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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
December 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 / / No /X/
(2) Yes /X/ No / /
Number of shares outstanding as of March 27, 1997:
5,841,145 shares of Common Stock, no par value.
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PART I, Financial Information
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, September 30,
1996 1996
------------ ------------
Current Assets:
Cash $ 1,663 $ 924
Accounts receivable, net of
allowance for doubtful
accounts of $27,000 and
$23,854, respectively 291,378 227,316
Inventories 575,648 626,786
Other current assets 12,853 18,516
------------ ------------
Total Current Assets 881,542 873,542
Property, Plant and Equipment, net 685,335 692,542
Deposits and Other Assets, net of
Amortization of $10,989 and
$9,990, respectively 24,525 26,218
------------ ------------
Total Assets $ 1,591,402 $ 1,592,302
============ ============
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)
December 31, September 30,
1996 1996
------------ ------------
Current Liabilities:
Accounts payable $ 925,617 $ 860,572
Accrued expenses 898,122 859,022
Short-term debt including
current portion of long-
term debt 463,931 510,109
------------ ------------
Total Current Liabilities 2,287,670 2,229,703
------------ ------------
Other Liabilities:
Long-term debt 87,402 88,002
------------ ------------
Total Liabilities $ 2,375,072 $ 2,317,705
------------ ------------
Shareholders' Equity (Deficit)
Common Stock, no par value:
6,000,000 shares authorized;
5,836,145 shares issued and
outstanding (Note 3) 4,060,163 4,060,163
Accumulated deficit (4,843,833) (4,785,566)
Total Shareholders' Equity ------------ ------------
(Deficit) ( 783,670) ( 725,403)
Total Liabilities and Share- ------------ ------------
holders' Equity (Deficit) $ 1,591,402 $ 1,592,302
============ ============
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 December 31,
--------------------------
1996 1995
------------ -----------
Sales $ 478,342 $ 637,137
Cost of Sales 224,803 259,257
------------ ------------
Gross profit 253,539 377,880
Selling, General and
Administrative Expense 285,204 392,941
Depreciation and Amortization Expense 1,623 8,000
Interest Expense 24,979 50,320
------------ ------------
Net Loss $ ( 58,267) $ ( 73,381)
============ ============
Net Loss per Share $ (.01) $ (.01)
============ ============
Weighted Average Shares Outstanding 5,836,145 5,811,145
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
------------------------
Accumulated
Shares Amount Deficit
--------- ------------ ------------
Balance at
September 30,
1996 5,836,145 $ 3,970,610 $(4,785,566)
Net income for
the period --- --- (58,267)
Balance at
December 31, --------- ----------- -----------
1996 5,836,145 $ 3,970,610 $(4,843,833)
========= =========== ===========
Shares to
be issued
(Note 3) 250,000 89,553 ---
Adjusted Balance
at December 31, --------- ----------- -----------
1996 6,086,145 $ 4,060,163 $(4,843,833)
========= =========== ===========
See accompanying notes to consolidated financial statements.
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended December 31,
---------------------------
1996 1995
------------ -----------
Cash Flows from Operating Activities:
Net loss $ ( 58,267) $ ( 73,381)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Depreciation and amortization 8,207 14,488
Effect of changes in foreign
currency exchange rates --- 316
Increase of common stock in lieu
of cash payments --- 10,000
Provision for losses on
accounts receivable 4,050 4,200
Changes in assets and liabilities:
Increase in accounts receivables (68,112) ( 4,922)
Decrease in inventory 51,138 23,788
Decrease in other current
assets 5,662 2,883
Decrease in other assets 694 4,500
Increase in accounts payable
and accrued expenses 104,145 25,511
------------ ------------
Total adjustments 105,784 80,764
Net cash provided by ------------ ------------
operating activities 47,517 7,383
-continued-
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PART I, Financial Information, continued
FCS LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months
Ended December 31,
---------------------------
1996 1995
------------ ------------
Cash Flows from Investing Activities:
Purchases of property, plant and
equipment $ --- $ ( 542)
Net cash used in investing ------------ ------------
activities --- ( 542)
Cash Flows from Financing Activities:
Net borrowing, repayment of short-
term revolving debt (27,486) 15,183
Payments on long-term debt and
installment obligations (19,392) (24,907)
Net cash used in ----------- ------------
financing activities (46,778) (9,724)
------------ ------------
Increase (decrease) in Cash 739 (2,883)
Cash at Beginning of
Three Month Period 924 6,106
Cash at End of ------------ ------------
Three Month Period $ 1,663 $ 3,223
============ ============
See accompanying notes to consolidated financial statements.
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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:
December 31, September 30,
1996 1996
------------ -------------
Raw material $ 39,420 $ 52,406
Work in process 536,228 574,380
------------ ------------
Total $ 575,648 $ 626,786
============ ============
NOTE 3: COMMON STOCK
At December 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
RESULTS OF OPERATIONS
Sales
During the first three months of fiscal 1997 which ended
December 31, 1996, sales decreased $158,795 or 24.9 percent below
the same period of the prior year. The decrease was primarily
due to a change in channels of distribution for its "retail"
domestic animal health product line.
Approximately $24,331 of this sales decline was due to a
decline of products 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 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
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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
RESULTS OF OPERATIONS, continued
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.
The Company decided to sell most of its "retail" animal
health activities and during March, 1996, 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. The buyer must purchase $168,000 of products from the
Company each quarter.
During the period, sales of products and services for
animals decreased $135,464 or 39.5 percent. Due to the
transactions noted above sales dollars decreased $135,023, 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. Thus virtually the
entire decrease in sales dollars of animal healthcare was due to
this change in method of distribution. The buyer has greater
resources than the Company and thus in future periods the impact
on sales should be positive.
Sales of test kits and other products for animals sold
abroad or through other laboratories other than the buyer
referenced above decreased $26,605, or 38.0 percent compared to
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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
RESULTS OF OPERATIONS, continued
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 $34,454 below the year earlier level
and cost of sales as a percentage of sales was 47.0 percent,
compared to 40.7 percent reported in the prior year period. The
increase in percentage was entirely due to the change in sale
prices to the domestic distributor noted above.
Operating Expenses
Operating expenses were reduced $139,455 from the prior
year. Selling, general and administrative expenses were
decreased by $107,737 or 27.4 percent below the year-earlier
levels. Late in 1995 the Company implemented major staffing
reductions, and additional reductions were implemented upon the
sale of part of its retail animal health activities. 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. Interest expense was reduced $25,341 or 50.4
percent due to lower debt levels.
Net Loss
These factors outlined above resulted in a net loss of
$58,267 in the current period compared to a net loss of $73,381
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 three months ending December 31, 1996, funds were
provided by a decrease in inventories and an increase in accounts
payable and accrued expenses. These funds were used to reduce
debt levels and to provide working capital to fund a temporary
increase in accounts receivable. During the same period of the
prior year, funds were provided by reducing inventory and
increasing accounts payable and short-term debt. During that
period, the funds were used to make payments on domestic bank
debt.
At December 31, 1996 current assets equaled $881,542,
current liabilities equaled $2,287,670 and the current ratio
equaled .39. The Company's total liabilities exceeded total
assets by $783,670.
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 lines of
credit for working capital purposes, subject to certain
restrictions based upon the amounts of accounts receivable which
secure such borrowing. As of December 31, 1996, the Company had
borrowed $165,730 under the line of credit and had an additional
$4,252 available. In addition, the Company has $147,982 of term
loans from Bank of America. The agreement, which covers both the
credit line and term loans, will expire October 31, 1997.
During the fiscal year, certain of the financial ratio
covenants in the agreement with Bank of America 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.
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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, continued
The Company also has a loan from M&I Thunderbird Bank which
is secured by land and buildings in Arizona. The loan, which
totals $105,620 becomes due in its entirety in July 1997.
All borrowings from these banks will soon be due and
payable. The outstanding amounts total $419,332. 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: May 29, 1997
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