________________________________________________________________
_________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
FOR THE QUARTER ENDED Commission File Number
MARCH 31, 1996 0-13154
FCS LABORATORIES, INC.
(Exact name of Registrant as specified in its charter)
ARIZONA 95-2568559
(State of Incorporation) (I.R.S Employer ID Number)
2330 S. INDUSTRIAL PARK AVE., TEMPE, ARIZONA 85282
(Address of principal executive offices) (Zip Code)
(602) 966-7248
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
(1) Yes /X/ No / /
(2) Yes /X/ No / /
Number of shares outstanding as of July 8, 1996:
5,841,145 shares of Common Stock, no par value.
_________________________________________________________________
_________________________________________________________________
PART I, Financial Information
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, September 30,
1996 1995
____________ ___________
Current Assets:
Cash $ 169,302 $ 6,106
Accounts receivable, net of
allowance for doubtful accounts
of $29,324 and $28,565,
respectively 290,879 350,236
Inventories 610,629 757,569
Other current assets 7,744 74,323
____________ __________
Total Current Assets 1,078,554 1,188,234
Property, Plant and Equipment, net 707,257 837,625
Deposits and Other Assets, net of
Amortization of $7,992 and $5,994,
respectively 27,387 46,297
____________ ___________
Total Assets $ 1,813,198 $ 2,072,156
============ ===========
See accompanying notes to consolidated financial statements.
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
March 31, September 30,
1996 1995
____________ ___________
Current Liabilities:
Accounts payable $ 800,082 $ 1,507,334
Accrued expenses 992,669 1,092,111
Short-term debt including
current portion of long-
term debt 599,847 1,628,757
____________ ___________
Total Current Liabilities 2,392,598 4,228,202
____________ ___________
Other Liabilities:
Long-term debt 106,000 8,900
____________ ___________
Total Liabilities $ 2,498,598 $ 4,237,102
____________ ___________
Shareholders' Equity (Deficit)
Common Stock, no par value:
6,000,000 shares authorized;
5,836,145 and 5,811,145 shares
issued and outstanding
respectively (Note 3) 4,060,163 3,960,610
Cumulative foreign currency translation
adjustment --- (94,136)
Accumulated deficit (4,745,563) (6,031,420)
____________ ___________
Total Shareholders' Equity
(Deficit) (685,400) (2,164,946)
____________ ___________
Total Liabilities and Share-
holders' Equity (Deficit) $ 1,813,198 $ 2,072,156
============ ===========
See accompanying notes to consolidated financial statements.
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended March 31,
1996 1995
____________ ___________
Sales $ 1,212,046 $ 1,572,845
Cost of Sales 451,396 613,335
____________ ___________
Gross profit 760,650 959,510
Selling, General and
Administrative Expense 771,948 1,190,584
Depreciation and Amortization Expense 15,910 19,086
Interest Expense 96,913 104,639
Other Income 188,374 ---
____________ ___________
Income (Loss) from Continuing
Operations 64,253 (354,799)
Extraordinary Gain 1,221,604 ---
____________ ___________
Net Income (Loss) $ 1,285,857 $ (354,799)
============ ===========
Net Income (Loss) per Share:
Income (Loss) from Continuing
Operations $ .01 $ (.06)
Extraordinary Gain .21 ---
------------ -----------
Net Income (Loss) per Share $ .22 $ (.06)
============ ===========
Weighted Average Shares Outstanding 5,823,577 5,558,397
See accompanying notes to consolidated financial statements.
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
1996 1995
____________ ___________
Sales $ 574,909 $ 779,827
Cost of Sales 192,139 313,421
____________ ___________
Gross profit 382,770 466,406
Selling, General and
Administrative Expense 379,007 617,268
Depreciation and Amortization Expense 7,910 9,151
Interest Expense 46,593 51,621
Other Income 188,374 ---
____________ ___________
Income (Loss) from Continuing
Operations $ 137,634 $ (211,634)
Extraordinary Gain 1,221,604 ---
____________ ___________
Net Income (Loss) $ 1,359,238 $ (211,634)
============ ===========
Net Income (Loss) per Share:
Income (Loss) from Continuing
Operations $ .02 $ (.03)
Extraordinary Gain .21 ---
____________ ___________
Net Income (Loss) per Share $ .23 $ (.03)
============ ===========
Weighted Average Shares Outstanding 5,836,145 5,583,672
See accompanying notes to consolidated financial statements.
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Cumulative
Foreign
Accumulated Currency
Shares Amount Deficit Translation
_________ __________ ___________ __________
Balance,
September 30,
1995 5,811,145 $3,960,610 $(6,031,420) $ (94,136)
Foreign currency
translation
adjustment --- --- --- 94,136
Shares issued 25,000 10,000 --- ---
Net income for
the period --- --- 1,285,857 ---
_________ __________ ___________ __________
Balance
March 31,
1996 5,836,145 $3,970,610 $(4,745,563) $ ---
========= ========== =========== ==========
Shares to
be issued
(Note 3) 250,000 89,553 --- ---
_________ __________ ___________ __________
Adjusted
Balance
March 31,
1996 6,086,145 $4,060,163 $(4,745,563) $ ---
========= ========== =========== ==========
See accompanying notes to consolidated financial statements.
-6-
PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31,
1996 1995
____________ ___________
Cash Flows from Operating Activities:
Net income (loss) $ 1,285,857 $ (354,799)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Extraordinary gain on debt
accommodation (1,221,604) ---
Sale of portion of business (626,842) ---
Valuation reserve on
French assets 342,810 ---
Expense the reserve for
currency exchange 95,658 ---
Depreciation and amortization 26,985 41,640
Effect of changes in foreign
currency exchange rates (144) 297
Increase of common stock in lieu
of cash payments 99,553 20,000
Provision for losses on
accounts receivable 8,400 9,000
Changes in assets and liabilities:
Decrease (increase) in accounts
receivables 40,050 (28,353)
Decrease (increase) in inventory (7,945) 27,574
Decrease in other current
assets 4,318 4,460
Decrease in other assets 11,159 ---
Increase (decrease) in
accounts payable
and accrued expenses (244,672) 295,037
____________ ___________
Total adjustments (1,472,274) 369,655
Net cash provided by (used in)
operating activities (186,417) 14,856
-continued-
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six Months Ended March 31,
1996 1995
____________ ___________
Cash Flows from Investing Activities:
Sale of portion of business $ 626,842 ---
Purchases of property, plant and
equipment (542) $ (2,928)
____________ ___________
Net cash used in investing
activities 626,300 (2,928)
Cash Flows from Financing Activities:
Net borrowing (repayment) of short-
term revolving debt (122,404) 36,623
Retirement of short-term debt (200,000) ---
Proceeds from issuance of long-
term debt 100,000 ---
Payments on long-term debt and
installment obligations (54,142) (34,911)
Payments on accounts
payable in France --- (10,132)
____________ ___________
Net cash provided by (used in)
financing activities (276,546) (8,420)
Effect of Exchange Rate Changes
on Cash (141) ---
____________ ___________
Increase in Cash 163,196 3,508
Cash at Beginning of
Six Month Period 6,106 12,292
____________ ___________
Cash at End of
Six Month Period $ 169,302 $ 15,800
============ ===========
See accompanying notes to consolidated financial statements.
-8-
PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1: BASIS OF PRESENTATION
The condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to Rules and
Regulations of the Securities and Exchange Commission. Certain
information normally included in footnote disclosure in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations. All adjustments necessary to assure a
fair statement of the results have been recorded and such
adjustments are of a normal recurring nature. The Company believes
the disclosure on the included condensed statements and footnotes
is adequate and that the information taken as a whole is not
misleading.
NOTE 2: INVENTORIES
The components of inventories are as follows:
March 31, September 30,
1996 1995
____________ ___________
Raw material $ 31,754 $ 82,125
Work in process 578,875 675,444
____________ ___________
Total 610,629 757,569
============ ===========
NOTE 3: COMMON STOCK
At March 31, 1996, there were 5,836,145 shares of common stock
issued and outstanding. An additional 250,000 shares will be
issued upon approval by the shareholders of an increase in the
number of shares authorized.
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
SUMMARY
During the quarter, the Company sold a portion of its
veterinary business and completed transactions restructuring its
bank debt and some vendor payables, which resulted in other income
and extraordinary gains totaling $1,409,978, and a decrease in the
deficit in shareholders' equity of $1,595,189. Before gains on
these transactions, operating losses in the quarter and the six
month period were reduced to less than half the comparable year-
earlier period.
FIRST SIX MONTHS RESULTS OF OPERATIONS
SALES
During the first six months of fiscal 1996 which ended March
31, 1996, sales decreased $360,799 or 22.9 percent below the same
period of the prior year.
This sales decline was primarily due to decline of product and
services for humans, due in large part to extensive staffing
reductions, discussed in more detail below under "Operating
Expenses." Also the restrictive insurance reimbursement policies
of major insurance companies adopted several years ago, while now
in the process of reversal, still impact sales negatively. The new
generation of antihistamines launched by major pharmaceutical
companies in the same time frame as the reimbursement policies
noted above combined with those policies to exacerbate the decline.
As allergy testing becomes more routine and less specialized, many
physicians are now sending samples to their own local laboratories
for testing, thus further compounding the problem. Physician
customers are increasingly resistant to splitting allergy samples
from other serum samples sent to the local laboratory for testing.
The Company expects to use existing resources to target new
potential allergy customers in an attempt to minimize this negative
sales impact.
In the field of animal health, the Company has serviced in
parallel both the veterinarian through the provision of services as
well as the veterinarian's local laboratory through the sale of
diagnostic kit products. The Company made this strategic decision
so that, to the extent the resistance to sample splitting becomes
a factor in the veterinary field, any negative impact would be
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations, continued
FIRST SIX MONTHS RESULTS OF OPERATIONS, continued
SALES, continued
minimized because of its parallel activities of both performing
testing services in its own testing laboratory, as well as selling
kits to other laboratories.
More recently the Company decided to in fact put its primary
emphasis on diagnostic test kits in the field of animal health. As
a result, the Company developed and since 1992 has manufactured and
distributed a test strip for use in the veterinarian's office for
screening canine patients suspected of having allergies. In 1993
the Company completed development of a test kit for allergen-
specific IgE in canine serum for use in reference laboratories. In
1994, this was superseded by a faster test which also included a
test for allergen-specific IgG, a second substance relevant in the
diagnosis of allergy. In addition, in 1994 the Company acquired
the rights to a test for a molecule critical to proper blood
coagulation processes, and began manufacturing and distributing
test kits and performing the test in its own laboratory. Also late
in 1994 the Company obtained distribution rights to and launched a
kit for the detection of dermatophytes in dogs, cats and horses and
began manufacturing and distributing a series of test kits for
horses.
In the final analysis the Company decided to sell most of its
"retail" animal health activities and during the month of March,
the Company sold to an independent third party, that portion of its
business relating to the provision of canine allergy testing
services and immunotherapy treatment products directly to
veterinarians. That portion of FCS's business involving the sale
of diagnostic kits to other laboratories that provide such testing
services and the sale of immunotherapy treatment to such
laboratories and distributors of such products was not impacted by
the transaction. The buyer also agreed to purchase its requirements
of the test kits necessary to provide such services and of
immunotherapy treatment products from FCS for a period of four
years.
During the period, sales of products and services for animals
decreased $128,977 or 17.0 percent. Unit sales of testing services
and treatment products for canines sold to veterinarians in the
U.S. continued to grow in the period, increasing 2.5 percent.
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations, continued
FIRST SIX MONTHS RESULTS OF OPERATIONS, continued
SALES, continued
However, due to the transactions noted above sales dollars
decreased 2.3 percent, the sales to veterinarians having been
replaced since the date of the transaction by sales to the buyer at
a transfer price lower than that price previously charged
veterinarians. The buyer has greater resources than the Company
and thus in future periods the impact on sales should be positive.
The buyer must purchase $168,000 of product from the company each
quarter.
Sales of test kits and other products for animals sold abroad
or through other laboratories other than the buyer referenced above
decreased $117,931, or 57.9 percent compared to the prior year.
Because of the Company's limited resources, it was determined that
the Company could not continue to pursue international distribution
of its products without assistance. Thus during 1995 the
responsibility for all international distribution of animal
healthcare products was transferred to DMS Laboratories. The
transfer prices to DMS are from 27 percent to 38 percent below the
Company's price to domestic distributors or customers. These
discounts reduced the dollars of sales below the level that would
otherwise have been reported, reducing sales in dollars of the
veterinary products as well as increasing the cost of sales
percentage. With the introduction of the new products described
earlier, the Company anticipates continued growth in worldwide
sales of kits as well as sales of testing services and treatment
products to veterinarians in the U.S.
COST OF SALES
Cost of sales decreased $161,929 below the year earlier level
and cost of sales as a percentage of sales decreased to 37.2
percent in the current period from 39.0 percent in the prior year
period.
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations, continued
FIRST SIX MONTHS RESULTS OF OPERATIONS, continued
OPERATING EXPENSES
Operating expenses were decreased $429,538 from the prior
year. Selling, general and administrative expenses were decreased
by $418,636 or 35.2 percent below the year-earlier levels. Late in
1995 the Company implemented major staffing reductions. These
reductions may impact the Company's ability to promptly complete
its plan of transition to a predominantly animal healthcare
business from a predominantly human health business, from a
predominantly service business to a predominantly product business
and to expand its technical base beyond allergy and related
diseases.
OTHER ACTIVITIES
As noted earlier, the Company sold a portion of its business
during the month of March. As consideration for the sale, FCS
received $500,000 and $250,000 in unconditional and assignable
promissory notes of the buyer. After sale of the notes at a
discount, and closing costs on the transactions, the Company
reported other income of $626,842 in the period.
The Company decided in January 1996 to discontinue all
operations in France and to cease making payments to creditors
under its reorganization plan. As a result, Iatric SA, one of the
Company's subsidiaries in France, received notification dated
February 15, 1996 that it had been liquidated by order of the
French bankruptcy court. The other three French subsidiaries were
not subject to the liquidation order. The Company also had loans
from CEPME, a French bank. The proceeds from these loans were used
to fund the launch of the French operations in 1985 and 1986. In
March 1996, utilizing funds from the sale described earlier, the
Company and CEPME reached an agreement to make a one time payment
of $78,388 in full satisfaction of $600,387, including accrued
interest of $158,540 owed to CEPME. The funds were transferred to
an escrow account to be held awaiting necessary documentation from
CEPME. This has now been completed. The company recorded a
reserve in the fiscal quarter in an amount equal to the carrying
value of the assets in excess of the liabilities of its
subsidiaries in France. The net effect of the liquidation of
Iatric SA, of the reserve described above and of the agreement with
CEPME resulted in offsetting gains and losses. The Company will
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations, continued
FIRST SIX MONTHS RESULTS OF OPERATIONS, continued
OTHER ACTIVITIES, continued
continue to own certain assets in France, primarily a building and
land. If in the future these assets are able to be sold, a gain
will be recorded at that time.
In addition, utilizing the funds from the sale discussed
earlier the Company has reached an accommodation with another one
of its banks and several providers of materials and services which,
in the aggregate, resulted in an extraordinary gain of $699,432 in
March, 1996.
The cumulative total of the other income and extraordinary
gains is $1,409,978 and there was a decrease in the deficit in
shareholders' equity of $1,595,189.
These factors outlined above resulted in a net income of
$1,285,857 in the current period compared to a net loss of $354,799
in the year-earlier period.
SECOND QUARTER RESULTS OF OPERATIONS
During the quarter sales decreased $204,918 or 26.3 percent.
Sales to the veterinary marketplace decreased $96,481, of which
$26,777 was due to lower prices due to change in distribution
channels for its canine veterinary products and services discussed
above. Sales of products and services for humans decreased
$108,437 or 27.6 percent due to the reasons discussed earlier.
Cost of Sales and operating expenses were further reduced in
the quarter. Before the gains on the special transactions
discussed above, losses from operations were reduced from $211,634
during the second quarter of 1995 to $50,740 in the current
quarter.
Due to the special transactions discussed earlier, the Company
reported other income of $188,374 and extraordinary gains of
$1,221,604, resulting in net income of $1,359,238 in the quarter.
Net income per share equalled $.23 compared to a loss of $.03 in the
year-earlier period.
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations, continued
LIQUIDITY AND CAPITAL RESOURCES
During the six months ending March 31, 1996, funds were
provided by the sale of a portion of the Company's veterinary
business. These funds were used to make payments on accounts
payable and accrued expenses, to reduce its bank debt, and to
reach agreement with its foreign banks and suppliers on discounted
payment of amounts owed. During the same period of the prior year,
funds were provided by increasing accounts payable and accrued
expenses. During that period, the funds were used to repay
domestic bank debt and long-term obligations to vendors in France.
At March 31, 1996, current assets equaled $1,078,554, current
liabilities equaled $2,392,598 and the current ratio equaled .45.
The Company's total liabilities exceeded total assets by $685,400.
Management believes that the Company's future success is
dependent upon permanently reversing the sales decline and
increasing sales through the launch of new products and through the
use of new distribution channels and/or raising or generating
additional capital. The Company is aggressively pursuing new
product opportunities within the cash constraints imposed by the
present financial situation of the Company. In addition, the
Company is actively pursuing both debt and equity capital.
However, there can be no assurance of the success of either of
these programs.
The Company had available from Bank of America Arizona lines
of credit for working capital purposes, subject to certain
restrictions based upon the amount of accounts receivable which
secure such borrowings. As of March 31, 1996, the Company had
borrowed $117,826 under the line of credit and had an additional
$20,655 available. In addition, the Company has $190,954 of term
loans from Bank of America Arizona. The agreement, which covers
both the credit line and term loans, will expire October 31, 1996.
During the quarter, certain of the financial ratio convents in
the agreement with Bank of America Arizona were not met by the
Company. The Company expects that it will continue to be out of
compliance with certain financial covenants until a new loan
agreement is executed.
The Company also has a loan from M&I Thunderbird Bank which is
secured by land and buildings in Arizona. The loan, which totals
-15-
PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations, continued
LIQUIDITY AND CAPITAL RESOURCES, continued
$167,198 becomes due in its entirety in July 1996. The Company
does not have the financial resources to repay this loan and must
make arrangements to extend or refinance this loan. The Company is
hopeful that this loan will be extended or refinanced, however, the
Company has no assurance that acceptable arrangements can be
reached.
All borrowings from these banks will soon be due and payable.
The outstanding amounts total $475,978. As indicated above, the
Company does not possess the financial resources to repay these
amounts at the present time and has made periodic arrangements to
extend such loan agreements in the past. The Company will attempt
to continue to reach periodic arrangements.
PART II, OTHER INFORMATION
None
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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 by the undersigned authorized officers.
FCS, Laboratories, Inc.
/S/ Nicholas A. Gallo, III
Nicholas A. Gallo, III
Chairman and member of
the Board of Directors
and President
/S/ Richard C. Mayo
Richard C. Mayo
Treasurer and
Chief Financial Officer
and Director
Date: July 9, 1996
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