<PAGE>
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 June 30, 1998
OR
[ ] 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 1-10538
GAMMA BIOLOGICALS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1668436
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 Mangum Road, Houston, Texas 77092
-----------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(713) 681-8481
----------------------------------------------------
(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.
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.
At August 13, 1998: 4,625,762 shares
<PAGE>
PART I. FINANCIAL INFORMATION
GAMMA BIOLOGICALS, INC.
Consolidated Balance Sheets
<TABLE>
ASSETS JUNE 30, 1998 MARCH 31, 1998
------------- --------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 1,312,797 $ 1,416,768
Short-term investments............................... 100,000 100,000
Receivables - net of allowance for doubtful
accounts of $103,000 and $118,000, respectively.... 3,473,081 4,489,387
Inventories.......................................... 4,460,361 3,969,444
Prepaid expenses..................................... 850,386 918,333
Deferred taxes....................................... 93,300 85,100
------------ ------------
Total current assets............................. 10,289,925 10,979,032
------------ ------------
PROPERTY - At cost, net of accumulated
depreciation and amortization of $6,591,401
and $6,297,958, respectively......................... 8,443,973 8,323,945
CASH VALUE OF LIFE INSURANCE........................... 2,092,608 2,026,250
EXCESS OF COST OVER NET ASSETS ACQUIRED-NET............ 100,884 108,645
OTHER ASSETS........................................... 771,234 695,368
------------ ------------
TOTAL............................................. $ 21,698,624 $ 22,133,240
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations............. $ 213,644 $ 226,835
Accounts payable - trade............................. 959,612 1,226,771
Dividends payable.................................... 115,645 115,270
Accrued salaries and other expenses.................. 475,054 288,455
------------ ------------
Total current liabilities......................... 1,763,955 1,857,331
------------ ------------
LONG-TERM OBLIGATIONS.................................. 782,520 851,240
------------ ------------
DEFERRED TAXES......................................... 854,200 918,200
------------ ------------
SHAREHOLDERS' EQUITY................................... 18,297,949 18,506,469
------------ ------------
TOTAL............................................. $ 21,698,624 $ 22,133,240
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
GAMMA BIOLOGICALS, INC.
Statements of Consolidated Income
(Unaudited)
<TABLE>
THREE MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET SALES...................................... $ 4,366,544 $ 4,827,992
COST OF SALES.................................. 2,154,886 2,165,405
----------- -----------
GROSS MARGIN................................... 2,211,658 2,662,587
----------- -----------
OPERATING EXPENSES:
Selling...................................... 1,176,210 1,085,929
General and administrative................... 838,728 588,125
Shipping and warehouse....................... 225,641 190,374
Research and development..................... 264,593 344,569
----------- -----------
Total operating expenses................. 2,505,172 2,208,997
----------- -----------
OPERATING INCOME (LOSS)........................ (293,514) 453,590
----------- -----------
OTHER INCOME (EXPENSE):
Interest income.............................. 43,552 60,663
Interest expense............................. (25,432) (11,283)
Other - net.................................. (13,108) (9,400)
----------- -----------
Other income - net....................... 5,012 39,980
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.............. (288,502) 493,570
INCOME TAXES (BENEFIT)......................... (131,600) 184,564
----------- -----------
NET INCOME (LOSS).............................. $ (156,902) $ 309,006
----------- -----------
----------- -----------
Weighted average number of common shares
outstanding assuming dilution................ 4,613,235 4,655,083
----------- -----------
Net income (loss) per common share - basic..... $ (.03) $ .07
----------- -----------
----------- -----------
Net income (loss) per common share - diluted... $ (.03) $ .07
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
GAMMA BIOLOGICALS, INC.
Statements of Consolidated Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1998 1997
---- ----
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
COMMON STOCK
Balance, beginning of period..................... 4,776,115 $ 477,611 4,762,615 $ 476,261
Exercise of stock options........................ 15,000 1,500
----------------------------------------------------------------
Balance, end of period........................... 4,791,115 479,111 4,762,615 476,261
----------------------------------------------------------------
CAPITAL IN EXCESS OF PAR
Balance, beginning of period..................... 13,711,791 13,674,209
Exercise of stock options........................ 40,650
----------------------------------------------------------------
Balance, end of period........................... 13,752,441 13,674,209
----------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of period..................... 5,493,805 4,644,801
Net income (loss)................................ (156,902) 309,006
Dividends declared............................... (115,645) (115,076)
----------------------------------------------------------------
Balance, end of period........................... 5,221,258 4,838,731
----------------------------------------------------------------
TRANSLATION ADJUSTMENTS
Balance, beginning of period..................... (25,268) (10,456)
Current period translation adjustments........... 21,877 713
----------------------------------------------------------------
Balance, end of period........................... (3,391) (9,743)
----------------------------------------------------------------
TREASURY STOCK........................................ (165,353) (1,151,470) (159,563) (1,119,908)
----------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY............................ 4,625,762 $18,297,949 4,603,052 $17,859,550
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
GAMMA BIOLOGICALS, INC.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1998 1997
---- ----
[INCREASE (DECREASE) IN CASH]
<C> <C>
Cash flows from operating activities:
Cash received from customers...................................... $ 4,375,866 $ 4,458,990
Interest received................................................. 42,319 59,441
Cash paid to suppliers and employees.............................. (3,861,466) (4,480,114)
Interest paid..................................................... (25,432) (11,278)
Income taxes paid................................................. (1,065) (26,794)
----------- -----------
Net cash provided by operating activities......................... 530,222 245
----------- -----------
Cash flows from investing activities:
Property additions................................................ (412,470) (431,869)
Increase in cash value of life insurance.......................... (66,358) (60,668)
----------- -----------
Net cash used in investing activities............................. (478,828) (492,537)
----------- -----------
Cash flows from financing activities:
Payments on long-term obligations................................. (83,384) (32,891)
Exercise of stock options......................................... 42,150
Dividends paid.................................................... (115,270) (115,077)
----------- -----------
Net cash used in financing activities............................. (156,504) (147,968)
----------- -----------
Effect of exchange rate fluctuation on cash....................... 1,139 (3,814)
Net decrease in cash................................................... (103,971) (644,074)
Cash and cash equivalents at beginning of period....................... 1,416,768 3,618,970
----------- -----------
Cash and cash equivalents at end of period............................. $ 1,312,797 $ 2,974,896
----------- -----------
----------- -----------
</TABLE>
5
<PAGE>
GAMMA BIOLOGICALS, INC.
Statements of Consolidated Cash Flows
(Unaudited)
Reconciliation of Net Income (Loss) to
Net Cash Provided by Operating Activities
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1998 1997
---- ----
<S> <C> <C>
Net Income (Loss) $ (156,902) $ 309,006
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation.................................................... 295,900 243,117
Amortization of intangibles..................................... 10,290 7,760
Loss on disposal of fixed assets................................ 2,706 1,862
(Increase) decrease in accounts receivable...................... 23,814 (352,949)
Increase in investments......................................... (1,233) (1,222)
(Increase) decrease in inventory................................ (455,838) 47,171
(Increase) decrease in prepaid expenses......................... 1,071,010 (21,831)
Increase in other assets........................................ (78,395) (198,987)
Decrease in accounts payable.................................... (294,520) (183,536)
Increase (decrease) in deferred taxes........................... (72,200) 7,100
Increase in accrued salaries and other expenses................. 185,590 142,754
---------- ---------
Net Cash Provided by
Operating Activities.............................................. $ 530,222 $ 245
---------- ---------
---------- ---------
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
In March 1996, the company outsourced the assembly of plastic droppers and
SegmentSamplers(TM). As a result, inventory of component parts totaling
$282,886 was transferred to outside vendors and a corresponding receivable
due from the vendors was recorded. This receivable was reduced as assembled
parts were delivered, with the cost of components deducted from the vendors'
selling price. Additional inventory of $105,000 was transferred to outside
vendors, and the remaining balance was recovered in full by March 31, 1998.
In June 1997, the company entered into a capital lease agreement for $745,360
for the design, manufacture, and installation of a special filling and
heat-sealing machine for the ReACT(R) strips. The machine was accepted in
March 1998.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
GAMMA BIOLOGICALS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Reconciliation of statutory rate with effective United States income tax
rate:
<TABLE>
THREE MONTHS ENDED
JUNE 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Statutory rate................................. (34.0)% 34.0%
Increase (decrease) resulting from:
Exempt export earnings....................... (3.3) (2.0)
Life insurance premiums...................... .3 1.2
Amortization of intangibles.................. 1.4 .4
Software development......................... (.9) (1.5)
Temporary differences related to property.... (11.8) 4.8
Other-net.................................... 3.4 .5
------ ----
Effective tax rate............................. (44.9)% 37.4%
------ ----
------ ----
</TABLE>
Significant components of the company's deferred tax assets (liabilities)
are as follows:
<TABLE>
JUNE 30, 1998 MARCH 31, 1998
------------- --------------
<S> <C> <C>
Allowance for bad debts............................... $ 35,000 $ 40,100
Inventory costs capitalized........................... 31,200 31,200
Other................................................. 27,100 13,800
----------- -----------
Net current deferred tax asset..................... 93,300 85,100
----------- -----------
Difference between book and tax basis of property,
plant and equipment................................ (826,100) (891,900)
Other................................................. (28,100) (26,300)
----------- -----------
Net noncurrent deferred tax liability.............. (854,200) (918,200)
----------- -----------
Net deferred tax liability............................ $ (760,900) $ (833,100)
----------- -----------
----------- -----------
</TABLE>
7
<PAGE>
2. Reconciliation of the numerators and denominators of the basic and diluted
EPS computations:
<TABLE>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
1998 1997
--------------------------------------- -------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss)................ $ (156,902) $ 309,006
BASIC EPS
Income (loss) available to common
shareholders................... $ (156,902) 4,613,235 $ (.03) $ 309,006 4,603,052 $ .07
-------- ------
-------- ------
Effect of Dilutive Securities
Options and warrants............. 52,031
------------ ---------- ---------- ---------
DILUTED EPS
Income (loss) available to common
shareholders plus assumed ------------ ---------- -------- ---------- --------- ------
conversion..................... $ (156,902) 4,613,235 $ (.03) $ 309,006 4,655,083 $ .07
------------ ---------- -------- ---------- --------- ------
------------ ---------- -------- ---------- --------- ------
</TABLE>
3. Inventories are valued at the lower of cost (principally FIFO) or market
value, as follows:
<TABLE>
JUNE 30, 1998 MARCH 31, 1998
------------- --------------
<S> <C> <C>
Raw materials.............................. $ 987,819 $ 932,210
Products in process........................ 314,996 464,719
Finished products.......................... 1,483,851 1,087,878
ReACT equipment............................ 745,219 611,618
Supplies................................... 928,476 873,019
----------- -----------
Total.................................. $ 4,460,361 $ 3,969,444
----------- -----------
----------- -----------
</TABLE>
4. In the opinion of management, the unaudited consolidated condensed
financial statements for Gamma Biologicals, Inc. (the "company") includes all
adjustments (consisting solely of normal recurring adjustments) necessary for
a fair presentation of the financial position of the company as of June 30,
1998, the results of operations of the three month periods ended June 30,
1998 and 1997 and cash flows for the three month periods ended June 30, 1998
and 1997. Although management believes the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. The results of
operations for the period ended June 30, 1998 are not necessarily indicative
of the results to be expected for the full year.
8
<PAGE>
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
<TABLE>
JUNE 30, 1998 MARCH 31, 1998
------------- --------------
<S> <C> <C>
Mortgage note, due monthly through 2000............... $ 242,823 $ 265,523
Note payable-foreign, due semiannually through 2000... 68,665 67,192
Capital lease, due quarterly through 2004............. 684,676 745,360
----------- -----------
996,164 1,078,075
Less current portion............................... 213,644 226,835
----------- -----------
Total long-term obligations........................... $ 782,520 $ 851,240
----------- -----------
----------- -----------
</TABLE>
The mortgage note bears interest at the bank's base rate, but not less than
7% nor more than 13%. At June 30, 1998, the note bore interest at 9.5%. The
mortgage note is collateralized by a first lien on the company's land and
building. The foreign note payable bears interest at 7%. The capital lease
for a filling and sealing machine for ReACT strips bears interest at 8.82%.
6. DAMAGE TO FACILITY
On September 11, 1997, the company's manufacturing facility in Houston,
Texas sustained damage from a fire that occurred while the building was
unoccupied. The company was open for business on September 12, and most
manufacturing activities resumed within seven days. Reconstruction of
affected areas should be completed by the Fall 1998.
The company has insurance for both property damage and business
interruption. The full cost of repair or replacement was determined to be
$2,506,121. As of March 31, 1998, $1,500,000 had been advanced to the
company, and a receivable of $1,001,121 was recorded. Final reimbursement
was received from the insurance carrier on May 5, 1998.
Insurance recoveries for property damage exceeded the depreciated value of
the affected assets. As a result, the company recognized in income for the
period ended March 31, 1998, an adjustment to the carrying value of the
facility amounting to $1,154,359.
7. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 is effective for periods beginning after December
15, 1997. SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that results from recognized transactions and other economic
events of the period other than transactions with owners in their capacity
as owners. In consolidating the Netherlands subsidiary, currency
translation adjustments can create comprehensive income. As of June 30,
1998, currency translation adjustments did not create any material
adjustments to net income to derive comprehensive income (refer to the
Statements of Consolidated Changes in Shareholders' Equity).
9
<PAGE>
8. CONTINGENCIES
On May 12, 1998, a patent infringement claim was filed in U.S. District
Court in Florida by Micro Typing Systems, Inc. and Stiftung fur
Diagnostiche Forschung (the foundation) alleging that the Gamma ReACT Test
System infringes U.S. Patent #5,512,432 granted to the foundation April 30,
1996. The plaintiffs seek a permanent injunction against the continued
alleged infringement, an award of treble damages with interest and costs,
and reasonable attorney's fees. On January 23, 1998, a former employee
filed suit in Harris County District Court, Texas alleging that the company
breached a verbal contract to provide certain post-employment benefits. The
plaintiff seeks specific performance of the contract or not less than
$1,500,000 in monetary damages. Management is confident that the ReACT
technology does not infringe any claims made in the foundation's patent and
that the company has not breached any obligations to the former employee.
Since these matters are in the earliest stages of proceedings and due to
uncertainties involved in litigation, management cannot predict the
likelihood of a particular outcome or estimate the financial impact of an
unfavorable resolution of either matter. However, an unfavorable outcome
could have a material adverse effect upon the business and the results of
operations in a given reporting period. As of June 30, 1998, an estimate of
$180,000 of litigation costs was recorded related to the patent
infringement suit. The company will continue to evaluate the situation and
anticipates incurring additional amounts in future periods.
9. SALES OF EXEMPT SECURITIES
In June 1997, the company granted Cyn Del & Co., Inc. a warrant to purchase
100,000 shares of the company's common stock at an exercise price of $5.00
per share (the "Warrant") pursuant to Section 4(2) of the Securities Act of
1933. The Warrant is exercisable by Cyn Del & Co., Inc. at any time prior
to June 19, 2002. The company granted the Warrant as partial consideration
for consulting services to be provided to the company's board of directors
by Cyn Del & Co., Inc.
10
<PAGE>
10. OPERATIONS BY GEOGRAPHIC AREA
The company operates within one dominant segment - the manufacture and sale
of blood bank and diagnostic products - and has no customer which accounts
for 10% or more of its total sales. During the three-month periods ended
June 30, 1998 and 1997, the company operated in two geographic areas, the
United States and Europe.
<TABLE>
THREE MONTHS ENDED
JUNE 30,
------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Net sales to unaffiliated customers:
United States............................................ $ 2,828 $ 3,083
Europe................................................... 646 641
Pacific Region........................................... 293 360
Mexico, Central and South America........................ 345 390
Middle East.............................................. 158 296
Other.................................................... 97 58
---------- ----------
Total.................................................. $ 4,367 $ 4,828
---------- ----------
---------- ----------
Export sales from United States to unaffiliated customers:
Europe................................................... $ 77 $ 358
Pacific Region........................................... 293 355
Mexico, Central and South America........................ 344 389
Middle East.............................................. 158 296
Other.................................................... 96 57
---------- ----------
Total.................................................. $ 968 $ 1,455
---------- ----------
---------- ----------
Sales between geographic areas:
United States to Europe.................................. $ 353 $ 126
---------- ----------
Income (loss) before income taxes:
United States............................................ $ (345) $ 411
Europe................................................... 56 83
---------- ----------
Total.................................................. $ (289) $ 494
---------- ----------
---------- ----------
6/30/98 3/31/98
---------- ----------
Identifiable assets:
United States......................................... $ 18,590 $ 19,213
Europe................................................ 821 595
Corporate............................................. 2,288 2,325
---------- ----------
Total............................................... $ 21,699 $ 22,133
---------- ----------
---------- ----------
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998
Revenues declined 10% for the three months ended June 30, 1998 compared
with the same period in 1997. ReACT equipment and consumables accounted for only
3% of total sales. Management now believes that it was overly optimistic about
consumable sales during the start-up phase, underestimating the impact of the
regulatory burden imposed on domestic customers when adopting new testing
technologies. Technical manufacturing issues that arose during the ramp-up to
full-scale production of test strips also affected ReACT sales. Overall,
domestic sales fell by 8% and international sales decreased by 12%. On the
domestic front, sales of core products are still being influenced by the loss of
purchasing group contracts that weakened third and fourth quarter sales in
fiscal 1998. Revenues for the quarter remained relatively constant compared to
the fourth quarter of fiscal 1998, so the effect of the lost contracts appears
to have leveled off. The company is redirecting its domestic sales efforts to
focus on smaller accounts, which tend not to be affiliated with large groups,
and is aggressively seeking new group contracts. Domestic revenues should also
improve as additional ReACT systems are placed and come on line. The decline in
international sales was due mostly to the timing of orders and the trend should
reverse itself during the next three quarters. For example, last year the
quarter benefited from a Saudi Arabian contract that has yet to be awarded for
1998-99.
Gross margin as a percentage of sales declined to 51% in 1998 from 55% in
1997. ReACT sales carried a lower margin than can be expected in the future, due
to the emphasis on equipment rather than consumables, i.e., reagent red cells
and test strips. Additionally, manufacturing efficiency was lower than usual
because of production slowdowns related to the September 1997 fire and to
decreased domestic demand for certain products mentioned above.
Selling expense increased 8% for the first quarter; 51% of the increase was
due to additional sales staff at Gamma Biologicals, B.V to market ReACT in
Europe and support the European distributor network. Gamma B.V. assumed
responsibility for servicing all European accounts, with the exception of our
Italian distributor, on April 1, 1998. Domestically, expenses rose with
increased marketing, demonstrations and training for customers interested in the
ReACT system. General and administrative expenses rose 43% over the prior year
mainly due to $180,000 in estimated litigation costs related to ReACT.
Litigation costs are expected to continue as the patent infringement lawsuit
progresses throughout the year. Shipping and warehouse expenses increased 19%
compared with the same period in 1997. Last August the company received a 3%
rate increase from our predominant domestic freight carrier that has not been
passed on to customers. In addition, we incurred certain rush postage and
freight charges for filling backorders as production resumed after the fire.
Research and development expenses fell 23% over the first quarter last year
as ReACT moved to its introductory marketing phase. Last year's first quarter
included expenses applicable to the since-discontinued biosensor project and for
a chief science officer position that no longer exists.
12
<PAGE>
The contribution of interest income fell 28%, as less cash was available
for investment. Interest expense more than doubled over last year with the
addition of the capital lease for the ReACT filling and sealing machine.
The provision for income taxes decreased due to the loss in the current
quarter.
The company recognizes the need to ensure that its operations will not be
adversely affected by Year 2000 software failures. Software failures due to
processing errors arising from calculations using the Year 2000 date are a known
risk. The company is addressing this risk to the availability and integrity of
financial systems and the reliability of operational systems and is
communicating with suppliers of goods and services to coordinate Year 2000
compliance. The risks and costs associated with the company's current computing
portfolio have been assessed; estimated costs to achieve compliance should not
exceed $50,000 and will be period costs for this fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows increased approximately $540,000 during the three month
period ended June 30, 1998 compared with the same period in 1997. Operating cash
flows improved significantly due to the following factors. In May 1998 the
company received final reimbursement for fire damages amounting to $1,001,121.
While the accounts receivable turn held at 73 days, receivables decreased
approximately $400,000 over last year with the decline in sales. Contrastingly,
inventory rose over $800,000 as the investment in ReACT equipment reached
$745,000 at June 30, 1998.
The company has contracted with a medical equipment manufacturer to provide
automated dispensing and reading devices for use with the Gamma-ReACT Test
System. The contract commits the company to purchase 50 dispensers and/or
readers during the first three years following FDA clearance to market the
devices in the United States. Our estimated cost should range between $650,000
and $1,700,000, depending on product mix.
Fiscal 1999 cash flows will be affected by the ramp-up of production at
Shanghai Gamma. The company is committed to providing manufacturing equipment
and know-how to the joint venture, as well as working capital, consisting of
cash and inventory. The timing and amount of the noncash contributions has not
yet been determined; the company expects to fund a cash contribution of $225,000
in the fall of 1998. Limited product shipments from the joint venture could also
begin this fall.
On May 12, 1998, a claim of patent infringement was filed in the U.S.
District Court in Miami, Florida, alleging that the Gamma-ReACT Test System
infringes a patent granted to Stiftung fur Diagnostiche, a Swiss foundation.
Management is confident that the ReACT technology does not infringe any claims
made in the plaintiff's patent and intends to vigorously defend the company's
position. Since the suit is in the earliest stage of proceedings, management
cannot assess the likelihood of a particular outcome or estimate the financial
impact of an unfavorable resolution. We do expect that litigation costs will
continue to have a material impact on fiscal 1999 financial condition and
results of operations.
Although the additional litigation costs will strain operating cash flows
during fiscal 1999, management believes that operating cash flows will be
sufficient to meet future operating needs, providing that ReACT sales improve
and international sales reach 1998 levels. We also
13
<PAGE>
look to improve operating cash flows through better inventory management and
the elimination of expenses that do not contribute to product quality,
customer service or the welfare of our employees. The company's existing
capital resources, consisting of $1,413,000 in cash and short-term
investments and a $1,500,000 revolving credit line, should be sufficient to
support development of the Shanghai Gamma joint venture and planned capital
improvements during the next 12 months.
Management's Discussion and Analysis includes certain forward-looking
statements reflecting the company's expectations in the near future,
particularly the anticipated contributions of the Gamma-ReACT Test System and
the Shanghai Gamma joint venture. However, many factors which may affect actual
results, especially market conditions and changing regulations, are difficult to
predict. Accordingly, there is no assurance that the company's expectations will
be realized.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits, Part II
(27) Article 5 Financial Data Schedule
(b) Reports on Form 8-K - None
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
GAMMA BIOLOGICALS, INC.
August 13, 1998 By: /s/ David E. Hatcher
----------------------------------
David E. Hatcher
President
(Chief Executive Officer)
August 13, 1998 By: /s/ Margaret J. O'Bannion
----------------------------------
Margaret J. O'Bannion
Vice President - Finance
(Chief Financial Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF CONSOLIDATED INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,312,797
<SECURITIES> 100,000
<RECEIVABLES> 3,576,081
<ALLOWANCES> 103,000
<INVENTORY> 4,460,361
<CURRENT-ASSETS> 10,289,925
<PP&E> 15,035,374
<DEPRECIATION> 6,591,401
<TOTAL-ASSETS> 21,698,624
<CURRENT-LIABILITIES> 1,763,955
<BONDS> 782,520
0
0
<COMMON> 479,111
<OTHER-SE> 17,818,838
<TOTAL-LIABILITY-AND-EQUITY> 21,698,624
<SALES> 4,366,544
<TOTAL-REVENUES> 4,366,544
<CGS> 2,154,886
<TOTAL-COSTS> 3,821,330
<OTHER-EXPENSES> 849,769
<LOSS-PROVISION> (11,041)
<INTEREST-EXPENSE> 25,432
<INCOME-PRETAX> (288,502)
<INCOME-TAX> (131,600)
<INCOME-CONTINUING> (156,902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (156,902)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
