1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1999 ----------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _______________ Commission File Number: 0-11647 HYCOR BIOMEDICAL INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 58-1437178 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7272 Chapman Avenue, Garden Grove, California 92841 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (714) 933-3000 ---------------- No Change - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 30, 1999 ---------------------------- ----------------------------- Common Stock, $.01 Par Value 7,283,456 2 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS HYCOR BIOMEDICAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, December 31, ASSETS 1999 1998 ------------ ------------ CURRENT ASSETS: (unaudited) Cash and cash equivalents $ 234,359 $ 655,716 Investments 1,260,870 1,266,935 Accounts receivable, net of allowance for doubtful accounts of $264,446 and $211,482 3,260,600 3,022,618 Inventories (Note 2) 4,171,979 4,268,949 Prepaid expenses and other current assets 343,264 424,597 ------------ ------------ Total current assets 9,271,072 9,638,815 ------------ ------------ PROPERTY AND EQUIPMENT, at cost 10,428,236 10,522,457 Less accumulated depreciation (6,394,706) (6,283,497) ------------ ------------ 4,033,530 4,238,960 ------------ ------------ GOODWILL AND OTHER INTANGIBLES, net of amortization of $875,489 and $858,678 1,885,299 2,012,348 OTHER ASSETS 82,214 92,586 ------------ ------------ Total assets $ 15,272,115 $ 15,982,709 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 804,475 $ 1,101,879 Accrued liabilities 1,256,581 1,321,329 Accrued payroll expenses 505,956 377,609 Current portion - debt (Note 3) 1,739,171 1,826,706 ------------ ------------ Total current liabilities 4,306,183 4,627,523 ------------ ------------ Long-Term Debt (Note 3) 657,946 678,491 ------------ ------------ Total Liabilities 4,964,129 5,306,014 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock 72,835 72,835 Paid-in capital 12,420,520 12,420,520 Accumulated deficit (1,677,750) (1,621,204) Accumulated other comprehensive loss (507,619) (195,456) ------------ ------------ Total stockholders' equity 10,307,986 10,676,695 ------------ ------------ Total liabilities and stockholders' equity $ 15,272,115 $ 15,982,709 ============ ============ Page 2 3 HYCOR BIOMEDICAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended March 31, ------------------------------- 1999 1998 ----------- ----------- NET SALES $ 4,761,727 $ 4,691,907 COST OF SALES 2,383,388 2,320,419 ----------- ----------- Gross profit 2,378,339 2,371,488 ----------- ----------- OPERATING EXPENSES Selling, general and administrative 1,882,953 2,077,464 Research and development 538,597 626,045 ----------- ----------- 2,421,550 2,703,509 ----------- ----------- OPERATING LOSS (43,211) (332,021) INTEREST EXPENSE (34,289) (45,081) INTEREST INCOME 26,796 27,977 GAIN (LOSS) ON FOREIGN CURRENCY TRANSACTIONS 6,158 (4,976) ----------- ----------- LOSS BEFORE INCOME TAX PROVISION (BENEFIT) (44,546) (354,101) INCOME TAX PROVISION (BENEFIT) 12,000 (162,584) ----------- ----------- NET LOSS $ (56,546) $ (191,517) =========== =========== BASIC AND DILUTED EARNINGS PER SHARE $ (0.01) $ (0.03) =========== =========== AVE. COMMON SHARES OUTSTANDING 7,283,456 7,171,304 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME NET LOSS $ (56,546) $ (191,517) OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Foreign currency translation adjustments (311,407) (116,483) Unrealized gains (losses) on securities: Unrealized gains (losses) on securities (756) 3,098 Plus: reclassification adjustment for losses included in net income 0 328 ----------- ----------- OTHER COMPREHENSIVE LOSS, NET OF TAX (312,163) (113,057) COMPREHENSIVE LOSS $ (368,709) $ (304,574) =========== =========== Page 3 4 HYCOR BIOMEDICAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended March 31, 1999 1998 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (56,546) $(191,517) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 338,640 454,026 Provision for doubtful accounts receivable 47,130 12,306 Deferred income tax provision -- (7,091) Change in assets and liabilities, net of effects of foreign currency adjustments Accounts receivable (335,562) (46,876) Income tax receivable -- (144,648) Inventories 33,107 161,698 Prepaid expenses and other current assets 74,380 50,921 Accounts payable (284,710) (332,725) Accrued liabilities (53,949) (166,851) Accrued payroll expenses 135,606 (61,298) --------- --------- Total adjustments (45,358) (80,538) --------- --------- Net cash used in operating activities (101,904) (272,055) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investments -- 205,247 Purchases of intangible assets (15,522) (12,469) Direct costs of acquisition -- (6,250) Purchases of property, plant and equipment (210,646) (209,452) Proceeds from sale of property and equipment -- 1,000 Proceeds from collection of notes receivable 14,735 23,734 --------- --------- Net cash provided by (used in) investing activities (211,433) 1,810 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt -- 48,716 Principal payments on long-term debt (102,691) (22,372) Proceeds from issuance of common stock -- 51,229 --------- --------- Net cash provided by (used in) financing activities (102,691) 77,573 --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (5,329) (8,203) DECREASE IN CASH AND CASH EQUIVALENTS (421,357) (200,875) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 655,716 814,908 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 234,359 $ 614,033 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year - interest $ 38,842 $ 50,680 - income taxes $ 14,446 $ 4,532 Page 4 5 HYCOR BIOMEDICAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 1. BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited financial statements include all adjustments necessary to present fairly the financial position as of March 31, 1999 and December 31, 1998, the results of operations and the cash flows for the three-month periods ended March 31, 1999 and 1998. These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and do not include all the information and note disclosures required by generally accepted accounting principles for complete financial statements and may be subject to year-end adjustments. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1998 annual report on Form 10-K as filed with the Securities and Exchange Commission. Certain items in the 1998 consolidated financial statements have been reclassified to conform with the 1999 presentation. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year. Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding. Common stock equivalents have been excluded from the calculation of diluted EPS in loss periods as the impact is anti-dilutive. 2. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market. Cost includes material, direct labor and manufacturing overhead. Inventories at March 31, 1999 and December 31, 1998 consist of: 3/31/99 12/31/98 ---------- ---------- Raw materials $1,056,009 $1,040,529 Work in process 1,413,690 1,420,231 Finished goods 1,702,280 1,808,189 ---------- ---------- $4,171,979 $4,268,949 ========== ========== 3. LONG TERM DEBT The Company has a line of credit which provides for borrowings up to $2,000,000 and expires in July, 1999. The loan is collateralized by the Company's accounts receivable, inventories, and property, plant and equipment. At March 31, 1999, $1,000,000 was outstanding. Advances under the line bear interest at the prime rate or at LIBOR plus 2%, payable monthly, with the principal due at maturity. At March 31, 1999, the Company's interest rate was 7.26%. The Company intends upon renewing its line of credit on substantially consistent terms with the bank upon maturity of the line in July 1999. Page 5 6 The line of credit contains restrictive covenants, the most significant of which relate to the maintenance of minimum tangible net worth, debt-to-tangible net worth requirements and liquid assets plus accounts receivable-to-current liabilities requirements. At March 31, 1999, the Company was in compliance with such covenants. The Company has outstanding notes in the amount of $1,190,000. These notes were issued to the seller group in executing the acquisition of Cogent Diagnostics LTD in July 1997. Interest on the notes accrues at a rate of 6.85% and is payable quarterly. Principal payments are due in three equal annual installments which commenced in July, 1998. In addition, the Company and one of the Company's foreign subsidiaries has long term debt, payable to financial institutions, aggregating $207,000 with weighted average interest rate of approximately 9%. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This Section and this entire Annual Report contain forward-looking statements and include assumptions concerning the Company's operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to a number of risks, uncertainties, and other factors. In connection with the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statements identifying important factors which, among other things, could cause the actual results and events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions contained in this Section and in this entire Report. Such factors include, but are not limited to, product demand and market acceptance risks; the effect of economic conditions; the impact of competitive products and pricing; product development; commercialization and technological difficulties; capacity and supply constraints or difficulties; availability of capital resources; general business and economic conditions, including currency risks based on the relative strength or weakness of the U.S. dollar, euro conversions, and Year 2000 issues; and changes in government laws and regulations, including taxes. YEAR 2000 READINESS DISCLOSURE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. If the computer systems cannot distinguish between the year 1900 and the year 2000, system failures or other computer errors could result. The potential for failures and errors spans all aspects of our business, including information technology ("IT") systems: computer hardware and software, voice and data networks; non-information technology ("Non-IT") related systems: copiers and fax machines, security and building infrastructure support systems; third party considerations; and products. Page 6 7 State of Readiness The Company has appointed a Year 2000 Corporate Compliance Team, which has prepared a compliance program for the Company and is responsible for coordinating and inspecting compliance activities in all business units. The compliance program requires all business units and locations to inventory potentially affected systems and products, assess risk, take any required corrective actions, test and certify compliance. In addition, the Company is in the process of identifying, prioritizing, and communicating with critical suppliers, distributors, and customers to determine the extent to which the Company may be vulnerable in the event those parties fail to properly identify and remediate their own Year 2000 issues. Detailed evaluations of the most critical third parties have been initiated through questionnaires, interviews, and other available means. The Company intends to monitor the progress made by those parties, test critical system interfaces, and formulate appropriate contingency and business continuation plans to address third-party issues identified through its evaluations and assessments. Based upon its identification and assessment efforts to date, the Company presently believes that the year 2000 issue will not pose significant operational problems or have a material adverse impact on the Company's financial position or results of operations. However, certain of its computer equipment, software and non-information technology related equipment will require replacement or modification. System upgrades completed to date include the Company's information systems primary operating software and hardware; the primary business applications which include the manufacturing, inventory, and billing modules; and certain Non-IT applications such as the telephone switchboard system and the internal communications network. Upgrades currently in process are the general ledger, fixed asset, and payroll administration applications. The Company presently believes that its planned modifications or replacements of certain existing computer equipment and software will be completed on a timely basis so as to avoid any of the potential Year 2000-related disruptions or malfunctions of its computer equipment and software that it has identified. In addition, in the ordinary course of business, the Company periodically replaces computer equipment and software, and in so doing, seeks to acquire only Year 2000 compliant software and hardware. Costs The Company will primarily use internal resources to reprogram or replace, test and implement its IT and non-IT systems for Year 2000 modifications. The Company does not separately track the internal costs incurred on the Year 2000 project. Such costs are principally payroll and related costs for its internal IT personnel. The total cost of the Year 2000 project, excluding these internal costs, is estimated at $100,000 and is being funded through operating cash flows. Risks The company currently believes that the most reasonably likely worst case scenario with respect to the Year 2000 issue is the failure of a supplier, including utility suppliers, to become Year 2000 compliant, which could result in the temporary interruption of the supply of necessary products or services to a manufacturing facility. This could result in interruptions in production for a period of time, which in turn could result in potential lost sales and profits. Additionally, marketing and administrative expense could increase if automated functions would need to be performed manually. Additionally, many of the Company's customers are directly or indirectly dependent on insurance or entitlement Page 7 8 programs for reimbursement on products or services provided. The Company's cash flow could be adversely impacted as a result of its customer's experiencing a slow down of reimbursements due to a failure on the part of the insurance carriers or entitlement program administrators to become Year 2000 compliant. The costs of the Year 2000 project and the dates on which the company believes it will complete the Year 2000 modifications and testing are based on management's best estimates, which were derived utilizing numerous assumptions regarding future events, including the continued availability of certain resources, third party modification plans, and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those currently anticipated. Examples of factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and embedded technology, and similar uncertainties. In addition, there can be no guarantee that the systems or products of other entities, or that a failure to convert by another company, or a conversion that is incompatible with the company's systems, would not have a material adverse effect on the company. Contingency Plans The Company's Guidelines require that contingency plans be developed and validated in the event that any critical system cannot be corrected and certified before the system's failure date. These plans could include, but are not limited to, material banking, use of alternate suppliers, and development of alternate means to process orders. The Company expects to have its contingency plans in place by October 31, 1999. In addition, the Company is forming a rapid response team as part of its IT group that will respond to any operational problems during the Year 2000 date change period. LIQUIDITY The Company has adequate working capital and sources of capital to carry on its current business and to meet its existing and expected future capital requirements. The Company increased its working capital $46,000 as of March 31, 1999, compared to December 31, 1998 as a result of normal operations. The Company's principal capital commitments are for lease payments under non-cancelable operating leases and note payments related to the acquisition of Cogent. Additionally, the HY-TEC business requires the purchase of instruments which in many cases are placed in use in laboratories of the Company's direct customers and paid for over an agreed contract period by the purchase of test reagents. This "reagent rental" sales program, common to the diagnostic market, creates negative cash flows in the initial years. RESULTS OF OPERATIONS During the three-month period ended March 31, 1999, sales increased approximately $70,000 or 2% compared to the same period last year. Sales of discontinued and non-core products decreased $194,000 or 35% while sales of core clinical immunology product lines increased $264,000 or 6% compared to the same period last year. The non-core products accounted for approximately 8% of sales in the three months ended March 31,1999 versus 12% in the same period last year. Page 8 9 Gross profit as a percentage of product sales decreased for the three-month period from 51% to 50% compared to the same period last year. The decrease in gross profit percentage is due primarily to the effects of HY-TEC instrument sales to our distributor partners, which generate a very low gross margin. Instrument sales accounted for approximately 4% of sales in the three months ended March 31,1999 versus 2% in the same period last year. Selling, general and administrative expenses decreased approximately $195,000 or 9% when compared to the same period last year. This decrease was primarily due to cost containment efforts which included the consolidation of the Irvine operation into the Company's Garden Grove facility. The Irvine facility closure resulted in a savings of approximately $84,000 from reduced rent and related expenses. Headcount reduction, postponement in filling certain open positions, and other cost containment efforts reduced expenses by a further $111,000. Research and development costs decreased approximately $87,000 or 14% compared to the same period last year. The decrease in research and development is primarily due to the completion of several projects related to the HY-TEC 288 instrument system as it approached its commercial launch. Effective with the fourth quarter of 1998, the Company adopted a position wherein a 100% valuation allowance was taken against all deferred tax assets. The tax provision of $12,000 for the three months ended March 31, 1999 reflects the provision for estimated tax liabilities with no deferred tax benefit recognized against the net operating loss for the quarter. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27 -- Financial Data Schedule (b) Reports on Form 8K None SIGNATURE 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 thereunto duly authorized. HYCOR BIOMEDICAL INC. --------------------- Date: May 12, 1999 By: /s/ Armando Correa ------------------------ Armando Correa, Director of Finance (Mr. Correa is the Principal Accounting Officer and has been duly authorized to sign on behalf of the registrant.) Page 9 10 EXHIBIT INDEX Exhibit Number Description ------- ----------- 27.1 Financial Data Schedule