SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999 Commission File
number 1-11700
HEMAGEN DIAGNOSTICS, INC.
---------------------------------------
(Exact name of Small Business Issuer as
Specified in its Charter)
Delaware 04-2869857
- ----------------------------------------------------------------------------
(State of Organization) (I.R.S. Employer
Identification
Number)
34-40 Bear Hill Road, Waltham, Massachusetts 02451
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(Address of principal executive offices, Zip Code)
(781) 890-3766
----------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
------- -------
As of June 30, 1999, the issuer had 7,751,890 shares of Common Stock,
$.01 par value per share outstanding.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
Consolidated Balance Sheets; 2
June 30, 1999 and
September 30, 1998
Consolidated Statements 4
of Operations; three months and nine
months ended June 30,
1999 and 1998
Consolidated Statements 5
of Cash Flows; nine months
ended June 30, 1999 and 1998
Notes to Consolidated 6
Financial Statements
Item 2. Management's Discussion and 9
Analysis of Financial
Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote 20
by Security Holders
Item 6. Exhibits and Reports on Form 8-K. 20
PART I - Financial Information
Item 1. Financial Statements
--------------------
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
------
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 40,375 $ 412,193
Accounts and other receivables,
less allowance for doubtful
accounts of $276,000 at June
and $477,000 at September 2,366,991 3,294,598
Inventories 6,848,387 6,212,254
Net assets of CPI, held for
sale (Note D) 778,571 -
Prepaid expenses and other current
assets 402,727 273,909
-------------------------------
Total current assets 10,437,051 10,192,954
Property and Equipment:
Fixed assets 7,800,750 7,293,427
Less accumulated depreciation 3,775,680 2,926,231
-------------------------------
4,025,070 4,367,196
Other assets 1,319,644 1,403,486
-------------------------------
$15,781,765 $15,963,636
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $1,412,862 $1,093,532
Customer deposits 453,526 -
Deferred revenue 91,094 152,929
Note payable 2,576,615 3,500,000
--------------------------------
Total current liabilities 4,534,097 4,746,461
--------------------------------
Subordinated note payable, net of
unamortized discount
of $113,523 at June and
$181,637 at September 1,136,477 1,068,363
--------------------------------
Stockholders' Equity:
Preferred stock, no par
value - 1,000,000 shares
authorized; none issued -- --
Common stock, $.01 par
value - 30,000,000 shares
authorized; 7,851,890 issued and
7,751,890 outstanding at June;
7,851,890 issued and outstanding
at September. 78,519 78,519
Additional paid-in capital 13,440,947 13,440,947
Accumulated deficit (3,312,638) (3,364,654)
---------------------------------
10,206,828 10,154,812
Receivable from stockholder (6,000) (6,000)
Treasury Stock, 100,000 shares at June 30 (89,637) -
--------------------------------
10,091,191 10,148,812
--------------------------------
$15,781,765 $15,963,636
================================
</TABLE>
See Notes to Consolidated Financial Statements
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales $3,698,853 $3,453,112 $11,956,355 $9,037,276
Costs and expenses:
Cost of product sales 2,156,769 2,002,234 7,257,487 5,111,675
Research and development 310,777 251,142 957,542 802,891
Selling, general and administrative 1,116,681 935,619 3,368,359 2,726,387
-----------------------------------------------------
3,584,227 3,188,995 11,583,388 8,640,953
-----------------------------------------------------
Operating Income 114,626 264,117 372,967 396,323
Other income (expenses), net (70,002) 12,230 (320,950) (19,969)
-----------------------------------------------------
Income before income taxes 44,624 276,347 52,017 376,354
Provision for income taxes (Note E) -- -- -- --
-----------------------------------------------------
Net income $ 44,624 $ 276,347 $ 52,017 $ 376,354
=====================================================
Net income per share - basic (Note B) $ 0.01 $ 0.04 $ 0.01 $ 0.05
=====================================================
Net income per share - assuming dilution (Note B) $ 0.01 $ 0.04 $ 0.01 $ 0.05
=====================================================
</TABLE>
See Notes to Consolidated Financial Statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
----------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 52,017 $376,354
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,064,520 604,146
Changes in assets and liabilities:
Restricted cash - (96,050)
Accounts and other receivables 593,237 357,117
Prepaid expenses and other current assets (135,837) (27,968)
Inventories (1,139,938) (797,394)
Customer deposits 453,526 109,410
Deferred revenue (61,835) -
Accounts payable and accrued expenses 474,147 2,574
----------------------
Net cash provided by operating activities 1,299,837 528,189
----------------------
Cash flows from investing activities:
Purchase of property and equipment (655,661) (236,235)
Other assets (2,971) (40,592)
Proceeds from short-term investments, net - 730,827
----------------------
Net cash provided (used) by investing activities (658,632) 454,000
----------------------
Cash flows from financing activities:
Proceeds from (payments of) long-term debt, net - (269,153)
Repayment of notes payable (923,386) (198,983)
Proceeds from issuances (payments for buybacks)
of common stock (89,637) 112,500
----------------------
Net cash used by financing activities (1,013,023) (355,636)
----------------------
Net increase (decrease) in cash and cash equivalents (371,818) 626,553
Cash and cash equivalents at beginning of year 412,193 294,086
----------------------
Cash and cash equivalents at end of period $ 40,375 $ 920,639
=======================
</TABLE>
See Notes to Consolidated Financial Statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Reference should be made to
the financial statements and related notes included in the Company's Form
10-KSB which was filed with the Securities and Exchange Commission on or
about December 24, 1998.
In the opinion of the management of the Company, the accompanying
financial statements reflect all adjustments which were of a normal
recurring nature necessary for a fair presentation of the Company's results
of operations and changes in financial position for the nine month period
ended June 30, 1999. Operating results for these periods are not necessarily
indicative of the results that may be expected for the year ending September
30, 1999.
NOTE B - NET INCOME PER SHARE
Earnings per share information is presented in accordance with the
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share".
The following is a reconciliation of the denominator (number of
shares) used in the computation of earnings (loss) per share. The numerator
(net income or loss) is the same for basic and diluted computations.
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
Basic shares 7,751,890 7,851,890 7,790,004 7,831,341
Effect of dilutive securities
- options and warrants - 17,181 - 22,049
Dilutive shares 7,751,890 7,869,071 7,790,004 7,853,390
</TABLE>
Options and warrants that have an exercise price greater than the
average market price of common stock were not included in the computation of
diluted EPS. Below is a summary of options and warrants excluded from the
calculation:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares excluded: 3,867,073 3,640,173 3,867,073 3,640,173
Price ranges: $1.20-$2.75 $1.75-$5.00 $1.20-$2.75 $1.75- 5.00
</TABLE>
NOTE C - STOCK PURCHASE RIGHTS PLAN
In January, 1999 the Company's Board of Directors declared a special
dividend distribution of one common share purchase right for each
outstanding share of common stock of Hemagen. The dividend was distributed
on February 10, 1999 to stockholders of record on that date. These rights
will become exercisable only if a person or group acquires 15 percent or
more of Hemagen's common stock or announces a tender offer that would result
in ownership of 15 percent or more of the Company's common stock. If one of
these conditions occur, each right may entitle its holder (other than the 15
percent person or group) to $4.00 worth of newly issued shares of common
stock of Hemagen (or of any company that acquires Hemagen) at a price equal
to 50 percent of the current market price.
The rights are redeemable at the option of the Board of Directors up
until ten days after public announcement that any person or group has
acquired 15 percent or more of Hemagen's common stock. The redemption price
is $.001 per right.
These rights will expire on January 27, 2009, unless redeemed prior to
that date. Distribution of the rights is not taxable to stockholders.
NOTE D - SALE OF CELLULAR PRODUCTS, INC.
On July 23, 1999, the Company sold all of the outstanding stock of its
wholly owned subsidiary, Cellular Products, Inc. ("CPI") located in Buffalo,
New York, to ZeptoMetrix Corporation, a company created by two of CPI's
senior managers for the purpose of purchasing CPI. The purchase price was
$800,000 cash. The price was negotiated as an arms length transaction.
NOTE E - INCOME TAXES
No provision for income taxes has been accrued during fiscal 1998 or
fiscal 1999 due to the availability of net operating loss carry forward.
NOTE F - NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("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 by the chief operating decision maker in deciding how to
allocate resources and assessing performance.
This new standard is effective for financial statements for the
periods beginning after December 15, 1997 and requires comparative
information for earlier years to be restated. Management does not expect
implementation of this standard to materially affect future financial
statements and disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
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 No.133, as amended, is effective for all fiscal years
beginning after June 15, 2000.
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 to affect its
financial statements.
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 risks
set forth in the section entitled "Risk Factors" in the Prospectuses
contained in the Company's Registration Statements on Form S-3, Commission
File Nos. 33-80009 and 333-6147 (which sections are hereby incorporated by
reference herein). These risks and uncertainties could cause the
registrant's actual results in future periods to differ materially from its
historical results and from any opinions or statements expressed in such
forward-looking statements. 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
The Company has historically concentrated its efforts on developing,
manufacturing and marketing medical diagnostic test kits used to aid in the
diagnosis of certain diseases. During the past several years the Company
has focused its expansion efforts on synergistic acquisitions of companies,
product lines and assets. The Company and its subsidiaries offer
approximately 135 different test kits that have been cleared by the United
States Food and Drug Administration ("FDA"). Several additional test kits
and components are sold in foreign markets.
On September 1, 1998, Hemagen completed the acquisition of the Analyst
automated system from Dade Behring, Inc. ("Dade"). The Analyst is a patent-
protected, low cost, bench top clinical chemistry and reagent system.
RAICHEM, Hemagen's clinical chemistry division has begun production of some
reagents and is in the process of developing many of the rest. Analyst
instruments are now manufactured and serviced at the Company's Massachusetts
facility. Hemagen's facility in Maryland will assemble the unit's rotors
and ship completed products. The Company has been redesigning all of its
facilities to accommodate these new activities. Much of this redesign is
complete. This acquisition positions the Company for growth in the multi-
billion dollar point-of-care market as well as the physician office
laboratory and veterinary diagnostic markets.
When Hemagen completed its initial public offering of its Common Stock
in 1993, the goal was to build a profitable multi-product diagnostic
enterprise that could serve as the cornerstone of a sizable medical device
company. It has been management's experience in this industry that success
is achieved by steadily growing sales of core product lines, developing new
products that complement existing products and acquiring enterprises with
complementary technologies. Following that strategy has poised Hemagen to
emerge as a prominent competitor in the medical and veterinary diagnostic
communities.
During the past few years, Hemagen has developed many new diagnostic
products while simultaneously pursuing strategic acquisitions that
management believes has added value to the Corporation by increasing the
menu of available diagnostic products offered for sale by Hemagen.
Management believes that the increased product offerings may attract new
distribution outlets and end users. The Board of Directors has overseen a
string of successful acquisitions and structural changes from 1993, when
they took the Corporation public, to the present, including:
the expansion of Hemagen's distribution center for Latin America in
Brazil in 1993;
the addition of the immunofluoresence product line in 1995;
the acquisition and integration of the RAICHEM clinical chemistry
business in 1996;
the acquisition of Cellular Products, Inc. research products in 1996;
the addition of several VIRGO and RAICHEM products for which the
Corporation has succeeded in receiving FDA clearance;
the execution of contracts with several multi-national corporations
including Carter-Wallace, Inc., AVL Scientific Corporation and
Boehringer Mannheim GmbH; and
the acquisition of the Analyst benchtop clinical chemistry system from
Dade Behring in 1998.
Management and the Board of Directors are optimistic about the ability
of Hemagen to leverage these recent developments to position the Corporation
for expansion into new markets. The Company is also seeking to increase
profit margins by concentrating efforts in three core areas within the field
of diagnostics that complement each other and provide an opportunity for
cross-marketing of Hemagen's products. Hemagen's three key platforms are:
its immunodiagnostic division;
its clinical chemistry division; and
its point-of-care instrumentation business, which includes the Analyst
and companion products.
Historically, Hemagen has placed the greatest emphasis on its
immunodiagnostic business. Management believes that the expansion into
additional product lines has allowed the Company to increase its presence in
international markets. Consistent with our recent emphasis on Hemagen's
three core technologies, management and the Board of Directors have been
examining which segments of the Corporation are incompatible with the
strategic focus. The Board of Directors determined that Cellular Products,
Inc. no longer fit into the strategic focus and therefore sold that
subsidiary in July 1999 (see "Liquidity and Capital Resourses" below). As
part of the master business plan, management has been analyzing other
aspects of the Company to reduce expenses and increase profitability. Based
upon estimates done by management, the Company expects that the measures
taken to date as well as the measures which are being implemented within the
next six months will save over $1,000,000 in expenses and future potential
losses. These measures include but are not limited to bringing various
manufacturing operations in-house and outsourcing certain sales and
marketing efforts. Add to that the Company's projected increase in sales
based solely upon the new Vet Rotor introduced in April, 1999 and the
reagent agreement with an international instrument company, AVL Scientific,
which management believes will show an increase in profits, management and
the Board of Directors is of the opinion that Hemagen's future is exciting
and optimistic.
The Board of Directors and management have also led Hemagen to develop
several new products, for which the Company is pursuing regulatory approval
by the FDA, in the fields of infectious diseases and autoimmune diseases.
The strategy of supporting continuous research and development is beginning
to reap rewards for the Corporation, and the Board of Directors believes
that continued emphasis on research and development will maximize long-term
value for Hemagen's shareholders.
Results of Operations
The Three Month Period Ended June 30, 1999 Compared to the Three Month
Period Ended June 30, 1998
Revenues for the three month period ending June 30, 1999 increased to
approximately $3,699,000 from approximately $3,453,000 (7%) for the period
ending June 30,1998. This increase was primarily due to the addition of
sales from the Analyst(R) Acquisition (See "Liquidity and Capital
Resources") and was partially offset by a large decrease in sales of blood
banking products as a result of the loss of an OEM agreement with Olympus,
America. Sales also decreased at RAICHEM and the Company's Brazilian
subsidiary, Hemagen Diagnosticos e Commercio, ("HDC"). However, both HDC
and RAICHEM have begun to show an increasing trend in sales.
Cost of product sales increased to approximately $2,157,000 from
approximately $2,002,000 (8%), due to the increase in sales. Cost of
product sales as a percentage of sales was 58% during both the three
month period ended June 30, 1998 and June 30, 1999. The Company believes the
costs of the Analyst products will decrease as a percentage of sales as more of
the Analyst business production is shifted to the Company's own facilities
later this year. Currently, Analyst equipment manufacture and service, and the
manufacture of some controls and calibrators is being done at the Company's
facilities.
Research and development expenses increased to approximately $311,000
from approximately $251,000 (24%), due to higher personnel and supply costs
in association with development of Analyst(R) reagents and products and new
ELISA immunodiagnostic tests. During the period the Company completed
development of ELISA kits for the detection of Beta 2 Glycoprotein 1. The
Company expects to have FDA clearance to market these kits before the end of
the current fiscal year. These will be marketed with our recently approved
anti-cardiolipin kits.
The Company is currently working to complete several research and
development programs including:
Autoimmune Diseases
The Company is continuing its development of products to aid in the
diagnosis of autoimmune diseases. ELISA kits for the detection of
antibodies associated with Beta 2 Glycoprotein 1 has been submitted to the
FDA for clearance to market. In addition, an ELISA Screen assay to detect
total antinuclear antibodies (ANA) is nearing completion. The Company
believes that, barring any unforeseen regulatory hurdles, these assays will
become commercially available during fiscal 1999.
Infectious Diseases
The Company has 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.
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"), and the Company
is attempting to modify them for use in the Analyst system (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 reimbursement procedures and to make the product more
informative for the doctor and the patient. These modifications should be
completed during the current calendar year. As mentioned above, the Company
is exploring the possibility of expanding the rotor technology to
immunoassays of serum protein, therapeutic drug monitoring, a thyroid panel
and a cardiac panel.
New Analyst Instrument
The Analyst instrument will be updated to include increased memory
capacity, user friendly calibration technology and a smaller instrument
footprint. The Company has contracted with an instrument developer to
design this new machine. The new Analyst instrument will be manufactured at
the Company's Waltham, MA facility.
Selling, general and administrative ("SG&A") expenses increased to
approximately $1,117,000 from approximately $936,000 (19%), due primarily to
an increase in payroll and personnel costs associated with the Company
hiring additional technical and customer support personnel and due to an
increase in royalties expense. Both of these increases are associated with
the purchase of the Analyst(R) business line.
Other expenses, net was approximately $70,000 expense, net as compared
to income, net of approximately $12,000 the same period last year. This
change was the result of an increase in interest expense associated with the
increased borrowings that were used to finance the Analyst purchase. (See
"Liquidity and Capital Resources").
Net, the Company income decreased to approximately $45,000 from
approximately $276,000 (84%) for the same period last year. This change was
due to higher cost of sales, higher SG&A expenses, higher research and
development expenses and higher other expenses. This was partially offset
by increases in sales.
The Nine Month Period Ended June 30, 1999 Compared to the Nine Month
Period Ended June 30, 1998
Revenues for the nine month period ending June 30, 1999 increased to
approximately $11,956,000 from approximately $9,037,000 (32%) for the same
period ending June 30,1998. This increase was entirely due to the addition
of sales from the Analyst(R) Acquisition (See "Liquidity and Capital
Resources") and was partially offset by a decrease in sales of blood banking
products as a result of the loss of an OEM agreement with Olympus, America,
a decrease in sales at RAICHEM, CPI, the Company's Brazilian subsidiary,
Hemagen Diagnosticos e Commercio, "HDC"), and in the Company's Virgo product
line manufactured in Maryland and Massachusetts.
Cost of product sales increased to approximately $7,257,000 from
approximately $5,112,000 (42%), due to the increase in sales, overhead costs
associated with production of Analyst(R) products and a decrease in the
margins at HDC due to the devaluation of the Brazilian Real. Cost of
product sales as a percentage of sales increased to 61% from 57% during the
period. The Company believes the costs of the Analyst products will decrease
as a percentage of sales as more of the Analyst business production is
shifted to the Company's own facilities later this year. Currently,
Analyst equipment manufacture and service and the manufacture of some
controls and calibrators has been transferred to the Company's facilities.
Research and development expenses increased to approximately $958,000
from approximately $803,000 (19%), due to higher personnel and supply costs
in association with development of Analyst(R) reagents and products and new
ELISA tests. During the period the Company completed development of a new
Vet Rotor and new normal and abnormal controls for the veterinary market.
These products were introduced to market in April, 1999. The Company has
also received clearance from the FDA to market an automated test for HDL-
Cholesterol through it's RAICHEM subsidiary and has completed work on ELISA
kits for the detection of antibodies associated with Beta 2 Glycoprotein 1.
These have been submitted to the FDA for clearance to market.
For a detail of current research and development projects see the
comparison of three month periods ended June 30, 1999 and 1998 above.
Selling, general and administrative ("SG&A") expenses increased to
approximately $3,368,000 from approximately $2,726,000 (23%), due primarily
to an increase in payroll and personnel costs associated with the Company
hiring additional sales and marketing, technical and customer support
personnel and due to an increase in royalties expense. Both of these
increases are associated with the purchase of the Analyst(R) business line.
Other expenses, net increased to approximately $321,000 from
approximately $20,000 during the same period last year. This increase was
the result of an increase in interest expense associated with the increased
borrowings that were used to finance the Analyst purchase and translation
losses associated with the devaluation of the Brazilian Real. (See
"Liquidity and Capital Resources").
Net income decreased to approximately $52,000 from approximately
$376,000 (86%) for the same period last year. This decrease was due to
higher cost of sales, higher SG&A expenses, higher research and development
expenses and higher other expenses associated with the Analyst business.
This was partially offset by an increase in sales.
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, lease financing arrangements, 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 July 23, 1999, the Company sold all of the outstanding stock of its
wholly owned subsidiary, Cellular Products, Inc. ("CPI") located in Buffalo,
New York, to ZeptoMetrix Corporation, a company created by two of CPI's
senior managers for the purpose of purchasing CPI. The purchase price was
$800,000 cash. The purchase price was negotiated as an arms length
transaction. Company management believes CPI no longer fits into the long
term strategic plan of Hemagen. The sale of CPI will allow Hemagen to focus
on the growth of its core markets: point of care systems; particularly the
Analyst Clinical Chemistry System, (described below) immunodiagnostics, and
clinical chemistry.
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 system. The
assets included were 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, San Diego, California and Waltham, Massachusetts.
Under the purchase agreement, at the closing, the Company paid
$3,500,000 in cash and issued a non-interest bearing promissory note (the
"Note") to Dade in the amount of $1,250,000. The Company agreed to pay Dade
in full on or before September 1, 2000. The Company and Dade have agreed,
in principle, to a $200,000 decrease to the purchase price related to
decreases 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. Under this loan
agreement the Company is required to meet certain covenants regarding
profitability, tangible net worth, leverage ratio and debt service coverage.
The Company did not meet the debt service coverage covenant of its loan
agreement primarily due to capital expenditures incurred in connection with
the transfer of the Analyst business and the Bank has agreed to a temporary
forbearance regarding this covenant, the exact terms of which are being
negotiated.
The Analyst system uses a rotor based technology that is capable of
producing results of up to 16 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.
At June 30, 1999, the Company's working capital was approximately
$5,903,000 compared to working capital of approximately $5,446,000 at
September 30, 1998.
During the nine months ended June 30, 1999, the Company generated
approximately $1,300,000 in cash from operating activities. This was the
result of depreciation and amortization expenses not requiring the outlay of
cash, a decrease in accounts receivable, an increase in customer deposits,
and an increase in accounts payable and accrued expenses. This was
partially offset by an increase in inventory balances. This cash, along
with existing cash balances, was used primarily to pay $923,000 of the note
to BankBoston (see above), to purchase property and equipment and to
repurchase 100,000 shares of its common stock.
Inventory balances increased from approximately $6,212,000 at
September 30, 1998 to approximately $7,352,000 at June 30, 1999 including
$504,000 of CPI inventory held for sale. This increase was in support of an
anticipated increase in product sales due to the increased marketing
efforts. Most of this increase has been in support of the Analyst product
line.
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.
Year 2000 Systems
The Company does not manufacture embedded system devices or any
products that are directly affected by the so-called "Year 2000 Problem".
We do recognize however, that some of our internal support systems could
disrupt our ability to distribute products in a timely manner to our
customers. To address this concern, the Company has established a company
wide network of Year 2000 team leaders to evaluate internal systems and
those of our suppliers. The Company uses a variety of off the shelf
consumer software for the implementation of business activities. All
current versions are either identified as Year 2000 compliant by the
manufacturer of said software or the software is in the process of being
converted to versions that are Year 2000 compliant.
The Company does not believe the total cost to address any changes
required by the Year 2000 problem will be material. Further, the Company
believes that any disruption of business operations as a result of the Year
2000 problem will be minimal and will not have a material effect upon the
Company.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("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 by the chief operating decision maker in deciding how to allocate
resources and assessing performance.
This new standard is effective for financial statements for the
periods beginning after December 15, 1997 and requires comparative
information for earlier years to be restated. Management does not expect
implementation of this standard to materially affect future financial
statements and disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
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 No.133,as amended, is effective for all fiscal years beginning
after June 15, 2000.
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 to affect its
financial statements.
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. The Company experienced significant
translation losses during the nine month period ended June 30, 1999 due to a
substantial devaluation of the Brazilian Real.
Stock Repurchase
The Company's Board of Directors approved a program to repurchase up
to 100,000 shares of its common stock. On January 15, 1999 the Company
completed these purchases in open market transactions.
Change of Company By Laws
On July 2, 1999 the Company's Board of Directors amended the Company's
by-laws to provide that, in order for the Corporation's shareholders to
amend, alter or repeal any by-law, holders of at least two-thirds of the
outstanding shares of Common Stock must approve such action.
The Board took this action for several reasons, including the change
aligns the vote necessary to change the by-laws with that required to change
the Corporation's certificate of incorporation, which had been two-thirds;
that it adds an additional level of protection to the Corporation's
classified board governance structure, which the Board believes contributes
to consistency and stability in corporate policy, while at the same time not
precluding a successful solicitation by the Redwood Group (see below); and
that it also tends to neutralize any timing advantage which would otherwise
inhere in the Redwood Group by virtue of its having filed its solicitation
materials with the Security and Exchange Commission ("SEC") several days
earlier than the Corporation's filing of its materials, thus increasing the
chances that all stockholders of the Corporation will have the opportunity
to read and consider both sides' positions before any action by written
consent can become final.
Redwood Consent Filing
A consent solicitation was filed by Jerry Ruyan, William Hales, Thomas
Donelan and Christopher Hendy (collectively the Redwood Group) with the SEC
proposing the following:
(1) Oust the duly elected Board of Directors of the Company, replacing
them with Messrs. Ruyan, Hales, Donelan and Hendy, and leave two
vacancies on the Board.
(2) Approve a grant to the Redwood Group members, or an entity that they
control, of options to purchase a total of 15% of Hemagen common stock,
on a fully diluted basis.
(3) Amend Hemagen's by-laws to eliminate the staggered board and make
certain other changes which would enable the Redwood group to remove
all of the directors without cause.
The Board of Directors of the Corporation unanimously and vigorously
oppose the Redwood Group's solicitation of consents and has filed a
Revocation of Consent in opposition to solicitation of the Redwood Group.
The full explanation of the Board of Directors position is contained within
this document which was filed with the SEC on July 27, 1999 and which is
included by reference herein.
PART II - Other Information
Items 1 through 3: Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
a) The Company's annual meeting was held on March 16, 1999.
b) The following individuals were elected as directors to serve a three
year term expiring in 2002. The following table indicates the number of
votes in favor and votes withheld:
<TABLE>
<CAPTION>
Director Votes in favor Votes withheld
- -------- -------------- --------------
<S> <C> <C>
Paul N. Fruitt 5,547,892 214,985
Charles W. Smith 5,527,664 235,213
</TABLE>
c) The shareholders voted in favor of the selection of BDO Seidman, LLP as
the independent accountants of the corporation for the fiscal year ending
September 30, 1999. The following table indicated the number of votes:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<C> <C> <C>
5,688,527 51,875 22,475
Item 5: Not applicable
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits attached hereto
10kk. Employment agreement between Hemagen Diagnostics, Inc.
and Carl Franzblau dated May 18, 1999.
10ll. Employment agreement between Hemagen Diagnostics, Inc.
and Ricardo de Oliveira dated May 18, 1999.
10mm. Employment agreement between Hemagen Diagnostics, Inc.
and William Franzblau dated May 18, 1999.
b) Reports on Form 8-K. On July 2, 1999 the Company filed a Form 8K
describing a change in corporate By Laws
On August 6, 1999 the Company filed a Form 8K describing the
sale of Cellular Products, Inc. to ZeptoMetrix Corporation.
c) The Company hereby incorporates by reference its definitive proxy
solicitation filed with the SEC on July 27, 1999.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Hemagen Diagnostics, Inc.
--------------------------
(Registrant)
August 16, 1999 /s/ Carl Franzblau
- --------------- -----------------------
Carl Franzblau
Chief Executive Officer
August 16, 1999 /s/ William Franzblau
- --------------- -----------------------
William Franzblau
Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 40,375
<SECURITIES> 0
<RECEIVABLES> 2,366,991
<ALLOWANCES> 276,000
<INVENTORY> 6,848,387
<CURRENT-ASSETS> 10,437,051
<PP&E> 7,800,750
<DEPRECIATION> 3,775,680
<TOTAL-ASSETS> 15,781,765
<CURRENT-LIABILITIES> 4,534,097
<BONDS> 0
0
0
<COMMON> 78,519
<OTHER-SE> 10,032,672
<TOTAL-LIABILITY-AND-EQUITY> 15,781,765
<SALES> 3,698,853
<TOTAL-REVENUES> 3,698,853
<CGS> 2,156,769
<TOTAL-COSTS> 2,156,769
<OTHER-EXPENSES> 1,427,458
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,504
<INCOME-PRETAX> 44,624
<INCOME-TAX> 0
<INCOME-CONTINUING> 44,624
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,624
<EPS-BASIC> .01
<EPS-DILUTED> .01
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