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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 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 OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
3700 MANGUM ROAD 77092
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (713) 681-8481
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK $.10 PAR VALUE AMERICAN STOCK EXCHANGE
COMMON STOCK PURCHASE RIGHTS AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant.
As of June 22, 1998: Common Stock, $.10 par value -- $22,550,590
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as at the latest practicable date.
As of June 22, 1998: Common Stock, $.10 par value -- 4,625,762 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to shareholders for the year ended March 31, 1998
are incorporated by reference into Part I and Part II.
Portions of the proxy statement for the annual meeting to be held August
11, 1998 are incorporated by reference into Part III.
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P A R T I
ITEM 1. BUSINESS.
Gamma Biologicals, Inc. (which, together with its subsidiaries is herein
referred to as the "company" or "Gamma") manufactures reagents and systems used
for IN-VITRO diagnostic testing. The reagents are sold to transfusion
departments of hospitals, blood collection centers, medical laboratories and
research institutions where they are used to detect the presence of
diagnostically significant substances in biological fluids, primarily human
blood. The company also develops test systems, which use certain of the
company's reagents and serve to standardize test procedures. See "New Technology
- - Gamma ReACT-TM- Test System".
The company's current products are used in a number of applications,
including:
- grouping donor and patient bloods and performing compatibility tests
prior to transfusion
- detecting hemolytic disease of the newborn
- identifying antibodies and certain inherited blood group antigens
Gamma markets its products to over 3,500 hospitals, blood centers and
laboratories in the United States and Canada, and to dealers in approximately 50
countries. Domestic sales are made through the company's direct sales force, as
well as through independent distributors. Internationally, the company sells its
products and products manufactured by others through its subsidiary, Gamma
Biologicals, B.V., and independent distributors.
CURRENT PRODUCTS
Most of the company's sales are derived from products used in tests
performed to determine the ABO and Rh groups of hospital patients and blood
donors, to detect and identify antibodies, to confirm compatibility between
blood donors and patients, and in routine prenatal care. Antibodies are serum
components produced in reaction to the introduction of foreign substances
into the body through transfusion, pregnancy or other mechanisms. The
company's reagent red cell products are used to test patients' blood
specimens for antibodies and, if antibodies are present, to determine their
identity, thereby enabling suitable donor blood to be selected. The selection
of proper donor blood is also aided by testing with the company's line of
other blood grouping reagents. Blood grouping reagents are products prepared
from serum (the liquid portion) of blood drawn from immunized human donors,
from antibodies secreted by monoclonal cell lines (hybridomas), and from
certain seed extracts (lectins). After an appropriate donor blood has been
selected for transfusion to a patient, a direct test of compatibility is
commonly performed using patient and donor bloods. The company's antiglobulin
reagents (commonly known as "Coombs reagents") are used in all stages of
these procedures beyond initial blood grouping.
BLOOD BANK PRODUCTS. This group includes blood grouping reagents, Coombs
reagents, antibody potentiators, test cell products, the ReACT Test System,
quality control systems and certain specialty products.
BLOOD GROUPING REAGENTS are used to determine the four major blood groups
(A, B, AB and O) and six factors in the Rh blood group system, and include other
products utilized to detect blood group factors in the eight other blood group
systems.
COOMBS REAGENTS are used in blood grouping, antibody detection and
identification procedures and in the diagnosis of hemolytic disease of the
newborn, as well as autoimmune hemolytic anemia. The company presently markets
five Coombs products in three different specificities.
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ANTIBODY POTENTIATORS are solutions added to blood testing systems to
enhance their sensitivity. Improved sensitivity is also achieved by the use of
certain proteolytic enzymes. The company presently markets six antibody
potentiators and two enzyme reagents.
REAGENT RED CELL PRODUCTS are used in conjunction with Coombs reagents or
with the Gamma ReACT Test System to detect and identify antibodies during
pregnancy and in patient and donor blood serums. The company presently
manufactures and sells 34 test cell products processed from human blood.
REAGENT QUALITY CONTROL (RQC-Registered Trademark-) KIT is a product
comprising three selected reagents, designed to enable hospital laboratories and
blood banks to test the effectiveness of reagents and to provide an organized
permanent record of the test results, as required by various regulatory
agencies.
SPECIALTY REAGENTS include a screening test for the detection of
significant fetal-maternal hemorrhage, a self-evaluation system that is designed
both to determine technical proficiency and to provide educational content, a
simpler system for competency testing, and seven products for the resolution of
unusual blood groups or antibody detection problems.
GAMMA PRODUCT GROUP TABLE
<TABLE>
NUMBER OF
BASIC PRODUCT GROUPS PRODUCTS MAIN USE OF PRODUCTS
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<S> <C> <C>
BLOOD GROUPING REAGENTS
ABO
Monoclonal 4 Routine testing of patients and donors and in
Lectin 2 prenatal care.
Rh
Human source 5 Rh phenotyping in selected cases; routine
Monoclonal 6 testing of patients and donors and in
prenatal care.
Rh Control 2 Routine control of Rh grouping tests.
Other
Human source 12 To aid in the selection of blood for patients
Monoclonal 8 with blood group antibodies.
COOMBS REAGENTS
Monoclonal 5 With other products, in routine antibody
detection (including pretransfusion
compatibility testing), antibody
identification and the diagnosis of certain
diseases.
ANTIBODY POTENTIATORS 6 With other products, in all antibody
detection and identification tests.
REAGENT RED CELL PRODUCTS
Serum ABO Grouping 4 With ABO blood grouping reagents, in routine
ABO grouping tests.
Antibody Detection 19 With Coombs reagents and antibody
potentiators or with the ReACT-TM- system, in
detection of antibodies in patients and
donors, and in prenatal care.
(TABLE CONTINUED ON FOLLOWING PAGE)
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NUMBER OF
BASIC PRODUCT GROUPS PRODUCTS MAIN USE OF PRODUCTS
-------------------- --------- --------------------
REAGENT RED CELL PRODUCTS (continued)
Antibody Identification 7 With Coombs reagents and antibody
potentiators, in identification of
antibodies detected in routine testing.
Reagent Control 4 Routine control of all Coombs tests and
control of the test for weak D (Du test),
mainly on donors.
REACT-TM- TEST SYSTEM 1 IgG antibody detection of sensitized red
blood cells by adherence to Protein A and
Protein G. System consists of centrifuge,
incubator, viewbox, test strips, workstation
and diluent.
RQC-Registered Trademark- 1 Routine quality control of blood bank
KIT reagents and procedures.
SPECIALTY REAGENTS
Fetal Bleed Screen Kit 1 To detect excessive fetal-maternal
hemorrhage in Rh-negative women.
ELU-KIT-Registered
Trademark- II 1 To aid in identification of antibodies
(especially those bound to red cells in the
circulation).
Blood Group Substances 2 To assist in antibody identification
procedures.
Enzymes 2 To assist in antibody detection and
identification.
Gamma-Quin-Registered 1 To remove cell-bound antibody in some
Trademark- disease states to enable patient cells to be
tested with blood grouping reagents.
EGA-TM-Kit 1 To remove cell-bound antibody in some
disease states to enable patient cells to be
tested with blood grouping reagents.
Lectins 2 For the investigation of polyagglutination.
RiSE-TM- 1 To determine technical proficiency and
provide continuing education.
Tech-Chek-TM- 1 To test technical staff for competency.
OTHER SPECIALTY ITEMS
PV-Plates-TM- 2 Extended blood grouping on selected samples,
for forensic use.
SegmentSampler-TM- 1 Disposable blood handling safety device.
Saber-TM- 1 Segment sampling device.
SureClean 1 To disinfect and clean cell washers.
</TABLE>
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NEW TECHNOLOGY
GAMMA REACT-TM- TEST SYSTEM. Gamma has developed and received a patent, in
September 1997, on a microcolumn technology to be used for red cell affinity
testing. Products based on this technology should help Gamma compete with other
microcolumn tests marketed very successfully in Europe since 1988 and recently
introduced in the United States. The acronym ReACT (Red Cell AdherenCe
Technology) has been chosen as a commercial trade name for the product line.
The principle of ReACT is based on the affinity adherence of red cells to
an immunologically active matrix. The matrix consists of specially treated
agarose beads. Custom designed disposables and dedicated centrifuge equipment
have been developed to provide customers with an easy-to-use and inexpensive
testing system.
The company's first ReACT products are used for antibody detection and
identification. Products to be used for red cell antigen typing in the ReACT
Test System are currently under development. The company has contracted with a
medical equipment manufacturer to provide automated dispensing and reading
devices for use with the ReACT Test System, and plans to develop a fully
automated system in the future. Gamma received FDA clearance to market the
first ReACT products in the United States in September 1997. Sales of ReACT to
international distributors began in September 1997; active U.S. sales efforts
began April 1, 1998, although a few systems were placed with U.S. customers late
in fiscal 1998. See "Item 3. - Legal Proceedings" regarding a claim of patent
infringement by the company.
PRODUCTS UNDER DEVELOPMENT
GAMMA-CLONE-Registered Trademark- (MONOCLONAL) REAGENTS. The development
of hybridoma technology has led to a ready availability of monoclonal
antibodies, which have had a major impact on the design and manufacture of
immunodiagnostic reagents. The company has recognized the potential for the
application of this new technology to several of its blood bank product lines,
and has pursued a program of introducing monoclonal-based products wherever the
technology proves to be advantageous.
The company currently markets eighteen FDA-licensed blood grouping reagents
manufactured by hybridoma technology. Its five monoclonal Coombs reagents
include the first FDA-licensed Anti-IgG. The company owns or has exclusive use
of the raw material sources (clones) for twelve of the blood grouping reagents
and all of the Coombs products; these clones are grown in-house to produce
source material for manufacturing the relevant products. A license supplement
was approved during fiscal 1998 for an Anti-e reagent manufactured from raw
material purchased from another company. Raw materials for the remaining
products are also purchased from a single supplier. Should the supply of these
materials from this source be interrupted, the company anticipates that it could
locate alternative sources of supply. The company is committed to a program
aimed at developing clones for all blood grouping reagents.
In May 1996, Gamma filed a license application for a monoclonal Anti-c
reagent based on a cell line of which the company has exclusive use. This
application is still awaiting approval. The company's premarket notification
submission for a product intended to assist in the testing of patients with
auto-immune hemolytic anemia (EGA-TM-Kit) has been cleared by the FDA, along
with the non-licensable components of the ReACT Test System.
We have contracted with Olympus America, Inc. to develop blood grouping
reagents and reagent red blood cells ready to use on that company's PK7200
immunohematology analyzers. Applications for the necessary license supplements
were made before the end of calendar 1997. Reagents for Rh phenotyping and
typing for the K antigen on the PK7200 have been developed, and field-test
studies to provide data to support an application to the FDA started in June
1998.
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PRODUCTION AND QUALITY CONTROL
The company believes that its reputation in the industry as a source of
quality products and services is largely attributable to the expertise of its
technical employees and its maintenance of rigid quality control procedures at
every step of the manufacturing process.
Raw materials for the FDA-licensed products manufactured and sold by the
company are obtained from several sources. The sources for many of the company's
blood grouping reagent products are human plasma obtained from FDA-licensed
establishments and monoclonal antibodies. Test cell products are manufactured
from whole blood drawn from local donors or purchased from licensed blood banks.
The company believes that the available sources of supply for all raw materials
are adequate for its present and anticipated needs. The company is not dependent
on any single source for any of its raw materials, other than six of its current
Gamma-clone-Registered Trademark- products (see above).
Once received, raw materials are subjected to a series of manufacturing and
quality control steps, which vary according to the product. FDA regulations
require samples of each finished lot of all blood grouping and Coombs reagents
to be submitted to the Center for Biologics Evaluation and Research for approval
of release prior to shipment. The FDA has granted the company exemptions from
the lot release requirements for Coombs reagents, for one of its Rh reagents,
for three of its other monoclonal blood grouping reagents, and also for two of
its monoclonal ABO reagents. The remaining blood grouping reagents remain
subject to this provision of the regulations. Test cell products, though also
licensed, do not require prior FDA approval on a lot-by-lot basis.
The products sold by the company that are not required to be licensed by
the FDA (including antibody potentiators, diagnostic and specialty reagents)
fall into two categories: those manufactured by the company from raw materials
acquired from various sources, and those purchased from outside manufacturers
for distribution by the company. All such products are manufactured in
accordance with a Quality System as promulgated by the FDA. See "Regulation".
The company is actively pursuing ISO 9001 certification and expects to obtain
certification by the end of fiscal 1999.
The company maintains product liability insurance against bodily injury and
property damage in the amount of $10,000,000.
MARKETING AND SERVICES
The company's marketing strategy is to build a broad base of customer
loyalty by providing a wide variety of quality products, marketed by a highly
qualified sales force and supported by in-house technical assistance. The
company believes that responsiveness to customer needs, both in the provision of
services and the introduction of new products, is the key to success.
The company sells its products to hospitals, blood banks, the United States
armed forces, and university and private research institutions throughout the
world. In the United States and Canada, the company is directly represented by
19 full-time salespersons. Most members of the sales force have degrees in
medical technology or blood banking experience. Each salesperson makes direct
calls on pathologists, chief blood bank technologists and purchasing agents at
institutions in defined geographic areas. The company also markets its products
domestically through selected distributors, who sell to small hospitals,
laboratories and doctors' offices. Internationally, the company is represented
by its subsidiary, Gamma Biologicals, B.V., and independent dealers.
Management believes that timely delivery of its products to customers is an
important element of its marketing and sales strategy. The company maintains an
inventory sufficient to allow prompt response to customer needs. The company
sells test cell products and its RQC and Tech-Chek Kits on standing orders for
shipment every two, three or four weeks. The RiSE educational product is shipped
quarterly. All contracts for company products may be terminated at any time
without penalty by either the customer or the company.
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To support its sales force and dealers, the company participates in a
number of educational programs, with management and employees serving as
speakers or faculty members in numerous domestic and international workshops and
conventions. This participation provides visibility for the company and enhances
its reputation in the scientific community. The company also conducts in-house
training programs for blood bank personnel. In addition, the company maintains a
reference laboratory, recognized by the American Association of Blood Banks,
which employs four persons (including two persons registered as blood bank
specialists by the American Society of Clinical Pathologists) and provides
consulting services for hospitals and blood banks with rare or difficult blood
testing problems. The reference laboratory often serves as a means of
introducing the company and its products to potential customers, generating new
products in response to customer needs and providing ongoing quality control of
the company's blood bank products. New discoveries made in the course of
investigating problems referred for consultation are regularly reported in
scientific literature or at scientific meetings.
Sales to the company's six largest domestic customers (two of which are
regional laboratory supply dealers) represented 5.5% of the company's net sales
for fiscal 1998, 5.7% for fiscal 1997 and 5.8% for fiscal 1996.
Approximately 35% of the company's net sales in fiscal 1998 were made to
foreign customers. In fiscal 1998 the company's export sales were to customers
in Japan ($781,000), the Netherlands ($688,000), Spain ($559,000), Italy
($417,000), Brazil ($396,000), and over 50 other countries worldwide.
REGULATION
The company operates under U.S. Government Establishment License No. 435,
granted by the National Institutes of Health in 1971. The terms of the license
subject the company to stringent manufacturing and quality control standards,
and the license may be suspended or revoked by the FDA for cause at any time.
Such revocation would cause the company to cease business. The company's blood
grouping and Coombs reagents, as well as its test cell products, must be
licensed by the FDA pursuant to the Public Health Service Act and are
manufactured in accordance with defined standards.
In addition, the Federal Food, Drug and Cosmetic Act and the Safe Medical
Devices Act, together with regulations issued or authorized thereunder, provide
for regulation by the FDA of the marketing, manufacture, labeling, packaging and
distribution of medical devices, including most of the company's non-licensed
products. Among the applicable regulations are requirements that medical device
manufacturers register with the FDA, list devices manufactured by them, and file
various reports. Regulations covering The Quality System for Medical Devices set
forth requirements for, among other things, the company's manufacturing
processes and associated record-keeping and maintenance. Certain requirements
must be met before initial marketing of medical devices, ranging from a minimum
obligation to notify the FDA before commencing marketing of a product
substantially equivalent to devices already in commerce, to a maximum obligation
to comply with the potentially expensive and time-consuming process of testing
necessary to support an application for premarket approval. The FDA also has the
authority, which it has so far exercised only to a limited degree, to issue
performance standards to be met by most of the types of non-licensed products
manufactured by the company. The company anticipates no difficulty in meeting
the performance standards for the products as promulgated by the FDA.
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None of the company's current or proposed products, except those labeled
for forensic use only, can be marketed in the United States without the licenses
or registrations required by the FDA. Unscheduled FDA inspections of the
company's facilities occur from time to time to determine compliance with
applicable FDA regulations. To date, the company believes that it has
satisfactorily complied with requirements imposed by the FDA, OSHA, EEOC and
other government agencies. The company also believes that the manufacturing and
quality control procedures it employs conform to requirements of the Quality
System regulations.
MARKETS AND COMPETITION
Management believes that the world market for blood bank reagent products
is more than $160 million per year, with about 40% of the market being in the
United States. There are three other domestic companies that actively compete
with the company, one of which is Ortho Diagnostic Systems, a division of
Johnson and Johnson, Inc., which the company believes accounts for about 50% of
all domestic sales. Other competitors include Immucor, Inc. and BCA, a division
of Biopool International.
Competition is based on quality of product, price, the size and talent of
sales forces, ability to furnish a range of existing and new products, customer
services and continuity of product supply. During the past several years, the
industry has experienced aggressive price competition, particularly among
manufacturers that target large hospitals and institutions as key customers. In
spite of this competitive environment, the company has maintained its worldwide
sales and increased market share outside the U.S., particularly in Latin
America. Management believes that this is due to the company's emphasis on
product quality, the introduction of new products, specialty products, customer
service and training.
RESEARCH AND DEVELOPMENT
The company's strategy for growth includes internal research and
development, technology acquisition and worldwide marketing. The research and
development program is based upon the allocation of available resources among
new product development, process development, product and process improvement,
and technical services to manufacturing and marketing.
Any new product developed by the company will require, prior to its
domestic sale, licensing or clearance to market by the FDA. There can be no
assurance that any such product will be so licensed or cleared, or that it will
gain acceptance in the marketplace.
In fiscal 1998, 1997, and 1996, the company expended $1,247,000,
$1,449,000, and $1,349,000 respectively, for research and development on
monoclonal, microcolumn and electro-biosensor technologies. The company
engaged in no customer-sponsored research during these periods.
The company's funding of electro-biosensor research at the University of
Wollongong, Australia, was discontinued in fiscal 1998. Although feasibility
and specificity of the test system were proven in a laboratory setting,
estimates of additional time and cost required to commercialize the technology
exceeded the company's expectations. Management believes that currently
available resources will be better utilized in projects with greater short and
intermediate term potential, such as the development of additional microcolumn
products and the automation of the ReACT Test System.
PATENTS AND TRADEMARKS
In May 1994, the company applied for United States and international
patents covering a new antigen/antibody detection procedure using an affinity
adherence technology; the U.S. patent was issued in September 1997. See "New
Technology- Gamma ReACT-TM- Test System"and "Item 3. - Legal Proceedings"
regarding a claim of patent infringement by the company. An additional patent
application has been submitted covering the ReACT technology.
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The company's trademark rights to the mark "Gamma" have been federally
registered. The company holds nine different trademark registrations for various
uses of "Gamma" and claims trademark rights in respect of other brand names
utilized to identify the company's products. The company presently owns a number
of federal and state registrations and has an aggressive policy of registering
its trademark rights, where such is deemed available. There can be no assurance
that any of the company's registrations will be enforceable.
EMPLOYEES
The company has 134 full-time employees, of whom 38 hold advanced technical
degrees or certifications in medical technology. Of the total, 45 are sales,
marketing and customer-support personnel, 58 are engaged in manufacturing and
quality control, and the remainder serve in other capacities. The company has
experienced a low turnover rate among its employees and considers its employee
relations to be excellent. None of the company's employees is represented by a
union.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The company operates in one industry segment and two geographic areas, the
United States and Europe.
ITEM 2. PROPERTIES.
The principal manufacturing, research, shipping, sales and administrative
functions of the company are conducted in a 41,000 square foot building located
in northwest Houston on a three-acre tract of land owned by the company. The
land and building are subject to a first lien mortgage. Management believes that
the facility is both suitable and adequate for current production needs and has
no plans for expanding its domestic facilities in fiscal 1999. Gamma
Biologicals, B.V. leases approximately 900 square feet of office and warehouse
space in Amsterdam, the Netherlands, which management believes is adequate for
current needs.
ITEM 3. LEGAL PROCEEDINGS.
On May 12, 1998, the company received notification that a claim of patent
infringement had been filed on that date in U.S. District Court, Southern
District of Florida, Miami Division, by Micro Typing Systems, Inc. and Stiftung
fur Diagnostiche Forschung (the Foundation). The claim alleges that the
recently introduced Gamma ReACT Test System (See "New Technology - Gamma
ReACT-TM- Test System") infringes U.S. patent No. 5,512,432 granted to the
Foundation April 30, 1996. The plaintiffs seek a preliminary and permanent
injunction against the continued alleged infringement by the company, an award
of treble damages, with interest and costs and reasonable attorney's fees.
Management is confident that the ReACT technology does not infringe any claims
made in the Foundation's patent; however, an unfavorable outcome in this action
could have a material adverse effect upon the business and the results of
operations in a given reporting period. Since this matter is in the earliest
stage 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.
On January 23, 1998, a former employee filed a suit in the District Court
of Harris County, Texas, alleging that the company breached a verbal contract to
provide certain post-employment benefits. The plaintiff seeks specific
performance of the contract or, in the alternative, money damages in an amount
not less than $1,500,000. Management denies that it has breached any
obligations to the plaintiff, and believes that it is unlikely that the outcome
of this case will have a material impact on the financial condition of the
company. The Company is vigorously contesting this claim and believes that its
positions are sustainable.
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The company is involved in various other legal actions that are in various
stages of litigation and investigation by the company and its legal counsel.
After reviewing all other actions pending or threatened involving the company,
management believes that while the resolution of any matter may have an impact
on the financial results of the period in which the matter is settled, their
ultimate resolution will not have any material adverse effect upon the business
or consolidated financial position of the company. Since these matters are in
various stages of proceedings, future developments could cause management to
revise its assessment of these matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 1998, no matter was submitted to a vote
of security holders of the company.
P A R T II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information contained under "Market for Registrant's Common Equity and
Related Shareholder Matters" on page 36 of the company's annual report to
shareholders for the year ended March 31, 1998, is incorporated herein by
reference. See also Notes 6 and 7 of Notes to Consolidated Financial Statements
on pages 30 and 31 of the company's annual report to shareholders for the year
ended March 31, 1998, which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information contained under "11-year Summary of Selected Financial
Data" on the inside front cover and page 1 of the company's annual report to
shareholders for the year ended March 31, 1998, is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 17 through 22 of the
company's annual report to shareholders for the year ended March 31, 1998, is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements of the company and its
subsidiaries, included on pages 23 through 35 of the company's annual report to
shareholders for the year ended March 31, 1998, are incorporated herein by
reference:
Statements of Consolidated Income -- Years ended March 31, 1998, 1997 and
1996
Consolidated Balance Sheets -- March 31, 1998 and 1997
Statements of Changes in Shareholders' Equity -- Years ended March 31,
1998, 1997 and 1996
Statements of Consolidated Cash Flows -- Years ended March 31, 1998, 1997
and 1996
Notes to Consolidated Financial Statements
The information contained under "Quarterly Financial Data (unaudited)" on
page 36 of the company's annual report to shareholders for the year ended March
31, 1998, is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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P A R T III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under "Proposal No. 1 - Election of Directors",
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" on pages 3, 4, 5, 6 and 12 of the company's proxy statement dated
June 30, 1998, which has been filed with the Securities and Exchange Commission,
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under "Executive Officers", "Severance
Agreements", and "Split-Dollar Agreements" on pages 5 through 12 (except for the
Compensation/Stock Option Committee Report and Performance Graph therein) of
the company's proxy statement dated June 30, 1998, which has been filed with the
Securities and Exchange Commission, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under "Common Stock Outstanding and Principal
Holders Thereof" on pages 2 and 3 of the company's proxy statement dated June
30, 1998, which has been filed with the Securities and Exchange Commission, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under "Certain Relationships and Related
Transactions" on page 12 of the company's proxy statement dated June 30, 1998,
which has been filed with the Securities and Exchange Commission, is
incorporated herein by reference.
P A R T IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) AND (2) FINANCIAL STATEMENTS AND RELATED SCHEDULES
The response to this portion of Item 14 is submitted as a separate
section of this report.
(3) EXHIBITS
The response to this portion of Item 14 is submitted as a separate
section of this report.
(b) REPORTS ON FORM 8-K
No Report on Form 8-K was filed by the company during the quarter
ended March 31, 1998.
(c) EXHIBITS
See Item 14(a)(3), above.
(d) FINANCIAL STATEMENT SCHEDULES
Such schedules are not required or are disclosed in the financial
statements.
-11-
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.
GAMMA BIOLOGICALS, INC.
By: DAVID E. HATCHER
--------------------------------------------------
(DAVID E. HATCHER, CHAIRMAN OF THE BOARD
OF DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE OFFICER)
Dated: June 26, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
SIGNATURES TITLE DATE
----------- ----- ----
<S> <C> <C>
DAVID E. HATCHER Chairman of the Board of Directors, June 26, 1998
------------------ President and Chief Executive Officer
(DAVID E. HATCHER) (Principal executive officer)
MARGARET J. O'BANNION Senior Vice President--Finance and June 26, 1998
--------------------- Chief Financial Officer (Principal
(MARGARET J. O'BANNION) financial and accounting officer)
BETTY FRANCIS HATCHER Director and Executive Vice June 26, 1998
---------------------- President
(BETTY FRANCIS HATCHER)
BRYAN J. BRIEDEN Director June 26, 1998
------------------
(BRYAN J. BRIEDEN)
HAYLE B. RANDOLPH Director June 26, 1998
------------------
(HAYLE B. RANDOLPH)
RICHARD H. ASTER, M.D. Director June 26, 1998
------------------------
(RICHARD H. ASTER, M.D.)
H. H. (WILL) HARDEE Director June 26, 1998
---------------------
(H. H. (WILL) HARDEE)
</TABLE>
-12-
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) and (2)
GAMMA BIOLOGICALS, INC. AND SUBSIDIARIES
MARCH 31, 1998
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of the registrant and its
subsidiaries, included on pages 23 through 35 of the annual report of the
registrant to its shareholders for the year ended March 31, 1998, are
incorporated by reference in Item 8.
Statements of Consolidated Income -- Years ended March 31, 1998, 1997 and
1996
Consolidated Balance Sheets -- March 31, 1998 and 1997
Statements of Changes in Shareholders' Equity -- Years ended March 31,
1998, 1997 and 1996
Statements of Consolidated Cash Flows -- Years ended March 31, 1998, 1997
and 1996
Notes to Consolidated Financial Statements
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(3)
EXHIBIT INDEX
EXHIBITS
YEAR ENDED MARCH 31, 1998
GAMMA BIOLOGICALS, INC.
HOUSTON, TEXAS
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(3)
GAMMA BIOLOGICALS, INC. AND SUBSIDIARIES
MARCH 31, 1998
EXHIBIT
NUMBER
- -------
3(a) -- Restated Articles of Incorporation of the Company dated June
20, 1996. Incorporated by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the year ended March
31, 1996 (the "1996 Form 10-K").
(b) -- Amended and Restated Bylaws of the Company dated April 13,
1990. Incorporated by reference to Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the year ended March
31, 1990 (the "1990 Form 10-K").
4(a) -- Specimen Common Stock certificate of the Company. Incorporated
by reference to Exhibit 4(a) to the 1990 Form 10-K.
(b) -- Shareholder Rights Plan dated as of September 5, 1989.
Incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated September 5, 1989.
10(a) -- Restated and Amended Split-Dollar Agreement dated May 29, 1990
between the Company and David E. Hatcher. Incorporated by
reference to Exhibit 10(a) to the 1990 Form 10-K.
(b) -- Restated and Amended Split-Dollar Agreement dated May 29, 1990
between the Company and Betty F. Hatcher. Incorporated by
reference to Exhibit 10(b) to the 1990 Form 10-K.
(c) -- Restated and Amended Split-Dollar Agreement dated May 29, 1990
between the Company and Bryan J. Brieden. Incorporated by
reference to Exhibit 10(c) to the 1990 Form 10-K.
(d) -- Restated and Amended Split-Dollar Agreement dated May 29, 1990
between the Company and Larry E. Letwin. Incorporated by
reference to Exhibit 10(d) to the 1990 Form 10-K.
(e) -- Amendment to Restated and Amended Split-Dollar Agreement dated
May 8, 1991 between the Company and David E. Hatcher.
Incorporated by reference to Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended March 31, 1991
(the "1991 Form 10-K").
(f) -- Amendment to Restated and Amended Split-Dollar Agreement dated
May 8, 1991 between the Company and David E. Hatcher.
Incorporated by reference to Exhibit 10(f) to the 1991 Form
10-K.
<PAGE>
EXHIBIT
NUMBER
- --------
(g) -- Amendment to Restated and Amended Split-Dollar Agreement dated
May 8, 1991 between the Company and Betty F. Hatcher.
Incorporated by reference to Exhibit 10(g) to the 1991 Form
10-K.
(h) -- Amendment to Restated and Amended Split-Dollar Agreement dated
May 8, 1991 between the Company and Betty F. Hatcher.
Incorporated by reference to Exhibit 10(h) to the 1991 Form
10-K.
(i) -- Amendment to Restated and Amended Split-Dollar Agreement dated
May 8, 1991 between the Company and Bryan J. Brieden.
Incorporated by reference to Exhibit 10(i) to the 1991 Form
10-K.
(j) -- Amendment to Restated and Amended Split-Dollar Agreement dated
May 8, 1991 between the Company and Larry E. Letwin.
Incorporated by reference to Exhibit 10(j) to the 1991 Form
10-K.
(k) -- Split-Dollar Agreement dated March 25, 1993 between the Company
and Margaret J. O'Bannion. Incorporated by reference to Exhibit
10(l) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1993 (the "1993 Form 10-K").
(l) -- Split-Dollar Agreement dated March 25, 1993 between the Company
and Jimmie L. Turner. Incorporated by reference to Exhibit
10(m) to the 1993 Form 10-K.
(m) -- Split-Dollar Agreement dated March 25, 1993 between the Company
and Jimmie L. Turner. Incorporated by reference to Exhibit
10(n) to the 1993 Form 10-K.
(n) -- Split-Dollar Agreement dated May 5, 1995 between the Company
and Gary L. Parrish. Incorporated by reference to Exhibit
10(o) to the 1996 Form 10-K.
(o) -- Split-Dollar Agreement dated October 23, 1996 between the
Company and Raul Alvarez. Incorporated by reference to Exhibit
10(p) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1997 (the "1997 Form 10-K").
(p) -- Split-Dollar Agreement dated October 21, 1996 between the
Company and Susan A. Batcha. Incorporated by reference to
Exhibit 10(q) to the 1997 Form 10-K.
(q) -- Split-Dollar Agreement dated October 17, 1996 between the
Company and Thomas H. Frame. Incorporated by reference to
Exhibit 10(r) to the 1997 Form 10-K.
(r) -- Split-Dollar Agreement dated October 17, 1996 between the
Company and Marilyn K. Moulds. Incorporated by reference to
Exhibit 10(s) to the 1997 Form 10-K.
(s) -- Incentive Stock Option Plan of the Company. Incorporated by
reference to the Company's Proxy Statement dated June 25, 1987,
Exhibit A.
<PAGE>
EXHIBIT
NUMBER
- --------
(t) -- 1991 Employee Stock Option Plan of the Company. Incorporated by
reference to Exhibit 28.2 to the Company's Registration
Statement on Form S-8 (File No. 33-44950) dated January 6,
1992.
(u) -- 1991 Outside Director Stock Option Plan of the Company.
Incorporated by reference to Exhibit 28.3 to the Company's
Registration Statement on Form S-8 (File No. 33-44950) dated
January 6, 1992.
(v) -- 1995 Employee Stock Option Plan of the Company. Incorporated by
reference to the Company's Registration Statement on Form S-8
(File No. 333-01147) dated February 21, 1996.
(w) -- 1997 Outside Director Stock Option Plan of the Company.
Incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (File No. 333-40367) dated
November 17, 1997.
(x) -- 401(k) Retirement Savings Plan of the Company adopted July 1,
1992. Incorporated by reference to Exhibit 10(r) to the 1993
Form 10-K.
(y) -- Patent License Agreement effective May 12, 1997 between the
Company and Pasteur Sanofi Diagnostics. Incorporated by
reference to Exhibit 10(y) to the 1997 Form 10-K.
(z) -- Warrant to Purchase Common Stock dated June 19, 1997.
Incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997 (the "June 30, 1997 Form 10-Q").
(aa) -- Registration Rights Agreement dated June 19, 1997 between the
Company and Cyn Del & Company, Inc. Incorporated by reference
to Exhibit 10(b) to the June 30, 1997 Form 10-Q.
(bb) -- Term and Revolving Line of Credit Loan Agreement dated August
17, 1990 between Sterling Bank and the Company. Incorporated by
reference to Exhibit 10(v) to the 1991 Form 10-K.
(cc) -- Promissory Note dated November 2, 1990 payable to the order of
Sterling Bank by the Company. Incorporated by reference to
Exhibit 10(w) to the 1991 Form 10-K.
(dd) -- Employment Contract dated January 29, 1976 between the Company
and John Case. Incorporated by reference to Exhibit 10(aa) to
the Company's Annual Report on Form 10-K for the year ended
March 31, 1986.
(ee) -- Amended and Restated Severance Agreement dated February 19,
1996 between Betty F. Hatcher and the Company. Incorporated by
reference to Exhibit 10(y) to the 1996 Form 10-K.
(ff) -- Amended and Restated Severance Agreement dated February 19,
1996 between David E. Hatcher and the Company. Incorporated by
reference to Exhibit 10(aa) to the 1996 Form 10-K.
<PAGE>
EXHIBIT
NUMBER
- --------
(gg) -- Amended and Restated Severance Agreement dated
February 19, 1996 between Margaret J. O'Bannion and the
Company. Incorporated by reference to Exhibit 10(bb) to the
1996 Form 10-K.
(hh) -- Amended and Restated Severance Agreement dated February 19,
1996 between Jimmie L. Turner and the Company. Incorporated
by reference to Exhibit 10(cc) to the 1996 Form 10-K.
(ii) -- Severance Agreement dated December 19, 1995 between Gary L.
Parrish and the Company. Incorporated by reference to Exhibit
10(dd) to the 1996 Form 10-K.
(jj) -- Severance Agreement dated August 12, 1996 between Raul F.
Alvarez and the Company. Incorporated by reference to Exhibit
10(ii) to the 1997 Form 10-K.
(kk) -- Severance Agreement dated August 12, 1996 between Susan A.
Batcha and the Company. Incorporated by reference to Exhibit
10(jj) to the 1997 Form 10-K.
(ll) -- Severance Agreement dated August 12, 1996 between Thomas H.
Frame and the Company. Incorporated by reference to Exhibit
10(kk) to the 1997 Form 10-K.
(mm) -- Severance Agreement dated August 12, 1996 between Marilyn K.
Moulds and the Company. Incorporated by reference to Exhibit
10(ll) to the 1997 Form 10-K.
11 -- Statement Regarding Computation of per Share Earnings.
Incorporated by reference to the Company's Statements of
Consolidated Income for the years ended March 31, 1998, 1997
and 1996 on page 23 of the Company's Annual Report to
Shareholders for the year ended March 31, 1998 and to Note 1 of
Notes to Consolidated Financial Statements on pages 27 and 28
of the Company's Annual Report to Shareholders for the year
ended March 31, 1998.
13 -- The Company's Annual Report to Shareholders for the year ended
March 31, 1998.
21 -- Subsidiaries of the Company.
23 -- Consent of Deloitte & Touche LLP.
27 (a) -- Financial Data Schedule for the year ended March 31, 1998
(b) -- Restated Financial Data Schedule for the six months ended
September 30, 1995.
<PAGE>
Gamma '98 Annual Report
From patent to product . . .
Tom Frame, senior vice president - research & development, became the "father
of ReACT" when Gamma was awarded U.S. Patent #5,665,558, "Method and Apparatus
Useful for Detecting Bloodgroup Antigens and Antibodies," the first patent
related to the Gamma-ReACT Test System. The red cell adherence test procedure
used in this microcolumn technology differs from the agglutination method used
by competitors.
-cover-
<PAGE>
Contents
11-year summary Inside front cover
Company profile 1
Letter to shareholders 2
From patent to product... 4
Management's discussion and analysis 17
Income statements 23
Balance sheets 24
Shareholders' equity 25
Cash flows 26
Notes to consolidated financials 27
Independent auditors' report 35
Management's report 35
Quarterly financial data 36
Market for common equity 36
Corporate data Inside back cover
11-year Summary of Selected Financial Data
<TABLE>
Year Ended March 31, 1998 1997
- -------------------- ------- -------
<S> <C> <C>
Financial
Net sales $18,254 $17,555
Operating income (loss) 654 1,576
Income (loss) before
extraordinary item** 1,310 1,116
Net income (loss)** 1,310 1,116
Working capital 9,122 10,167
Total assets 22,133 19,870
Long-term obligations 851 345
Shareholders' equity 18,506 17,665
Statistical
Operating margin 3.6% 9.0%
Return on net sales 7.2% 6.4%
Return on average equity 7.2% 6.5%
Current ratio 5.9 8.7
Per Share Amounts
Income (loss) before
extraordinary item-diluted** $ .28 $ .24
Net income (loss)-diluted** .28 .24
Dividends .10 .10
Book value 3.94 3.83
Weighted average common shares
outstanding assuming dilution 4,698 4,608
</TABLE>
**Includes a $1,154,000 adjustment to carrying value of facility related to
insurance recoveries in 1998
-inside front cover-
<PAGE>
<TABLE>
1996 1995 1994 1993 1992 1991* 1990 1989 1988
- --------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$16,941 $18,261 $17,213 $16,390 $16,942 $15,674 $19,257 $18,089 $18,385
899 2,193 1,546 (966) 678 1,402 2,288 (2,631) 938
824 1,467 1,348 (904) 533 896 727 (3,510) (83)
824 1,467 1,348 (904) 721 1,253 1,299 (3,510) (83)
10,299 10,675 11,261 9,772 10,543 6,714 8,719 9,410 7,722
18,426 18,384 18,030 16,925 17,800 19,005 23,158 22,056 28,548
353 19 630 734 815 1,122 1,240 4,168 2,531
16,852 16,454 15,620 14,507 15,397 14,818 14,354 12,383 16,582
5.3% 12.0% 9.0% (5.9)% 4.0% 8.9% 11.9% (14.5)% 5.1 %
4.9% 8.0% 7.8% (5.5)% 4.3% 8.0% 6.7% (19.4)% (.5)%
4.9% 9.1% 9.0% (6.0)% 4.8% 8.6% 9.7% (24.2)% (.5)%
11.9 7.5 8.3 6.8 7.6 3.2 2.2 2.7 1.8
$ .18 $ .32 $ .28 $ (.20) $ .12 $ .20 $ .17 $ (.77) $ (.02)
.18 .32 .28 (.20) .16 .28 .29 (.77) (.02)
.10 .10 .05
3.66 3.55 3.29 3.16 3.35 3.26 3.15 2.72 3.67
4,609 4,638 4,744 4,594 4,661 4,551 4,551 4,546 4,542
</TABLE>
*The company sold its Italian subsidiaries in 1991.
The Company
Gamma Biologicals, Inc. manufactures and sells a wide variety of highly refined
and specialized testing products known as IN-VITRO diagnostic reagents. These
reagents, which are restricted to specific uses and for which there are no
substitutes, are used - to test blood to ensure safe transfusions, - to detect
hemolytic disease of the newborn, - to determine the presence or absence of the
Rh factor, - to study inherited blood factors, and - to aid in the diagnosis of
certain human diseases, such as autoimmune hemolytic anemia.
Operating in a niche market, Gamma supplies products and services to
immunohematology, commonly called "blood banking". Immunohematology is one of
the major disciplines within the $2+ billion clinical (laboratory) medicine
market.
The company sells its products to blood collection centers (blood banks),
transfusion departments of hospitals, medical laboratories, and research
institutions through a direct sales force and a dealer network. Gamma
distributes its products to more than 50 countries.
-1-
<PAGE>
Letter to Shareholders
Dear Shareholder:
Introducing a new product as complex as ReACT has been a real challenge for
Gamma. Over the past several years, this company's management and employees
have used their experience and skills to build the Gamma-ReACT-TM- Test System
from research to patent to product and now to sales.
While ReACT was too new to have contributed significantly to fiscal 1998
earnings, Gamma was again profitable through sales of traditional reagents. The
company earned $1,310,000 (28 cents per share) on net sales of $18,254,000.
[Detailed financial information begins on page 17.]
Earnings reflect an adjustment to the cost basis of our manufacturing
facility due to fire damage suffered last September. The after-hours fire in
a sterilizing oven, while minor in nature, nevertheless resulted in
approximately $2.5 million of heat and water damage. It didn't stop us from
opening for business the next day, although it took about a week to resume
certain manufacturing activities. Some raw material had to be discarded, but
that didn't affect either final product quality or customer shipments.
The Year's Highlights
Gamma-ReACT-TM- Test System
Fiscal 1998 saw ReACT progress out of the development stage and into the
production and marketing stage. In mid-September 1997, Gamma received a patent
related to the ReACT adherence technology. U.S. Patent #5,665,558, "Method and
Apparatus Useful for Detecting Bloodgroup Antigens and Antibodies," is the
first issued of several patents applied for the ReACT Test System.
Then in late September, just prior to the American Association of Blood
Banks (AABB) annual meeting, the Food and Drug Administration gave us
clearance to market the product domestically, only 11 months after 510K
submission. On track with projections, the company has shipped 127 ReACT
systems to our overseas dealers and 41 to domestic customers, and has orders
pending for approximately 50 additional systems. Disposable test strips,
filled, sealed, labeled and packaged in house, will provide an ongoing
revenue stream from ReACT.
We developed a unique red cell product line specifically for ReACT.
Studies show that the line functions well in other gel column systems, which
could expand sales. Over time, we will develop a complete line of reagents
specifically for ReACT, a complement to our complete line of traditional and
specialty reagent products.
By the way, ReACT's ease of use, marked by our ready-to-use cell
suspension, generated considerable interest at the AABB meeting.
Canadian Dealer
With the premarketing phase of ReACT complete, Gamma appointed Dominion
Biologicals, Ltd., of Nova Scotia as the exclusive distributor in Canada. We
chose the Canadian market leader because of its direct sales force. Gamma has
no sales representatives based in Canada, although several of our U.S. reps
have a few Canadian customers for traditional reagents and cell products. The
initial five-year contract is valued at more than $1 million, equivalent to
about 5% of Gamma's fiscal 1998 revenues.
-2-
<PAGE>
Screening Cell Pool
There are two segments of our customer base: donors, who give blood, and
patients, who receive it. Initially, we marketed ReACT for the antibody
screening of presurgery patients. In April 1998, we secured FDA clearance to
market a ReACT blood donor screening cell pool. Screening of blood donors is a
required routine test on all donations. Gamma's product allows the technologist
to screen large numbers of donors quickly, saving time and money. In addition
to extending the ReACT product line, we have opened a new market for the
estimated 12 million annual blood donations in the United States.
Long-term Project
Shanghai Gamma Biologicals Co. Ltd., the company's 50/50 joint venture with the
Shanghai Blood Center (SBC), though strictly long-term, is progressing through
government requirements much more quickly than expected because of substantial
support from SBC officials. In May 1998, we signed the contract and articles of
association, two more steps in the approval process. So far, we have:
- - registered the Shanghai Gamma name and received a tax identification number;
- - submitted two plans for the interior construction for our full floor in the
new Shanghai Blood Center;
- - developed the equipment list for items available locally and those that must
be imported; and
- - started recruiting an American-trained business person to become general
manager of the joint venture.
Additionally, the Shanghai Blood Center sent two people to Houston for a
month to study business practices related to our industry and to
profit-making ventures in general. We could begin limited shipments of bulk
product from the joint venture as early as this fall. To date, we have
shipped small amounts of finished reagents for the center's in-house
evaluation and samples for its large customers. In all cases, Gamma's
reagents were found to be of exceptional quality.
Our basis for the joint venture is that China has no manufacturer
dedicated to producing a complete line of blood group typing reagents. The
country does collect approximately 30 million blood donations annually,
making it potentially the world's largest market for diagnostic reagent
products.
The Year To Come
After all our efforts, expertise, time and money devoted to developing ReACT,
it should come as no surprise that our fiscal 1999 focus will be to sell ReACT
systems and disposable test strips in the domestic and international
marketplace. Gamma will continue marketing traditional reagents, but our
emphasis will be on ReACT.
We look forward to reporting to you a successful year.
Sincerely,
/s/ David E. Hatcher
David E. Hatcher
Chairman, President & Chief Executive Officer
June 15, 1998
-3-
<PAGE>
From patent to product . . .
Humans have been advancing technology since at least 6500 BC, when the potter's
wheel was invented in Asia Minor. With the 1611 AD invention of the double
convex microscope and the 1658 discovery of red blood cells, healthcare
scientists leaped forward in the study of the human blood system. Their
experiments carried risks, such as with early blood transfusion attempts,
partially because of what they did NOT know.
Opportunities arose when the major blood groups were discovered around the turn
of the Twentieth Century. But not until the mid-1940s, with the first antibody
detection tests, did companies like Gamma begin to develop better products and
technologies for identifying antibodies and antigens. Each product was driven
by the need for improved patient care; each technology, by the laboratory
technologist's demand for accuracy and speed.
Today, as from its founding in 1970, Gamma manufactures and sells IN-VITRO
diagnostic reagents that test blood to ensure safe transfusions and to
determine certain blood factors.
-4-
<PAGE>
Over the years, company scientists have contributed to the detection and
identification of more than 25 unique blood group factors (of 400 so-far
known). Along the way, Gamma has researched, developed and received FDA
clearance for a complete line of traditional reagents, the profession's most
comprehensive line of monoclonal reagents, and a variety of specialized
products for use in the immunohematology laboratory.
The Gamma-ReACT-TM- Test System, the company's newest product, was developed
because blood bank technologists asked for an easy-to-use, gel-based system
that could lower human error rates. We've received FDA clearance to market the
product. We've received a patent on the adherence technology used in the
system. Now comes the real challenge - marketing and selling ReACT to a
diverse, worldwide customer base - with the inherent risks associated with new
products, the individual's natural reluctance to change, and healthcare's ever-
shifting rules.
-5-
<PAGE>
[photo of G. Parrish goes here]
-6-
<PAGE>
"Domestic customers want quality products and service. Gamma gives them more."
Gary Parrish, senior vice president - national sales, sold Gamma reagents back
when building a relationship with the head of immunohematology (the chief blood
bank technologist) guaranteed repeat orders. Now he oversees 19 domestic sales
representatives who, to sell a capital item like the ReACT Test System, must
submit a proposal to laboratory managers, administration personnel, purchasing
agents, materials managers and the technologists who will actually use the
product.
When introducing a custom product like ReACT, demonstration and training are
key to a sale. Thoroughly indoctrinated in using the ReACT system, the Gamma
sales force tutors customers on-site. Large group presentations at regional and
national meetings, advertising, and even customer-produced posters for
professional meetings all present a more complete picture of the product's
value than instruction manuals and direction inserts alone. Gamma now offers
the ReACT system both to individual customers and as an option on group bids
and government contracts.
[photo of four sales representatives goes here]
In addition to servicing their own territories, Ruth Usuriello, MT(ASCP)
[left], Marian Fortmann, MT(ASCP)SBB, Nancy Cornwell, MT(ASCP)SBB [seated], and
Jim Hall, MT(ASCP), comprise the regional team that helps the rest of Gamma's
domestic sales force troubleshoot installation questions and train customers on
ReACT.
-7-
<PAGE>
[two-page photo of filling equipment goes here]
Gamma built a cleanroom around its new Swiss-made, multipart machine that
fills, seals, labels (both user label and bar code) and packages the custom
disposable strips that will provide a cash flow stream from each ReACT system
sold. Rudy Vargas (foreground) and Romina Williams have operated the equipment
during the installation phase and will be responsible for ongoing production.
-8 & 9-
<PAGE>
"Our job internationally is to increase distributors' business and Gamma's
profits."
Raul Alvarez, senior vice president - international business, works in
partnership with distributors around the world to sell Gamma reagents, cell
products and, now, ReACT. The purchasing process for equipment and disposables
varies by country and depends on how the healthcare system is organized.
Marketing ReACT in Mexico requires a different strategy from that used in
Germany. Economics, politics, local currencies, and blood banking culture all
play a role.
Most countries have government-controlled healthcare systems, but they aren't
all at the same development stage. For European laboratories, which regularly
perform sophisticated antibody screening tests, ReACT is an evolution in gel
technology. For South American countries that began screening donors and
patients just a few years ago, ReACT is an innovation. In conservative, heavily
regulated Japan, the health ministry may evaluate diagnostic products for up to
three years before allowing sales to begin. In China, Gamma will have to
develop a market for traditional tests before it can introduce an advanced
product like ReACT. Meanwhile, through its headquarters and its Netherlands
subsidiary, the company provides tutorial programs for both distributors'
representatives and their customers on all Gamma products. International
customers know they can call on Gamma's Consultation Department to solve
complex serological problems and for training in new techniques.
-10-
<PAGE>
[photo of R. Alvarez goes here]
-11-
<PAGE>
[two-page photo of workstation goes here]
The ReACT system takes little space in the customer's laboratory. A workstation
to hold test tubes and ReACT strips, a small incubator for this fast process, a
desktop centrifuge and a viewbox make short work of specific antibody detection
tests. Gloria Schlanser, MT(ASCP), trains international distributors and
customers in performing tests, using the equipment and reading results.
-12 & 13-
<PAGE>
[photo of J. Turner goes here]
-14-
<PAGE>
"Introducing a new product challenges manufacturing, QC, finance, sales,
everyone."
Jimmie Turner, executive vice president and chief operating officer, makes sure
reagent products remain on track, while introducing ReACT into the
manufacturing process at Gamma's Houston facility. Making room for massive
machinery, training technicians, reworking schedules, and seeking FDA
clearances of product and process all affect the day-to-day operations.
Regardless of the sales effort, products must still be produced before they can
be sold, and customer service capabilities must be in place if the ReACT Test
System is to succeed as Gamma desires.
To accommodate its new diagnostic product, Gamma remodeled an area for the
filling equipment, increased one laboratory's workload by adding 11 new cell
products just for ReACT, designed boxes, produced direction inserts, collected
data and obtained FDA clearances. Because of the time required to manufacture a
single lot of the gel base, Gamma instituted a different procedure from
traditional antiserum production. The Quality Control Department added on
responsibility for checking each lot of gel, as well as the new cell products.
The greatest challenge was the time and money Gamma invested in research;
patent applications; outside suppliers for the centrifuge, incubator and
disposable strip mold; a ReACT project manager; and staff training, not to
mention the hours of meetings required to deal with strategies and details.
-15-
<PAGE>
[10 bar charts, representing five years each, go here]
Net sales, in $millions
Sales foreign & domestic, in $millions
Net sales per employee, in $thousands
Net income, in $millions
Net income per share - diluted, in $
Working capital, in $millions
Cash flows provided by operations, in $millions
Shareholders' equity, in $millions
Total debt, in $millions
Book value, in $
-16-
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The successful market introduction of the Gamma-ReACT-TM- Test System required
the commitment of a significant portion of the company's financial and human
resources during fiscal 1998. The investments made to promote the system
worldwide, including those to automate the filling and sealing of the
disposable test strips used in the system and to build an inventory of the
equipment comprising the test system, had a material effect on the company's
financial position and results of operations. Promotion and sales of the system
outside the U.S. began prior to FDA clearance for domestic marketing, which
arrived in September 1997. The domestic sales campaign was launched in late
March 1998 after the automated filling equipment was placed on-line. Initial
ReACT sales, representing sales of equipment, test strips and specially
formulated reagent red cell products, accounted for $400,000, or 2% of total
sales in fiscal 1998.
Current year results also include a $1,154,359 adjustment to the carrying
value of the company's facility in Houston, Texas, related to insurance
recoveries of damages caused by a fire in September 1997. This nonrecurring
item had a significant impact on earnings, raising net income to $1,309,616, a
17% increase over net income of $1,115,820 in 1997. The financial results of
fiscal 1997 reflected a payback on previous investments in infrastructure with
a 75% increase in operating income to $1,576,255 and a 35% increase in net
income to $1,115,820, compared with $898,974 and $823,530 in 1996,
respectively.
Revenues
Revenues rose 4% to $18,253,763 after a similar increase in 1997. International
sales originating from the United States rose 16%, with ReACT products
accounting for half of the increase. To date, Gamma has placed 127 ReACT Test
Systems internationally. Gamma Biologicals, B.V., acquired in September 1996,
contributed an additional $317,000 to revenues in its first full year as a
consolidated subsidiary, a 121% increase over 1997. Domestic sales declined 4%
as certain contracts for routine high-volume products were awarded to
competitors, several products at the ends of their life cycles were phased out,
and pricing pressure remained constant. A 47% increase in revenues from third-
party products partially offset declines in other areas. The Gamma-ReACT Test
System offers the best opportunity to regain lost ground domestically. Since
the ReACT technology is not covered by in-force group contracts, these products
may open the door to some purchasing groups from which the company has been
excluded. In addition, ReACT reagent red cell products can be used with
competing microcolumn test systems, enlarging the base of potential customers.
As of June 1998, Gamma has placed 41 ReACT Test Systems domestically and has
orders pending for approximately 30 additional systems.
In May 1998, the contract and articles of association were signed with
the Shanghai Blood Center (SBC) of Shanghai, P.R. China to market Gamma
reagent products through a 50/50 joint venture named Shanghai Gamma
Biologicals Co. Ltd. (Shanghai Gamma). At present, China has no manufacturer
dedicated to producing a complete line of blood group typing reagents. The
China market for diagnostic blood banking reagents, with approximately 30
million blood donations annually, is 2-1/2 times the size of the U.S. market
of 12 million donations and growing. Shanghai Gamma is strictly long-term;
progress through government requirements is being made more quickly than
expected because of support from SBC officials. The first large order for bulk
reagents is under negotiation. Limited product shipments from the joint
venture could begin as early as September 1998.
-17-
<PAGE>
Under the agreement with Olympus America Inc., Clinical Instruments
Division, Gamma is to manufacture a custom line of monoclonal reagents
dedicated to the PK series of immunohematology analyzers. Applications for the
necessary license supplements were made before the end of calendar 1997 for
the first group of reagents. Reagents for Rh phenotyping and typing for the K
antigen on the PK 7200 have been developed, and field-test studies to provide
data to support an application to the FDA started in June 1998. The Olympus
agreement is for an initial term of three years following FDA clearance of
the first group, which is not expected before late fiscal 1999. Gamma estimates
sales of approximately $500,000 during the first full year of the contract.
In 1997, revenues rose 4% to $17,554,502 after a 7% decline to
$16,940,588 in 1996. Increased sales volume of reagent red cell, RQC and
potentiator products and one third-party product offset the loss of $338,000
in revenues from mature, noncore lines that were being phased out. Gamma
Biologicals, B.V., our former distributor in the Netherlands, also contributed
$262,000 to consolidated revenues. During the six months ended March 31, 1997,
Gamma Biologicals, B.V. sold directly to customers in the Netherlands and to
certain distributors in Europe and other areas.
Gross Margin
Gross margin as a percentage of sales declined to 54% in 1998 after rising to
55% in 1997. The significant increase in third-party product sales reduced
overall margins in 1998. Margins on sales of these products average 17%, versus
a 57% margin on revenues from core products. Initial ReACT sales carried a
lower gross margin than can be expected in the future, due to the emphasis on
equipment rather than consumables (reagent red cell products and test strips).
Additionally, manufacturing efficiency was lower than usual because of
production slowdowns related to the September fire and to decreased domestic
demand for certain products mentioned above. In January 1997, we began the
process leading to ISO 9001 certification. More and more customers and
regulatory bodies are requesting and/or demanding such certification of
suppliers; we anticipate certification by the end of fiscal 1999. Although the
required validation and documentation of all manufacturing processes and
procedures has increased short-term operating costs, the investment in the
certification process should generate future savings through efficiencies
achieved by enhancing our quality system.
The 1997 increase in margin was attributed to economies achieved in
converting primary reagent product lines to clone-based raw materials grown
in-house and the extension of reagent red cell product shelf life which
resulted in reduced manufacturing lead time and allowed for more efficient use
of raw materials.
Selling Expenses
Selling expenses rose 17% compared with 1997 and included a full year of
expenses for Gamma Biologicals, B.V., as well as increased personnel, travel
and entertainment costs necessary to promote Gamma-ReACT and support the
increase in export sales. In 1997, selling expenses rose 7% compared with
1996 due to the September 1996 acquisition of
-18-
<PAGE>
Gamma Biologicals, B.V., increased expenditures for the annual American
Association of Blood Banks (AABB) meeting where the ReACT test system was
presented, and for travel and promotional materials required to establish new
international distributors. Selling expenses should decrease in fiscal 1999
following completion of the market introduction of ReACT.
General and Administrative Expenses
General and administrative expenses rose 25% after falling 14% in 1997. Fees
for investor relations and financial advisory services contributed
significantly to the increase, as did a full year of depreciation expense on
assets related to the computer upgrade implemented in the latter part of fiscal
1997. Other expenses returned to normal levels after decreasing in 1997 due to
a reduction in the allowance for doubtful accounts to reflect recent loss
experience and the reclassification of state income taxes.
General and administrative expenses in 1997 did not bear the singular
expenditures that burdened 1996. These included legal fees related to patent
applications covering ReACT and biosensor technologies, travel associated with
the evaluation of potential sites outside the United States to manufacture
products awaiting FDA approval, and financial advisory services to assist the
company in identifying and reviewing strategic alternatives to enhance
shareholder value.
Shipping and Warehouse Expenses
Shipping and warehouse expenses returned to 1996 levels after declining 13% in
1997. Gains in productivity following implementation of a new shipment
processing system and product bar coding were more than offset by a 3% rate
increase from our predominant domestic freight carrier which has not been
passed on to customers and increased depreciation expense.
Research and Development Expenses
Research and development expenses declined 14% after increasing 7% in 1997.
Research and development costs associated with ReACT fell as the system
received FDA clearance in September 1997 and moved into the production phase.
Funding commitments for electro-biosensor research at the University of
Wollongong, Australia expired and were not renewed. Although feasibility and
specificity of the test system were proven in a laboratory setting, estimates
of additional time and cost required to commercialize the technology exceeded
the company's expectations. Management believes that currently available
resources will be better utilized in projects with greater short- and
intermediate-term potential, such as the development of additional microcolumn
products and the automation of the ReACT Test System.
-19-
<PAGE>
Unusual Item
On September 11, 1997, the company's manufacturing facility in Houston, Texas
sustained damage from a fire that occurred while the building was unoccupied
(see Note 14). Insurance recoveries for property damage associated with
events of this type require the recognition of a new cost basis for the
rebuilt or replaced assets. As a result, the company recognized an adjustment
to the carrying value of the facility to the extent of recoveries received
amounting to $1,154,359.
Interest and Other Income
Interest income decreased 4% in 1998 and 22% in 1997 due to a reduction in the
amount of funds invested and a change in the investment mix in the prior
period. Interest expense declined 23% in 1998 due to normal debt retirement; a
9% domestic reduction in 1997 was offset by interest expense on debt carried by
Gamma Biologicals, B.V.
Other expense increased $41,000 in 1998 due to losses on assets retired
and currency exchange losses experienced by Gamma Biologicals, B.V. The other
income decline in 1997 was related to the sale of a noncore product technology
in 1996.
Income Taxes
The 1998 provision for income taxes remained level with the 1997 provision. The
1997 provision rose 96% due to a 52% increase in income and to deferred taxes
provided for temporary differences between the book and tax basis of property
additions.
Other
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information". SFAS No. 130 establishes standards for reporting and displaying
of comprehensive income and its components. SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS Nos. 130 and 131 are effective for periods beginning after December 15,
1997. These two statements did not have any effect on the company's 1998
financial statements; however, management is evaluating what, if any,
additional disclosures may be required when these statements are implemented.
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 incurred in fiscal 1999.
-20-
<PAGE>
Liquidity and Capital Resources
Operating Activities
Net cash flows decreased $2,097,000 during the fiscal year ended March 31, 1998
and $2,034,000 during the fiscal year ended March 31, 1997. Reduced cash flows
from operating activities accounted for most of the 1998 decline. Although
sales increased 4% over the prior period, operating expenses, excluding
depreciation and amortization, rose 12%, or $870,000, as outlined above in
"Results of Operations". In June 1997, a fee of $200,000 was paid to acquire a
nonexclusive license from the owner of a patent issued in several European
countries, covering certain technology utilized in the ReACT test strips. A
planned buildup of ReACT equipment inventory in connection with the market
introduction reduced operating cash by $612,000. Finally, operating cash flows
were temporarily restricted by unreimbursed expenditures related to the fire,
as mentioned in Note 14; the company was fully reimbursed by its insurance
carrier on May 5, 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. During the third quarter, Gamma
Biologicals, B.V. purchased one complete system, consisting of a dispenser and
reader, and five readers at a cost of approximately $100,000. These units were
purchased in anticipation of the European market introduction planned for
mid-1998.
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.
(See Note 15.) 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 defense costs will have a material impact on fiscal 1999 financial
condition and results of operations.
In 1997, cash flows from operating activities declined $105,000. Cash
received from customers increased $462,000. This improvement in cash flow was
offset by increased investment in inventory, license fees paid and insurance
deposits.
Investing Activities
Cash flows from investing activities remained relatively constant for 1998
after they decreased $1,965,000 in 1997. The company continued to invest in
building improvements and the computer network at above-normal levels.
Reconstruction following the fire created an opportunity to make other
improvements to the manufacturing areas that otherwise might not have been
undertaken at this time. We also continued to invest in the computer network
to improve efficiency in all areas of the company.
Fiscal 1999 cash flows from investing activities 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
-21-
<PAGE>
determined; the company expects to fund a cash contribution of $225,000 in
late August or September 1998. Limited product shipments from the joint
venture could begin as early as September 1998.
In 1997, completing improvements to the shipping area and the computer
system, and projects in progress to relocate and streamline the packaging
function and to double the monoclonal laboratory capacity, kept capital
expenditures at a higher than normal level. The downswing in cash flow from
investing activities was partially offset by $143,000 acquired with Gamma
Biologicals, B.V.
Financing Activities
Cash flows used in financing activities increased $32,000 in 1998 with the
addition of payments on debt acquired with Gamma Biologicals, B.V. Reduced
long-term debt payments, with the termination of certain capital leases in
October 1996, was responsible for the 1997 decrease in cash flows used in
financing activities.
Customized equipment to automate the filling, sealing and labeling of
ReACT test strips was delivered as scheduled in January 1998 and was on-line
by March 1998. The installed cost of this equipment was approximately
$815,000; the company has entered into a lease agreement to finance the
equipment purchase. Modifications to existing space to house the equipment,
including the "clean room" required for the filling and sealing operation,
were substantially completed prior to the delivery date, at a cost of
approximately $100,000.
Future Needs
Although the additional cost of defending the company's position in the
patent infringement suit 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 reach targeted levels. Our
existing capital resources, consisting of $1,520,000 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.
Costs of materials and services have remained relatively stable over the
past three years, with the exception of the shipping rate increase in 1998 and
the shipping supply increase in 1996. We do not expect operations to be
influenced significantly by rising costs in the foreseeable future.
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.
-22-
<PAGE>
Statements of Consolidated Income
<TABLE>
Year ended March 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 18,253,763 $ 17,554,502 $ 16,940,588
Cost of sales 8,396,753 7,857,815 7,825,828
- -----------------------------------------------------------------------------------------------
Gross margin 9,857,010 9,696,687 9,114,760
- -----------------------------------------------------------------------------------------------
Operating expenses:
Selling 4,447,107 3,792,115 3,530,721
General and administrative 2,654,985 2,122,075 2,468,584
Shipping and warehouse 854,190 756,848 867,209
Research and development 1,246,754 1,449,394 1,349,272
- -----------------------------------------------------------------------------------------------
Total operating expenses 9,203,036 8,120,432 8,215,786
- -----------------------------------------------------------------------------------------------
Operating income 653,974 1,576,255 898,974
- -----------------------------------------------------------------------------------------------
Unusual item: Adjustment
to carrying value of facility
related to insurance recoveries 1,154,359
Other income (expense):
Interest income 195,544 204,554 262,228
Interest expense (37,430) (48,449) (48,350)
Other income (expense) (50,431) (9,623) 19,578
- -----------------------------------------------------------------------------------------------
Other income (expense) - net 107,683 146,482 233,456
- -----------------------------------------------------------------------------------------------
Income before income taxes 1,916,016 1,722,737 1,132,430
Income taxes 606,400 606,917 308,900
- -----------------------------------------------------------------------------------------------
Net income $ 1,309,616 $ 1,115,820 $ 823,530
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding assuming dilution 4,697,694 4,607,518 4,608,771
- -----------------------------------------------------------------------------------------------
Net income per common share - basic $ .28 $ .24 $ .18
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Net income per common share - diluted $ .28 $ .24 $ .18
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-23-
<PAGE>
Consolidated Balance Sheets
<TABLE>
March 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,416,768 $ 3,618,970
Short-term investments 100,000 100,000
Receivables - net of allowance for doubtful
accounts: 1998 - $118,000; 1997 - $105,505 4,489,387 3,524,585
Inventories 3,969,444 3,658,642
Prepaid expenses 918,333 515,660
Deferred taxes 85,100 73,400
- --------------------------------------------------------------------------------
Total current assets 10,979,032 11,491,257
- --------------------------------------------------------------------------------
Property:
Land 284,147 284,147
Building and improvements 7,291,220 6,091,377
Machinery and equipment 6,449,950 5,261,132
Furniture and fixtures 596,586 599,056
- --------------------------------------------------------------------------------
Total 14,621,903 12,235,712
Less accumulated depreciation and amortization 6,297,958 6,241,338
- --------------------------------------------------------------------------------
Property - net 8,323,945 5,994,374
- --------------------------------------------------------------------------------
Cash value of life insurance 2,026,250 1,858,672
Excess of cost over net assets acquired - net 108,645 139,686
Other 695,368 385,538
- --------------------------------------------------------------------------------
Total assets $22,133,240 $19,869,527
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term obligations $ 226,835 $ 127,761
Accounts payable - trade 1,226,771 786,214
Dividends payable 115,270 115,077
Accrued salaries and other expenses 288,455 294,748
- --------------------------------------------------------------------------------
Total current liabilities 1,857,331 1,323,800
- --------------------------------------------------------------------------------
Long-term obligations 851,240 345,120
- --------------------------------------------------------------------------------
Deferred taxes 918,200 535,700
- --------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock - $10.00 par value; 1,000,000 shares
authorized; none outstanding
Common stock - $.10 par value; 25,000,000 shares
authorized; outstanding: 1998 - 4,776,115 shares;
1997 - 4,762,615 shares 477,611 476,261
Capital in excess of par value 13,711,791 13,674,209
Retained earnings 5,493,805 4,644,801
Accumulated translation adjustment (25,268) (10,456)
Treasury stock at cost: 1998 - 165,353 shares;
1997 - 159,563 shares (1,151,470) (1,119,908)
- --------------------------------------------------------------------------------
Total shareholders' equity 18,506,469 17,664,907
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $22,133,240 $19,869,527
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-24-
<PAGE>
Statements of Changes in Shareholders' Equity
<TABLE>
Year ended March 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Common Stock
Balance, beginning of year 4,762,615 $476,261 4,711,365 $471,136 4,700,303 $470,030
Acquisition of wholly
owned subsidiary 50,000 5,000
Exercise of stock options 13,500 1,350 1,250 125 11,062 1,106
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year 4,776,115 477,611 4,762,615 476,261 4,711,365 471,136
- -----------------------------------------------------------------------------------------------------------------------
Capital in Excess
of Par Value
Balance, beginning of year 13,674,209 13,512,836 13,482,615
Acquisition of wholly
owned subsidiary 157,500
Exercise of stock options 37,582 3,873 30,221
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year 13,711,791 13,674,209 13,512,836
- -----------------------------------------------------------------------------------------------------------------------
Retained Earnings
Balance, beginning of year 4,644,801 3,988,022 3,619,289
Net income 1,309,616 1,115,820 823,530
Dividends declared (460,612) (459,041) (454,797)
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year 5,493,805 4,644,801 3,988,022
- -----------------------------------------------------------------------------------------------------------------------
Translation Adjustments
Balance, beginning of year (10,456)
Current year translation
adjustments (14,812) (10,456)
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year (25,268) (10,456)
- -----------------------------------------------------------------------------------------------------------------------
Treasury Stock
Balance, beginning of year (159,563) (1,119,908) (159,563) (1,119,908) (159,169) (1,118,258)
Purchase of treasury stock (5,790) (31,562) (394) (1,650)
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year (165,353) (1,151,470) (159,563) (1,119,908) (159,563) (1,119,908)
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,610,762 $18,506,469 4,603,052 $17,664,907 4,551,802 $16,852,086
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-25-
<PAGE>
Statements of Consolidated Cash Flows
<TABLE>
Year ended March 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Cash received from customers $ 18,246,883 $ 17,916,399 $ 17,454,501
Interest received 190,916 204,315 149,118
Cash paid to suppliers and employees (17,902,748) (15,722,474) (15,060,164)
Interest paid (37,430) (48,444) (48,350)
Income taxes paid (470,228) (302,680) (343,000)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,393 2,047,116 2,152,105
- -----------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Property additions (2,853,738) (1,609,727) (1,668,145)
Purchase of investments (892,709)
Investment in subsidiary 142,659
Increase in cash value of life insurance (167,578) (128,898) (197,776)
Proceeds from:
Investments 4,909 4,786 3,093,608
Assets disposed of 1,379,359 50 38,618
- -----------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (1,637,048) (1,591,130) 373,596
- -----------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Payments on long-term obligations (128,758) (96,199) (172,324)
Exercise of stock options 38,932 3,998 31,327
Dividends paid (460,421) (457,760) (454,529)
Purchase of treasury stock (31,562) (1,650)
- -----------------------------------------------------------------------------------------------
Net cash used in financing activities (581,809) (549,961) (597,176)
- -----------------------------------------------------------------------------------------------
Effect of exchange rate fluctuation on cash (10,738) (11,434)
Net (decrease) increase in cash (2,202,202) (105,409) 1,928,525
Cash and cash equivalents at beginning of period 3,618,970 3,724,379 1,795,854
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,416,768 $ 3,618,970 $ 3,724,379
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Reconciliation of Net Income to Net Cash
provided by Operating Activities
Net income $ 1,309,616 $ 1,115,820 $ 823,530
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 1,026,506 822,368 650,471
Amortization of intangibles 38,817 15,521
(Gain) loss on disposal of fixed assets (1,141,181) 3,312 148
Gain on sale of investments (4,628) (239) (206,718)
Deferred taxes 361,900 295,600 28,500
Net effect of changes in operating accounts (1,563,637) (205,266) 856,174
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 27,393 $ 2,047,116 $ 2,152,105
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-26-
<PAGE>
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Business
The company manufactures and sells a wide variety of highly refined and
specialized testing products known as in-vitro diagnostic reagents. The
company operates in one industry segment and two geographic areas, the United
States and Europe. Customers include numerous hospitals, blood collection
centers, medical laboratories and research institutions in more than 50
countries. The company does not have a concentration of credit risk due to
its large customer base.
Consolidation
The consolidated financial statements include the accounts of Gamma
Biologicals, Inc. and all subsidiaries (the company). All significant
intercompany items have been eliminated in consolidation.
Translation of Foreign Currencies
All assets and liabilities in the balance sheet of the company's foreign
subsidiary are translated at year-end exchange rates. Translation gains and
losses are not included in determining net income but are accumulated in a
separate component of shareholders' equity.
Inventories
Inventories are valued at the lower of cost or market value.
Property and Depreciation
Property, including improvements, is stated at cost, including interest
charges incurred during construction. Expenditures for maintenance and
repairs are charged to operations as incurred. Costs of assets sold or
retired and the related amounts of accumulated depreciation are eliminated
from the accounts, and the resulting gains or losses are recognized in
current operations.
Depreciation on machinery and equipment and furniture and fixtures is
computed using the straight-line method over estimated useful lives of five
to 10 years. Depreciation and amortization on building and improvements are
computed using the straight-line and 150% declining balance methods over
estimated service lives of five to 30 years.
Excess of Cost Over Net Assets Acquired
The excess cost over net assets acquired in the purchase of Gamma
Biologicals, B.V. was $155,207 and is being amortized over five years on a
straight-line basis. The accumulated amortization was $46,562 at March 31,
1998 and $15,521 at March 31, 1997.
Research and Development Expenditures
The company capitalizes certain costs relating to the development of new
technologies. Capitalization does not begin until technological feasibility
is established. All other research and development expenditures are charged
to expense in the period incurred.
Revenue Recognition
Revenue is recognized when products are shipped or services are performed.
Income Taxes
The company utilizes an asset and liability approach in the calculation of
deferred income taxes. This approach gives consideration to the future tax
consequences of differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements. The net taxable or
deductible amounts in future years are adjusted for the effect of any
available tax credits.
Net Income Per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share". SFAS No. 128 establishes standards for
computing and presenting earnings per share (EPS) and requires restatement of
all prior-period EPS data presented.
-27-
<PAGE>
The company adopted SFAS No. 128 on October 1, 1997. The adoption of SFAS No.
128 did not have a material effect on the company's EPS.
Net income per common share - basic is computed using the weighted average
number of shares outstanding during each year. Net income per common share
- -diluted is computed using the weighted average number of shares and dilutive
equivalent shares outstanding during each year. [See Note 9.]
Statements of Consolidated Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and in banks, amounts deposited in money market funds, and
certificates of deposit with original maturities of three months or less.
Fair Value of Financial Instruments
The company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and long-term
obligations. As of March 31, 1998 and 1997, the fair value of these items
approximated the carrying value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2. Inventories
Inventory is valued at the lower of cost (principally FIFO) or market, as
follows:
<TABLE>
March 31, 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 932,210 $1,144,949
Products in process 464,719 432,357
Finished products 1,087,878 1,319,605
ReACT equipment 611,618
Supplies 873,019 761,731
- -----------------------------------------------------------------------------------
Total $3,969,444 $3,658,642
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
Note 3. Cash Value of Life Insurance
Cash value of life insurance consists primarily of contractual rights under
split-dollar life insurance agreements on the lives of certain officers and
directors. The company owns the policies and pays the premiums. Each insured
party is required to reimburse the company for the annual economic benefit that
the insured party receives. The premiums paid by the company less amounts
reimbursed by the insured party (net premiums) accrue interest at 3% per year.
The company can borrow against the policies. With the company's permission, the
insured parties can also secure loans against the policies. The company can
elect to pay the interest accruing on loans secured by insured parties.
Upon death of an insured party, the insured party's estate must repay
all loans against the policy and accrued interest (plus 3%) previously paid
by the company. Additionally, policy proceeds in excess of the amount (net
premiums paid plus interest) due to the company under terms of the
split-dollar insurance agreements will be distributed to the designated
beneficiaries of the insured party.
-28-
<PAGE>
Note 4. Long-term Obligations and Credit Agreement
Long-term Obligations
Long-term obligations consist of:
<TABLE>
March 31, 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage note, due monthly through 2000 $ 265,523 $353,485
Note payable - foreign, due semiannually through 2000 67,192 119,396
Capital lease, due quarterly through 2004 745,360
- ------------------------------------------------------------------------------------
1,078,075 472,881
Less current portion 226,835 127,761
- ------------------------------------------------------------------------------------
Total long-term obligations $ 851,240 $345,120
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
The mortgage note bears interest at the bank's base rate, but not less
than 7% nor more than 13%. At March 31, 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%.
Long-term obligations mature as follows: $226,835 in 1999; $262,181 in
2000; $238,379 in 2001; $160,336 in 2002; $175,059 in 2003; and $15,285 in
2004.
Credit Agreement
The company has a revolving line of credit agreement under which the company
can borrow $1,500,000 at the bank's floating base rate plus 0.5%. The agreement
was renewed in August 1997. At March 31, 1998 or during the year then ended,
no borrowings were outstanding under this agreement. The company pays no fees
nor is required to maintain any compensating balances under this agreement.
The line of credit agreement provides for maximum amounts that can be
outstanding, based on the company's receivables and inventories. Prepayments
on this loan may be required when the bases of receivables and inventories,
as determined under the agreement provisions, are less than certain defined
levels.
The agreement also contains various provisions that restrict borrowings,
capital expenditures, advances and other distributions, and certain direct or
contingent liabilities. Dividend payments are restricted to 25% of the
company's prior year net income. This restriction was waived for the years
ended March 31, 1998, 1997 and 1996. The agreement also provides for the
maintenance of certain ratios or amounts relative to working capital, net
worth and debt-to-equity. At March 31, 1998, the company was in compliance
with the provisions of the agreement.
Security for the company's obligations under the line of credit agreement
includes substantially all of the company's assets, except for the cash value
of all life insurance policies and the company's land and building which are
pledged as collateral for the mortgage note.
Note 5. Cash Flows Information
Following is a summary of the changes in operating assets and liabilities.
<TABLE>
Year ended March 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease (increase) in:
Receivables $ 38,535 $ 373,941 $ 290,400
Inventories (306,435) (483,338) 567,135
Prepaid expenses (1,408,095) (142,903) 136,359
Other assets (317,607) (121,873) 61,842
Increase (decrease) in:
Accounts payable 422,043 225,179 (77,968)
Accrued salaries and other expenses 7,922 (56,272) (121,594)
- -------------------------------------------------------------------------------------------------
Net effect of change in operating accounts $(1,563,637) $(205,266) $ 856,174
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
-29-
<PAGE>
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 the
outside vendors, and the remaining balance was recovered in full by March 31,
1998.
The company purchased 100% of the outstanding shares of Gamma
Biologicals, B.V., effective September 30, 1996, for 50,000 shares of common
stock. In conjunction with the acquisition, assets of $336,000 (including
$143,000 cash) were received, and liabilities of $313,000 were assumed.
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 strips. The machine was accepted in
March 1998.
Note 6. Stock Option Plans
Under the company's incentive stock option plan, 250,000 shares of its common
stock are reserved for grant to various employees. The options become
exercisable at 25% per year. The number of shares reserved under the plan will
be adjusted for stock splits and stock dividends.
Options have been granted to certain nonemployee members of the board of
directors to purchase shares of common stock. The 1997 Outside Director Stock
Option Plan (nonqualified) reserves 100,000 shares of the company's common
stock for grant to nonemployee directors.
The following is a summary of the company's stock option plans:
<TABLE>
Year ended March 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Number Average Number Average Number Average
of Shares Price of Shares Price of Shares Price
Options outstanding
at beginning of year 465,775 $4.14 469,025 $4.14 411,337 $4.07
Options granted 101,680 4.03 0 73,500 4.25
Options exercised (13,500) 2.88 (1,250) 3.20 (11,062) 2.83
Options canceled (48,500) 4.41 (2,000) 4.50 (4,750) 3.12
- -----------------------------------------------------------------------------------------------------
Options outstanding
at end of year 505,455 $4.12 465,775 $4.14 469,025 $4.14
- -----------------------------------------------------------------------------------------------------
Options exercisable
at end of year 421,455 $4.06 383,399 $4.08 320,900 $3.96
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Options available
at end of year 303,570 256,750 334,750
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
The company accounts for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, under which no compensation cost has
been recognized for stock option awards. In fiscal 1998, had compensation cost
of the plans been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," the company's pro forma net income would have been
$1,158,758 and pro forma basic and diluted earnings per common share would have
been $.25 and $.25, respectively. The fair value of options under the
company's plans during 1998 was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used: dividend yield of 2.33%, expected volatility of 31.97%,
risk-free interest rate of 6.50% and expected lives of 10 years.
-30-
<PAGE>
Note 7. Shareholder Rights Plan
The company has a shareholder rights plan which expires in September 1999.
Under terms of the plan: a) the rights are not exercisable until 10 days after
a public announcement that a person or group has acquired or intends to acquire
20% or more of the company's common stock without the consent of the board of
directors; and b) each share of common stock has the right to purchase common
stock with a value of two times the right's purchase price. The right's
purchase price, which is subject to adjustment by the board of directors, is
currently $15.00 per right. If exercisable, based upon a closing market price
of $4.75 per share at March 31, 1998, a shareholder could purchase, by
exercising such right, approximately 6.3 shares of common stock for each share
held. The board of directors may elect to redeem the outstanding rights at $.01
per right at any time before the expiration date.
Note 8. Employee Retirement Savings Plan
The company has a 401(k) Retirement Savings Plan. Under the plan's provisions,
the company may, at the discretion of the board of directors, match a portion
of the employee's annual contribution. All employees over 21 years of age with
at least one year of service are eligible for the plan. Company contributions,
which are 100% vested after five years of continuous service, were $39,588 in
1998; $37,043 in 1997; and $35,194 in 1996.
Note 9. Earnings Per Share
<TABLE>
Year ended March 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Shares Per Share Income Shares Per Share Income Shares Per Share
Amount Amount Amount
Net income $1,309,616 $1,115,820 $823,530
Basic EPS
Income available to
common shareholders 1,309,616 4,604,826 $0.28 1,115,820 4,577,729 $0.24 823,530 4,545,747 $0.18
Effect of Dilutive Securities:
Options and Warrants 92,868 29,789 63,024
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted EPS
Income available to
common shareholders
plus assumed
conversion $1,309,616 4,697,694 $0.28 $1,115,820 4,607,518 $0.24 $823,530 4,608,771 $0.18
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-31-
<PAGE>
Note 10. Income Taxes
Income taxes consist of the following:
<TABLE>
Year ended March 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $185,300 $273,000 $280,400
State 14,200 13,900
Foreign 45,000 24,417
- -----------------------------------------------------------------------------------------------
Total current 244,500 311,317 280,400
- -----------------------------------------------------------------------------------------------
Deferred:
Federal 361,900 295,600 28,500
- -----------------------------------------------------------------------------------------------
Total deferred 361,900 295,600 28,500
- -----------------------------------------------------------------------------------------------
Total $606,400 $606,917 $308,900
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
Income taxes as shown in the statements of consolidated income differ from
the amount that would be computed if income before income taxes was multiplied
by the United States federal income tax rate (statutory rate) applicable in each
year. The reasons for this difference are as follows:
<TABLE>
Year ended March 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Exempt export earnings (2.0) (2.3) (4.1)
Temporary differences related to property 22.5 8.7 (2.3)
Research and development credit (7.9)
Software development (2.7)
Gain on insurance recoveries (20.5)
Other - net .3 2.7 (.3)
- -----------------------------------------------------------------------------------------------
Effective tax rate 31.6% 35.2% 27.3%
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
Significant components of the company's deferred tax assets (liabilities)
are as follows:
<TABLE>
Year ended March 31, 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for doubtful accounts $ 40,100 $ 35,900
Inventory costs capitalized 31,200 37,500
Other 13,800
- -----------------------------------------------------------------------------------------------
Net current deferred tax asset 85,100 73,400
- -----------------------------------------------------------------------------------------------
Difference between book and tax basis of property,
plant and equipment (891,900) (523,900)
Other (26,300) (11,800)
- -----------------------------------------------------------------------------------------------
Net noncurrent deferred tax liability (918,200) (535,700)
- -----------------------------------------------------------------------------------------------
Net deferred tax liability $(833,100) $(462,300)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
-32-
<PAGE>
Note 11. 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 year ended March 31, 1998, the company
operated in two geographic areas, the United States and Europe. Prior to the
September 30, 1996 acquisition of Gamma Biologicals, B.V., the company operated
in one geographic area from which it sold to numerous countries.
<TABLE>
Year ended March 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net sales to unaffiliated customers:
United States $11,884 $12,317 $12,260
Europe 2,565 1,697 1,553
Mexico, Central and South America 1,518 1,297 1,020
Pacific Region 1,239 1,382 1,244
Middle East 754 651 620
Other 294 211 244
- -----------------------------------------------------------------------------------------------
Total $18,254 $17,555 $16,941
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Export sales from United States to unaffiliated customers:
Europe $ 1,433 $ 1,284 $ 1,553
Mexico, Central and South America 1,513 1,297 1,020
Pacific Region 1,209 1,382 1,244
Middle East 742 651 620
Other 290 211 244
- -----------------------------------------------------------------------------------------------
Total $ 5,187 $ 4,825 $ 4,681
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Export sales from United States to affiliated customers: $ 605 $ 151
- -----------------------------------------------------------------------------------------------
Income from operations:
United States $ 1,190 $ 1,078 $ 824
Europe 120 38
- -----------------------------------------------------------------------------------------------
Total $ 1,310 $ 1,116 $ 824
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Identifiable assets:
United States $19,213 $17,468 $16,696
Europe 595 318
Corporate 2,325 2,084 1,730
- -----------------------------------------------------------------------------------------------
Total $22,133 $19,870 $18,426
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
Note 12. Acquisition of Wholly Owned Subsidiary
Effective September 30, 1996, the company acquired 100% of the outstanding
shares of its distributor in the Netherlands, Gamma Biologicals, B.V.
Consideration for the acquisition was 50,000 shares of Gamma common stock,
valued at $3.25 per share, the market price on the effective date. The
acquisition has been accounted for using the purchase method of accounting, and
accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based upon the fair values at the acquisition date. The
excess of the purchase price over the fair values of the net assets acquired
was $155,207 and has been recorded as goodwill, which is being amortized over
five years.
Gamma Biologicals, B.V. was formed in November 1993 to market Gamma
products and certain noncompeting product lines in the Netherlands. Subsequent
to the acquisition, the subsidiary continues to sell directly in the
Netherlands, as well as serving as a European distribution center.
-33-
<PAGE>
Note 13. Sales of Exempt Securities
In June 1997, the company granted to 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.
Note 14. 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 was
completed after fiscal year-end.
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.
Note 15. Commitments and Contingencies
Operating Leases
The company leases certain facilities, equipment and automobiles under
operating leases which range from one month to five years. Rent expense charged
to income was approximately $333,000 in 1998; $262,000 in 1997; and $239,000 in
1996. Future minimum rental commitments at March 31, 1998 are $834,000, due
between two and five years.
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 Country
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.
-34-
<PAGE>
Independent Auditors' Report
Gamma Biologicals, Inc.
We have audited the accompanying consolidated balance sheets of Gamma
Biologicals, Inc. and subsidiaries (the company) as of March 31, 1998 and 1997,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended March
31, 1998. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the company at March 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Houston, Texas
May 22, 1998
Management's Responsibility for Financial Reporting
The management of Gamma Biologicals, Inc. has prepared and is responsible for
the financial statements and related financial data contained in this report.
The financial statements were prepared in accordance with generally accepted
accounting principles and necessarily include certain amounts based upon
management's best estimates and judgments. The financial information contained
elsewhere in this annual report is consistent with that in the financial
statements.
The company maintains internal accounting control systems that are adequate
to prepare financial records and to provide reasonable assurance that the
assets are safeguarded from loss or unauthorized use. We believe these
systems are effective, and the cost of the systems does not exceed the
benefits obtained.
The Audit Committee, composed exclusively of outside directors, meets
periodically with the company's management and independent public accountants
on financial reporting matters. The independent public accountants have free
access to the Audit Committee and may meet with the committee, without
management present, to discuss their audit results and opinions on the
quality of financial reporting.
The role of independent public accountants is to render a professional,
independent opinion on management's financial statements to the extent
required by generally accepted auditing standards. Gamma's responsibility is
to conduct its affairs according to the highest standards of personal and
corporate conduct.
/s/ Margaret J. O'Bannion
Margaret J. O'Bannion
Senior Vice President - Finance
-35-
<PAGE>
Quarterly Financial Data (unaudited)
<TABLE>
Operating Basic Diluted
Net Gross Income Net Net Income Net Income
Sales Margin (Loss) Income Per Share Per Share
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Fiscal 1998
First Quarter $ 4,828 $2,663 $ 454 $ 309 $.07 $.07
Second Quarter 4,612 2,587 287 321 .07 .07
Third Quarter 4,400 2,411 198 518 .11 .11
Fourth Quarter 4,414 2,196 (285) 162 .04 .03
- --------------------------------------------------------------------------------------------------
$18,254 $9,857 $ 654 $1,310 $.28 $.28
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Fiscal 1997
First Quarter $ 4,212 $2,227 $ 332 $ 220 $.05 $.05
Second Quarter 4,177 2,445 455 332 .07 .07
Third Quarter 4,650 2,464 351 330 .07 .07
Fourth Quarter 4,516 2,561 438 234 .05 .05
- --------------------------------------------------------------------------------------------------
$17,555 $9,697 $1,576 $1,116 $.24 $.24
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
Market for the Registrant's Common Equity and Related Shareholder Matters
The company's common stock trades on the American Stock Exchange under the
symbol GBL. The bid prices included in the following table are from the
American Stock Exchange and may not reflect prices in actual transactions.
The prices do not include markups, markdowns or commissions.
<TABLE>
High Closing Low Closing
Bid Price Bid Price Dividend
- ----------------------------------------------------------------
<S> <C> <C> <C>
Fiscal 1998
First Quarter $ 4.81 $ 3.56 $ .025
Second Quarter 5.75 4.38 .025
Third Quarter 6.38 4.13 .025
Fourth Quarter 5.38 4.31 .025
Fiscal 1997
First Quarter $ 4.50 $ 3.75 $ .025
Second Quarter 4.00 2.88 .025
Third Quarter 3.75 3.00 .025
Fourth Quarter 4.00 3.06 .025
</TABLE>
As of June 22, 1998, there were 438 holders of record of the company's
common stock. The number does not include shares held in broker or nominee
name.
-36-
<PAGE>
Corporate Data
Officers
David E. Hatcher
Chairman, President & Chief Executive Officer
Jimmie L. Turner
Executive Vice President & Chief Operating Officer
Betty Francis Hatcher
Executive Vice President
Raul F. Alvarez
Senior Vice President - International Business
John Case
Senior Vice President - Regulatory Affairs
Thomas H. Frame
Senior Vice President - Research & Development
Margaret J. O'Bannion
Senior Vice President - Finance & Chief Financial Officer
Gary L. Parrish
Senior Vice President - National Sales
Susan A. Batcha
Vice President - Assistant to Regulatory Affairs
Marilyn K. Moulds
Vice President - Consultation & Education
Lawrence E. Letwin
Corporate Secretary
Directors
David E. Hatcher
Chairman
Richard H. Aster, MD *+
Chairman
Genetic Testing Institute, Inc.
Milwaukee, Wisconsin
(Medical diagnostic products manufacturer)
Bryan J. Brieden *+
Consultant & former president
Bryan Biologicals, Inc.
Detroit, Michigan
(Laboratory supplies distributor)
H.H. (Will) Hardee *+
Senior Vice President
Dain Rauscher
Houston, Texas
(Regional securities firm)
Betty Francis Hatcher
Hayle B. Randolph *+
Blood Services Consultant
Rio Verde and Flagstaff, Arizona
* Member, Audit Committee
+ Member, Compensation/Stock Option Committee
General Counsel
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
Houston, Texas
Auditors
Deloitte & Touche LLP
Houston, Texas
Stock Transfer Agent and Registrar
<PAGE>
Please direct communications concerning stock transfer requirements, lost
certificates or changes of address to:
Harris Trust and Savings Bank
ATTN: Shareholder Services
P.O. Box A3504
Chicago, IL 60690-3504
1-800/577-5042.
Stock Trading
Gamma Biologicals, Inc. common stock trades on the American Stock Exchange
using the symbol GBL.
SEC Form 10-K
Gamma will provide its shareholders, without charge, a copy of the company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1998, as filed
with the Securities and Exchange Commission. Please direct requests to:
Margaret J. O'Bannion
Gamma Biologicals, Inc.
3700 Mangum Road
Houston, TX 77092.
Financial Mailing List
Shareholders whose stock is held in trust or by a brokerage firm may receive
timely financial mailings directly from Gamma by writing to Ms. Margaret J.
O'Bannion at the above address.
Annual Meeting
The directors and officers of Gamma Biologicals, Inc. invite interested
shareholders to attend the annual meeting at 3:00 p.m. CDT on Tuesday, August
11, 1998, at the company's offices, 3700 Mangum Road, Houston, Texas.
-inside back cover-
<PAGE>
Gamma Biologicals, Inc.
3700 Mangum Road
Houston, Texas 77092
713/681-8481
FAX 713/956-3333
www.gammabio.com
-back cover-
<PAGE>
EXHIBIT 21
GAMMA BIOLOGICALS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
State or Country
in which Percent
Incorporated Owned
---------------- -------
Registrant:
Gamma Biologicals, Inc. Texas Not Applicable
Subsidiaries of the Registrant(A):
Delta Diagnostics, Inc. Texas 100%
Gamma Biologicals International, Inc. United States
Virgin Islands 100%
Gamma Biologicals, B.V. The Netherlands 100%
- -------------
Note A All of the subsidiaries are included in the consolidated financial
statements of the Registrant.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Gamma Biologicals, Inc.
We consent to the incorporation by reference in Registration Statement
No. 33-44950 on Form S-8, Registration Statement No. 333-01147 on Form S-8
and Registration Statement No. 333-40367 on Form S-8 of Gamma Biologicals,
Inc. of our report dated May 22, 1998, incorporated by reference in the
Annual Report on Form 10-K of Gamma Biologicals, Inc. for the year ended
March 31, 1998.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Houston, Texas
June 26, 1998
<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> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,416,768
<SECURITIES> 100,000
<RECEIVABLES> 4,607,387
<ALLOWANCES> 118,000
<INVENTORY> 3,969,444
<CURRENT-ASSETS> 10,979,032
<PP&E> 14,621,903
<DEPRECIATION> 6,297,958
<TOTAL-ASSETS> 22,133,240
<CURRENT-LIABILITIES> 1,857,331
<BONDS> 851,240
0
0
<COMMON> 477,611
<OTHER-SE> 18,028,858
<TOTAL-LIABILITY-AND-EQUITY> 22,133,240
<SALES> 18,253,763
<TOTAL-REVENUES> 18,253,763
<CGS> 8,396,753
<TOTAL-COSTS> 14,944,804
<OTHER-EXPENSES> 2,609,569
<LOSS-PROVISION> 45,416
<INTEREST-EXPENSE> 37,430
<INCOME-PRETAX> 1,916,016
<INCOME-TAX> 606,400
<INCOME-CONTINUING> 1,309,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,309,616
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,458,960
<SECURITIES> 2,082,963
<RECEIVABLES> 3,640,660
<ALLOWANCES> 209,123
<INVENTORY> 4,097,722
<CURRENT-ASSETS> 11,629,260
<PP&E> 10,205,621
<DEPRECIATION> 5,369,101
<TOTAL-ASSETS> 18,394,612
<CURRENT-LIABILITIES> 1,357,704
<BONDS> 2,798
0
0
<COMMON> 470,330
<OTHER-SE> 16,288,680
<TOTAL-LIABILITY-AND-EQUITY> 18,394,612
<SALES> 8,419,798
<TOTAL-REVENUES> 8,419,798
<CGS> 3,837,027
<TOTAL-COSTS> 6,668,162
<OTHER-EXPENSES> 1,103,964
<LOSS-PROVISION> 29,501
<INTEREST-EXPENSE> 32,050
<INCOME-PRETAX> 745,275
<INCOME-TAX> 221,200
<INCOME-CONTINUING> 524,075
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 524,075
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
