SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT of 1934
For the Fiscal Year Ended May 31, 1995 Commission File Number 0-16664
GENETIC LABORATORIES WOUND CARE, INC.
(Exact Name of Company as specified in its charter)
Minnesota 41-1604048
____________________ _______________________________
(State of Incorporation) (IRS Employer Identification No.)
2726 PATTON ROAD, ST. PAUL, MINNESOTA 55113
(Address)
TELEPHONE NUMBER: (612) 633-0805
Securities Registered Pursuant to Section 12(b) OF THE ACT: None
Securities Registered Pursuant to Section 12(g) OF THE ACT:
COMMON STOCK $.01 par value
___________________________
Check whether the issurer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the Company was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No_____
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $2,214,093.
Aggregate market value of voting stock held by nonaffiliates of Company
as of June 30, 1995 was approximately $1,200,000.
The number of shares of each class of common stock outstanding on June
30, 1995 was:
Common Stock $.01 par value 2,326,100 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated Document Location on Form 10-KSB
1. Genetic Laboratories Wound Care, Inc. Part III
Proxy statement for 1995 Annual
meeting of Shareholders
PART I
ITEM 1. BUSINESS
General Development of Business
Genetic Laboratories Wound Care, Inc. (herein referred to as "the
Company") manufactures and markets proprietary wound care products.
The Company contracts out the manufacture of its products having
complete control over all manufacturing specifications involved. The
Company sells the completed products to its distribution network
consisting of independent distributors who resell the products to its
end users, principally physicians, hospitals and clinics.
The Company was incorporated on January 19, 1988, in the state of
Minnesota as a dividend to the shareholders of Bioplasty, Inc. (referred
to herein as Bioplasty). Pursuant to an Agreement between Bioplasty and
the Company dated as of February 29, 1988 (referred to herein as the
"Purchase Agreement"), the Company acquired the wound care business and
certain assets of Bioplasty. The wound care business and assets of
Bioplasty include the right to develop and market proprietary wound care
products.
Financial Information about Industry Segments
The Company has only one industry segment, namely, the manufacture and
marketing of wound care products. Financial information about the
Company's business is contained in Items 6 and 7 hereof.
Products
The Company has continued to develop and market the wound care products
through its independent dealer organization worldwide. These products
include:
SUTURE STRIP is a sterile pressure sensitive adhesive wound closure
strip. The wound closure strip was designed with flexibility
characteristics which provides maximum adherence to maintain wound
integrity, while allowing the proper amount of flex to minimize problems
with skin shear and blistering. Suture Strip is available in a wide
variety of sizes and packages, and is used in various surgical and wound
care procedures.
FLEXINET/SYSTENET is a specially woven versatile elastic net dressing
for wounds which reduces dressing time, allowing for proper ventilation
without restrictions and holds the dressings in place firmly and
comfortably. Flexinet/Systenet is available in various sizes and
packages and is used to hold dressings firmly in place.
SPECIALTY FASTENERS:
NG STRIP is a nasogastric tube fastener. It is made of a flexible
material designed to maximum adhesion and minimize irritation,
blistering, and skin shear. NG Strip is available in various packages
and is used to secure nasal or feeding tubes to the nose.
UC STRIP /CATH-STRIP is a catheter tubing fastener. UC
Strip/Cath-Strip allows you to secure urinary and gastrostomy catheter
tubing to the patients skin. UC Strip/Cath-Strip is made of a flexible
material designed to maximize adhesion and minimize irritation,
blistering, and skin shear. UC Strip/Cath-Strip is available in
various packages and is used to secure catheter tubing.
Sales of the companies products are not seen as being affected by
seasonal influences. Product sales as a percent of net revenues are as
follows:
1995 1994 1993 1992 1991
Suture Strip 65% 65% 63% 65% 67%
Flexinet/Systenet 12% 12% 14% 12% 11%
Specialty Fasteners 20% 19% 21% 18% 14%
Materials and Manufacturing
The Company does not manufacture its products. Independent contractors
manufacture the products for the Company utilizing specifications
provided by the Company. The Company's intention will be to add
manufacturing when and where appropriate. As reported in the Company's
10QSB, November 30, 1994, a major supplier will discontinue production
of an essential component material used in the Company's wound closure
strips and fastener products. These products combined accounted for 85%
and 84% of net revenues for the years ended May 31, 1995 and 1994,
respectively. The Company immediately began identifying alternatives
for the discontinued component material. The Company has qualified an
alternative component material for one of its fasteners, Cath-Strip.
The Company expects to qualify another alternative component material
for the remaining products before the product inventory levels will be
affected.
Government Regulation
The Company's products are subject to government regulation by the FDA
under the Federal Food, Drug and Cosmetic Act (the "FDCA") and
accordingly, unless determined to be exempt, are subject to preclearance
procedures of the FDA before marketing.
Under the FDCA, a medical device is classified as either a Class I
device, which is subject only to the general control provisions of the
FDCA; a Class II device which, in addition to applicable general
controls, is subject to performance standards (if such standards have
been developed) and may be subject to premarket approval; or a Class III
device which, in addition to applicable general controls is subject to
the FDA premarket approval. A premarket approval application (PMAA), if
granted, permits full marketing in the United States. A PMAA is only
granted after experimental data has been obtained under an
investigational device exemption ("IDE"), which permits clinical use of
products for experimental purposes. All of the Companies products have
been classified as Class I devices. The Company has 510(k) approval
from the FDA to market all of its Class I devices.
The governmental regulatory policies of countries outside the United
States vary considerably. This results in some countries allowing the
use of medical products through a registration only process, while other
countries require a lengthy approval process. Inability to receive
governmental approval from a country outside the United States has not
hindered the Company through a loss of sales in countries outside the
United States.
Patents, Trademarks, Licenses, Franchises and Concessions
The Company has patents on its Suture Strip, NG Strip and UC Strip
products in the United States and the United Kingdom. The patents begin
to expire in the year 2005. The Company also has trade names for Suture
Strip, Flexinet, NG Strip, and UC Strip.
The Company believes that its success as a business will depend
primarily upon the quality and economic value of its products, rather
than its ability to obtain and defend patents. There can be no
assurance that the Company's patents will afford protection against
competitors with similar technology; nor can there be any assurance that
any patents issued to the Company will not be infringed upon or designed
around by others or that others will not obtain patents that the Company
would need to license or design around.
Dependence on Single Customer
Two distributors each accounted for more than 10% of the Company's sales
for the period ended May 31, 1995. The Company believes its
relationship with these two distributors is strong. During the year
ended May 31, 1995 the Company has seen its customer base remain
unchanged from the prior year.
The Company has developed relationships with all the large distributors
of medial products in the hospital, clinic and long-term care markets
and continues to work on strengthening these relationships.
Marketing and Competition
The Company's products are sold through an international network of
independent distributors servicing the hospital, clinic, and long-term
care facilities. This network, which presently has over 200
distributors, is managed by two Regional Sales Managers. Each Regional
Sales Manager has independent manufacturers representatives working with
the distributors, hospitals, clinic, and long-term care facilities.
Competition in the sale of medical devices and products such as the
wound care products is intense. The principal factors of competition
are product performance, customer service, and price. There are several
other suppliers of competing products. Several of such companies are
considerably larger than the Company, or are a division or subsidiary of
corporations which have much greater resources than the Company. The
Company believes it has a competitive edge in the quality and
performance of its product allowing it to compete with the larger
companies. The Company also feels it is able to provide more personal
service to its customers giving it an advantage over larger more rigidly
structured companies. The Company does not have enough information to
date to estimate its market position in the wound care field nor its
competitors position, however, management does not believe the Company
currently controls a significant share of the market. The Company's
main competition in the wound closure strip market is 3M with their
Steri-Strip products that control a large share of the wound closure
strip market.
Research and Development
The Company's ability to greatly increase sales will depend upon, among
other things, the expansion of its current product lines or the
introduction of new products. The Company is actively pursuing new
product ideas that match the interests of the current international
distribution network already in place. Arthur A. Beisang, the C.E.O.,
is in charge of evaluating the development and acquisition of new
products. No research and development expense has been incurred by the
Company in fiscal years 1995 and 1994. However, a portion of Arthur A.
Beisang, C.E.O., and Robert A. Ersek, Medical Director, time is devoted
to the evaluation of new product development.
Environmental Compliance
Compliance by the Company with applicable environmental requirements is
not expected to have a material effect upon the capital expenditures,
earnings or competitive position of the Company.
Employees
As of May 31, 1995, the Company employed thirteen employees of which
eleven are full time. None of such employees has a collective
bargaining agreement with the Company. The Company's size allows it to
foster a close relationship with its employees which management feels
increases productivity.
Financial Information about Foreign and Domestic Operations and Export
Sales
The Company sold approximately $363,000 and $316,000 to foreign
distributors during the year ended May 31, 1995 and 1994, respectively.
All sales require payment to be made in U.S. Funds. The Company
intends to expand its exporting in the future. The Company has
experienced no losses from any foreign receivables in the years ended
May 31, 1995 and 1994.
ITEM 2. PROPERTIES
The Company does not own any real estate. The Company leases 6,800
square feet of office and warehouse space at 2726 Patton Road, St. Paul,
Minnesota 55113, pursuant to a five-year lease that expires March 1997.
The Company considers such space to be adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to nor is any of its property subject to any
material pending or threatened legal, governmental, administrative or
other judicial proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Of the 12,000,000 shares authorized on May 31, 1995, there were
2,326,100 shares issued and outstanding. The Company's common stock is
traded in the "Local Over the Counter Market" on the "Pink Sheets" and
on the NASD Electronic Bulletin board under the symbol GELW. At May 31,
1995, there were approximately 1,100 shareholders of record. The bid
and ask prices were as follows:
Quarter Ending: Bid Ask
Fiscal 1994
August 31, 1993 3/8 5/8
November 30, 1993 1/4 1/2
February 28, 1994 3/8 5/8
May 31, 1994 3/8 5/8
Fiscal 1995
August 31, 1994 3/8 5/8
November 20, 1994 3/8 5/8
February 20, 1995 3/8 5/8
May 31, 1995 1 1 3/8
These prices represent quotations between dealers without adjustments
for retail mark-up, mark-down or commissions, and do not necessarily
represent actual transactions. The Company has not paid cash dividends
on its common stock and does not anticipate cash dividends in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues
Net revenues for the year ended May 31, 1995 were $2,214,093 compared to
$2,092,372 for the year ended May 31, 1994, a 5.8% increase. The
increase resulted from increases in both unit volume and unit prices of
some products. The following products saw unit increases; Suture Strip,
NG Strip and UC Strip/Cath-Strip. The Flexinet/Systenet product unit
sales were flat. The Company also increased its prices to International
dealers for all products effective January 1, 1995. Net revenues
increased 5.6% for the year ended May 31, 1994 over May 31, 1993 due to
volume increases of the Company's wound closure strips.
Domestic sales, which accounted for 84% of net revenues, were up 4.0%
for the year ended May 31, 1995 when compared to the year ended May 31,
1994. International sales, which accounted for 16% of net revenues,
were up 14.8% for the year ended May 31, 1995 when compared to the year
ended May 31, 1994.
Included in net revenues are royalties of $56,237 for the year ended May
31, 1995 and $50,351 for the year ended May 31, 1994. Royalties were
2.5% and 2.4% of net revenues for the years ended May 31, 1995 and 1994,
respectively. On June 26, 1995, the Company sold its rights, title and
interest in the royalty agreement for approximately $165,000. See note
5 to the financial statements.
The Company has set up an international network of independent stocking
distributors. Sales to international customers accounted for 16% of net
revenues for the year ended May 31, 1995 and 15% for the year ended May
31, 1994.
Gross Profit
The gross profit percentages remain stable between fiscal years 1995 and
1994 and reflect the Company's ability to keep product costs constant
during the fiscal year. The Company does expect product costs to
increase slightly during the fiscal year ending May 31, 1996, as the
cost of packaging continues to increase.
Operating Expenses
Operating expenses as a percent of net revenues were 53% in the year
ended May 31, 1995 and 54% in the year ended May 31, 1994. While the
operating expenses as a percentage of net revenues remained relatively
constant, there were increases for product promotion. The Company's
level of expenses is not expected to change significantly in the near
future.
Net Income
Net income increased to $133,763 for the year ended May 31, 1995 from
$108,590 for the year ended May 31, 1994. The increase is a direct
result in increased revenues.
Liquidity and Capital Resources
At May 31, 1995, the Company had working capital of $834,432 and a
working capital ratio of approximately 5.0 to 1 compared to $689,846 and
a working capital ratio of approximately 6.7 to 1 on May 31, 1994.
The Company's cash and cash equivalents increased to $295,830 on May 31,
1995 as compared to $259,171 on May 31, 1994. The increase is the result
of cash generated from operations, which was $47,906 for the year ended
May 31, 1995. Cash generated from operations for the year ended May 31,
1994 was $207,060. The Company increased its inventory at May 31, 1995
to $429,105 from $255,312 at May 31, 1994, an increase of $173,793. The
increase in inventory was planned by management to allow for more time
to locate an alternative component material for its wound closure strips
and fastener products.
During the year ended May 31, 1995 $11,247 was used for the purchase of
equipment. During the year ended May 31, 1994 $17,735 was used for the
purchase of equipment and $8,077 was used for principal payments of long
term obligations.
Trade accounts receivable increased to $277,541 on May 31, 1995 from
$260,154 on May 31, 1994. Accounts Payable increased to $132,368 on May
31, 1995 from $73, 851 on May 31, 1994.
The Company had no long-term debt on May 31, 1995.
The Company believes its financial position is adequate and anticipates
it will be able to fund its operations and any capital expenditure
requirements through internally generated funds during the next 12
months. The Company has a $75,000 line of credit with a local bank to
provide additional liquidity if needed. See note 4 to the financial
statements.
Inflation and Changing Prices
Inflation and changing prices have not had a significant impact upon the
operations or growth of the Company during the past three years.
Increases in prices of the components used to produce the Company's
products during the next twelve months are not expected to significantly
affect the Company's operations. Although the Company believes that the
Wound Care business is extremely competitive, management believes that
product integrity, customer service, and reputation are more important
than pricing in a customers selection of Wound Care products.
ITEM 7. FINANCIAL STATEMENTS
Page Reference
Form 10KSB
Independent auditor's report 10
Balance sheets at May 31, 1995 and 1994 11,12
Statements of operations for the years
ended May 31, 1995 and 1994 13
Statements of stockholders' equity for the
years ended May 1995 and 1994 14
Statements of cash flows for the years
ended May 31, 1995 and 1994 15
Notes to Financial Statements 16-19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Directors and Executive Officers" in the
Registrant's definitive proxy statement for its 1995 annual meeting of
shareholders is incorporated by reference herein.
ITEM 10. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" and "Election of
Directors" in the Registrant's definitive proxy statement for its 1995
annual meeting of shareholders is incorporated by reference herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections entitled "Beneficial Ownership of Principal Shareholders
and Management" and "Election of Directors" in the Registrant's
definitive proxy statement for its 1995 annual meeting of shareholders
is incorporated by reference herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
Two directors of the Company, Arthur A. Beisang and Robert A. Ersek,
M.D. and a former director, Daniel G. Holman were also directors of
Bioplasty, during the negotiations of the terms of the Spin-off
Agreement, dated January 18, 1988, between the Company and Bioplasty,
therefore the negotiations were not conducted on an arms length basis.
In addition such persons, in the aggregate, owned beneficially
approximately 31% of the outstanding stock of both the Company and
Bioplasty.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report in Item 7:
1. Financial Statements:
Independent auditor's report
Balance sheets at May 31, 1995 and 1994
Statement of operations for the years ended May 31, 1995 and 1994
Statements of stockholders' equity for the years ended May 31 1995
and 1994
Statements of cash flows for the years ended May 31, 1995 and 1994
Notes to financial statements
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter ended
May 31, 1995.
(c) Exhibits:
Incorporated by Reference
In This Report From
(3) Articles of Incorporation Exhibit (3.1) and (3.2) to
Company's Form 10 (File
No.000-16664) dated March 25,
1988
(4) Instruments Defining Rights Exhibit (3.1) and (3.2) above
Security Holder
(10) Material Contracts Exhibit (2.1)
10.1 Genetic Laboratories Wound Form 10-K Annual Report for
Care, Inc. Incentive Stock the year ended May 31, 1989
Option Plan (File No. 0-16664) dated
August 25, 1989
10.2 Executive Agreement with Form 10-KSB Annual Report for
Arthur A. Beisang the year ended May 31, 1993
(File No. 0-16664) dated
August 25, 1993
10.3 Executive Agreement with Form 10-KSB Annual Report for
Dr. Robert Ersek the year ended May 31, 1993
(File No. 0-16664) dated
August 25, 1993)
10.4 Executive Agreement with Form 10-KSB Annual Report for
H. James Thompson the year ended May 31, 1993
(File No. 0-16664) dated
August 25, 1993)
27 Financial Data Schedule
FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Genetic Laboratories Wound Care, Inc.
St. Paul, Minnesota
We have audited the accompanying balance sheets of GENETIC
LABORATORIES WOUND CARE, INC. as of May 31, 1995 and 1994 and the
related statements of operations, stockholders' equity and cash flows
for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Genetic Laboratories Wound Care, Inc. as of May 31, 1995 and 1994, the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
St. Paul, Minnesota
June 30, 1995
<TABLE>
GENETIC LABORATORIES WOUND CARE, INC.
BALANCE SHEETS
May 31, 1995 and 1994
ASSETS
<CAPTION>
1995 1994
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $295,830 $259,171
Receivables
Trade, less allowance for doubtful
accounts of $4,000 and $3,000,
respectively (Notes 4 and 5) 277,541 260,154
Other (Note 5) 10,787 8,537
Inventories (Note 4) 429,105 255,312
Prepaid expenses 29,141 27,954
__________ __________
Total current assets 1,042,404 811,128
PROPERTY AND EQUIPMENT
(Notes 3 and 4)
Production equipment and tooling 59,093 59,093]
Office equipment 132,492 121,245
__________ __________
191,585 180,338
Less accumulated depreciation 159,990 143,477
__________ __________
31,595 36,861
__________ __________
OTHER ASSETS, net 11,952 17,509
__________ __________
$1,085,951 $865,498
========== ==========
</TABLE>
<TABLE>
GENETIC LABORATORIES WOUND CARE, INC.
BALANCE SHEETS (continued)
May 31, 1995 and 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
1995 1994
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 132,368 $ 73,851
Accrued expenses 65,804 42,236
Income taxes payable 9,800 5,195
__________ __________
Total current liabilities 207,972 121,282
COMMITMENTS AND CONTINGENCIES
(Notes 3 and 5)
STOCKHOLDERS' EQUITY (Note 2)
Common stock, $.01 par value issued
2,326,100 shares 23,261 23,261
Additional paid-in capital 625,186 625,186
Retained earnings 229,532 95,769
__________ __________
877,979 744,216
$1,085,951 $865,498
========== ==========
See Notes to Financial Statements
</TABLE>
<TABLE>
GENETIC LABORATORIES WOUND CARE, INC.
STATEMENTS OF OPERATIONS
Years Ended May 31, 1995 and 1994
<CAPTION>
1995 1994
<S> <C> <C>
Net revenues (Note 5) $2,214,093 $2,092,372
Cost of revenues 846,403 812,016
__________ __________
Gross profit 1,367,690 1,280,356
Selling, general and administrative
expense 1,172,086 1,122,506
__________ __________
Operating income 195,604 157,850
Other, net 3,759 240
__________ __________
Income before taxes 199,363 158,090
Provision for income taxes (Note 6) 65,600 49,500
Net income $133,763 $108,590
========== ==========
Net income per common share $ .06 $ .05
========== ==========
Weighted average number of common
and common equivalent shares
outstanding 2,387,106 2,344,020
See Notes to Financial Statements
</TABLE>
<TABLE>
GENETIC LABORATORIES WOUND CARE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 31, 1995 and 1994
<CAPTION>
Common Stock Addl Retained
Paid-in Earnings
Shares Amount Capital (Deficit) Total
_______ _______ ________ ________ _____
<S> <C> <C> <C> <C> <C>
Balance,
May 31,
1993 2,326,100 $23,261 $625,186 $(12,821) $635,626
Net
Income 0 0 0 108,590 108,590
Balance,
May 31,
1994 2,326,100 23,261 625,186 95,769 744,216
Net
Income 0 0 0 133,763 133,763
Balance,
May 31,
1995 2,326,100 $23,261 $625,186 $229,532 $877,979
========= ======= ======== ======== ========
See Notes to Financial Statements
</TABLE>
<TABLE>
GENETIC LABORATORIES WOUND CARE, INC.
STATEMENTS OF CASH FLOWS
Years Ended May 31, 1995 and 1994
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $133,763 $108,590
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 22,070 21,209
Changes in current assets and
liabilities:
Receivables (19,637) (47,583)
Inventories (173,793) 98,702
Prepaid expenses (1,187) 6,166
Accounts payable 58,517 (4,026)
Accrued expenses 23,568 18,807
Income taxes payable 4,605 5,195
________ ________
Net cash provided by operating
activities 47,906 207,060
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (11,247) (17,735)
________ ________
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under long-term
obligations 0 (8,077)
________ ________
Net increase in cash and cash
equivalents 36,659 181,248
CASH AND CASH EQUIVALENTS
Beginning 259,171 77,923
Ending $295,830 $259,171
See Notes to Financial Statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of Business
The Company manufactures and markets wound care products,
primarily adhesive backed wound closure strips, elastic net dressings
for wounds, nasogastric tube fasteners, and urinary catheter fasteners.
Sales are made primarily to medical supply distributors throughout the
United States and in foreign countries. See Note 5 for concentration of
sales to major customers. Revenues are recognized upon shipment of the
products.
Significant Accounting Policies
Inventories:
Inventories are stated at the lower of cost (first-in,
first-out method) or market. Inventories are comprised primarily of
goods held for resale.
Property and Equipment:
Additions to property and equipment are stated at cost.
Depreciation is computed using accelerated and straight line methods
over the estimated useful lives of the individual items.
Cash Flows and Cash Equivalents:
For purposes of reporting its cash flows, the Company
considers all highly liquid debt instruments with an original maturity
of three months or less to be cash equivalents. The Company maintains
its cash in bank checking and savings accounts which, at times, may
exceed insured limits. The Company has not experienced any losses in
such accounts.
Cash payments for interest totalled $0 and $529, for the years
ended May 31, 1995 and 1994, respectively.
Cash payments for income taxes totalled $61,000 and $44,311
for the years ended May 31, 1995 and 1994, respectively.
Net Income per Common Share:
Net income per common and common equivalent share is computed
on the basis of the weighted average number of common and common
equivalent shares outstanding during the respective years. Common
equivalent shares consist of the dilutive effect, when material, of
outstanding stock options.
Income Taxes:
Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary
differences and operating loss or tax credit carryforwards and deferred
tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the amounts of assets
and liabilities recorded for income tax and financial reporting
purposes. Deferred tax assets are reduced by a valuation allowance when
management determines that it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effect of changes in tax
laws and rates on the date of enactment. Income tax expense is the tax
payable or refundable for the year plus or minus the change in deferred
tax assets and liabilities during the year. At May 31, 1995 the Company
has no significant temporary differences on which to recognize deferred
tax assets or liabilities.
Note 2. Authorized Shares and Employee Stock Option Plan
Authorized Shares:
The Company's Articles of Incorporation provide for an
aggregate of 12,000,000 authorized shares of $.01 par value stock. The
Board of Directors is authorized to designate the class of shares and
their terms. As of May 31, 1995, 2,326,100 shares are designated as
common and 9,673,900 are subject to future designation.
Employee Stock Option Plan:
The Company has a qualified incentive stock option plan which
authorizes the granting of options to purchase up to 275,000 shares of
common stock to officers and other key employees. These options are
granted at the discretion of the directors. All options must be granted
at no less than 100% of the fair market value of the stock on the date
of the grant (110% for employees owning more than 10% of the Company's
common stock). The options expire at varying dates not to exceed ten
years from the grant date and are not transferable. When exercising
options, an employee's payment may be either cash, shares of the Company
stock valued at the fair market value, or a combination of the two. All
options outstanding at May 31, 1995 are exercisable. A summary of stock
option activity through May 31, 1995 is as follows:
Number of Exercise Price
shares per share
Balance May 31, 1993 162,550 $ .25 to .625
Surrendered/Cancelled (110,200) .25 to .625
Options granted 127,600 .25 to .625
__________ _____________
Balance May 31, 1994 179,950 .25 to .625
Cancelled (4,000) .25 to .625
Options granted 48,000 .375 to .4125
__________ _____________
Balance May 31, 1995 223,950 $ .25 to .625
========== =============
Note 3. Commitments
Operating Leases:
The Company leases office and production facilities under a lease
expiring March 1997. Future minimum rental payments of approximately
$36,000 and $27,000 are due in each of the years ending May 31, 1996 and
1997, respectively. Total rental expense of $55,466 and $53,123 was
charged to operations for the years ended May 31, 1995 and 1994,
respectively.
Savings and Retirement Plan:
The Company has a savings and retirement plan for eligible
employees. The plan was adopted pursuant to Section 401(k) of the
Internal Revenue Code. Contributions to the plan are discretionary for
both the Company and the employees. The Company may make contributions
to the plan which match employee contributions subject to certain
limitations. The Company contributed $19,014 and $10,509 to the plan in
the years ending May 31, 1995 and 1994, respectively.
Employment Agreements:
The Company has Employment Agreements with three individuals for
total aggregate annual base compensation of $161,000. Two of the
individuals are directors with total aggregate annual base compensation
of $84,000. The third individual is an officer with total aggregate
annual base compensation of $77,000.
The agreements with the two directors with total aggregate annual
compensation of $84,000, provide that in the event of a change of
control of the Company the two directors, if terminated, be paid cash as
severance equal to all future amounts owed under those agreements for
the remainder of the terms. All three agreements expire April 30,
1996.
Note 4. Revolving Credit Agreement
The Company has a revolving credit agreement with a bank which
allows the Company to borrow up to $75,000. Borrowings bear interest at
1.5% above the bank's prime interest rate. Under the terms of the
agreement, substantially all assets of the Company are pledged as
collateral. The loan agreement also contains provisions requiring
compliance with certain financial covenants. The agreement terminates
on October 31, 1995. No amounts were outstanding under the agreement at
May 31, 1995 or 1994.
Note 5. Major Customers and Suppliers
Royalty Agreement:
Under terms of a royalty agreement, with Bio-Vascular, Inc., the
Company receives royalties on sales of certain products through July 31,
1995. Royalty revenues of $56,237 and $50,351 were earned under this
agreement for the years ended May 31, 1995 and 1994, respectively.
Unpaid royalties of $10,787 and $8,537 are recorded in Other Receivables
at May 31, 1995 and 1994, respectively. On June 26, 1995, the Company
sold its rights, title and interest in the royalty agreement to
BioVascular, Inc. for approximately $165,000.
Major Customers:
During the years ended May 31, 1995 and 1994, the following
customers individually accounted for more than ten percent of the
Company's net revenues.
1995 1994
Acct. Acct.
% Balance % Balance
Net to May 31, Net to May 31,
Revenues Total 1995 Revenues Total 1994
Cust A $410,758 18.5% $43,999 $479,354 22.9% $49,153
Cust B 252,935 11.4% 17,282 260,670 12.5% 27,583
Foreign Sales:
The Company sells directly to foreign distributors located mainly
in Canada and Europe. Total foreign sales accounted for approximately
16% and 15% of net revenues for the years ended May 31, 1995 and 1994,
respectively. Accounts receivable at May 31, 1995 and 1994 included
amounts due from foreign customers of approximately $48,000 and
$60,000, respectively.
Suppliers:
The Company has purchased a majority of its products from one
supplier. During Fiscal 1995, this supplier informed the Company that
they would discontinue production of one of the component materials the
Company uses in the production of its wound closure strips and fastener
products. These products combined accounted for 85% and 84% of net
revenues for the years ended May 31, 1995 and 1994, respectively. The
Company expects to qualify an alternative component material for these
products before inventory levels will be affected.
Note 6. Income Tax
The effective tax rate varies from the statutory Federal income
tax rate for the following reasons:
1995 1994
Statutory income tax rate 35.0% 35.0%
State income taxes, net of federal tax
benefits 2.2 2.4
Non-deductible expenses 1.8 1.7
Benefit of income taxed at lower rates (4.6) (7.8)
Tax credits (1.5) -
------- -------
Effective tax rate 32.9% 31.3%
======= =======
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GENETIC LABORATORIES WOUND
CARE, INC.
August 25, 1995 By:__________________________
Arthur A. Beisang
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities on the dates indicated.
/s/ Arthur A. Beisang Chief Executive Officer August 25, 1995
_____________________ Director
Arthur A. Beisang
/s/ H. James Thompson President August 25, 1995
_____________________ Chief Financial Officer
H. James Thompson
/s/ Robert A. Ersek Director, Secretary August 25, 1995
_____________________
Robert A. Ersek, M.D.
/s/ John H. Olson Director August 25, 1995
_____________________
John H. Olson
