<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITITES EXCHANGE ACT OF 1934
DATE OF THE REPORT (DATE OF EARLIEST EVENT REPORTED): NOVEMBER 5, 1998
MERIDIAN DIAGNOSTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 0-14902 31-0888 197
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
3471 RIVER HILLS DRIVE
CINCINNATI, OHIO 45244
PHONE: (513) 271-3700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)
<PAGE> 2
INFORMATION TO BE INCLUDED IN THE REPORT
Items 1, 3, 4, 5, 6, and 8 are not applicable and are omitted from this Current
Report. The information required by Items 2 and 7 (c) has been previously filed.
This amended report is filed to provide the financial information required by
Items 7 (a) and 7 (b).
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
<S> <C> <C>
(a) PRO FORMA FINANCIAL INFORMATION OF MERIDIAN DIAGNOSTICS, INC. (UNAUDITED)
Pro Forma Consolidated Condensed Statement of Operations for the Year Ended September 30, 1998 .................5
Notes to Pro Forma Combined Condensed Statement of Operations for the Year Ended September 30, 1998 ............6
Pro Forma Combined Condensed Balance Sheet as of September 30, 1998 ............................................7
Notes to Pro Forma Combined Condensed Balance Sheet as of September 30, 1998 ...................................8
(b) FINANCIAL STATEMENTS OF Gull Laboratories, INC. (Gull)
Report of KPMG LLP, Independent Auditors .....................................................................F-1
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1997 and 1996 ....................................................F-2
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 ...................F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 .........F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 ...................F-5
Notes to Consolidated Financial Statements ............................................................F-7 - F-20
Unaudited Consolidated Condensed Balance Sheets at December 31, 1997 and June 30, 1998 ......................F-21
Unaudited Consolidated Condensed Statements of Operations for the three months ended June 30,
1998 and 1997 ............................................................................................F-22
Unaudited Consolidated Condensed Statements of Operations for the six months ended June 30, 1998 and 1997 ...F-23
Unaudited Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 1998 and 1997 ...F-24
Notes to Unaudited Consolidated Condensed Financial Statements .......................................F-25 - F-27
(c) Exhibits
1.) Consent of Independent Public Accountants .........................................................Exhibit 23
2.) Forward Looking Statements ........................................................................Exhibit 99
</TABLE>
2
<PAGE> 3
PRO FORMA FINANCIAL INFORMATION OF MERIDIAN DIAGNOSTICS, INC. (UNAUDITED)
The Pro Forma Combined Condensed Balance Sheet of Meridian Diagnostics
(the "Company") as of September 30, 1998 reflects the financial position of the
Company after giving effect to the acquisition discussed in Item 2 as if the
acquisition occurred as of September 30, 1998. The Pro Forma Consolidated
Statement of Operations for the year ended September 30, 1998, assumes that the
acquisition occurred on October 1, 1997, and is based on the operations of the
Company for the year then ended.
The allocation of purchase price, which is currently pending the
completion of the final audit, was based on estimates. These estimates may be
revised at a later date upon the completion of certain appraisals and other
analyses and estimates of fair value, as well as a final audit, which are not
currently complete and may differ substantially from pro forma adjustments.
The Unaudited Pro Forma Combined Condensed Financial Statements have
been derived from the financial statements of Meridian Diagnostics, Inc. and
Gull Laboratories, Inc. The acquisition is being accounted under the purchase
method of accounting pursuant to which the purchase price is allocated based on
the fair value of assets acquired and liabilities assumed. The Unaudited Pro
Forma Combined Financial Statements presented herein are not necessarily
indicative of the future consolidated financial position or consolidated results
of operations of the Company. The statements are also not indicative of the
consolidated financial position or consolidated results of operations of the
Company that would have actually occurred had the transaction been in effect as
of the date or for the periods presented primarily because the acquisition and
related purchase price were based on financial terms and conditions that existed
on the acquisition date and not as of the beginning of the period. It should be
noted that for periods subsequent to September 30, 1998, the Company's
consolidated financial statements will reflect the acquisition, which, for
accounting purposes, was effective on October 31, 1998.
The Unaudited Pro Forma Condensed Consolidated Financial Statements
should be read in conjunction with the historical consolidated Financial
Statements and related notes of the Company contained in its annual report on
Form 10-K for the year ended September 30, 1998.
On November 5, 1998, a wholly-owned subsidiary of the Company acquired all of
the approximately 8 million shares of common stock of Gull Laboratories, Inc.
(Gull) for $2.25 per share or approximately $18.0 million, in cash. The purchase
price was financed by cash and cash equivalents on hand. Gull, headquartered in
Salt Lake City, Utah, is engaged in the development, manufacture and marketing
of high-quality diagnostic test kits for the detection of infectious diseases
and autoimmune disorders. Gull also offers a line of instrumentation for
laboratory automation and products for blood grouping and HLA tissue typing for
transplantation. Fresenius AG, a German stock company and the former majority
shareholder of Gull ("Fresenius"), is subject to certain non-competition
agreements, as are certain employees of Gull upon their leaving the employment
of the Company. Amounts that Gull owed to Fresenius, subject to various
adjustments as agreed to in the purchase agreement, will be paid to Fresenius
one-half on June 15, 1999 and the remaining half on December 31, 1999, with
annual interest at 7.5%. For accounting purposes, the acquisition was effective
on October 31, 1998 and the results of operations of Gull will be included in
the consolidated results of operations of the Company from that date forward.
The resulting goodwill from this transaction will be amortized over twenty
years.
3
<PAGE> 4
In connection with the acquisition of Gull, the estimated assets
acquired and liabilities assumed are as follows (dollars in thousands):
Gull
-------
Fair value of assets acquired:
Cash $ 891
Accounts and notes receivable 3,317
Inventory 6,785
Other current assets 390
Property plant and equipment 5,809
Other non current assets 1,597
-------
$18,789
Fair value of:
Liabilities assumed 7,270
Debt assumed 5,620
-------
12,890
-------
Net assets acquired $ 5,899
=======
Purchase price:
Cash paid for net assets $18,000
Transaction costs 800
-------
$18,800
Estimated Goodwill 12,901
-------
$ 5,899
=======
In fiscal 1999, the Company plans to close the Salt Lake City and certain other
facilities of Gull, sell the Gull land and buildings in Salt Lake City, transfer
equipment, technology and manufacturing capabilities to the Company's
headquarters in Cincinnati and terminate substantially all Gull employees.
Additional purchase liabilities to be recorded will include severance and costs
associated with the shut down and consolidation of the acquired facilities.
4
<PAGE> 5
MERIDIAN DIAGNOSTICS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the year ended September 30, 1998
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma
Adjustments Pro
Meridian Gull (Note 4) Forma
<S> <C> <C> <C> <C> <C>
Net Sales $33,169 $20,366 $53,535
Cost of Goods 10,650 10,811 21,461
------- ------- -------
Gross Profit 22,519 9,555 32,074
Operating Expenses
Research & Development 1,994 1,755 3,749
Selling, General & Administrative 12,174 11,793 645 (1) 24,612
------- ------- ------- -------
Total Operating Expenses 14,168 13,548 645 28,361
Operating Income 8,351 (3,993) (645) 3,713
Other Income (Expense)
Interest Income 1,340 -- (1,060) (2) 280
Interest Expense (1,624) (1,107) (2,731)
Other, net (13) 382 369
Total Other Income (Expense) (297) (725) (1,060) (2,082)
Earnings (Loss) before Income Taxes 8,054 (4,718) (1,705) 1,631
Income Taxes 3,096 (857) (700) (3)
------- ------- -------
Net Earnings (Loss) $ 4,958 $(3,861) $(1,005) $92
======= ======= ======= =======
Basic Weighted Average Number of common shares 14,376 14,376
outstanding
Basic Earnings per share $.34 $.01
Diluted Weighted Average number of common shares 14,703 14,703
outstanding
Diluted Earnings per common share $.34 $.01
</TABLE>
5
<PAGE> 6
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
Pro Forma Statement reflects the impact of the following Pro Forma adjustments:
(1) An increase in goodwill amortization of based on a preliminary
estimate of goodwill of approximately $13 million and an
amortization period of 20 years.
(2) A reduction in interest income reflecting the use of $18,800
in cash to purchase Gull on October 1, 1997.
(3) The tax effect of the revised earnings before taxes assuming
an effective tax rate of 38%, utilization of a portion of
Gull's U.S. tax losses and the establishment of valuation
reserves for potentially unrealizable deferred tax assets
related to current year operating losses until such time as
the Company has been able to finalize strategies to utilize
such losses.
(4) The Pro Forma Statement does not reflect the following items:
o Anticipated reductions in operating expenses as a
result of terminations and facility closings in
connection with the integration of Gull operations
into Meridian's organization.
o Expected improvements in gross profit upon the
integration of Gull operations into Meridian's
Cincinnati production facility due to production
efficiency, improved materials management and reduced
overhead.
o Tax benefits from the expected utilization of Gull
net operating losses, primarily in foreign countries.
The Company is in the process of determining the
amount of net operating losses available and
strategies to utilize such net operating losses.
o The Company plans to close the Salt Lake City and
certain other facilities of Gull, sell the Gull land
and buildings in Salt Lake City, transfer equipment,
technology and manufacturing capabilities to the
Company's headquarters in Cincinnati and terminate
substantially all Gull employees. Additional purchase
liabilities will be recorded for costs associated
with this shut down and consolidation of the acquired
facilities; however, the cost of such has not been
determined and accordingly is not reflected in the
pro forma statement.
6
<PAGE> 7
MERIDIAN DIAGNOSTICS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of September 30, 1998
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma
Meridian Gull Adjustments Pro Forma
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and Cash Equivalents $19,400 $ 891 $(18,800) (1) $ 1,491
Investments 4,369 -- 4,369
Accounts and Notes Receivable 9,707 3,317 13,023
Inventories 5,569 6,785 12,354
Other Current Assets 718 390 1,109
------- ------- -------- -------
Total Current Assets 39,763 11,383 (18,800) 32,346
Net Property, Plant & Equipment 8,809 4,309 1,500 (2) 14,618
Other Assets
Long Term Receivables and Other 1,035 514 1,549
Deferred Tax Assets 740 1,083 1,823
Deferred Debentures Offering Costs, net 1,057 -- 1,057
Goodwill and Other Intangibles, Net 7,743 937 11,964 (3) 20,644
------- ------- -------- -------
Total Other Assets 10,575 2,534 11,964 25,073
------- ------- -------- -------
Total Assets $59,147 $18,226 (5,336) $72,037
======= ======= ======== =======
Current Liabilities
Current Portion of Long Term Obligations 213 851 1,064
Line of Credit -- 1,518 1,518
Accounts Payable and Accrued Expense 3,656 9,336 (2,808) (4) 10,184
------- ------- -------- -------
Total Current Liabilities 3,869 11,705 (2,808) 12,766
Long Term Debt and Capital Lease Obligations 20,595 3,251 23,846
Other Long Term Liabilities 742
--
742
Common Stock 2,397 8 (8) (5) 2,397
Additional Paid in Capital 20,653 8,925 (8,925) (6) 20,653
Retained Earnings 11,935 (5,908) 5,908 (7) 11,935
Cumulative Foreign Currency Translation (302) (497) 497 (8) (302)
------- ------- -------- -------
Total Shareholders' Equity 34,683 2,528 (2,528) 33,530
------- ------- -------- -------
Total Liabilities and Shareholders' Equity $59,147 $18,226 $ (5,336) $72,037
======= ======= ======== =======
</TABLE>
7
<PAGE> 8
MERIDIAN DIAGNOSTICS, INC.
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
(dollars in thousands)
The following pro forma adjustments are reflected in the pro forma Combined
Condensed Balance Sheet as of September 30, 1998.
(1) This adjustment is made to reduce cash and cash equivalents to reflect
the Gull purchase price, including acquisition costs.
(2) This adjustment is made to estimate the fair market value of the Salt
Lake City facilities.
(3) This adjustment is made to record the estimated goodwill related to the
Gull acquisition, net of the write-off of goodwill on the Gull balance
sheet at the date of the acquisition.
(4) This adjustment is made to reduce amounts payable to Gull's parent
company in accordance with the merger agreement.
(5) This adjustment is made to eliminate Gull's historical common stock
accounts.
(6) This adjustment is made to eliminate Gull's historical paid-in capital
accounts.
(7) This adjustment is made to eliminate Gull's historical retained
earnings accounts.
(8) This adjustment is made to eliminate Gull's historical cumulative
foreign currency translation adjustment accounts.
8
<PAGE> 9
Independent Auditors' Report
The Board of Directors and Stockholders
Gull Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Gull
Laboratories, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gull Laboratories,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG LLP
Salt Lake City, Utah
March 3, 1998, except as to note 18
which is as of April 6, 1998
F-1
<PAGE> 10
GULL LABORATORIES, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash $ 239,993 301,033
Accounts receivable, less allowance for doubtful accounts of
$282,973 in 1997 and $320,815 in 1996 (note 5) 1,963,410 3,100,612
Net investment in sales-type leases (notes 6 and 8) 272,125 262,831
Income tax refund receivable (note 9) 119,499 134,743
Inventories (notes 3 and 5) 6,197,359 4,881,426
Prepaid expenses 316,878 399,775
----------- -----------
Total current assets 9,109,264 9,080,420
Property, plant, and equipment, net (notes 4, 6, and 7) 4,189,999 4,409,569
Net investment in sales-type leases (notes 6, 7, and 8) 763,412 810,419
Deferred income taxes (note 9) 236,586 -
Other assets, net (note 2) 1,001,812 989,101
----------- -----------
$15,301,073 15,289,509
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable (note 5) $ 1,498,146 1,675,322
Accounts payable 2,331,126 1,561,132
Accrued expenses 1,853,521 1,043,452
Deferred income taxes (note 9) 6,884 69,371
Current installments of long-term debt and capital lease
obligations (notes 6 and 7) 3,576,085 545,420
----------- -----------
Total current liabilities 9,265,762 4,894,697
Long-term debt and capital lease obligations, excluding current
installments (notes 6 and 7) 733,082 3,000,803
Deferred income taxes (note 9) - 252,260
Other long-term liabilities 362,278 413,801
----------- -----------
Total liabilities 10,361,122 8,561,561
----------- -----------
Commitments and contingencies (notes 7, 15, 17, and 18)
Stockholders' equity (note 12):
Preferred stock, $.01 par value. Authorized 5,000,000
shares; no shares issued or outstanding - -
Common stock, $.001 par value. Authorized 50,000,000 shares; issued and
outstanding 7,940,409 and 7,883,934 shares in 1997 and 1996, respectively 7,941 7,884
Additional paid-in capital 8,416,335 8,113,555
Foreign currency translation adjustment (413,737) (137,578)
Accumulated deficit (3,070,588) (1,255,913)
----------- -----------
Total stockholders' equity 4,939,951 6,727,948
----------- -----------
$15,301,073 15,289,509
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 11
GULL LABORATORIES, INC.
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales $21,705,552 24,443,935 26,261,130
Cost of sales 9,236,929 11,631,952 11,890,053
----------- ----------- -----------
Gross profit 12,468,623 12,811,983 14,371,077
----------- ----------- -----------
Expenses:
Selling, general, and administrative 10,904,133 10,378,679 11,339,139
Research and development 1,553,119 1,512,915 1,078,387
Merger and integration costs (note 14) 1,455,298 - -
Restructuring charge (note 14) - 326,442 535,277
----------- ----------- -----------
Total expenses 13,912,550 12,218,036 12,952,803
----------- ----------- -----------
Operating income (loss) (1,443,927) 593,947 1,418,274
----------- ----------- -----------
Other income (expense):
Interest expense (593,361) (535,786) (647,656)
Other (note 11) 29,325 58,457 818,220
----------- ----------- -----------
Total other income (expense) (564,036) (477,329) 170,564
----------- ----------- -----------
Income (loss) before provision for income taxes (2,007,963) 116,618 1,588,838
Income tax expense (benefit) (note 9) (193,288) 225,841 1,130,151
----------- ----------- -----------
Net income (loss) (1,814,675) (109,223) 458,687
=========== =========== ===========
Net income (loss) per common share:
Basic $ (.23) (.01) .06
=========== =========== ===========
Diluted $ (.23) (.01) .06
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 12
GULL LABORATORIES, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Addi- Foreign Total
Common stock tional currency Accum- stock-
-------------------- paid-in translation ulated holders'
Shares Amount capital adjustment deficit equity
--------- --------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 (note 1) 7,874,934 $7,875 7,901,260 (59,667) (1,605,377) 6,244,091
Stock options exercised 9,000 9 15,178 - - 15,187
Tax benefit from exercise of stock options - - 197,117 - - 197,117
Net income - - - - 458,687 458,687
Foreign currency translation adjustment - - - (76,510) - (76,510)
--------- ------ --------- -------- ---------- ---------
Balances, December 31, 1995 7,883,934 7,884 8,113,555 (136,177) (1,146,690) 6,838,572
Net loss - - - - (109,223) (109,223)
Foreign currency translation adjustment - - - (1,401) - (1,401)
--------- ------ --------- -------- ---------- ---------
Balances, December 31, 1996 7,883,934 7,884 8,113,555 (137,578) (1,255,913) 6,727,948
Stock options exercised 56,425 56 204,140 - - 204,196
Tax benefit from exercise of stock options - - 94,346 - - 94,346
Sale of common stock to ESOP 50 1 530 - - 531
Net assets not acquired from Fresenius AG - - (248,832) - - (248,832)
Tax benefit from goodwill amortization - - 252,596 - - 252,596
Net loss - - - - (1,814,675) (1,814,675)
Foreign currency translation adjustment - - - (276,159) - (276,159)
--------- ------ --------- -------- ---------- ---------
Balances, December 31, 1997 7,940,409 $7,941 8,416,335 (413,737) (3,070,588) 4,939,951
========= ====== ========= ======== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 13
GULL LABORATORIES, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,814,675) (109,223) 458,687
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,186,864 1,243,109 1,194,849
Loss (gain) on disposal of property, plant, and equipment 58,871 13,810 (370,478)
Provision for losses on accounts receivable 50,257 63,754 93,649
Provision for loss on leases 51,756 65,470 86,765
Provision for inventory reserve 115,329 223,434 393,713
Provision for warranty reserve 64,063 84,515 84,609
Tax benefit from exercise of stock options 94,346 - 197,117
Gain on sales-type leases (130,401) (246,484) (275,662)
Amortization of unearned income on sales-type leases (141,768) (100,892) (53,448)
Changes in assets and liabilities:
Accounts receivable 100,249 102,398 98,620
Income tax refund receivable 15,244 129,765 (110,681)
Inventories (1,329,031) (145,949) (902,795)
Prepaid expenses 50,939 (166,370) (6,834)
Other assets (145,350) 5,541 (206,905)
Accounts payable and accrued expenses 2,293,359 (623,071) 152,625
Other liabilities (51,523) 39,724 (30,895)
Deferred income taxes (256,758) (171,516) (179,978)
Due to parent company - (265,390) 60,103
----------- ----------- -----------
Net cash provided by operating activities 211,771 142,625 683,061
----------- ----------- -----------
Cash flows from investing activities:
Increase in sales-type leases (527,951) (233,960) (344,854)
Payments received on sales-type leases 386,735 421,966 226,384
Proceeds from sale of property, plant, and equipment 115,319 24,889 989,127
Purchase of property, plant, and equipment - (1,361,048) (1,305,186)
Proceeds from the sale of Gull GmbH - - 313,500
----------- ----------- -----------
Net cash provided by used in investing activities (25,897) (1,148,153) (121,029)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (505,829) (2,129,727) (1,397,033)
Net increase (decrease) in line-of-credit 293,780 (634,583) 469,346
Proceeds from issuance of long-term debt - 3,498,027 299,539
Proceeds from issuance of common stock 204,727 - 15,187
----------- ----------- -----------
Net cash provided by (used in) financing activities (7,322) 733,717 (612,961)
----------- ----------- -----------
Effect of foreign exchange rates on cash (239,592) 353,429 (97,810)
----------- ----------- -----------
Net increase (decrease) in cash (61,040) 81,618 (148,739)
Cash at beginning of year 301,033 219,415 368,154
----------- ----------- -----------
Cash at end of year $ 239,993 301,033 219,415
=========== =========== ===========
</TABLE>
F-5
<PAGE> 14
GULL LABORATORIES, INC.
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information
Cash paid (received) during the year for:
Interest $ 599,344 546,754 644,609
Income taxes (25,081) 56,409 1,323,757
Supplemental Disclosures of Noncash Investing and
Financing Activities
Note payable and capital lease obligations incurred for equipment $1,155,050 127,808 60,491
Transfer of inventory to net investment in sales-type leases 339,342 327,133 236,605
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 15
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(1) Summary of Significant Accounting Policies
(a) Business Presentation
Gull Laboratories, Inc. (the Company or Gull) is in the
business of developing, manufacturing, and selling medical
diagnostic kits and bioreagents. The Company operates in a
global market with direct sales representatives in the United
States, Germany, Belgium, France, and the Netherlands, and
sells through distributors and OEM relationships in other
foreign countries. The accompanying consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany transactions
and accounts have been eliminated in consolidation.
Fresenius AG, a German company, owns 62 percent of the
outstanding common stock of the Company. In 1997, the Company
acquired certain assets and liabilities of the Fresenius
Diagnostics Business Unit of the Intensive Care and
Diagnostics Division of Fresenius AG (Fresenius Diagnostics)
in exchange for 1,320,000 shares of the Company's common
stock. The transaction was between entities under common
control, and accounted for as if a pooling-of-interests.
Accordingly, the consolidated financial statements for periods
prior to 1997 have been restated to include the accounts and
results of operations of Fresenius Diagnostics. Net assets not
acquired as part of the acquisition of Fresenius Diagnostics
have been shown as a reduction of stockholders' equity.
Although the Company purchases certain raw materials from a
single supplier, alternative sources of supply are available
for all raw materials.
(b) Accounts Receivable
As a general policy, collateral is not required for
receivables, but customers' financial condition and credit
worthiness are regularly evaluated and historical losses have
been within the range of management's expectations. The
Company maintains an allowance for losses based upon the
expected collectibility of all accounts receivable.
(c) Inventories
Inventories are stated at the lower of cost or market using
the first-in, first-out method.
(d) Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost and are
depreciated on the straight-line method over their estimated
useful lives of twenty to thirty-two years for buildings and
improvements and three to eight years for all other classes of
depreciable property.
F-7
<PAGE> 16
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(e) Other Assets
Other assets include the excess of cost over fair value of
assets acquired (goodwill), marketing rights, deposits, and
certain deferred costs. Goodwill is amortized on the
straight-line basis over ten years and other assets are
amortized on the straight-line basis over their estimated
lives of five to ten years.
(f) Research, Development, and Advertising
Research, development, and advertising costs are expensed as
incurred.
(g) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and deferred tax liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred tax assets and deferred tax liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
deferred tax liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(h) Net Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
Earnings per Share (SFAS 128). SFAS 128 became effective for
financial statements with interim and annual periods ending
after December 15, 1997. Accordingly, the Company has adopted
SFAS 128.
SFAS 128 establishes a different method of computing net
income (loss) per common and common-equivalent share than was
previously required under the provisions of Accounting
Principles Board Opinion No. 15. SFAS 128, requires the
presentation of basic and diluted income (loss) per share.
Basic earnings (loss) per common share is the amount of net
income (loss) for the period available to each share of common
stock outstanding during the reporting period. Diluted
earnings (loss) per common share is the amount of net income
(loss) for the period available to each share of common stock
outstanding during the reporting period and to each share that
would have been outstanding assuming the issuance of common
shares for all dilutive potential common shares outstanding
during the period. Potential common shares (stock options and
warrants) have not been included in the computation of loss
per share in 1997 and 1996, as they would have had a dilutive
effect. Prior periods have been restated for presentation in
accordance with SFAS 128, as applicable.
F-8
<PAGE> 17
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(h) Net Income (Loss) Per Common Share (continued)
In calculating income (loss) per common share, the net income
(loss) was the same for both the basic and diluted
calculation. Below is a reconciliation between the basic and
diluted weighted average common and common-equivalent shares
for 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Basic (weighted average common shares
outstanding during the year) $7,926,775 7,883,934 7,879,245
Weighted average common stock options
outstanding during the year - - 19,954
========== ========== ==========
Diluted $7,926,775 7,883,934 7,899,199
========== ========== ==========
</TABLE>
(i) Foreign Currency Translation
Assets and liabilities of foreign operations are translated at
exchange rates in effect at year-end, and statements of
operations are translated at the average exchange rates for
the year. Adjustments resulting from translation are reported
as a separate component of stockholders' equity until the
foreign entity is sold or liquidated. Gains and losses
resulting from foreign currency transactions are generally
included in income.
(j) Use of Estimates
The preparation of the consolidated 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 consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(k) Disclosure About Fair Value of Financial Instruments
At December 31, 1997 and 1996, the book value of all of the
Company's financial instruments approximates their fair value.
F-9
<PAGE> 18
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(l) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123) encourages
entities to adopt a fair-value based method of accounting for
stock options or similar equity instruments. However, it also
allows an entity to continue measuring compensation cost for
stock-based compensation using the intrinsic-value method of
accounting prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has elected to continue to apply the provisions of APB
25 and provide pro forma footnote disclosures required by SFAS
123.
(m) Impairment of Long-Lived Assets
Management periodically reviews long-lived assets including
intangible assets for possible impairment. Recoverability of
assets is measured by comparison of the carrying amount of the
asset to net future cash flows expected to be generated from
the asset. No impairment has been recognized in the
accompanying consolidated financial statements.
(n) Reclassification
Certain amounts in 1996 and 1995 have been reclassified to
conform with the 1997 presentation.
(2) Other Assets
Other assets consist of the following at December 31:
1997 1996
---------- --------
Goodwill $ 897,166 897,166
Deposits 93,722 26,372
Patents, organizational costs,
and marketing rights 367,727 288,135
Other 165,591 174,453
Less accumulated amortization (522,394) (397,025)
---------- --------
$1,001,812 989,101
========== ========
(3) Inventories
Inventories consist of the following at December 31:
1997 1996
---------- ---------
Raw materials $2,514,522 1,677,800
Work-in-process 889,947 822,576
Finished goods 1,576,303 1,571,557
Equipment held for lease or sale 1,216,587 809,493
----------- -----------
$6,197,359 4,881,426
=========== ===========
F-10
<PAGE> 19
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(4) Property, Plant, and Equipment
Property, plant, and equipment consist of the following at December 31:
1997 1996
----------- ----------
Land and improvements $ 649,835 649,835
Building and improvements 2,981,079 2,841,102
Machinery and equipment 3,380,315 3,061,230
Office furniture and equipment 2,803,259 3,062,233
Transportation equipment 297,694 371,247
Construction-in-progress 11,479 3,610
----------- -----------
Less accumulated depreciation 10,123,661 9,989,257
and amortization 5,933,662 5,579,688
----------- ----------
$ 4,189,999 4,409,569
=========== ==========
(5) Notes Payable and Related Party Transactions
Notes payable consist of the following at December 31:
1997 1996
---------- -----------
Lines of credit $1,498,146 1,601,116
Bank overdraft facility -- 74,206
========== ==========
Total notes payable $1,498,146 1,675,322
========== ==========
The Company maintains lines of credit with banks totaling approximately
$2,400,000 which are either due on demand or expire in May 1998.
Borrowings under the lines of credit are limited to certain levels of
accounts receivable and inventories. The rates of interest charged
range from the foreign bank's reference rate plus .25 percent to the
U.S. banks reference rate plus .4 percent (effective rates from 7.50 to
8.90 percent at December 31, 1997). The lines of credit are secured by
accounts receivable and inventories. Among other restrictions, debt
covenants related to the line of credit require the Company to maintain
certain levels of tangible net worth.
The Company and Fresenius AG have entered into service contracts in
which Fresenius AG leases certain property and provides services to the
Company. Amounts paid to Fresenius AG totaled $965,000, $1,103,000 and
$1,021,000 in 1997, 1996 and 1995, respectively for these services.
Accounts payable at December 31, 1997, include approximately $860,000
due to Fresenius AG for payments Fresenius AG made to creditors on
behalf of the Company.
F-11
<PAGE> 20
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(6) Long-term Debt
Long-term debt consists of the following at December 31:
1997 1996
---------- ----------
Mortgage note payable to a bank at 10.06%
interest, payable in monthly installments of
$19,605, including interest, based on a
15-year amortization with a balloon payment
due in June 2006. The note is secured by
land and a building $1,719,620 1,776,499
Note payable to a bank at 9.38% interest, payable
in monthly installments of $3,391, including
interest, through October 1999. The note is
secured by equipment 68,301 100,769
Mortgage note payable to a bank at 8.81% interest,
payable in monthly installments of $572,
including interest, based on a 20-year
amortization with a balloon payment due in
February 2001. The note is secured by a building 60,773 62,792
Note payable to lending institution at 11% interest,
payable in monthly payments of $15,798 through
August 1997 and decreasing thereafter
incrementally through May 2001. The note is
secured by equipment and the proceeds of
certain sales-type leases 324,958 452,746
Note payable to Fresenius AG 204,498 -
Capitalized lease obligations (note 7) 1,931,017 1,153,417
---------- ----------
Total long-term debt and
capital lease obligations 4,309,167 3,546,223
Less current portion 3,576,085 545,420
---------- ----------
Long-term debt and capital
lease obligations excluding
current installments $ 733,082 3,000,803
========== ==========
Principal maturities of long-term debt and capital lease obligations
for the years subsequent to December 31, 1997 are as follows:
1998 $3,576,085
1999 498,814
2000 182,438
2001 51,830
==========
$4,309,167
==========
In connection with the acquisition of Fresenius Diagnostics (note 1),
Fresenius AG made available a working capital loan to the Company of
approximately $1,000,000 bearing interest at an annual rate of eight
percent payable quarterly. The amount available under the loan
decreased to $800,000 on December 31, 1997 and will continue to
decrease by $200,000 every six months thereafter with any remaining
balance outstanding due on June 30, 1999. The loan is secured by a
pledge of the Company's ownership interest in its German subsidiaries'
common stock.
F-12
<PAGE> 21
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
As a result of the loss and decrease in liquidity in 1997, the Company
was not in compliance with certain earnings and liquidity covenants
associated with its long-term debt, lease obligations, and line of
credit with two banks at December 31, 1997. The banks have waived the
noncompliance with the covenants through December 31, 1997, and are
currently discussing alternative covenants to be put into place in
connection with the extension of the line of credit which is due in May
1998. However, because the bank has not waived the covenants through
January 1, 1999, certain long-term obligations have been classified as
current liabilities.
(7) Lease Obligations
Capital Leases - The Company leases equipment under a master capital
lease agreement with a financial institution and under other capital
lease agreements. Minimum rentals of these leases have been capitalized
at the present value of the rentals at the inception of the lease and
the obligation for such amount is recorded as a liability. Interest is
accrued on the basis of the outstanding lease obligation. Assets
securing such leases had an approximate net book value of $530,000 and
$829,000 at December 31, 1997 and 1996, respectively.
Operating Leases - The Company leases administrative offices,
manufacturing facilities, and certain equipment under noncancelable
operating lease agreements expiring through August 2005. Total rent
expense approximated $92,000, $81,000, and $44,000 in 1997, 1996, and
1995, respectively.
Required future minimum lease payments and the present value of the
future minimum capital lease payments at December 31, 1997 are as
follows:
Capital Operating
leases leases
----------- ---------
Year ending:
1998 $1,909,767 84,804
1999 208,832 70,404
2000 134,531 70,404
2001 31,528 70,404
2002 -- 70,404
Thereafter -- 187,744
---------- --------
Total future minimum lease payments 2,284,658 $554,164
========
Less amount representing interest 353,641
----------
Present value of future minimum lease
payments (see note 6) $1,931,017
==========
(8) Net Investment in Sales-Type Leases
The Company has invested in certain equipment financing agreements
under sales-type leases. Each sales-type lease is collateralized by a
security interest in the financed equipment. At December 31, 1997 and
1996, the net investment reflected in the accompanying consolidated
balance sheets for these sale-type leases consisted of the following:
1997 1996
---------- ----------
Gross minimum sales-type lease receivables $1,380,121 1,605,283
Less allowance for uncollectible
receivables (44,744) (128,622)
----------- ----------
Net minimum sales-type lease receivables 1,335,377 1,476,661
Unearned interest income (299,840) (403,411)
----------- ----------
Net investment in sales-type leases 1,035,537 1,073,250
Less current portion (272,125) (262,831)
----------- ----------
Net investment in sales-type leases,
excluding current portion $ 763,412 810,419
=========== ==========
F-13
<PAGE> 22
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(8) Net Investment in Sales-Type Leases (continued)
Minimum gross receipts from sales-type lease receivables for the next
five years are as follows:
Year ending December 31:
1998 $ 390,511
1999 385,062
2000 328,626
2001 203,720
2002 72,202
----------
Total $1,380,121
==========
(9) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1997,
1996, and 1995 is as follows:
1997 1996 1995
--------- --------- ----------
Current:
Federal $ 72,670 404,369 695,600
State 13,839 77,000 132,000
Foreign - (53,118) 261,686
--------- --------- ----------
86,509 428,251 1,089,286
--------- --------- ----------
Deferred:
Federal 12,600 7,900 24,700
State 2,400 1,500 5,000
Foreign (294,797) (211,810) 11,165
--------- --------- ----------
(279,797) (202,410) 40,865
--------- --------- ----------
Total tax espense
(benefit) $(193,288) 225,841 1,130,151
========= ========= ==========
Income tax expense differs from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to income from operations as
follows:
1997 1996 1995
--------- -------- ----------
Computed "expected" tax expense (benefit) $(682,707) 39,650 540,205
Increase (decrease) in income taxes
resulting from:
Goodwill amortization 31,000 31,000 31,000
Exclusion of loss from foreign
subsidiary 207,619 86,422 411,646
Foreign sales corporation exclusion - (2,900) (32,000)
State taxes, net of federal benefits 10,000 41,000 90,000
Acquisition costs 148,000 - -
Other 92,800 30,669 89,300
--------- -------- ----------
Provision for income taxes $(193,288) 255,841 1,130,151
========= ======== ==========
F-14
<PAGE> 23
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(9) Income Taxes (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>
1997 1996
----------------------- ------------------------
Domestic Foreign Domestic Foreign
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Tax losses $ -- 3,370,000 -- 2,477,000
Research and development expenses -- -- -- --
Warranty reserve 60,000 -- 45,000 --
Vacation reserve 50,000 -- 38,000 --
Bad debt reserve 29,000 -- 35,000 --
Inventory reserve 67,000 -- 21,000 --
Technology amortization 21,000 -- 14,000 --
Property, plant and equipment -- 6,929 -- 45,740
Net investment in sales-type leases -- 108,246 -- 80,623
Other items 11,000 18,000 6,000 18,850
---------- ----------- --------- -----------
Total gross deferred tax assets 238,000 3,503,175 159,000 2,622,213
Less valuation allowance -- (2,749,000) -- (2,448,000)
---------- ----------- --------- -----------
Deferred tax assets 238,000 754,175 159,000 174,213
---------- ----------- --------- -----------
Deferred tax liabilities:
Patents (73,000) -- (35,000) --
Sales leases (137,000) -- (92,000) --
Other payables -- (25,000) -- (29,000)
Property, plant and equipment (178,000) -- (167,000) --
Deferred revenue (55,000) -- (55,000) --
Other -- (294,473) -- (276,844)
---------- ----------- --------- -----------
Total gross deferred tax liabilities (443,000) (319,473) (349,000) (305,844)
---------- ----------- --------- -----------
Net deferred tax asset (liability) $ (205,000) 434,702 (190,000) (131,631)
========== =========== ========= ===========
Net current deferred tax asset (liability) $ 161,000 (167,884) 108,000 (177,371)
Net noncurrent deferred tax asset (liability) (366,000) 602,586 (298,000) 45,740
---------- ----------- --------- -----------
$ (205,000) 434,702 (190,000) 131,631
========== =========== ========= ===========
</TABLE>
The domestic valuation allowance for deferred tax assets as of January
1, 1996 was zero. There was no change in the total domestic valuation
allowance for the years ended December 31, 1997 and 1996. The valuation
allowance of $2,749,000 and $2,448,000 at December 31, 1997 and 1996,
respectively, is solely attributable to the foreign jurisdiction.
F-15
<PAGE> 24
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(9) Income Taxes (continued)
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that all or a portion of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize
the benefits of these deductible differences.
(10) Employee Benefit Plans
The Company has an Employee Stock Ownership Plan (ESOP) and 401(k) plan
that covers all United States employees who have been employed for one
month. The ESOP contributions are used to purchase Company securities.
The Board of Directors approved discretionary contributions to the ESOP
totaling $11,587 for 1995. No discretionary contribution was made to
the ESOP during the years ended December 31, 1997 and 1996.
The Company matches 25 percent of employee contributions to the 401(k)
plan up to a maximum individual employee contribution of four percent
of the employee's cash compensation. These matching contributions vest
over a seven-year period. Employer matching contributions totaled
$62,860, $45,273, and $38,413 for 1997, 1996, and 1995, respectively.
Gull Diagnostics S.A. has a contract with an insurance company under
which certain foreign employees may receive lump-sum payments or
annuity payments at retirement. The Company pays two-thirds of the
monthly premiums and the employee pays the remaining one third. The
Company's contribution to the plan was approximately $15,400, $14,500,
and $17,000 during 1997, 1996, and 1995, respectively.
(11) Other Income
Other income consisted of the following approximate amounts for the
years ended December 31,:
1997 1996 1995
--------- -------- --------
Gain on sale of building $ -- -- 516,533
Currency transaction gains (losses) 52,530 (38,496) 155,116
Interest income 144,706 132,981 92,083
Other nonoperating income (expenses) (167,911) (36,028) 54,488
========= ======== ========
$ 29,325 58,457 818,220
========= ======== ========
F-16
<PAGE> 25
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(12) Stock Compensation Plans
Under the 1984 Gull Laboratories, Inc. fixed Stock Option Plan, the
Company may grant options to its employees for up to 833,333 shares of
common stock. Under the Company's fixed 1992 Stock Option Plan, the
Company may grant options to its officers, directors, and key
management personnel for up to 500,000 shares of common stock. Under
both plans, the exercise price of each option equals the market price
of the Company's stock on the date of grant, and an option's maximum
term is ten years. Options are granted at the discretion of the
compensation committee of the Company's Board of Directors and
generally vest 25 percent per year. A summary of the activity under the
plans is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ------------------------- ---------------------------
Weighted-average Weighted-average Weighted-average
exercise exercise exercise
Shares price Shares price Shares price
--------- ---------------- -------- ---------------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 506,000 $4.63 386,000 $4.64 270,000 $4.88
Granted 158,500 9.99 130,000 4.68 200,000 4.50
Exercised (56,425) 3.93 - - (9,000) 1.69
Forfeited (25,500) 5.26 (10,000) 5.50 (75,000) 5.50
======== ======== ========
Outstanding at end
of year 582,575 $6.13 506,000 $4.63 386,000 $4.64
======== ======== ========
Options exercisable at
year-end 302,075 $4.83 269,750 $4.68 70,000 $4.40
Weighted-average fair
value of options
granted during the
year $5.84 3.34 2.77
</TABLE>
F-17
<PAGE> 26
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(12) Stock Compensation Plans (continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------- ------------------------------
Number Number
outstanding Weighted-average exercisable
at remaining Weighted-average at Weighted-average
Range of exercise December 31, contractual exercise December 31, exercise
prices 1997 life price 1997 price
-------------------- ------------ ----------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$1.125 9,500 1 yrs. $1.13 9,500 1.13
3.00 - 4.00 6,250 6 3.88 6,250 3.88
4.00 - 5.00 297,925 8 4.56 172,925 4.53
5.00 - 6.00 113,400 4.5 5.50 113,400 5.50
9.00 - 10.00 155,500 9.5 9.99 - -
======== ========
582,575 7.6 6.13 302,075 4.83
======== ========
</TABLE>
Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income (loss)
and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- --------
<S> <C> <C> <C>
Net income:
As reported $(1,814,675) (109,223) 458,687
Pro forma (2,158,146) (399,844) 424,062
Basic earnings per common share:
As reported $ (.23) (.01) .06
Pro forma (.27) (.05) .05
Diluted earnings per common share:
As reported $ (.23) (.01) .06
Pro forma (.27) (.05) .05
</TABLE>
The effect that calculating compensation cost for stock-based
compensation under SFAS 123 has on the pro forma net income (loss) as
presented above may not be representative of the effects on reported
net income or losses for future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996, and 1995
respectively: expected volatility of 60.3, 66.2, and 49.5 percent; risk
free interest rates of 6.0, 6.1, and 6.3 percent; no dividend yield for
any year; and expected lives of 5.2, 7.5, and 7.5 years.
On May 9, 1996, the Company granted an option to purchase 15,000 shares
of the Company's common stock to a nonemployee. The option is
exercisable 5,000 shares at $6 per share, 5,000 shares at $8.50 per
share, and 5,000 shares at $11 per share and becomes exercisable when
the Company's stock closes for twenty consecutive trading days at an
average price of $6, $8.50, and $11, respectively. Compensation expense
related to these options was not material.
F-18
<PAGE> 27
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(13) Foreign Operations, Export Sales, and Major Customer
Operations by geographic area:
Sales
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
United States $ 15,457,761 15,217,860 15,272,576
Europe 12,682,781 12,189,526 14,497,234
Eliminations (6,434,990) (2,963,451) (3,508,680)
============ ============ ============
$ 21,705,552 24,443,935 26,261,130
============ ============ ============
Income (loss) before income taxes
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
United States $ 141,265 1,429,577 2,281,061
Europe (1,393,075) (714,340) 123,708
Eliminations (162,792) (62,833) (168,275)
------------ ------------ ------------
(1,414,602) 652,404 2,236,494
Interest expense (593,361) (535,786) (647,656)
------------ ------------ ------------
$ (2,007,963) 116,618 1,588,838
============ ============ ============
Identifiable assets
------------ ------------ ------------
1997 1996 1995
------------ ------------ ------------
United States $ 35,933,845 21,892,565 20,842,949
Europe 6,185,235 5,213,220 6,652,928
Eliminations (26,818,007) (11,816,276) (11,276,216)
------------ ------------ ------------
$ 15,301,073 15,289,509 16,219,661
============ ============ ============
United States export sales to unaffiliated customers by destination of
sale:
1997 1996 1995
---------- ---------- ----------
Europe $1,124,033 1,653,612 1,525,900
Pacific Rim (Australia, New Zealand,
and the Far East) 1,147,596 1,154,586 1,293,038
Other 325,002 149,310 131,243
---------- ---------- ----------
$2,596,631 2,957,508 2,950,181
========== ========== ==========
Sales to one customer amounted to 11 percent, 11 percent, and 10
percent of total sales in 1997, 1996, and 1995, respectively. No single
country in Europe or the Pacific Rim accounted for more than ten
percent of sales to unaffiliated customers.
F-19
<PAGE> 28
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(14) Merger, Integration, and Restructuring Charges
In an effort to bring its European operations to profitability, the
Company incurred restructuring charges of $326,442 and $535,277 in 1996
and 1995, respectively, substantially all of which relate to personnel
termination costs. In connection with the acquisition of Fresenius
Diagnostics, (note 1) the Company incurred $1,455,298 of merger and
integration costs. Of these costs, approximately $625,000 relate to
investment banking, professional, and other costs incurred in
investigating and negotiating the acquisition, $630,000 relate to the
cost of severance payments and rental costs to be incurred under
long-term leases for property that will not be used in the future and
$200,000 relate to costs incurred integrating management information
systems and office space.
(15) Commitments and Contingencies
The Company is involved in legal actions arising in the ordinary course
of business. In the opinion of management, ultimate disposition of
these matters will not materially affect the consolidated financial
position or results of operations of the Company.
In October 1997, Fresenius AG announced that it has engaged an
investment banker to evaluate various partnering alternatives for the
Company. These alternatives could involve the sale of Fresenius AG's
ownership interest in the Company. The Company has made several
presentations to interested parties but no transactions have been
completed to date.
(16) Accounting Standards Issued Not Yet Adopted
In June of 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income." and Statement No. 131 "Disclosures about
Segments of an Enterprise and Related Information." These statements,
which are effective for periods beginning after December 15, 1997
expand or modify disclosures and, accordingly, will have no impact on
the Company's reported financial position, results of operation, or
cash flows.
(17) Liquidity
As a result of the operating loss in 1997, including non-recurring
merger and integration costs associated with the acquisition of
Fresenius Diagnostics, the Company violated certain debt covenants with
two banks causing the reclassification of certain long-term obligations
as short-term liabilities as discussed in note 6. Changes have been
made in the Company's manufacturing operations and certain management
personnel together with the implementation of cost cutting programs all
of which are intended to return the Company to profitability.
Management believes that as a result of these changes together with
amounts available from existing lines of credit and other sources, the
Company will be able to generate sufficient cash flow to meet its
short-term working capital requirements. If the Company is unable to
negotiate new loan covenants or continues to incur losses, it will need
to seek additional debt, equity and/or lease financing. There is no
guarantee that it will be able to obtain funding if working capital
needs cannot be financed through internally generated funds.
(18) Subsequent Events
Subsequent to year end, the President and Executive Vice President of
the Company resigned. Both have employment agreements with the Company
providing for severance payments. The amount to be paid under these
agreements is currently in negotiation.
F-20
<PAGE> 29
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 569,740 $ 239,993
Receivables-net 3,335,320 1,963,410
Net investment in sales-type leases 249,464 272,125
Income tax refund receivable 307,855 119,499
Inventories 6,901,716 6,197,359
Prepaid expenses 422,133 316,878
----------- -----------
Total current assets 11,786,228 9,109,264
Property, plant and equipment - net 4,444,173 4,189,999
Net investment in sales-type leases 582,590 763,412
Deferred taxes 279,569 236,586
Other assets - net 971,897 1,001,812
----------- -----------
Total assets $18,064,457 $15,301,073
=========== ===========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,664,831 $ 1,498,146
Accounts payable 6,409,155 2,331,126
Accrued expenses 1,791,249 1,853,521
Deferred income taxes 48,177 6,884
Current portion of long
term obligations 3,531,381 3,576,085
----------- -----------
Total current liabilities 13,444,793 9,265,762
Long-term obligations 749,195 733,082
Other long-term liabilities 375,073 362,278
----------- -----------
Total liabilities 14,569,061 10,361,122
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 8,008 7,941
Additional paid-in capital 8,924,782 8,416,335
Foreign currency translation adjustment (443,847) (413,737)
Accumulated deficit (4,993,547) (3,070,588)
----------- -----------
Total stockholders' equity 3,495,396 4,939,951
----------- -----------
Total liabilities and stockholders' equity $18,064,457 $15,301,073
=========== ===========
</TABLE>
F-21
<PAGE> 30
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Sales $ 4,909,146 $ 5,193,226
Cost of good sold 2,910,019 2,069,007
----------- -----------
Gross Profit 1,999,127 3,124,219
----------- -----------
Expenses:
Selling, general and administrative 3,010,550 2,512,635
Research and development 358,404 367,691
----------- -----------
Total expenses 3,368,954 2,880,326
----------- -----------
Operating income (loss) (1,369,827) 243,893
----------- -----------
Other expense:
Interest expense (178,899) (167,863)
Other 94,317 59,420
----------- -----------
Total other expense (84,582) (108,443)
----------- -----------
Income (loss) before provision for
income taxes (1,454,409) 135,450
Income tax provision (112,005) 17,370
----------- -----------
Net income (loss) $(1,342,404) $ 118,080
=========== ===========
Net income (loss) per common share:
Basic and diluted $ (.17) $ .01
=========== ===========
</TABLE>
F-22
<PAGE> 31
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Sales $10,049,552 $11,225,000
Cost of good sold 5,457,363 4,453,000
----------- -----------
Gross Profit 4,592,189 6,772,000
----------- -----------
Expenses:
Selling, general and administrative 5,661,840 5,159,000
Research and development 725,645 769,000
----------- -----------
Total expenses 6,387,485 5,928,000
----------- -----------
Operating income (loss) (1,795,296) 844,000
----------- -----------
Other expense:
Interest expense (378,171) (313,000)
Other 143,361 56,000
----------- -----------
Total other expense (234,810) (257,000)
----------- -----------
Income (loss) before provision for
income taxes (2,030,106) 587,000
Income tax provision (107,148) 411,000
----------- -----------
Net income (loss) $(1,922,958) $ 176,000
=========== ===========
Net income (loss) per common share:
Basic and diluted $ (.24) $ .02
=========== ===========
</TABLE>
F-23
<PAGE> 32
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations $(1,922,958) $ 176,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 621,550 563,514
Stock option exercise compensation expense 238,625
Other 227,351 41,707
Changes in assets and liabilities:
Net receivables (1,413,041) (1,654,188)
Inventories (842,068) (2,261,889)
Prepaid expenses (105,983) (298,643)
Other assets/liabilities (37,961) 142,205
Income taxes (receivable) payable (121,790) 267,586
Accounts payable 4,087,232 2,153,807
Deferred income taxes (3,376) 11,000
Accrued expenses (82,434) 316,927
----------- -----------
Net cash provided by (used in) operating activities 645,147 (541,974)
----------- -----------
Cash flows from investing activities:
Receipts of sales type lease 184,012 162,454
Disposition of property, plant
and equipment 45,520 15,957
Purchase of property, plant and equipment (507,469) (1,171,051)
----------- -----------
Net cash used in investing activities (277,937) (992,640)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term obligations 1,642,667
Principal payments on long-term obligations (389,688) (537,599)
Line of Credit 167,847 496,601
Proceeds from issuance of common stock 203,322 210,424
----------- -----------
Net cash provided from financing activities (18,519) 1,812,093
----------- -----------
Foreign currency translation adjustment (18,944) (359,460)
----------- -----------
Net increase/(decrease) in cash 329,747 (81,981)
Cash at beginning of period 239,993 301,033
----------- -----------
Cash at end of period $ 569,740 $ 219,052
=========== ===========
</TABLE>
F-24
<PAGE> 33
GULL LABORATORIES, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
1. Basis of presentation
The unaudited consolidated condensed financial statements of Gull
Laboratories, Inc. (the "Company") as of June 30, 1998 and for the three months
and the six months ended June 30, 1998 and 1997 were prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Income statement amounts for the six months ended June 30,
1997 have been rounded to the nearest $1,000. These financial statements and
related notes should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1997 contained in its Annual Report
on Form 10-K.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all necessary adjustments to the
financial statements have been made to present fairly the financial position and
results of operations and cash flows. The results of operations for the periods
presented are not necessarily indicative of the results for the respective
complete years.
2. Inventories
Inventories consisted of the following:
June 30, December 31,
1998 1997
---------- ------------
Raw materials $1,878,907 $2,514,522
Work-in-process 1,227,474 889,947
Finished goods 2,121,791 1,576,303
Equipment held for
lease or sale 1,673,544 1,216,587
---------- ----------
Total $6,901,716 $6,197,359
========== ==========
3. Earnings per share
SFAS 128, requires the presentation of basic and diluted income (loss)
per share. Basic earnings (loss) per common share is the amount of net income
(loss) for the period available to each share of common stock outstanding during
the reporting period. Diluted earnings (loss) per common share is the amount of
net income (loss) for the period available to each share of common stock
outstanding during the reporting period and to each share that would have been
outstanding during the period. A total of 147,150 potential common shares (stock
options) have not been included in the computation of loss per share for the
three months and six months ended June 30, 1998, as they would have had a
dilutive effect.
F-25
<PAGE> 34
In calculating income (loss) per common share, the net income (loss)
was the same for both the basic and diluted calculation. Below is a
reconciliation between the basic and diluted weighted average common and
common-equivalent shares for three months and six months ended June 30, 1998 and
1997.
Three Months Ended June 30,
1998 1997
---- ----
Basic (weighted average common shares
outstanding during the period) 8,000,662 7,929,825
Weighted average common stock options
outstanding during the period -- 164,591
--------- ---------
Diluted 8,000,662 8,094,416
========= =========
Six Months Ended June 30,
1998 1997
---- ----
Basic (weighted average common shares
outstanding during the period) 7,973,387 7,914,882
Weighted average common stock options
outstanding during the period -- 162,459
--------- ---------
Diluted 7,973,387 8,077,341
========= =========
4. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", effective January 1, 1998 which
establishes standards for reporting and display of comprehensive income and its
components in financial statements. The components of the Company's
comprehensive income are as follows:
F-26
<PAGE> 35
Three Months Ended June 30,
1998 1997
---- ----
Net income/(loss) $(1,342,404) $ 118,080
Foreign currency translation
increase/(loss) (4,189) 14,000
------------ -----------
Comprehensive income/(loss) $(1,346,593) $ 132,080
============ ===========
Six Months Ended June 30,
1998 1997
---- ----
Net income/(loss) $(1,922,958) $ 176,000
Foreign currency translation loss (30,110) (131,422)
----------- -----------
Comprehensive income/(loss) $(1,953,068) $ 44,578
=========== ===========
F-27
<PAGE> 36
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Meridian Diagnostics, Inc.
Dated: January 19, 1999 By:
--------------------------------
Gerard Blain,
Executive Vice President,
Chief Financial Officer & Secretary
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Meridian Diagnostics, Inc.
We consent to the inclusion of our report dated March 3, 1998, except as to
note 18 which is dated as of April 6, 1998, with respect to the consolidated
balance sheets of Gull Laboratories, Inc. and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, which report appears in the Form 8-K/A of
Meridian Diagnostics, Inc. dated November 5, 1998.
KPMG LLP
KPMG LLP
Salt Lake City, Utah
January 18, 1999
<PAGE> 1
Exhibit 99
Forward looking statements Statement
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from
civil litigation in many instances for forward-looking statements. In order to
take advantage of the Act, such statements must be accompanied by meaningful
cautionary statements that identify important factors that could cause actual
results to differ materially from those that might be projected. This Exhibit is
being filed in order to allow the Company to take advantage to the new
provisions of this Act by providing the following cautionary statements.
RISK FACTORS AFFECTING THE COMPANY
The Company's business operations and strategy are subject to a number of
uncertainties and risks which could adversely affect its performance in the
future. Among these are the following:
One of the Company's main growth strategies is the acquisition of other
companies and/or product lines in the disposable diagnostic test kits business.
Although previous acquisitions have been successful to date, there can be no
assurance that additional acquisitions will be consummated or that, if
acquisitions are consummated, they will be successful. Because of Gull's size,
the challenges faced by the Company in integrating Gull into its operations
involves greater risks and uncertainties than prior acquisitions. Acquisitions
require a significant commitment of corporate resources, management attention
and capital which, in certain cases, could exceed that available to the Company.
In addition, the benefits expected from such acquisitions will not be achieved
fully unless the operations of the acquired entities are successfully integrated
with those of the Company.
The diagnostic test industry is characterized by ongoing technological
developments and changing customer requirements. The Company's success and
continued growth depend, in part, on its ability to develop or acquire rights
to, and successfully introduce into the marketplace, enhancements of existing
products or new products that incorporate technological advances, meet customer
requirements and respond to products developed by the Company's competition.
While the Company has introduced over twenty new products since 1991, there can
be no assurance that it will be successful in developing or acquiring such
rights to products on a timely basis or that such products will adequately
address the changing needs of the marketplace.
Approximately 27% of the Company's net sales for fiscal 1998 were attributable
to international sales, primarily in Western Europe. Although the majority of
the Company's international sales have been made in U.S. dollars, the Company is
subject to the risks associated with fluctuations in currency exchange rates, in
particular, the recent strengthening of the dollar. The Company cannot assure
that sales of certain products made under endemic conditions in specific
geographic areas during fiscal 1998 will continue in fiscal 1999. The Company is
also subject to other risks associated with international operations, including
tariff regulations, requirements for export licenses and medical licensing and
approval requirements.
11
<PAGE> 2
The healthcare industry is in transition with a number of changes that affect
the market for diagnostic test products. Changes in the healthcare delivery
system have resulted in major consolidation among reference laboratories and in
the formation of multi-hospital alliances, reducing the number of institutional
customers for diagnostic test products. There can be no assurance that the
Company will be able to enter into and/or sustain contractual or other marketing
or distribution arrangements on a satisfactory commercial basis with these
institutional customers.
Many of the Company's competitors have greater financial and other resources
than the Company. These resources could give them an advantage in price, service
and development of competing products.
In recent years, the federal government has been examining the nation's
healthcare system from numerous standpoints, including the cost of and access to
health care and health insurance. Proposals impacting the health care system are
constantly under consideration and could be adopted at any time. It is unclear
what effect the enactment of such proposals would have on the Company.
12
