<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission file number 1-10538
GAMMA BIOLOGICALS, INC.
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1668436
- --------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 Mangum Road, Houston, Texas 77092
------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(713) 681-8481
----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At February 13, 1998: 4,606,111 shares
<PAGE>
PART I. FINANCIAL INFORMATION
GAMMA BIOLOGICALS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 2,623,208 $ 3,618,970
Short-term investments.............................................. 100,000 100,000
Receivables - net of allowance for doubtful
accounts of $109,331 and $105,505, respectively.................. 3,443,292 3,524,585
Inventories......................................................... 4,159,477 3,658,642
Prepaid expenses.................................................... 854,844 515,660
Deferred taxes...................................................... 74,700 73,400
----------- ----------
Total current assets................................................ 11,255,521 11,491,257
----------- ----------
PROPERTY - at cost, net of accumulated
depreciation and amortization of $6,226,161 and $6,241,338,
respectively....................................................... 7,491,886 5,994,374
CASH VALUE OF LIFE INSURANCE.......................................... 1,970,362 1,858,672
EXCESS OF COST OVER NET ASSETS ACQUIRED-NET........................... 116,405 139,686
OTHER ASSETS.......................................................... 665,684 385,538
----------- ----------
TOTAL............................................................... $ 21,499,858 $ 19,869,527
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations............................ $ 139,026 $ 127,761
Accounts payable - trade........................................... 728,711 786,214
Dividends payable................................................... 115,128 115,077
Accrued salaries and other expenses................................. 474,446 294,748
----------- ----------
Total current liabilities........................................... 1,457,311 1,323,800
----------- ----------
LONG-TERM OBLIGATIONS................................................. 844,131 345,120
DEFERRED TAXES........................................................ 722,100 535,700
SHAREHOLDERS' EQUITY.................................................. 18,476,316 17,664,907
----------- ----------
TOTAL............................................................... $ 21,499,858 $ 19,869,527
=========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
GAMMA BIOLOGICALS, INC.
Statements of Consolidated Income
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- --------------------------------
DECEMBER 31, DECEMBER 31,
------------------------------- --------------------------------
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES............................................. $ 4,400,447 $ 4,649,766 $ 13,839,939 $ 13,038,671
COST OF SALES......................................... 1,989,320 2,185,539 6,179,220 5,901,657
----------- ---------- ----------- ----------
GROSS MARGIN.......................................... 2,411,127 2,464,227 7,660,719 7,137,014
----------- ---------- ----------- ----------
OPERATING EXPENSES:
Selling............................................. 1,058,083 999,156 3,271,253 2,750,667
General and administrative.......................... 660,591 547,364 1,896,174 1,632,656
Shipping and warehouse.............................. 227,107 188,221 598,007 541,225
Research and development............................ 267,625 378,488 957,068 1,074,139
----------- ---------- ----------- ----------
Total operating expense.......................... 2,213,406 2,113,229 6,722,502 5,998,687
----------- ---------- ----------- ----------
OPERATING INCOME...................................... 197,721 350,998 938,217 1,138,327
----------- ---------- ----------- ----------
UNUSUAL ITEM:
Adjustment to carrying value of facility............ 509,675 659,675
----------- ---------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest income..................................... 68,335 53,998 193,980 155,592
Interest expense.................................... (8,967) (13,000) (27,849) (35,112)
Other - net......................................... (10,303) (5,134) (29,207) (5,695)
----------- ---------- ----------- ----------
Other income - net............................... 49,065 35,864 136,924 114,785
----------- ---------- ----------- ----------
INCOME BEFORE INCOME TAXES............................ 756,461 386,862 1,734,816 1,253,112
INCOME TAXES.......................................... 238,340 56,619 586,686 370,119
----------- ---------- ----------- ----------
NET INCOME............................................ $ 518,121 $ 330,243 $ 1,148,130 $ 882,993
=========== ========== =========== ==========
Net income per common share-basic..................... $ .11 $ .07 $ .25 $ .19
=========== ========== =========== ==========
Net income per common share-diluted................... $ .11 $ .07 $ .24 $ .19
=========== ========== =========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
GAMMA BIOLOGICALS, INC.
Statements of Consolidated Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
DECEMBER 31,
-------------------------
1997 1996
---- ----
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
COMMON STOCK
Balance, beginning of period......................... 4,762,615 $ 476,261 4,711,365 $ 471,136
Acquisition of wholly-owned subsidiary............... 50,000 5,000
Exercise of stock options............................ 3,500 350 1,000 100
--------------------------------------------------------------
Balance, end of period............................... 4,766,115 476,611 4,762,365 476,236
--------------------------------------------------------------
CAPITAL IN EXCESS OF PAR
Balance, beginning of period......................... 13,674,209 13,512,836
Acquisition of wholly-owned subsidiary............... 157,500
Exercise of stock options............................ 9,831 2,710
--------------------------------------------------------------
Balance, end of period............................... 13,684,040 13,673,046
--------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of period......................... 4,644,801 3,988,022
Net income........................................... 1,148,130 882,993
Dividends declared................................... (345,318) (343,963)
-------------------------------------------------------------
Balance, end of period............................... 5,447,613 4,527,052
--------------------------------------------------------------
TRANSLATION ADJUSTMENTS
Balance, beginning of period......................... (10,456)
Current period translation adjustments............... 1,227 (162)
-------------------------------------------------------------
Balance, end of period............................... (9,229) (162)
--------------------------------------------------------------
TREASURY STOCK
Balance, beginning of period......................... (159,563) (1,119,908) (159,563) (1,119,908)
Purchase of treasury stock........................... (441) (2,811)
--------------------------------------------------------------
Balance, end of period............................... (160,004) (1,122,719) (159,563) (1,119,908)
--------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY............................. 4,606,111 $18,476,316 4,602,802 $17,556,264
==============================================================
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
GAMMA BIOLOGICALS, INC.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
DECEMBER 31,
------------
1997 1996
------------- ------------
[INCREASE (DECREASE) IN CASH]
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers.......................................... $ 13,831,390 $ 13,484,822
Interest received..................................................... 190,315 156,569
Cash paid to suppliers and employees.................................. (13,105,125) (11,803,096)
Interest paid ........................................................ (27,844) (35,112)
Income taxes paid..................................................... (315,320) (302,825)
------------- ------------
Net cash provided by operating activities............................. 573,416 1,500,358
------------- ------------
Cash flows from investing activities:
Property additions.................................................... (1,870,485) (1,283,188)
Increase in cash value of life insurance.............................. (111,690) (107,478)
Proceeds from investments............................................. 2,443 2,343
Investment in subsidiary.............................................. 142,659
Proceeds from assets disposed of...................................... 856,813 49
------------- ------------
Net cash used in investing activities................................. (1,122,919) (1,245,615)
------------- ------------
Cash flows from financing activities:
Payments on long-term obligations..................................... (102,673) (77,805)
Exercise of stock options............................................. 10,181 2,811
Purchase of treasury stock............................................ (2,811)
Dividends paid........................................................ (345,267) (342,688)
------------- ------------
Net cash used in financing activities................................. (440,570) (417,682)
------------- ------------
Effect of exchange rate fluctuation on cash........................... (5,689) (1,889)
Net decrease in cash.................................................... (995,762) (164,828)
Cash and cash equivalents at beginning of period........................ 3,618,970 3,724,379
------------- ------------
Cash and cash equivalents at end of period.............................. $ 2,623,208 $ 3,559,551
============= ============
</TABLE>
5
<PAGE>
GAMMA BIOLOGICALS, INC.
Statements of Consolidated Cash Flows
(Unaudited)
Reconciliation of Net Income to
Net Cash Provided by Operating Activities
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
DECEMBER 31,
--------------------------------
1997 1996
---------- ----
<S> <C> <C>
Net Income $1,148,130 $ 882,993
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation........................................................ 758,410 586,624
Amortization of goodwill............................................ 23,281 7,145
Amortization of patent.............................................. 4,969
(Gain) loss on disposal of fixed assets............................. (648,949) 3,312
Decrease in accounts receivable..................................... 11,092 491,541
(Gain) loss on investments.......................................... (3,665) 977
Increase in inventory............................................... (495,041) (564,237)
Increase in prepaid expenses........................................ (235,049) (11,541)
Increase in other assets............................................ (285,116) (16,998)
Increase (decrease) in accounts payable............................. (73,265) 71,302
Increase in accrued salaries and other expenses..................... 368,619 49,240
---------- ----------
Net Cash Provided by
Operating Activities.................................................. $ 573,416 $1,500,358
========== ==========
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
In March 1996, the company outsourced the assembly of plastic droppers and
SegmentSamplers(TM). As a result, inventory of component parts totaling $282,886
was transferred to outside vendors and a corresponding receivable due from the
vendors was recorded. This receivable is being reduced as assembled parts are
delivered, with the cost of components deducted from the vendors' selling price.
To date, additional inventory of $105,000 was transferred to outside vendors and
the outstanding receivable balance at December 31, 1997 was $6,247.
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
approximately $750,000 for the design, manufacture, and installation of a
special filling and heat-sealing machine for the ReACT strips. As of December
31, 1997, $621,314 has been funded. The interest rate varies based upon the
amount funded, 7% at December 31, 1997. Payments will be due quarterly over
five years following the installation of the equipment in January 1998.
See notes to unaudited consolidated financial statements.
6
<PAGE>
GAMMA BIOLOGICALS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Reconciliation of statutory rate with effective United States income tax
rate:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 31, DECEMBER 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory rate...................................................... 34.0% 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Exempt export earnings........................................... (1.3) (1.7) (1.7) (2.4)
Life insurance premiums.......................................... .8 3.3 1.0 1.4
Amortization of goodwill......................................... .2 .6 .3 .2
Reduction of taxes provided in prior year........................ (3.9) (51.0) (1.7) (15.7)
Research and development credit.................................. (.5) (18.6) (1.7) (5.7)
Gain on involuntary conversion-damage to facility................ (22.9) (12.9)
Valuation of temporary differences............................... 24.1 44.5 15.3 16.1
Other-net........................................................ 1.0 3.5 1.2 1.6
----- ----- ----- -----
Effective tax rate.................................................. 31.5% 14.6% 33.8% 29.5%
===== ===== ===== =====
Significant components of the company's deferred tax assets (liabilities) are
as follows:
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
Allowance for bad debts............................................. $ 37,200 $ 35,900
Inventory costs capitalized......................................... 37,500 37,500
--------- ---------
Net current deferred tax asset................................... 74,700 73,400
--------- ---------
Difference between book and tax basis of property,
plant and equipment.............................................. (714,600) (523,900)
Other............................................................... (7,500) (11,800)
--------- ---------
Net noncurrent deferred tax liability............................ (722,100) (535,700)
--------- ---------
Net deferred tax liability.......................................... $(647,400) $(462,300)
========= =========
</TABLE>
7
<PAGE>
2. Reconciliation of the numerators and denominators of the basic and diluted
EPS computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1997 1996
----------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
------ ------ --------- ------ ------ ---------
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- -------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income.................................$ 518,121 $ 330,243
BASIC EPS
Income available to common
shareholders.............................$ 518,121 4,605,575 $ .11 $ 330,243 4,602,802 $ .07
====== ======
EFFECT OF DILUTIVE SECURITIES
Options and warrants....................... 110,832 18,863
------------------------- -------------------------
DILUTED EPS
Income available to common
shareholders plus assumed ---------------------------------------------------------------------------------
conversion...............................$ 518,121 4,716,407 $ .11 $ 330,243 4,621,665 $ .07
=================================================================================
NINE MONTHS ENDED DECEMBER 31,
------------------------------
1997 1996
----------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
------ ------ --------- ------ ------ ---------
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- -------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income.................................$ 1,148,130 $ 882,993
BASIC EPS
Income available to common
shareholders.............................$ 1,148,130 4,603,949 $ .25 $ 882,993 4,569,493 $ .19
====== ======
EFFECT OF DILUTIVE SECURITIES
Options and warrants....................... 97,918 18,863
------------------------- -------------------------
DILUTED EPS
Income available to common
shareholders plus assumed ---------------------------------------------------------------------------------
conversion...............................$ 1,148,130 4,701,867 $ .24 $ 882,993 4,588,356 $ .19
=================================================================================
</TABLE>
8
<PAGE>
3. Inventories are valued at the lower of cost (principally FIFO) or market
value, as follows:
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
Raw materials...................... $1,261,557 $1,144,949
Products in process................ 301,323 432,357
Finished products.................. 1,688,957 1,319,605
Supplies........................... 907,640 761,731
---------- ----------
Total............................ $4,159,477 $3,658,642
========== ==========
4. In the opinion of management, the unaudited consolidated condensed financial
statements for Gamma Biologicals, Inc. (the "company") include all
adjustments (consisting solely of normal recurring adjustments) necessary for
a fair presentation of the financial position of the company as of December
31, 1997, the results of operations of the three and nine month periods ended
December 31, 1997 and 1996 and cash flows for the nine month periods ended
December 31, 1997 and 1996. Although management believes the disclosures in
these financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. The results of
operations for the period ended December 31, 1997 are not necessarily
indicative of the results to be expected for the full year.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
Mortgage note, due monthly through 2000................ $287,824 $353,485
Note payable-foreign, due semiannually through 2000.... 74,019 119,396
Other obligations...................................... 621,314
-------- --------
983,157 472,881
Less current portion.................................. 139,026 127,761
-------- --------
Total long-term obligations.............................. $844,131 $345,120
======== ========
</TABLE>
The mortgage note bears interest at the bank's base rate, but not less than 7%
nor more than 13%. At December 31, 1997, 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%.
In June 1997, the company entered into a capital lease agreement for
approximately $750,000 for the design, manufacture, and installation of a
special filling and heat-sealing machine for the ReACT strips. As of December
31, 1997, $621,314 has been funded. The interest rate varies dependant upon
the amount funded. At December 31, 1997, the lease bore interest at 7%.
9
<PAGE>
6. 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 date of
acquisition. 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.
7. MINOR DAMAGE TO FACILITY
On September 11, 1997, the company's manufacturing facility in Houston, Texas
sustained minor 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 all
affected areas should be completed by February 28, 1998.
The company maintains insurance for both property damage and business
interruption. The policy providing the coverages is subject to deductibles of
$5,000 each for property damage and business interruption. As of February 13,
1998, the insurance carrier has advanced $1,500,000 to cover estimated costs
to clean up, repair or replace damaged property. The total cost to restore
the facility is estimated at $1,800,000.
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 has recognized in its statements of income
for the three and nine month periods ended December 31, 1997, an adjustment to
the carrying value of the facility to the extent of recoveries received.
Total spending to restore the facility was approximately $856,000 through
December 31, 1997.
10
<PAGE>
8. OPERATIONS BY GEOGRAPHIC AREA
The company operates within one dominant segment - the manufacture and sale of
blood bank and diagnostic products - and has no customer which accounts for
10% or more of its total sales. During the three and nine month periods ended
December 31, 1997 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, the United
States, from which it sold to numerous countries.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
1997 1996 1997 1996
------------ ---------- ------------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers:
United States.................................... $2,920 $3,334 $ 9,084 $ 9,253
Europe........................................... 487 433 1,746 1,191
Pacific Region................................... 326 315 973 1,023
Mexico, Central and South America................ 375 325 1,189 968
Middle East...................................... 204 190 643 456
Other............................................ 88 53 205 148
------ ------ ------- -------
Total........................................... $4,400 $4,650 $13,840 $13,039
====== ====== ======= =======
Export sales from United States to
unaffiliated customers:
Europe........................................... $ 266 $ 274 $ 973 $ 1,032
Pacific Region................................... 309 315 951 1,023
Mexico, Central and South America................ 375 325 1,189 968
Middle East...................................... 204 190 643 456
Other............................................ 88 53 205 148
------ ------ ------- -------
Total........................................... $1,242 $1,157 $ 3,961 $ 3,627
====== ====== ======= =======
Sales between geographic areas:
United States to Europe.......................... $ 109 $ 78 $ 392 $ 78
------ ------ ------- -------
Income before income taxes:
United States.................................... $ 730 $ 401 $ 1,608 $ 1,267
Europe........................................... 26 (14) 127 (14)
------ ------ ------- -------
Total........................................... $ 756 $ 387 $ 1,735 $ 1,253
====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
12/31/97 3/31/97
---------------- ---------------
<S> <C> <C>
Identifiable assets:
United States.................................... $18,829 $17,469
Europe........................................... 486 318
Corporate........................................ 2,185 2,083
------- -------
Total........................................... $21,500 $19,870
======= =======
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the company's financial condition, results of
operations, capital resources and liquidity. This discussion and analysis
should be read in conjunction with the Consolidated Financial Statements of the
company and the notes thereto. Management's review includes certain forward-
looking statements reflecting the company's expectations in the near future;
however, many factors which may affect the 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.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED DECEMBER 31, 1997
- ------------------------------------
Revenues declined 5% for the three months ended December 31, 1997 compared
with the same period in 1996, with international sales increasing 12% and
domestic sales declining 12%. Domestic sales declined as certain contracts for
routine, high-volume products were awarded to competitors and several products
at the ends of their lifecycles were phased out. Introduction of Gamma-ReACT(TM)
Test System in the U.S., scheduled to begin as soon as automated test strip
production comes on-line, should improve the company's position in the domestic
market. International sales rose overall with sales of ReACT equipment
accounting for much of the increase. ReACT sales were concentrated in Europe,
where total sales rose 12%. Sales to Mexico and Central and South America grew
15% this quarter. This measurable growth in international sales reflects the
company's focus on globalization to mitigate the impact of competitive pressures
in the domestic market.
Gross margin as a percentage of sales improved to 55% in 1997 from 53% in
1996. The increase in international sales as a percentage of total sales to 34%
from 28% has had a positive effect on margin, as international prices are
generally more favorable than those offered domestically. In addition, the use
of in-house clone material to produce many of our high-volume products keeps
manufacturing costs low. Sales of ReACT systems to end-users should also help
to maintain or improve current margins, based on pre-production estimates of
test strip manufacturing costs and initial pricing strategies.
Selling expense increased 6% for the quarter. The increase reflects higher
international commissions, more frequent travel and additional personnel to
support export sales growth and increased marketing expenses related to the
promotion of ReACT worldwide. General and administrative expenses rose 21% over
the prior year mainly due to increased depreciation related to the computer
upgrade implemented in the latter part of fiscal 1997 and additional fees for
financial and investor relations advisory services. Shipping and warehouse
expenses rose 21% with a 3% rate increase from our predominant domestic freight
carrier which has not been passed on to customers, and higher depreciation on
the order fulfillment system implemented in fiscal 1997.
12
<PAGE>
Research and development expenses declined 29% over the same quarter last year
as the Gamma-ReACT Test System moved into its pre-production phase following the
receipt of FDA approval to market in September 1997, and funding commitments for
electro-biosensor research expired and were not renewed.
The company's manufacturing facility sustained minor damage from a fire on
September 11, 1997. As a result, the company has recognized an adjustment to
the carrying value of the facility to the extent of recoveries received of
approximately $510,000 in the period ended December 31, 1997.
The contribution of interest and other income increased 37% between the
periods due to higher interest earned on investments.
The provision for income taxes rose significantly in the current period due to
the benefit of 1996 tax overpayments recognized in fiscal 1997.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing EPS
previously found in Accounting Principles Board Opinion No. 15, "Earnings Per
Share," and makes them comparable to international EPS standards. This statement
requires restatement of all prior-period EPS data presented. The company
adopted SFAS No. 128 in December 1997; the adoption of this statement did not
have a material effect on EPS.
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 will 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 two statements are implemented.
NINE MONTHS ENDED DECEMBER 31, 1997
- -----------------------------------
Net income for the nine months ended December 31, 1997 rose 30% over the prior
period. An adjustment to the carrying value of the facility as stated above
resulted in a 38% increase in pretax earnings. A 6% increase in revenues was
offset by a 12% increase in operating expenses as outlined above for the three
month period ended December 31, 1997.
In September 1997, the FDA approved the company's 510K application to market the
Gamma-ReACT Test System. The U.S. Patent Office also issued the first of three
patents that were applied for regarding ReACT adherence technology. Marketing
information indicates that the ReACT system could contribute over $3,000,000 of
revenues during the first full year of worldwide sales.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash flows decreased approximately $831,000 during the nine month period
ended December 31, 1997 compared with the same period in 1996. Operating cash
flows shrunk significantly due to the following factors. Although sales
increased 6% over the prior period, operating expenses, excluding depreciation,
rose 10% 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
covering certain technology utilized in the ReACT test strips in several
European countries. Although the investment in ReACT inventory required to
support expected sales during the introductory period may result in negative
operating cash flows in the next three to six months, management believes that
operating cash flows will be sufficient to meet future operating needs.
Approximately $1,000,000 has been committed for 500 additional ReACT
centrifuges and incubators. Fifty centrifuges and 25 incubators were delivered
in December 1997, with the remainder scheduled for the fourth quarter.
Customized equipment to automate the filling, sealing and labeling of ReACT test
strips was delivered as scheduled in January 1998, and should be on-line by
March 1998. The installed cost of this equipment is approximately $750,000; 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 operations, were substantially
completed prior to the delivery date, at a cost of approximately $100,000.
The company has contracted with a medical equipment manufacturer to provide
automated dispensing and reading devices for use with the ReACT Test System.
The contract commits the company to purchase 50 dispensers and/or readers during
the first three years following FDA approval to market the devices in the U.S.
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.
The company's existing capital resources, consisting of $2,723,000 in cash and
short-term investments and a $1,500,000 revolving credit line, should be
sufficient to support planned product introduction, development and capital
improvements during the next 12 months.
RECENT SALES OF EXEMPT SECURITIES
- ---------------------------------
In June 1997, the company granted Cyn Del & Co., Inc. a warrant to purchase
100,000 shares of the company's common stock at an exercise price of $5.00 per
share (the "Warrant") pursuant to Section 4(2) of the Securities Act of 1933.
The Warrant is exercisable by Cyn Del & Co., Inc. at any time prior to June 19,
2002. The company granted the Warrant as partial consideration for consulting
services to be provided to the company's board of directors by Cyn Del & Co.,
Inc.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits, Part II
(27) Article 5 Financial Data Schedule
(b) Reports on Form 8-K - None
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
GAMMA BIOLOGICALS, INC.
February 13, 1998 By: /s/ David E. Hatcher
---------------------------------
David E. Hatcher
President
(Chief Executive Officer)
February 13, 1998 By: /s/ Margaret J. O'Bannion
--------------------------
Margaret J. O'Bannion
Vice President - Finance
(Chief Financial Officer)
16
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<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.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 2,623,208
<SECURITIES> 100,000
<RECEIVABLES> 3,552,623
<ALLOWANCES> 109,331
<INVENTORY> 4,159,477
<CURRENT-ASSETS> 11,255,521
<PP&E> 13,718,047
<DEPRECIATION> 6,226,161
<TOTAL-ASSETS> 21,499,858
<CURRENT-LIABILITIES> 1,457,311
<BONDS> 844,131
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<COMMON> 476,611
<OTHER-SE> 17,999,705
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<SALES> 13,839,939
<TOTAL-REVENUES> 13,839,939
<CGS> 6,179,220
<TOTAL-COSTS> 4,826,328
<OTHER-EXPENSES> 1,876,532
<LOSS-PROVISION> 19,642
<INTEREST-EXPENSE> 27,849
<INCOME-PRETAX> 1,734,816
<INCOME-TAX> 586,686
<INCOME-CONTINUING> 1,148,130
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