek Antigen EIA
kits, Gene Detective EOA kits, monoclonal antibodies, Lymphocyte Isolation
Adjuncts, and Recombinant Growth Factors. The second market is the
industrial raw materials market. Major products in this area include
purified viral lysates, monoclonal antibodies, polyclonal antibodies and
conjugates. CPI also services a number of smaller markets with products
such as the Retro-Tek IFA kits and is the exclusive distributor for a
product line manufactured by Genelabs Diagnostics U.S.A. Inc.
Analyst System Products
The Company currently markets five rotor types for use on its Analyst
clinical chemistry analyzer. These include two general chemistry rotors, a
glucose test, a lipid screen test and a theophylline test. All five tests
are cleared for marketing by the FDA.
South American Activities
In 1991, the Company began to market its product line in South America
through HDC. In fiscal 1994, HDC completed the renovation of a new
manufacturing and sales office facility in Sao Paulo, Brazil, which allows
HDC to complete light manufacturing of test kits in South America.
The Company markets its full product line to the South American
market, including three proprietary assays for Chagas' disease. Chagas'
disease (American Trypanosomiasis) is an insect and blood transfusion
transmitted parasitic infection which eventually attacks the victim's
cardiovascular system. Due to poor sanitation and other factors, insects
have transmitted Chagas' disease widely throughout Central and South
America, with substantial encroachment into Mexico. In response to the need
for efficient and accurate testing for Chagas' disease, the Company has
developed three diagnostic tests: an instrument-free hemagglutination assay,
an ELISA assay, and a hemagglutination assay prepared specifically for use
with certain automated blood-typing instruments. The ELISA assay has
received FDA clearance for sale in the United States.
The office in Sao Paulo is presently staffed by five full-time
salespeople administrators who receive and process orders, and four people
in production, shipping and technical support. In addition, Dr. de
Oliveira, the Company's Vice President of Research and Development, spends
time in Brazil attending to business of the Company. In fiscal 1998, and
1997 the Company derived product sales through HDC of approximately
$1,473,000, and $1,255,000 respectively. See "Business - Facilities."
In August, 1997, the Company entered into a distribution agreement
with Donner Systems to distribute the Company's clinical chemistry product
line in Brazil. Donner has agreed to a minimum purchase amount of $2
million over the term of the three year agreement once the Company's
products have been registered for sale in Brazil. Product registration was
completed during fiscal 1998, however, Donner has failed to attain its
minimum purchase requirements.
Distribution and Marketing
General
In the United States, the Company sells its products directly to
clinical laboratories and blood banks and on a private-label basis through
multinational distributors of medical diagnostics. Internationally, the
Company sells its products primarily through distributors. The Company
grants exclusive and non-exclusive distributorships, which generally cover
limited geographic areas and specific test kits. The Company's exclusive
distributorship arrangements generally condition exclusivity on the
distributor maintaining minimum purchases from the Company. The Company has
relationships with approximately 35 exclusive and non-exclusive distributors
and its products have been sold in over 20 countries.
In June, 1998 the Company hired a six person outside sales force to
assist in the sales effort in the United States and Europe. This sales
force, operating in specified regions within the United States and Europe
will allow the Company to focus on selling products directly to customers as
well as increasing marketing and selling efforts of distributors.
Since 1989 the Company has been the exclusive provider of test kits to
detect CMV antibodies for use with the Olympus' PK Series Pre-Transfusion
instruments, the world's most widely used automated blood-typing instruments
in blood banks and large commercial laboratories. Sales of CMV assays to
Olympus were approximately $1,313,000, and $1,057,000 during fiscal 1998,
and 1997, respectively. Olympus and the Company did not renew this
exclusive agreement when it terminated in March, 1998. However, Olympus has
continued to purchase these products from the Company since the termination
of the contract. The Company cannot predict whether these purchases will
continue and when Olympus will stop purchasing these products from the
Company.
The Company also manufactures products on a private label basis for
Sigma, Boehringer, Hoffman La Roche, and Carter-Wallace pursuant to supply
agreements. Some of these agreements provide for minimum purchases;
however, the Company cannot predict the level of revenues it will derive
from these agreements.
Carter-Wallace accounted for approximately 10% and 14% of the
Company's revenue for the fiscal years ended September 30, 1998 and 1997,
respectively. Although the Company expects that its relationship with
Carter Wallace will continue, if it were to cease doing business with the
Company it would have a material adverse effect on the Company's business.
The Company's South American Distribution and Marketing activities are
described in the section entitled "Business: South American Activities."
Products Under Development
The Company is presently developing new products in areas described
below. The Company spent a total of approximately $1,073,000, and $1,072,000
on Company-sponsored research and development for the fiscal years ended
September 30, 1998, and 1997, respectively. The Company spent a total of
approximately $ 0, and $6,000 on externally-sponsored research and
development for the years ended September 30, 1998, and 1997, respectively.
The Company's Projects Include The Following:
Autoimmune Diseases
The Company intends to continue its development of products to aid in
the diagnosis of autoimmune diseases. ELISA kits for the detection of
antibodies associated with Beta 2 glycoprotein are currently under
development. These will be marketed with our recently approved anti-
cardiolipin kits. In addition, an ELISA Screen assay to detect total
antinuclear antibodies (ANA) is being developed. The Company believes that
it will have commercially available assays for these purposes in fiscal
1999, subject to obtaining appropriate regulatory clearances.
Acute Phase Reactants
Working together with the Framingham Heart Study, the Company's CRP
ELISA kit has been shown to be an effective predictor of cardiovascular
disease. These results are preliminary and several studies are planned in
the coming year to validate the initial findings.
Infectious Diseases
The Company continues to develop additional assays to aid in the
diagnosis of infectious diseases. The Company recently completed the
development of products known as a "ToRCH panel" which include assays for
toxoplasmosis, rubella, CMV, and herpes. Several of these products are being
evaluated for submission to the FDA for clearance.
CPI has begun development of the viral lysates used in the Company's
infectious disease products, including HIV herpes and CMV. It is expected
that more of these viral lysates will be developed during the coming year.
Clinical Chemistry Reagents
The Company continues to develop additional assays and reagents to
fill in its clinical chemistry reagent product line sold under the RAICHEM
label. Almost all of the powdered clinical chemistry assays are now
available in liquid format, making RAICHEM one of the most complete clinical
chemistry lines offered worldwide. Continuing efforts are directed at
increasing the line of Serum Protein Immunoassays (SPIAs), especially to
modify them for use in the Analyst (see below) Development of a kit to
measure blood levels of ferritin is almost complete and plans to produce
several other assays are in place.
Analyst Instrument System
Studies have begun to modify the contents (test panel) of the human
Chem 14 rotor to ease the reimbursement procedures and to make the product
more informative for the doctor and the patient. These modifications should
be accomplished in the coming calendar year. Relatively few changes need to
be made for this to happen. As mentioned above, we will explore the
possibility of expanding the rotor technology to immunoassays of serum
proteins, therapeutic drug monitoring and a thyroid panel.
New Analyst Instrument
The Analyst instrument itself is a rugged and highly reliable unit
that needs only to be updated rather than overhauled. New features to be
included are increased memory capacity, user-friendly calibration technology
and smaller instrument footprint. The Company has entered into serious
discussion with key instrument manufacturers and it believes that
development and design of a new more robust Analyst will be available in the
second quarter of Fiscal Year 2000.
Vet Rotor
The Company together with the personnel at Dade, have developed a
prototype rotor for the veterinary market. It is denoted as the Vet 16 rotor
and it is expected to be introduced to the market in the second quarter of
Fiscal Year 1999. At present, it is being tested in the field at several vet
sites. Five new or modified assays were added to the Chem 14 rotor to
accomplish this feat. The staff at RAICHEM made the raw material; It was
modified and processed at Dade.
Relationship with Boston University
Dr. Carl Franzblau, the Chairman of the Board, Chief Executive Officer
and President of the Company, serves as a Professor and Chairman of the
Department of Biochemistry and as Associate Dean for Graduate Affairs at
Boston University School of Medicine. Dr. Alan Cohen, a Director of the
Company, served as a Professor of Medicine and Pharmacology at Boston
University School of Medicine. Lawrence Gilbert, a Director of the Company,
was also the Director of the Patent and Technology Administration at Boston
University through December, 1994. Charles W. Smith, a Director of the
Company, served as Senior Vice President of Boston University from 1984
through 1989 and as its Treasurer from 1983 through June 1992. The Company
believes that the continuing relationship between Boston University and
these individuals, particularly Dr. Franzblau, is beneficial to the Company,
particularly with respect to providing the Company with access to new
developments in scientific areas related to the Company's business.
License Agreements
In March 1992, the Company entered into a license agreement (the "B.
U. License Agreement") with Boston University (the "University") pursuant to
which the Company has obtained the exclusive right to use certain of the
University's patented technology to manufacture and market assays for the
detection of acute phase reactants. See "Business - Products under
Development." Pursuant to the B. U. License Agreement, the Company is
obligated to pay an annual royalty of 5% of the first $50,000 of the
Company's net sales of these assays, and 10% of the Company's net sales of
these assays in excess of $50,000 until the Company has paid the University
a license fee of $10,000 and reimbursed it for certain patent expenses.
Thereafter, the Company will pay a 5% royalty on its net sales of these
assays. Sales under the B.U. License Agreement have been immaterial to
date.
In July 1994, the Company entered into a second license agreement with
the University under which the Company obtained the exclusive right to use
additional patented and patent-pending technology of the University to
manufacture and market certain products. The royalties due under the terms
of the agreement are the same as the B.U. License Agreement and will be
applied to a license fee of $15,000. No royalties were paid in the years
ended September 30, 1998 or 1997 and no amounts were accrued for royalties
at September 30, 1998 or 1997. The agreement terminates upon the
termination of the patents.
Manufacturing and Sources of Supply
The Company manufactures its hemagglutination and ELISA test kits
primarily at its facility in Waltham, Massachusetts, and its products based
on immunofluorescence technology at its facility in Columbia, Maryland. The
Company's clinical chemistry products are produced at the Company's facility
in San Diego, California and the raw material and research lines are
produced in Buffalo, New York. Presently, the Analyst and related
consumables are manufactured or purchased by Dade in Glasgow, Delaware and
Atlanta, Georgia. The Company purchases RBC(s) and many of the antigens and
other reagents used in the kits from outside vendors. Some reagents used in
the Company's test kits are manufactured at the Company's facilities. The
Company uses lyophilization equipment to preserve sensitized RBCs for its
hemagglutination test kits.
All components used in the Company's products are available from
multiple sources, except for an antigen called SSA, which the Company uses
in two of its ELISA and two of its hemagglutination test kits. The Company
believes that the supplier of this antigen produces this antigen for many
customers. Management believes that if necessary, the Company could produce
sufficient quantities of this antigen itself. Therefore, if the supply of
this antigen were to cease, the Company believes it would not have a long-
term material adverse impact on the Company's business taken as a whole.
Government Regulation
The Company's manufacturing, distribution, and marketing of diagnostic
test kits are subject to a number of both domestic and international
regulatory controls. In the United States, the Company's production and
marketing activities are subject to regulation by the United States Food and
Drug Administration ("FDA"), under the authority of the Federal Food Drug,
and Cosmetic Act, as amended by the Medical Device Amendments Act of 1976,
The Safe Medical Devices Act of 1990, and The Medical Device Amendments of
1992 and the FDA Modernization Act of 1997.
These regulations require that the Company must formally notify the
FDA of its intentions to market in vitro diagnostic devices through a
regulatory submissions process, either the 510(k) process or the Premarket
Approval process ("PMA"). When a 510(k) process is used the Company is
required to demonstrate that the product is "substantially equivalent" to
another product in commercial distribution. The Company cannot proceed with
sales of its diagnostic products until it receives clearance from the FDA.
Currently, the majority of products that are reviewed by the 510(k) process
are cleared within 90 days.
In certain cases the Company must follow the PMA process which
involves a lengthier and more burdensome process.
The Company is required to register with the FDA as a device
manufacturer and list its devices. As such, the Company is subject to
inspection on a routine basis for compliance with the FDA's Quality System
Regulations (QSR). These regulations require that the Company manufacture
its products and maintain its documents in a prescribed manner with respect
to manufacturing, testing, control, and distribution activities. In
addition, the Company is required to comply with various FDA requirements
for labeling, pursuant to the Medical Device Reporting Act regulations.
Finally, the FDA prohibits an approved device from being marketed for
unapproved applications. The Company believes it is in conformity with all
such regulations.
The regulatory controls being imposed upon the Company with respect to
the international distribution, and marketing of in vitro diagnostic devices
are increasing. Specifically, member nations of the European Community are
developing a standardized quality system similar to QSR called EN 29000 that
is anticipated to be effective no sooner than 1998 and will allow companies
a three year period to conform to the directive. The Company will be
required to conform to the EN 29000 regulations for any product sold in the
European Community. The European Community has adopted the IVD Directive.
All In-Vitro Devices ("IVDs") must bear the CE Marking of Conformity by
2005. Instruments must bear the CE Marking by June, 1998. The Company
expects to be able to conform to these regulations within the required time
frame. The Company is testing the Analyst to insure that it complies with
these regulations.
Competition
The clinical diagnostic industry is highly competitive. There are many
companies, both public and private, engaged in diagnostics-related research
and development, including a number of well-known pharmaceutical and
chemical companies. Competition is based primarily on product reliability,
customer service and price. Some of these companies have substantially
greater capital resources and have marketing and business organizations of
substantially greater size than the Company. Many companies have been
working on immunodiagnostic reagents and products, including some products
believed to be similar to those currently marketed or under development by
the Company, for a longer period of time than has the Company. The Company
believes that its primary competitors in the diagnostics market include
Abbott Laboratories, Sigma Diagnostics, Trace-America, Inc., Gull
Laboratories, Inc., INOVA, Sanofi Diagnostics Pasteur, Inc., Diamedix
Corporation, IDEXX and Abaxis, Inc. The Company expects competition within
this industry to intensify.
Product Liability
The testing, marketing and sale of clinical diagnostic products entail
an inherent risk of allegations of product liability, and there can be no
assurance that product liability claims will not be asserted against the
Company. The Company may incur product liability due to product failure or
improper use of products by the user. Inaccurate detection may result in the
failure to administer necessary therapeutic drugs or administration of
unnecessary and potentially toxic drugs. Even with proper use of a product,
there may be specific instances in which the results obtained from the
Company's test kits could lead a physician to incorrectly predict the
appropriate therapy for a particular patient. The Company maintains product
liability insurance in the amount of up to $5,000,000 per incident and in
the aggregate which, based on the Company's experience and industry
practice, the Company believes to be adequate for its present operations. No
assurance can be given that the amount of the Company's insurance is
sufficient to fully insure against claims which may be made against the
Company.
Patents and Proprietary Rights
The Company protects its technology primarily as trade secrets rather
than by relying on patents, either because patent protection is not possible
or, in management's opinion, would be less effective than maintaining
secrecy. In addition, the Company relies upon confidentiality agreements
with its employees. To the extent that it relies on confidentiality
agreements and trade secret protection, there can be no assurance that the
Company's efforts to maintain secrecy will be successful or that third
parties will not be able to develop the technology independently. The
Company may in the future apply for patent protection for certain of its
technology when management believes such protection would be beneficial to
the Company. The protection afforded by patents depends upon a variety of
factors which may severely limit the value of the patent protection,
particularly in foreign countries, and no assurance can be given that
patents, if granted, will provide meaningful protection for the Company's
technology.
Royalty Obligations
The Company is required to pay royalties to third parties on sales of
some of its products and proposed products. See "Business - Relationship
with Boston University" and "Business - Analyst Purchase"
Employees
As of September 30, 1998, the Company had 114 full-time employees, of
which four are executive officers, 30 are employed in sales, marketing,
general and administrative activities and 80 are involved in production and
research and development.
None of the Company's employees are represented by a labor
organization and the Company is not a party to any collective bargaining
agreement. The Company has never experienced any strike or work stoppage
and considers its relationship with its employees to be excellent.
Item 2. Description of Property.
The Company maintains its principal executive offices, laboratory and
production operations in Waltham, Massachusetts in two adjacent buildings;
one a 4,000 sq. ft. facility which houses the Company's research and
development laboratories, and the other a 15,000 sq. ft. facility which
accommodates the laboratory and production operations and the executive
offices of the Company. The Company pays rent in the amount of $133,500 per
annum for the two facilities pursuant to the terms of that lease which ends
May 30, 2002. The Company also leases 29,000 square feet in a production
facility in Columbia, Maryland where it manufactures the immunofluorescence
products. Under the Columbia lease, which extends through June 30, 2000,
the Company pays $108,156 per annum in rent. The Company also leases 20,100
square feet in San Diego, California, where it manufactures the RAICHEM
products. Under the San Diego lease, which extends through September 30,
2002, the Company pays approximately $201,000 per annum. In addition, the
Company leases a 1,900 square foot warehouse facility near its production
site for which it pays $13,080 per annum on an annual lease which may be
renewed each April 1. As part of the purchase of substantially all the
assets of 872 Main Street Corporation in November, 1996, the Company
acquired the land and building located at 872 Main Street in Buffalo, New
York. CPI operates out of this facility which consists of approximately
15,000 square feet of space. The Company believes that its facilities are
adequate for its present and foreseeable needs.
The Company's 51%-owned subsidiary leases approximately 4,500 square
feet in Sao Paulo, Brazil pursuant to a lease which expires in September 30,
1999. This subsidiary pays rent in an amount of approximately $5,500 per
month for this space. The Company believes that its facilities in Sao Paulo
are adequate for its present and foreseeable needs.
Item 3. Legal Proceedings.
The Company is not presently involved in any material pending
litigation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.
The Company's Common Stock has been traded on the over-the-counter
market through the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") since February 4, 1993. The Company's Common
Stock is also traded on the Boston Stock Exchange. On December 14, 1998,
the closing bid and ask price for the Common Stock as reported by NASDAQ
were $0.94 and $0.84 per share, respectively.
For the periods indicated, the following table sets for the range of
high and low bid prices for the Common Stock as reported by NASDAQ during
Fiscal 1997 and 1998. These prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997
First Fiscal Quarter $2.94 $2.12
Second Fiscal Quarter $2.69 $2.06
Third Fiscal Quarter $2.38 $1.44
Fourth Fiscal Quarter $2.19 $1.75
1998
First Fiscal Quarter $2.47 $1.69
Second Fiscal Quarter $2.13 $1.16
Third Fiscal Quarter $1.56 $1.16
Fourth Fiscal Quarter $1.22 $0.66
1999
First Quarter (through December 14, 1998 $1.25 $0.63
</TABLE>
As of December 14, 1998, there were approximately 170 holders of
record of the Company's Common Stock.
For the periods indicated, the following table sets for the range of
high and low bid prices for the Common Stock Warrants as reported by NASDAQ
during Fiscal 1997 and 1998. These prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent
actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997
First Fiscal Quarter $1.63 $0.63
Second Fiscal Quarter $1.25 $0.63
Third Fiscal Quarter $1.06 $0.31
Fourth Fiscal Quarter $0.97 $0.38
1998
First Fiscal Quarter $0.69 $0.38
Second Fiscal Quarter $0.50 $0.13
Third Fiscal Quarter $0.41 $0.16
Fourth Fiscal Quarter $0.38 $0.09
1999
First Quarter (through December 14 , 1998) $0.16 $0.09
</TABLE>
As of December 14, 1998, there were approximately 60 holders of record
of the Company's Common Stock Warrants.
Dividends
The Company has never paid cash dividends. The Company currently
intends to retain all future earnings, if any, for use in its business and
does not anticipate paying any cash dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
This section contains certain forward-looking statements that are
subject to risks and uncertainties including but not limited to those
discussed in the section entitled "Risk Factors" in the Prospectus contained
in the Company's Registration Statement on Form S-3, File Nos. 333-6147 and
33-80009 (which section is hereby incorporated by reference herein). These
risks and uncertainties could cause the Company's actual results in future
periods to differ materially from its historical results, and from any
opinions or statements expressed in forward-looking statements. Such
forward-looking statements speak only as of the date of this report, and the
Company cautions readers not to place undue reliance on these statements.
Overview
Historically, the Company has concentrated its efforts on developing,
manufacturing and marketing medical diagnostic test kits used to aid in the
diagnosis of certain diseases and the profiling of general health
conditions. Since the fiscal year ending 1995, the Company has also
concentrated its expansion efforts on synergistic acquisitions of companies,
product lines and assets. The Company presently has approximately 135
different test kits available for general sale, approximately 125 of which
have received FDA clearance for sale in the United States.
Results of Operations
Fiscal Year Ended September 30, 1998 Compared
to Fiscal Year Ended September 30, 1997
Revenues decreased to approximately $12,327,000 from approximately
$12,991,000 (5%), primarily as a result of an approximate $634,000 decrease
in contract manufacturing sales to Carter Wallace. Hemagen is not involved
in the sale of the Carter Wallace products to the end user and therefore
does not control the sales volume of these products. Sales of Hemagen/Virgo
products increased approximately 9% during the year. This was offset by
small decreases in sales at the RAI and CPI subsidiaries. The CPI decrease
was the result of regulatory issues with one product. A customer had been
selling the product in the United States without properly licensing this
product with the FDA. RAICHEM sales declined due to a decrease in direct
sales within the United States. All the product sale decreases were
slightly offset by sales in September, 1998 relating to the Analyst
business. The Company is confident that the introduction of a sales force
within the United States will reverse both declines in the coming year.
Cost of product sales decreased to approximately $7,299,000 from
approximately $7,598,000 (4%) due to the decrease in sales. Cost of product
sales as a percentage of sales were approximately unchanged at 59%.
Reductions in the cost of materials resulted from the lower sales and an
increase in the amount of raw materials produced by the Company were
partially offset by increases in facilities and depreciation expenses.
Research and development expenses decreased to approximately
$1,073,000 from approximately $1,078,000 (1%), primarily due to lower costs
at RAI resulted from the consolidation of certain research and development
expenses at the corporate offices. This was partially offset by higher
personnel costs and higher equipment costs at the corporate offices. The
Company is currently developing a wide variety of products which it believes
will enhance all of the Company's product lines. (See: "Business - Products
Under Development"). The Company expects its spending in Research and
Development to increase during the coming year as it brings more of these
products to market.
Selling, general and administrative expenses increased to
approximately $3,855,000 from approximately $3,808,000 (1%), primarily due
to the hiring of a national sales force and increased advertising expenses.
This was partially offset by lower costs at RAI that are the result of
consolidating sales and marketing efforts at the corporate offices. The
Company believes the introduction of a sales force and the increased
advertising efforts will result in increased sales during the fiscal year
ending September 1999.
Net other expense decreased to approximately $90,000 from
approximately $102,000 due to a decrease in interest expense.
Net income decreased to approximately $10,000 compared to
approximately $405,000 the previous year primarily due to lower sales and
increased marketing expenses.
Liquidity and Capital Resources
The Company has financed its capital expenditures, operating
requirements and growth primarily from the initial public offering of its
common stock, a bridge loan, lease financing arrangements, borrowings from
nonaffiliates and related parties, cash flow from operations, private
placements completed in September 1995 and March, 1996 and a $5,000,000 line
of credit provided by BankBoston N.A. which was put in place on September 1,
1998.
On September 1, 1998 the Company purchased certain assets from Dade
related to a product line sold under the tradename Analyst. The Analyst
product line consists of both the Analyst bench top clinical chemistry
system and all the related consumables which are used in that bench top
system. The assets included accounts receivable, inventory, equipment, and
certain intellectual property. The Company agreed to assume certain of
Dade's liabilities including accounts payable, service contracts and
warranty obligations. Pursuant to the purchase and the related agreements,
Dade will continue to manufacture the products under a separate
manufacturing agreement for a period of up to thirty six months while the
Company transitions the manufacturing operations to its facilities located
in Columbia, Maryland and San Diego, California. The Company intends to
have the instruments manufactured by Dade or some other suitable third party
for the foreseeable future.
Under the purchase agreement, at the closing, the Company paid
$3,500,000 in cash and issued a non-interest bearing promissory note to Dade
(the "Note") in the amount of $1,250,000. The Company agrees to pay Dade in
full on or before September 1, 2000. The Note and the purchase price are
subject to adjustment due to changes in working capital transferred at the
close of the purchase agreement. The Company has also agreed to pay Dade a
royalty on the sale of certain consumables for use with the Analyst
instrument.
The Company financed the acquisition using $3,500,000 in proceeds from
a $5,000,000 revolving credit line from BankBoston, N.A., which is secured
by all the assets of the Company and its subsidiaries.
The Analyst system uses a rotor based technology that is currently
capable of producing results of up to 14 different clinical chemistry tests
in under ten minutes. The rotor contains dry prepackaged reagents in tablet
form. Included tests include cholesterol, triglycerides, glucose and total
protein. The Analyst is sold in point of care settings such as physician
office laboratories and veterinary office laboratories.
On November 1, 1996 the Company, through its wholly owned subsidiary,
CPI, completed the purchase of substantially all the assets of 872 Main
Street Corporation (formally Cellular Products, Inc.) for $400,000 in cash
and a $200,000 promissory note which was paid in full on November 1, 1997.
CPI is based in Buffalo, New York and is a manufacturer of biotechnology
materials and assays for research and for the manufacture of clinical
diagnostic test kits. Its products are used in the growth and testing of
retroviruses and as raw materials by manufacturers of clinical diagnostic
assays. The product mix includes enzyme oligonucleotide assays, monoclonal
antibodies, recombinant growth factors, viral lysates and bulk raw
materials. CPI presently manufactures a significant amount of material for
use in the Company's clinical diagnostic tests which has reduced the
Company's manufacturing costs.
At September 30, 1998, the Company's working capital was approximately
$5,446,000 compared to approximately $6,157,000 at September 30, 1997. This
decrease was principally due to the draw down of $3,500,000 against the
Company's $5,000,000 line of credit in relation to the Analyst system
purchase.
Inventory balances increased from approximately $3,954,000 on
September 30, 1997 to approximately $6,212,000 on September 30, 1998 due to
the purchase of Analyst inventory and purchases of inventory in support of
an anticipated increase in product sales due to the increase marketing
efforts. The Company often purchases large quantities of raw materials due
to issues of price, quality and availability. Accounts payable and accrued
expenses increased from approximately $785,000 to approximately $1,094,000
primarily due to accrued expenses related to the Analyst purchase. Accounts
receivable balances increased from approximately $2,289,000 to approximately
$3,295,000 due to the purchase of accounts receivable in connection with the
Analyst purchase.
Long term obligations including current maturities increased from
approximately $537,000 on September 30, 1997 to approximately $1,068,000 on
September 30, 1998. The $1,068,000 represents the net present value of the
Note payable to Dade Behring in connection with the Analyst purchase as of
September 30, 1998.
Management believes its cash and cash equivalents, together with
anticipated cash flow from operations, are sufficient to meet the Company's
cash needs for its ongoing business.
Impact of Inflation
Domestic inflation during the last two fiscal years has not had a
significant effect on the Company's business activities. Translation and
transaction gains and losses between the Company and its subsidiary in
Brazil are expensed each period.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial positions will
be unaffected by the implementation of these new standards.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", ("SFAS No. 130") establishes standards for reporting
and display of comprehensive income, its components, and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items that
are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas, and major customers. SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for
the periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Management does not expect
implementation of these standards to materially affect future financial
statements and disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133
requires companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributed to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly,
the Company does not expect adoption of the new standard on October 1, 1999,
to affect its financial statements.
Year 2000 Systems
The Company has undertaken a review concerning the ability of its
internal information systems, including its internal accounting systems, to
handle date information and to function appropriately from and after January
1, 2000, and does not believe that the total cost to address any changes
required as a result of the so-called "Year 2000 Problem" will be material.
In addition, the Company has evaluated the impact of possible Year 2000
problems encountered by its suppliers and customers upon the Company and
does not believe that any problems would have material effect upon the
Company.
Item 7. Financial Statements and Supplementary Data.
See Item 13 below and the Index therein for a listing of the financial
statements and supplementary data filed as part of this report.
PART III
Items 9 to 12 are incorporated herein by reference to the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission.
PART IV
Item 13. Exhibits, List and Reports on Form 8-K.
(a)(1) Financial Statements. The financial statements required to be
filed by Item 7 herewith are as follows:
Page
----
Report of Independent Certified Public Accountants -
BDO Seidman, LLP F-2
Consolidated Balance Sheets at September 30, 1998
and 1997 F-3 to F-4
Consolidated Statements of Income for the years
ended September 30, 1998, and 1997 F-5
Consolidated Statements of Stockholders' Equity
for the years ended September 30, 1998, and 1997 F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 1998, and 1997 F-7
Notes to Consolidated Financial Statements F-8 to F-29
(a)(2) Exhibits.
(i) The following exhibits, required by Item 601 of Regulation
S-B, are filed herewith:
(ii) The following exhibits were filed as part of the Company's
Form SB-2 Registration Statement (33-52686-B) declared
effective by the Securities and Exchange Commission (the
"Commission") on February 4, 1993 and are herein
incorporated by reference:
Exhibit No. Title
3a Certificate of Incorporation.
3b Bylaws.
3c Certificate of Agreement of Merger between Hemagen
Diagnostics Inc., a Massachusetts corporation, and the
Company, dated May 1, 1992.
3d Articles of Merger between Hemagen Diagnostics Inc., a
Massachusetts corporation, and the Company, dated May 1,
1992.
4a Rights of security holders (included in Exhibits 3a
and 3b).
4b Specimen Stock Certificate.
10a Technology Purchase Agreement between Dr. de Oliveira and
Dr. Lazzari and Seragen, Inc., dated April 15, 1983.
10b Assignment and Assumption Agreement between the Company
and Seragen, Inc., dated September 12, 1985.
10c Product Development Agreement between the Company and
Boston University, dated February 14, 1992.
10d License Agreement between the Company and Boston
University, dated March 1992.
10e Distributorship Agreement between the Company and Eurobio
Laboratories, dated June 11, 1991.
10f Distributorship Agreement between the Company and
International Reagents Corporation, dated February 1,
1990.
10g Financial Assistance Agreement between the Company and
Hemagen Diagnosticos, Comercio, Importacao e Exportacao
Ltd., dated July 31, 1991.
10h Distribution Agreement between the Company and Hemagen
Diagnosticos, Comercio, Importacao e Exportacao Ltd.,
dated July 31, 1991.
*10i Form of Employment Agreement between the Company and Dr.
Franzblau.
*10j Form of Employment Agreement between the Company and Dr.
de Oliveira.
*10k 1992 Stock Option Plan.
10l Distributorship Agreement between the Company and Labor
Diagnostika GmbH, dated July 1, 1990.
10m Product Purchase Agreement between the Company and Olympus
Corporation, dated February 24, 1989.
10n OEM Agreement between the Company and Sigma Diagnostics,
Inc., dated May 11, 1992.
10o Note issued by the Company to Boston University, dated
December 15, 1985.
10p Letter Agreement between the Company and Antonio Lazzari,
M.D., dated April 28, 1985.
10q Lease between the Company and Philip Pagliazzo and Rose
Pagliazzo, dated May 15, 1992.
10r Distribution Agreement between the Company and Olympus
Corporation, dated September 1, 1992.
*10s Form of Employment Agreement between the Company and Mr.
von Stein.
10t Product Development Agreement between the Company and
Sigma Diagnostics, Inc., dated October 16, 1992.
*10u Revised Employment Agreement between the Company and Dr.
de Oliveira.
*10v Revised Employment Agreement between the Company and Dr.
Franzblau.
10w Description of the Company's lease for certain premises
located in Waltham, Massachusetts.
10x Lease for office space of Hemagen Diagnosticos, Comercio,
Importaceo e Exportaceo, Ltd. ("HDC") in Sao Paulo,
Brazil.
10x Description of the Lease for office space of HDC in Sao
Paulo, Brazil.
10y Equity Purchase Agreement between the Company and HDC,
dated as of October 1, 1992.
10aa Form of Warrant issued in connection with the Bridge Loan
and Statement of Registration Rights.
10cc Form of Subscription Agreement used in connection with the
Bridge Loan.
21 List of the Company's Subsidiaries.
- -------------------
* These exhibits relate to a management contract or compensatory plan or
arrangement.
(iii) The following exhibit was filed as part of the Company's
Form 10-QSB for the quarter ended March 30, 1993.
Exhibit No. Title
- ----------- -----
10a Master Lease Agreement between the Company and Aberlyn
Capital Management Limited Partnership, dated April 1,
1993.
(iv) The following exhibit was filed as part of the Company's
Form 10-KSB for the Fiscal Year ending September 30,
1994.
Exhibit No. Title
- ----------- -----
10a Product Development Agreement between the Company and
Boehringher Mannheim GmbH, dated November 25, 1993.
10b Option Agreement between the Company and Boston
University, dated October 15, 1993.
(v) The following exhibits were filed as part of the
Company's Form 10QSB for the quarter ending December 31,
1994
Exhibit No. Title
- ----------- -----
10dd Distributorship Agreement between the Company and Labor
Diagnostika GmbH dated October 1, 1994
10ee Agreement between the Company and Carter-Wallace, Inc.
dated December 22, 1994.
10ff License Assignment and License Agreement between the
Company and Aberlyn Capital Management Limited
Partnership dated December 30, 1994.
(vi) The following exhibits were filed as part of the
Company's Form 10-KSB for the year ending September 30,
1996.
Exhibit No. Title
- ----------- -----
10gg Distributorship Agreement between the Company and
Schiapparelli Biosystems, B.V.
10hh Distributorship Agreement between the Company and Olympus
America, Inc.
23a Consent of Independent Certified Public Accountants - BDO
Seidman, LLP
23b Consent of Independent Certified Public Accountants -
Price Waterhouse LLP
(vii) The following exhibits were filed as part of the
company's Form 10KSB for the year ending September 30,
1997.
Exhibit No. Title
- ----------- -----
10ii Distribution agreement between the Company and Donnor
Com. IND. LTDA
10jj Distribution agreement between the Company and Phoenix
Diagnostics, Inc.
(b) Reports on Form 8-K.
(i) On September 1,1998, the Company filed form 8-K related
to the purchase of the Analyst business line.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HEMAGEN DIAGNOSTICS, INC.
Date: December 18, 1998 By: /s/ Carl Franzblau
Carl Franzblau, President
In accordance with 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 date indicated.
Name Capacity Date
- ---- -------- ----
/s/Carl Franzblau President and Chairman of December 18, 1998
Carl Franzblau, Ph.D. of the Board of Directors
(Principal Executive Officer)
/s/William Franzblau Chief Financial Officer December 18, 1998
William Franzblau (Principal Financial
Officer)
/s/Myrna Franzblau Treasurer (Principal December 18,1998
Myrna Franzblau Accounting Officer)
/s/Alan S. Cohen Director December 18, 1998
Alan S. Cohen, M.D.
/s/Lawrence Gilbert Director December 18, 1998
Lawrence Gilbert
Director December 18, 1998
Ricardo M. de Oliveira, M.D.
/s/Charles W. Smith Director December 18, 1998
Charles W. Smith
HEMAGEN DIAGNOSTICS, INC.
INDEX TO EXHIBITS
Exhibit No. Title
- ----------- -----
23a Consent of Independent Certified Public Accountants -
BDO Seidman, LLP
27 Financial Data Schedule
Hemagen Diagnostics, Inc.
and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants F-2
Consolidated financial statements:
Balance sheets F-3 to F-4
Statements of income F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7
Notes to consolidated financial statements F-8 to F-29
<PAGE> F-1
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Hemagen Diagnostics, Inc.
We have audited the accompanying consolidated balance sheets of Hemagen
Diagnostics, Inc. and subsidiaries as of September 30, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hemagen
Diagnostics, Inc. and subsidiaries at September 30, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Boston, Massachusetts
December 4, 1998
<PAGE> F-2
Hemagen Diagnostics, Inc.
and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 412,193 $ 294,086
Short-term investments - 730,827
Accounts receivable, less allowance for
doubtful accounts of $477,000 and $55,500
at September 30, 1998 and 1997, respectively 3,294,598 2,288,793
Inventories 6,212,254 3,953,601
Prepaid expenses and other current assets 273,909 221,646
- --------------------------------------------------------------------------------
Total current assets 10,192,954 7,488,953
Property and equipment, net of accumulated
depreciation and amortization 4,367,196 2,545,470
Other assets 1,403,486 1,512,227
- --------------------------------------------------------------------------------
$15,963,636 $11,546,650
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> F-3
Hemagen Diagnostics, Inc.
and Subsidiaries
Consolidated Balance Sheets
(Continued)
<TABLE>
<CAPTION>
September 30, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable:
Bank $ 3,500,000 $ -
Other - 198,983
Accounts payable and accrued expenses 1,093,532 785,135
Deferred revenue 152,929 -
Current maturities of long-term debt - 347,388
- --------------------------------------------------------------------------------
Total current liabilities 4,746,461 1,331,506
Subordinated note payable, net of unamortized
discount of $181,637 1,068,363 -
Long-term debt, less current maturities - 189,281
- --------------------------------------------------------------------------------
Total liabilities 5,814,824 1,520,787
- --------------------------------------------------------------------------------
Minority interest in consolidated subsidiary - -
Commitments and contingencies (Note 17) - -
Stockholders' equity:
Preferred stock, $.01 par value - 1,000,000
shares authorized; none issued - -
Common stock, $.01 par value - 30,000,000 shares
authorized; 7,851,890 and 7,776,890 shares
issued and outstanding at September 30, 1998
and 1997, respectively 78,519 77,769
Additional paid-in capital 13,440,947 13,329,197
Accumulated deficit (3,364,654) (3,375,103)
- --------------------------------------------------------------------------------
10,154,812 10,031,863
Less - receivable from stockholders (6,000) (6,000)
- --------------------------------------------------------------------------------
Total stockholders' equity 10,148,812 10,025,863
- --------------------------------------------------------------------------------
$15,963,636 $11,546,650
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> F-4
Hemagen Diagnostics, Inc.
and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Product sales $12,327,352 $12,971,102
Research and development contracts - 20,000
- --------------------------------------------------------------------------
12,327,352 12,991,102
- --------------------------------------------------------------------------
Cost and expenses:
Cost of product sales 7,298,563 7,597,981
Cost of research and development contracts - 5,928
Research and development 1,072,696 1,072,188
Selling, general and administrative 3,855,215 3,808,000
- --------------------------------------------------------------------------
12,226,474 12,484,097
- --------------------------------------------------------------------------
Operating income 100,878 507,005
- --------------------------------------------------------------------------
Other income (expenses):
Interest income 64,258 63,727
Interest expense (102,660) (131,806)
Foreign exchange loss (68,511) (18,306)
Other income (expense) 16,484 (15,491)
- --------------------------------------------------------------------------
(90,429) (101,876)
- --------------------------------------------------------------------------
Net income $ 10,449 $ 405,129
==========================================================================
Net income per share of common stock:
Basic $ - $ .05
Diluted $ - $ .05
==========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> F-5
Hemagen Diagnostics, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Receivable
--------------------- Paid-in Accumulated from Stockholders'
Shares Par Value Capital Deficit Stockholders Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 7,620,890 $76,209 $13,132,757 $(3,780,232) $(6,000) $ 9,422,734
Issuance of common stock to employees
under stock option plan 56,000 560 97,440 - - 98,000
Exercise of common stock purchase warrants 100,000 1,000 99,000 - - 100,000
Net income - - - 405,129 - 405,129
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 7,776,890 77,769 13,329,197 (3,375,103) (6,000) 10,025,863
Exercise of common stock purchase warrants 75,000 750 111,750 - - 112,500
Net income - - - 10,449 - 10,449
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 7,851,890 $78,519 $13,440,947 $(3,364,654) $(6,000) $10,148,812
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> F-6
Hemagen Diagnostics, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 10,449 $ 405,129
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Gain on sale of property and equipment (21,081) -
Depreciation and amortization 886,211 847,296
Amortization of debt discount 7,897 11,190
Foreign exchange loss 68,511 18,306
Changes in operating assets and liabilities, net of
effects of purchase of Analyst(R) in 1998 and CPI
in 1997:
Accounts receivable 175,446 (405,345)
Inventories (684,260) (319,019)
Prepaid expenses and other current assets (53,523) 53,854
Accounts payable and accrued expenses 40,155 (771,101)
Deferred revenue (18,173) -
- -------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 411,632 (159,690)
- -------------------------------------------------------------------------------------
Cash flow from investing activities:
Payment for acquisitions, net of cash acquired (3,500,000) (395,479)
Proceeds from maturity of short-term investments 730,827 629,422
Purchases of property and equipment (362,105) (325,082)
Proceeds from sale of property and equipment 36,707 -
Other assets (92,203) (8,095)
- -------------------------------------------------------------------------------------
Net cash used by investing activities (3,186,774) (99,234)
- -------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings under revolving line of credit 3,500,000 -
Repayments of long-term debt (536,669) (405,876)
Repayments of notes payable (198,983) -
Exercise of stock options and warrants 112,500 198,000
- -------------------------------------------------------------------------------------
Net cash provided (used) by financing
activities 2,876,848 (207,876)
- -------------------------------------------------------------------------------------
Effect of exchange rates on cash and cash equivalents 16,401 3,967
- -------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 118,107 (462,833)
Cash and cash equivalents, beginning of year 294,086 756,919
- -------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 412,193 $ 294,086
=====================================================================================
Cash payments of interest $ 59,499 $ 147,840
=====================================================================================
</TABLE>
Supplemental disclosure of non-cash financing and investing activities, see
Note 2.
See accompanying notes to consolidated financial statements.
<PAGE> F-7
Hemagen Diagnostics, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Organization
Hemagen Diagnostics, Inc. ("Hemagen" or the "Company") is a biotechnology
company which develops, manufactures, and markets laboratory medical
diagnostic kits used to aid in the diagnosis of certain autoimmune and
infectious diseases. In the United States, the Company sells its products
directly to clinical laboratories and blood banks and on a private-label
basis through multinational distributors of medical supplies.
Internationally, the Company sells its products primarily through
distributors. The Company was incorporated in the Commonwealth of
Massachusetts in 1985 and reincorporated in the state of Delaware in 1992.
2. Significant Accounting Policies
Estimates and Assumptions
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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. The results of Reagents
Applications, Inc. ("RAI") and Hemagen Diagnostics Commercio, Importaco &
Exporataco, Ltd. ("HDC") are included for the two years ended September 30,
1998, and the results of Cellular Products, Inc. ("CPI") are included from
November 1, 1996, the effective date of the CPI acquisition as described in
Note 3. The results of the Analyst(R) product line are included from
September 1, 1998 the effective date of the acquisition as described in Note
3. All significant intercompany balances and transactions have been
eliminated in consolidation.
The Company has a 51% interest in HDC. All losses of HDC in excess of the
minority shareholders' investment have been allocated to the Company.
<PAGE> F-8
Foreign Currency Translation
The functional currency of HDC is the U.S. dollar. Certain assets
(primarily inventories and property and equipment) and liabilities and
related income and expenses of HDC are remeasured into U.S. dollars at
exchange rates in effect when the assets were acquired or the liabilities
were incurred. All other assets and liabilities are translated at the
exchange rates in effect as of the balance sheet date, and income and
expense items are translated at average exchange rates for the period.
Remeasurement gains and losses are included in operations as they occur.
Cash Equivalents and Short-Term Investments
The Company considers all investments with an original maturity of three
months or less to be cash equivalents. The Company invests its excess cash
in certificates of deposit.
Short-term investments are accounted for in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for
Certain Investments in Debt and Equity Securities," which requires that debt
and marketable equity securities be classified as trading, available-for-
sale, or held-to-maturity. Available-for-sale securities are reported in
the balance sheet at fair value with unrealized gains or losses included in
a separate component of stockholders' equity. At September 30, 1998, the
Company held no short-term investments. Short-term investments held at
September 30, 1997 consisted of certificates of deposit that matured during
1998. These certificates of deposit were classified as available-for-sale
and recorded at cost at September 30, 1997, which approximated fair value.
Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets.
Expenditures for repairs and maintenance are expensed as incurred.
<PAGE> F-9
Goodwill
Goodwill resulting from the excess of cost over fair value of net assets
acquired is being amortized on a straight-line basis over 15 years. The
Company evaluates the recoverability and remaining life of its goodwill and
determines whether the goodwill should be completely or partially written-
off or the amortization period accelerated. The Company will recognize an
impairment of goodwill if undiscounted estimated future operating cash flows
of the acquired business are determined to be less than the carrying amount
of the goodwill. If the Company determines that the goodwill has been
impaired, the measurement of the impairment will be equal to the excess of
the carrying amount of the goodwill over the amount of the undiscounted
estimated future operating cash flows. If an impairment of goodwill were to
occur, the Company would reflect the impairment through a reduction in the
carrying value of goodwill.
Income Taxes
The Company utilizes the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109,
"Accounting For Income Taxes." Under this method, deferred tax liabilities
and assets are recognized for the expected future tax consequences of
temporary differences between the carrying amount and the tax basis of
assets and liabilities.
Revenue Recognition
Revenues from the sale of products are recognized upon product shipment.
Revenues from contracts to conduct research and development are recognized
using the percentage-of-completion method. Revenues from product service
contracts are recognized ratably over the terms of the contracts. Losses
are provided for at the time that management determines that contract costs
will exceed related revenues. The portion of contract billings related to
research and development and product service contracts not complete at the
balance sheet date is included in deferred revenue.
<PAGE> F-10
Advertising
The Company expenses advertising costs as incurred. Advertising expense was
approximately $176,000 and $94,000 in fiscal 1998 and 1997, respectively.
Statement of Cash Flows - Disclosure of
Non-Cash Investing Activity
Instruments with a net book value of $114,523 were transferred from fixed
assets to inventory during 1997.
Stock Options
Effective October 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." The Company has elected to continue to account
for stock options at their intrinsic value with disclosure of the effects of
fair value accounting on net income (loss) and income (loss) per basic and
diluted share of common stock on a pro forma basis.
Net Income Per Share of Common Stock
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS
No. 128 requires the presentation of both basic and diluted earnings per
share and replaces previously required standards for computing and
presenting earnings per share. Earnings per share amounts for all periods
have been presented and, where appropriate, restated to conform to the new
requirements of SFAS No. 128. Adoption of SFAS No. 128 did not have an
affect on the Company's earnings per share calculation.
<PAGE> F-11
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," ("SFAS No. 130") establishes standards for reporting
and display of comprehensive income, its components, and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items that
are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas, and major customers. SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Management does not expect
implementation of these standards to materially affect future financial
statements and disclosures.
<PAGE> F-12
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge the objective of which is to match the timing of gain
or loss recognition on the hedging derivative with the recognition of (i)
the changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on October 1, 1999 to
affect its financial statements.
<PAGE> F-13
3. Acquisitions
On September 1, 1998, the Company acquired certain assets, primarily
accounts receivable, inventory, equipment and certain intellectual property,
and assumed certain liabilities related to the Analyst(R) product line of
Dade Behring, Inc. ("Dade") for total consideration and related costs of
$5,007,000. The purchase price consisted of $3,500,000 in cash and an
unsecured subordinated promissory note in the amount of $1,250,000 due
September 1, 2000. The present value of the note was $1,068,363 at
September 30, 1998. The Analyst(R) product line includes the development,
manufacture and sale of the Analyst(R) instrument together with the rotors
and reagents for use in in-vitro diagnostics. Revenues are principally
derived from the sale of reagents to physicians, veterinarians, and small
clinics in the United States. The preliminary purchase price allocation was
recorded using the purchase method of accounting.
On November 1, 1996, the Company acquired certain assets, primarily
inventory and fixed assets, and assumed certain liabilities of 872 Main
Street Corp. (formerly Cellular Products, Inc.) for total consideration and
related costs of $738,600 and formed a new subsidiary, Cellular Products,
Inc. ("CPI"). The purchase price consisted of $400,000 in cash and an
unsecured promissory note to 872 Main Street Corp. in the amount of $200,000
due November, 1997. The present value of the note payable, which was fully
repaid during 1998, was $198,983 at September 30, 1997. The acquisition was
recorded using the purchase method of accounting. CPI manufactures
biotechnology materials and assays for research and for the manufacture of
clinical diagnostic test kits.
For both the CPI and Analyst(R) product line acquisitions, the excess of the
fair value of net assets acquired over the purchase price was recorded as a
reduction of the fixed assets acquired, in accordance with the provisions of
Accounting Principles Board Opinion No. 16, "Business Combinations."
<PAGE> F-14
The consolidated statements of operations and cash flows for the year-ended
September 30, 1998 include the results of operations and cash flows for the
Analyst(R) product line from September 1, 1998 through September 30, 1998
and CPI for the entire year.
The consolidated statements of operations and cash flows for the year-ended
September 30, 1997 include the results of operations and cash flows for CPI
from November 1, 1996 through September 30, 1997.
The unaudited pro forma combined results of operations of the Company and
the businesses acquired in fiscal 1998 and 1997 for the years ended
September 30, 1998 and 1997, assuming that the acquisitions had occurred at
October 1, 1996 and after giving effect to certain pro forma adjustments are
as follows:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Revenue $19,288,000 $22,361,000
Net loss $ (36,000) $(2,411,000)
Net loss per common share:
Basic $ (.01) $ (.31)
Diluted $ (.01) $ (.31)
</TABLE>
4. Related Party Transactions
Related Parties
The Company's Chairman of the Board, Chief Executive Officer, President and
principal stockholder is the Chairman of Boston University's (the
"University") Biochemistry Department and a Professor and Associate Dean for
Graduate Affairs of the University's School of Medicine. Certain other
directors and stockholders of the Company are also employed by the
University. The Company has entered into certain license agreements with
the University as further described below.
<PAGE> F-15
License Agreements
In March 1992, the Company entered into a license agreement with the
University under which the Company obtained the exclusive right to use the
University's patented and patent pending technology to manufacture and
market certain products. Under the agreement, the Company is obligated to
pay an annual royalty of 5% of the first $50,000 of the Company's net sales
of these products and 10% of net sales of these products in excess of
$50,000 until the Company has paid the University a license fee of $10,000
in total and reimbursed it for certain patent expenses. All royalties to be
paid thereafter will equal 5% of the Company's net sales of these products.
Sales of products using technology obtained under the agreement, but not
specifically covered under the patent application, and sales which occur if
no patents are granted, are subject to a 3% royalty for a period of ten
years. The Company also agreed to pay the University 27.5% of royalties the
Company receives if it sublicenses the technology and 25% of the license
fees resulting from any sublicense agreement. Sales of these products and
the related royalties paid by the Company to the University were not
material in the years ended September 30, 1998 and 1997. The agreement
terminates upon the termination of the patents.
In July 1994, the Company entered into a license agreement with the
University under which the Company obtained the exclusive right to use
additional patented and patent-pending technology of the University to
manufacture and market certain products. The royalties due under the terms
of the agreement are the same as the initial license agreement and will be
applied to the license fee of $15,000. Because there have been no sales of
these products, no royalties were paid in the years ended September 30, 1998
and 1997 and no amounts were accrued for royalties at September 30, 1998 or
1997. The agreement terminates upon the termination of the patents.
<PAGE> F-16
5. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Raw materials $1,712,873 $1,558,916
Work-in-process 640,981 250,612
Finished goods 3,858,400 2,144,073
- ------------------------------------------------------------------------
$6,212,254 $3,953,601
========================================================================
</TABLE>
6. Property and Equipment
Property and equipment include the following:
<TABLE>
<CAPTION>
September 30, 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Land $ 16,000 $ 16,000
Building 194,226 172,000
Furniture and equipment 6,500,018 3,987,991
Leasehold improvements 583,183 552,352
- ------------------------------------------------------------------------
7,293,427 4,728,343
Less accumulated depreciation
and amortization 2,926,231 2,182,873
- ------------------------------------------------------------------------
$4,367,196 $2,545,470
========================================================================
</TABLE>
Depreciation and amortization expense relating to property and equipment was
$753,778 and $701,816 for the years ended September 30, 1998 and 1997,
respectively.
In fiscal 1998, the Company retired remaining lease obligations amounting to
$41,613 and acquired the ownership of the assets under these leases. At
September 30, 1997, equipment under capital leases and accumulated
amortization amounted to $119,135 and $83,395, respectively.
<PAGE> F-17
7. Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Goodwill, net of accumulated
amortization of $272,583 and
$163,549 for 1998 and 1997,
respectively $1,362,904 $1,471,938
Other 40,582 40,289
- ------------------------------------------------------------------------
$1,403,486 $1,512,227
========================================================================
</TABLE>
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
<TABLE>
<CAPTION>
September 30, 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Accounts payable - trade $ 380,157 $ 375,046
Accrued professional fees 31,742 78,424
Accrued vacation 99,115 129,327
Accrued other 582,518 202,338
- ------------------------------------------------------------------------
$1,093,532 $ 785,135
========================================================================
</TABLE>
9. Development and License Agreements
The Company has an agreement with a customer which provides for certain
minimum purchases by the customer. During 1997, the customer did not meet
its minimum purchase requirement but agreed to satisfy the annual amount
obligated. During 1998, the terms of this agreement were renegotiated to
eliminate minimum purchase requirements. Sales to this customer amounted to
approximately $27,000 and $203,000 in 1998 and 1997, respectively.
<PAGE> F-18
Pursuant to the 1998 purchase of the Analyst(R) product line, the Company
entered into an agreement with Dade under which the Company obtained
exclusive proprietary rights to certain patents, licenses and technology to
manufacture, market and sell certain products. Under the agreement, the
Company is obligated to make quarterly royalty payments to Dade based on a
percentage of sales of the defined products through August 31, 2004.
In addition, the Company entered into a sublicense agreement with Dade
whereby two license agreements related to certain Analyst(R) products were
transferred from Dade to the Company. These license agreements, which
contain provisions for royalty obligations based on production and net sales
of certain Analyst(R) products, expire in March, 2000 and May, 2005. Royalty
expense under the Dade royalty agreement and the Dade sublicense agreement
was not material in fiscal 1998.
10. Revolving Line of Credit
In August, 1998, the Company obtained a revolving line of credit with a bank
for the purpose of purchasing the Analyst(R) product line. Under the terms
of the Revolving Credit Agreement (the "Agreement"), the maximum available
loan commitment, which was $5,000,000 at September 30, 1998, is reduced by
$187,500 each quarter through August 31, 2001 (the termination date of the
revolving line of credit). Outstanding borrowings, which are due upon
demand, are collateralized by the assets of the Company and its
subsidiaries. The Agreement provides for monthly interest payments at
either the bank's prime lending rate (8% at September 30, 1998) plus .25% or
the London Interbank Offered Rate ("LIBOR") plus 2.25%. The Agreement
requires compliance with various covenants including leverage ratio, debt
service coverage, minimum profitability and maximum capital expenditures.
The Company was in compliance with these covenants at September 30, 1998.
Outstanding borrowings under the revolving line of credit amounted to
$3,500,000 at September 30, 1998.
<PAGE> F-19
11. Long-Term Debt
Borrowings classified as long-term debt consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Term loan at an effective interest rate
of approximately 13%, repaid in full
during 1998 $ - $ 495,056
Obligations under capital leases, repaid
in full during 1998 (Note 6) - 41,613
- -----------------------------------------------------------------------
Total - 536,669
Less current portion - 347,388
- -----------------------------------------------------------------------
Long-term portion $ - $ 189,281
=======================================================================
</TABLE>
12. Stockholders' Equity
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, $.01 par value per share. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance
by the Board of Directors and may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking
fund provisions.
<PAGE> F-20
Common Stock Purchase Warrants
At September 30, 1998 and 1997, the following warrants were outstanding:
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------
Exercise Price Expiration
Shares Per Share Date
-----------------------------------------------
<S> <C> <C>
269,526 $2.75 February 28, 1999
20,000 3.25 April 29, 1999
52,000 2.50 December 30, 1999
35,000 2.00 June 30, 2000
2,695,255 2.75 February 28, 2001
269,526 2.75 February 28, 2001
-----------------------------------------------
Total 3,341,307
===============================================
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------
Exercise Price Expiration
Shares Per Share Date
-----------------------------------------------
<S> <C> <C>
10,000 $2.37 October 16, 1997
270,000 3.00 December 31, 1997
82,500 1.50 December 31, 1997
30,000 8.00 February 3, 1998
269,526 2.75 February 28, 1999
70,000 3.25 April 29, 1999
52,000 2.50 December 30, 1999
35,000 2.00 June 30, 2000
2,695,255 2.75 February 28, 2001
269,526 2.75 February 28, 2001
-----------------------------------------------
Total 3,783,807
===============================================
</TABLE>
<PAGE> F-21
During 1998 and 1997, warrants for the purchase of 75,000 shares and 100,000
shares at a purchase price of $1.50 per share and $1.00 per share,
respectively, were exercised. In fiscal 1998, warrants for the purchase of
an aggregate of 367,500 shares of common stock at prices ranging from $1.50
to $8.00 expired. No warrants expired in fiscal 1997. No warrants were
granted in fiscal 1998 or 1997.
In connection with a 1996 private placement offering, the Company issued
2,695,255 warrants expiring February 28, 2001 and 269,526 Placement Agent
Warrants. Each Placement Agent Warrant entitles the holder to purchase
269,526 units at a price of $2.75 per unit. Each unit consists of one share
of the Company's common stock and one common stock Purchase Warrant which
entitles the holder to purchase one share of the Company's common stock for
$2.75 per share expiring February 28, 2001. The Placement Agent Warrants
expire February 28, 1999.
Reserved Shares
At September 30, 1998, the Company has reserved 4,280,207 shares of common
stock for issuance upon the exercise of outstanding common stock options and
warrants.
1992 Stock Option Plan
The 1992 Stock Option Plan (the "Plan"), as amended, provides for the grant
of incentive and nonqualified stock options for the purchase of an aggregate
of 1,000,000 shares of the Company's common stock by employees, directors,
and consultants of the Company. The Board of Directors is responsible for
the administration of the Plan. The Board determines the term of each
option, the number of shares for which each option is granted and the rate
at which each option is exercisable. The Company may not grant an employee
incentive stock options with a fair market value in excess of $100,000 that
is exercisable during any one calendar year. The term of incentive stock
options granted cannot exceed ten years (five years for options granted to
holders of more than 10% of the voting stock of the Company). The exercise
price for incentive stock options granted may not be less than 100% of the
fair market value per share of the underlying common stock (110% for options
granted to holders of more than 10% of the voting stock of the Company).
The Board, at the request of any optionee, may convert incentive stock
options that have not been exercised at the date of conversion into
nonqualified stock options. All options outstanding as of September 30,
1998 and 1997 were fully vested.
<PAGE> F-22
Changes in options outstanding under the 1992 Stock Option Plan are
summarized as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
- ---------------------------------------------------------------------------
<S> <C> <C>
Balance, September 30, 1996 228,225 $2.54
Granted 187,625 2.19
Exercised (56,000) 1.75
Cancelled or expired (50,900) 4.78
- ---------------------------------------------------------------------
Balance, September 30, 1997 308,950 2.08
Granted 312,600 1.26
Exercised - -
Cancelled or expired (54,625) 1.96
- ---------------------------------------------------------------------
Balance, September 30, 1998 566,925 $1.64
=====================================================================
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise September 30, Contractual Exercise
Prices 1998 Life (years) Price
-------------------------------------------------------------
<S> <C> <C> <C>
$5.00 3,000 .2 $5.00
2.19 175,075 3.2 2.19
2.00 13,950 2.5 2.00
1.75 96,500 1.8 1.75
1.20 278,400 4.5 1.20
-----------------------------------------------------------
$1.20 to $5.00 566,925 3.6 $1.64
===========================================================
</TABLE>
<PAGE> F-23
The Company accounts for its stock-based compensation plan using the
intrinsic value method. Accordingly, no compensation cost has been
recognized for its stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the method of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," the Company's net income (loss) and earnings (loss) per
share would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) As reported $ 10,449 $405,129
Pro forma (176,286) 181,179
Income (loss) per
common share: As reported:
Basic - .05
Diluted - .05
Pro forma:
Basic (.02) .02
Diluted (.02) .02
</TABLE>
In determining the pro forma amounts above, the Company estimated the fair
value of each option granted using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants in 1998 and
1997: dividend yield of 0% for both years and expected volatility of 46.1%
for 1998 and 27.6% for 1997, risk free rates ranging from 5.57% to 5.74% in
1998 and 5.95% to 6.13% for 1997, and expected lives of 5 years for 1998 and
1997. The weighted average fair value of options granted in fiscal 1998 and
1997 was $0.60 per share and $1.20 per share, respectively.
<PAGE> F-24
13. Income Taxes
Domestic and foreign income (loss) before income taxes and minority interest
in net income of consolidated subsidiary are as follows:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Domestic $(159,362) $316,314
Foreign 169,811 88,815
- ------------------------------------------------------------------------
$ 10,449 405,129
========================================================================
</TABLE>
The difference between income taxes provided at the Company's effective tax
rate and the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Federal tax at statutory rate $ 3,553 $ 137,744
Operating income offset by
current tax loss generating
no current or deferred tax effect (3,553) (137,744)
- ------------------------------------------------------------------------
$ - $ -
========================================================================
</TABLE>
<PAGE> F-25
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
September 30, 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 1,593,000 $ 1,317,000
Amortization of intangible assets 48,000 324,000
Research and development and
investment tax credit carryforwards 100,000 100,000
Other 88,000 134,000
Basis difference of property
and equipment (51,000) (51,000)
- ------------------------------------------------------------------------
Total deferred tax assets 1,778,000 1,824,000
Deferred tax asset valuation
allowance (1,778,000) (1,824,000)
- ------------------------------------------------------------------------
Net deferred tax assets $ - $ -
========================================================================
</TABLE>
The Company has provided a valuation allowance equal to 100% of the total
deferred tax asset in recognition of the uncertainty regarding the ultimate
amount of the net deferred tax asset that will be realized.
At September 30, 1998, the Company has approximately $3,982,000, $2,334,000
and $188,000 of federal, state, and foreign net operating losses,
respectively, available to offset future taxable income, which expire on
various dates through 2013. At September 30, 1998, the Company has $100,000
of federal research and development tax credit carryforwards and $65,000 of
state research and development and investment tax credit carryforwards
available to offset future income taxes payable, which expire on various
dates through 2012. Ownership changes as defined in the Internal Revenue
Code may limit the amount of net operating loss and tax credit carryforwards
that may be utilized annually.
<PAGE> F-26
14. Net Income Per Share of Common Stock
The Company follows Statement of Financial Accounting Standards No. 128
("SFAS No. 128"), Earnings per Share, issued by the Financial Accounting
Standards Board. Under SFAS No. 128, the basic and diluted net earnings per
share of common stock for the years ended September 30, 1998 and 1997 is
computed by dividing the net income by the weighted average number of common
shares outstanding during the period.
The weighted average number of common shares outstanding is summarized as
follows:
<TABLE>
<CAPTION>
September 30, 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Denominator for basic income per share:
Weighted average common
shares outstanding 7,836,520 7,676,561
Potential dilutive common shares
Stock options 69,449 85,586
Stock warrants 3,992 47,891
- -------------------------------------------------------------------------
Denominator for diluted income per share 7,909,961 7,810,038
=========================================================================
</TABLE>
The following table summarizes securities that were outstanding as of
September 30, 1998 and 1997 but not included in the calculation of diluted
net earnings per share because such shares are antidilutive:
<TABLE>
<CAPTION>
September 30, 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Stock options 192,025 43,000
Stock warrants 3,341,307 3,604,307
</TABLE>
<PAGE> F-27
15. Significant Sales and Concentration of Credit Risk
In 1998 and 1997, the Company derived revenues from a single customer
totalling $1,245,000 and $1,880,000, respectively. The Company derived
revenues from another customer amounting to $1,447,000 and $1,190,000 for
the years ended 1998 and 1997, respectively. Revenues derived from export
sales amounted to $4,976,000 in 1998 and $4,777,000 in 1997. Export sales
to Europe were approximately $2,198,000 in 1998 and $2,591,000 in 1997.
Export sales to South America were approximately $2,016,000 in 1998 and
$1,446,000 in 1997.
16. International
Operations
The following is a summary of certain selected financial information as of
September 30, 1998 and 1997 and for the years then ended of the Company's
51% owned subsidiary, excluding the applicable intercompany balances.
<TABLE>
<CAPTION>
September 30, 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Assets $ 813,117 $ 852,578
Liabilities $ 79,007 $ 82,952
Revenues $1,473,275 $1,255,318
</TABLE>
17. Commitments
The Company leases certain office and manufacturing facilities under
noncancelable operating leases expiring through 2002. In addition, the
Company leases an office and manufacturing facility under a cancelable
operating lease which has no future minimum rental commitments. Future
minimum lease commitments under the noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Years ending September 30, Total
-------------------------------------------
<S> <C>
1999 $ 462,000
2000 433,000
2001 336,000
2002 301,000
-------------------------------------------
$1,532,000
===========================================
</TABLE>
Rent expense approximated $549,000 and $524,000 in 1998 and 1997,
respectively.
<PAGE> F-28
Retirement Plan
The Company maintains a defined contribution retirement plan which qualifies
under Section 401(k) of the Internal Revenue Code, covering substantially
all employees. Participant contributions and employer matching
contributions are made as defined in the Plan agreement. The Company's
contributions to the Plan amounted to approximately $105,000 and $111,000 in
fiscal 1998 and 1997, respectively.
Joint Venture
In December, 1997, the Company entered into a joint venture with a
biotechnology company which owns certain proprietary biotechnology. Using
this technology, the joint venture is planning an early detection assay for
septic shock. The agreement provides for the sharing of profit and loss, as
defined, upon the successful completion of the joint venture project.
Included in fiscal 1998 expenses are research and development costs of
approximately $30,000 incurred by the Company on behalf of the joint
venture.
<PAGE> F-29
Consent of Independent Certified Public Accountants
Hemagen Diagnostics, Inc.
Waltham, Massachusetts
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statements on Form S-3 (Nos. 33-
80009 and 333-06147) and in the Registration Statement on Form S-8 (No. 33-
3333718) of our report dated December 4, 1998, relating to the consolidated
financial statements of Hemagen Diagnostics, Inc. appearing in the Company's
Annual Report on Form 10-KSB for the year ended September 30, 1998.
BDO Seidman, LLP
Boston Massachusetts
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 412,193
<SECURITIES> 0
<RECEIVABLES> 3,294,598
<ALLOWANCES> 477,000
<INVENTORY> 6,212,254
<CURRENT-ASSETS> 10,192,954
<PP&E> 7,393,425
<DEPRECIATION> 2,926,231
<TOTAL-ASSETS> 15,963,636
<CURRENT-LIABILITIES> 4,746,461
<BONDS> 0
0
0
<COMMON> 78,519
<OTHER-SE> 10,070,293
<TOTAL-LIABILITY-AND-EQUITY> 15,963,636
<SALES> 12,327,352
<TOTAL-REVENUES> 12,327,352
<CGS> 7,298,563
<TOTAL-COSTS> 7,298,563
<OTHER-EXPENSES> 4,927,911
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,660
<INCOME-PRETAX> 10,449
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,449
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
