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, 1997 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 issuer (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 $2,906,215.
Aggregate market value of voting stock held by nonaffiliates of Company as of
June 30, 1997
was approximately $1,200,000.
The number of shares of each class of common stock outstanding on June 30, 1997
was:
Common Stock $.01 par value 2,401,850 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated Document Location on Form 10-KSB
1. Genetic
Laboratories Wound Care, Inc. Part III
Proxy statement for 1997 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; primarily wound closure strips, specialty fasteners, and net
dressings.
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 independent distribution
network who resells
the products to the end users;
principally physicians, hospitals, nursing homes, 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 markets the wound care products through its independent dealer
organization
worldwide utilizing independent sales
representatives. These products include:
WOUND CLOSURE STRIPS:
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.
NET DRESSINGS:
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
maximize 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.
PERCU-STAY is a sterile, self adhesive catheter fastener for percutaneous
drainage catheters.
Percu-Stay is made of a
combination of a moisture-absorbent hydrocolloid surrounded by a pressure
sensitive adhesive
on a non-woven backing. Percu-
Stay is available in two sizes and two packages and is used to secure
percutaneous drainage
catheters.
Sales of the Company's products are not seen as being affected by seasonal
influences. Product
sales for the years ended May 31 are
as follows:
1997 1996
1995
$ % $ % $
%
Wound Closure Strips $1,617,728 55.7 $1,634,252
66.9 $1,428,560
64.5
Specialty Fasteners 980,874 33.8 516,980
21.2 437,038 19.7
Net Dressings 273,782 9.4 263,392
10.8 256,329 11.6
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. The
Company has utilized one supplier to manufacture a majority of its products.
The Company has
had a good working relationship with
this supplier and plans to continue to do business with this supplier because
of its ability to
manufacture high quality products
required by the Company. The manufacturer also has strong regulatory and
quality departments
that allow them to comply with all
regulatory issues.
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. The European Community has issued
various
directives for the sale of foreign products.
These directives have certain requirements to be met before products can be
sold in the European
Community. Sales to the European
Community were approximately 13% and 17% of net revenues for the years ended
May 31, 1997
and 1996, respectively. On July 21,
1997 the Company was granted CE certification for its products allowing it to
sell to the
European Community countries.
Patents, Trademarks, Licenses, Franchises and Concessions
The Company has patents on its Suture Strip, NG Strip, Cath-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,
Cath-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
One distributor accounted for more than 10% of the Company's sales for the year
ended May 31,
1997. The Company believes its
relationship with this distributor is strong. During the year ended May 31,
1997 the Company's
customer base remained relatively
constant from the prior year.
The Company has developed relationships with large distributors of medical
products in the
hospital, clinic and long-term care
markets and continues to work on strengthening these relationships. Many of the
Company's
distributors have merged or been
acquired by other distributors.
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
other suppliers of
competing products who are
considerably larger than the Company, or are a division or subsidiary of
corporations which have
much greater resources than the
Company. These competitors also have a variety of products available to them
and can offer the
end user more choices than the
Company can offer giving the competitors a selling advantage. 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. There are
products that compete with the specialty fasteners, including white hospital
tape. The Company's
task is to demonstrate to the end
user that white hospital tape does have a cost and risk associated with its
use. When the end user
accepts the cost and risks associated
with white hospital tape, the specialty fasteners provide better performance
with lower risks
involved.
The net dressings market is very price competitive. The Company provides its
customers with
the highest quality net dressing and
does not compete on price. The Company believes it has a loyal base of net
dressing customers
that will continue to buy because of
the product quality and the customer service they receive.
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. 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. The Company incurred $19,290 and $19,474
of research
and development costs for the years
ended May 31, 1997 and 1996, respectively.
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, 1997, the Company employed eighteen employees of which sixteen
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 $427,000 and $462,000 to foreign distributors
during the year
ended May 31, 1997 and 1996,
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,
1997 and 1996.
ITEM 2. PROPERTIES
The Company does not own any real estate. The Company leases 9,500 square feet
of office and
warehouse space at 2726 Patton
Road, St. Paul, Minnesota 55113, pursuant to a five-year lease that expires
March 2002. 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, 1997, there were 2,401,850
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, 1997, there were approximately 900 shareholders of
record. The
bid and ask prices were as follows:
Quarter Ending: Bid Ask
Fiscal 1996
August 31, 1995 1/2 15/16
November 30, 1995 7/8 1 1/8
February 29, 1996 3/4 1 1/8
May 31, 1996 1/2 7/8
Fiscal 1997
August 31, 1996 7/16 13/16
November 30, 1996 3/8 5/8
February 28, 1997 1/2 3/4
May 31, 1997 7/16 11/16
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. The Company's current debt agreement
prohibits the payment
of dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the net revenues, gross profit, and operating
income of the
Company for the years ended May 31, 1997,
1996, and 1995.
1997 1996 1995
Net Revenues
Domestic Sales $ 2,479,392 $ 1,980,699 $ 1,794,729
International Sales 426,823 462,179 363,127
Royalties - - 56,237
Total $ 2,906,215$2,442,878 $2,214,093
Gross Profit $ 1,834,564$1,440,122$1,367,690
Operating Income $ 147,147 $ 27,618 $ 195,604
COMPARISON OF THE YEAR ENDED MAY 31, 1997 WITH THE YEAR ENDED MAY 31,
1996
Revenues
Net revenues increased 19.0% to $2,906,215 for fiscal 1997 from $2,442,878 for
fiscal 1996.
Domestic sales increased by 25.2% to
$2,479,392 for fiscal 1997 from $1,980,699 for fiscal 1996. International sales
decreased 7.6% to
$426,823 for fiscal 1997 from
$462,179 for fiscal 1996. The growth in domestic sales is attributable to unit
sales growth of the
Company's specialty fasteners.
Net revenues from wound closure strips decreased by 1.0% to $1,617,728 for
fiscal 1997 from
$1,634,252 for fiscal 1996. The
decrease was the result of fewer units sold, primarily to international
customers. Unit sales
decreased by 2.8%.
Net revenues from specialty fasteners increased by 89.7% to $980,874 for fiscal
1997 from
$516,980 for fiscal 1996. The increase
was in units sold for all of the specialty fasteners; NG Strip, UC Strip,
Cath-Strip, and
Percu-Stay. Percu-Stay, a new product for the
Company in fiscal 1996, revenues were $353,673 in fiscal 1997 compared to
$15,439 in fiscal
1996, accounting for a majority of the
increase in revenues of specialty fasteners.
Net revenues from net dressings increased by 3.9% to $273,782 for fiscal 1997
from $263,392
for fiscal 1996. The increase was due
to a 3.8% increase in units sold.
Gross Profit
The gross profit percentage increased to 63.1% for fiscal 1997 from 59.0% for
fiscal 1996. The
increase is primarily due to the
increased proportion of sales of specialty fasteners which have a higher gross
margin percentage
than the wound closure strips.
Operating Expenses
Operating expenses increased to $1,687,417, 58.1% of net revenues, for fiscal
1997 from
$1,412,504, 57.8% of net revenues, for
fiscal 1996. Increases were due in a large part to increased marketing
activities intended to more
rapidly increase the sales of the
specialty fasteners and an increase in wages and benefits.
Other Income
Other income includes interest income of $6,024 and interest expense of $884
for fiscal 1997.
For fiscal 1996 other income consisted
of $164,213 for the sale of the Company's right, title, and interest in a
royalty agreement and
$10,550 of interest income.
COMPARISON OF THE YEAR ENDED MAY 31, 1996 WITH THE YEAR ENDED MAY 31,
1995
Revenues
Net revenues increased 10.3% to $2,442,878 for fiscal 1996 from $2,214,093 for
fiscal 1995.
Domestic sales increased by 10.4% to
$1,980,699 for fiscal 1996 from $1,794,729 for fiscal 1995, while international
sales inceased
27.3% to $462,179 for fiscal 1996 from
$363,127 for fiscal 1995.
Net revenues from sales of wound closure strips increased by 15% due to an
increase in units
sold. Net revenues from sales of
specialty fasteners increased by 15% due mainly to an increase in the unit
sales price of one of
the new fasteners sold by the
Company. Net revenues from the sales of net dressings increased by 3% on a
minor increase in
units sold.
The Company received no royalties in fiscal 1996. On June 26, 1995, the Company
sold its
rights, title, and interest in the royalty
agreement for $164,213 (see Note 7 to the Financial Statement).
Gross Profit
The gross profit percentage decreased to 59.0% of net revenues for fiscal 1996
from 61.8% for
fiscal 1995. The decrease in gross
profit percentage was the result of slight increases in product costs, an
increase in international
sales which have a lower profit
percentage, and the discontinuance of the royalties.
Operating Expenses
Operating expenses increased to $1,412,504, 57.8% of net revenues, for fiscal
1996 from
$1,172,086, 52.9% of net revenues, for
fiscal 1995. The majority of the increase resulted from increased marketing
activities intended to
more rapidly increase sales of the
specialty fasteners and wound closure strips.
Other Income
The Company sold its right, title, and interest in a royalty agreement with Bio
Vascular for
$164,213 in fiscal 1996. The royalty
agreement was due to terminate in July 1995. Other income includes interest
income of $10,550
for fiscal 1996 and $3,759 for fiscal
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $1,067,892 on May 31, 1997 and a working
capital ratio of
5.9 to 1 compared to working
capital of $998,872 and a working capital ratio of 4.5 to 1 on May 31, 1996.
The Company's cash and cash equivalents increased to $351,201 on May 31, 1997
compared to
$252,188 on May 31, 1996.
Operating activities provided $155,712, while $71,851 was spent for equipment.
The Company
obtained an $18,000 loan for the
purchase of a new phone system and made principal payments of $3,130 on the
loan.
The Company believes 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 $200,000 line of credit with
a local bank to
provide additional liquidity if
needed. (See Note 4 to the financial statements.) The agreement expires in
October 1997, the
Company intends to renew the line for
another year.
INFLATION AND CHANGING PRICES
The Company believes 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.
FOREIGN CURRENCY TRANSACTIONS
All of the Company's foreign transactions are negotiated, invoiced and paid in
U.S. dollars.
Fluctuations in currency exchange rates in
other countries may therefore reduce the demand for the Company's products by
increasing the
price of the Company's products in
the currency of the countries in which the products are sold.
FORWARD LOOKING STATEMENTS
In addition to historical information this report may contain forward-looking
statements that are
subject to risks and uncertainties that
may cause actual results to differ materially from those reflected in the
forward-looking
statements. The Company believes it has
made fair and accurate forward-looking statements by relying on past events and
current
information available. The Company
undertakes no obligations to revise these forward-looking statements to reflect
events that may
arise.
ITEM 7. FINANCIAL STATEMENTS
Page Reference
Form 10-KSB
Independent auditor's report 12
Balance sheets at May 31, 1997 and 1996 13,14
Statements of operations for the years ended May 31, 1997 and 1996 15
Statements of stockholders' equity for the years ended May 31, 1997 and 1996
16
Statements of cash flows for years ended May 31, 1997 and 1996 17
Notes to Financial Statements 18-22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS, COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
The section entitled "Directors and Executive Officers" in the Registrant's
definitive proxy
statement for its 1997 annual meeting of
shareholders is incorporated by reference herein.
ITEM 10. EXECUTIVE COMPENSATION
The sections entitled "Executive Compensation" and "Election of Directors" in
the Registrant's
definitive proxy statement for its 1997
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 1997 annual meeting of
shareholders is
incorporated by reference herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
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, 1997 and 1996
Statement of operations for the years ended May 31, 1997 and 1996
Statements of stockholders' equity for the years ended May 31, 1997 and
1996
Statements of cash flows for the years ended May 31, 1997 and 1996
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,
1997.
(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 the year
ended May 31, 1989
Care, Inc. Incentive Stock Option Plan (File No.
0-16664) dated August 25,
1989
10.2 Executive Agreement with Form 10-KSB
Annual Report for the year
ended May 31, 1993
Arthur A. Beisang (File No. 0-16664) dated August 25, 1993
10.3 Executive Agreement with Form 10-KSB
Annual Report for the year
ended May 31, 1993
Dr. Robert Ersek (File No. 0-16664) dated August 25, 1993
10.4 Executive Agreement with Form 10-KSB
Annual Report for the year
ended May 31, 1993
H. James Thompson (File No. 0-16664) dated August 25, 1993
10.5 Executive Agreement with Form 10-KSB
Annual Report for the year
ended May 31, 1996
Arthur A. Beisang (File No. 0-16664) dated August 23, 1996
10.6 Executive Agreement with Form 10-KSB
Annual Report for the year
ended May 31, 1996
Dr. Robert Ersek (File No. 0-16664) dated August 23, 1996
10.7 Executive Agreement with Form 10-KSB
Annual Report for the year
ended May 31, 1996
H. James Thompson (File No. 0-16664) dated August 23, 1996
10.8 Genetic Laboratories Wound Care, Inc. Form
14-A Proxy Statement
1996 Incentive Stock Option Plan (File No.
0-16664) dated September 20,
1996.
27 Financial Data Schedule Filed
herewith electronically.
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,
1997 and 1996 and the related statements of operations, stockholders' equity
and cash flows for
the years than 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, 1997 and 1996, the results
of its operations
and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
June 26, 1997
GENETIC LABORATORIES WOUND CARE, INC.
BALANCE SHEETS
MAY 31, 1997 and 1996
ASSETS
1997 1996
CURRENT ASSETS
Cash and cash equivalents $351,201 $252,188
Receivables
Trade less allowance for doubtful accounts
$7,000 and $5,500 respectively (Notes 4 and 5) 412,919
330,779
Income taxes 5,930 -
Inventories (Note 4) 478,711 631,734
Prepaid expenses 35,128 69,454
Total current assets 1,283,889 1,284,155
PROPERTY AND EQUIPMENT (Notes 3 and 4)
Production equipment and tooling 60,140 59,093
Office equipment 194,552 148,021
254,692 207,114
Less accumulated depreciation 166,363 174,993
88,329 32,121
OTHER ASSETS, net 5,087 8,136
$1,377,305 $1,324,412
GENETIC LABORATORIES WOUND CARE, INC
BALANCE SHEETS (continued)
May 31, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
CURRENT LIABILITIES
Current maturities of long term debt $5,760$ -
Accounts payable 122,443 215,764
Accrued expenses 87,794 69,519
Total current liabilities 215,997 285,283
LONG TERM DEBT, less current maturities (Note 4) 9,110
- -
COMMITMENTS (Note 3)
STOCKHOLDERS' EQUITY (Note 2)
Common stock, $.01 par value; 12,000,000 shares authorized,
issued 2,401,850 and 2,401,100
shares, respectively 24,018 24,011
Additional paid-in capital 646,880 646,605
Retained earnings 481,300 368,513
1,152,198 1,039,129
$1,377,305 $1,324,412
See Notes to Financial Statements
GENETIC LABORATORIES WOUND CARE, INC.
STATEMENTS OF OPERATIONS
Years Ended May 31, 1997 and 1996
1997 1996
Net revenues (Note 5) $2,906,215 $2,442,878
Cost of revenues 1,071,651 1,002,756
Gross profit 1,834,564
1,440,122
Selling, general and administrative expenses 1,687,417
1,412,504
Operating income 147,147 27,618
Other income (Note 7) 5,140 174,763
Income before income taxes 152,287 202,381
Provision for income taxes (Note 6) 39,500 63,400
Net income $112,787 $138,981
Net income per common share $.05 $.06
Weighted average number of common and common
equivalent shares outstanding 2,444,780 2,461,989
See Notes to Financial Statements
GENETIC LABORATORIES WOUND CARE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 31, 1997 and 1996
Common Stock Additional
Paid in Retained
Shares Amount Capital Earnings Total
Balance, May 31, 1995 2,326,100$ 23,261$ 625,186$ 229,532$ 877,979
Stock issued (Note 2) 75,000 750 21,419 - 22,169
Net income - - -
138,981 138,981
Balance, May 31, 1996 2,401,100 24,011 646,605 368,5131,039,129
Stock issued (Note 2) 750 7 275 - 282
Net income - - -
112,787 112,787
Balance, May 31, 1997 2,401,850$ 24,018$ 646,880$ 481,300$ 1,152,198
See Notes to Financial Statements
GENETIC LABORATORIES WOUND CARE, INC.
STATEMENTS OF CASH FLOWS
Years Ended May 31, 1997 and 1996
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $112,787 $138,981
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 18,692 18,819
Changes in current assets and liabilities:
Receivables (88,070) (42,451)
Inventories 153,023 (202,629)
Prepaid expenses 34,326 (40,313)
Accounts payable (93,321) 83,396
Accrued expenses 18,275 3,715
Income taxes payable - (9,800)
Net cash provided by (used in) operating activities
155,712 (50,282)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (71,851)
(15,529)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (3,130)
-
Proceeds from note payable 18,000 -
Proceeds from stock issuance 282 22,169
Net cash provided by financing activities 15,152
22,169
Net increase (decrease) in cash and cash equivalents 99,013
(43,642)
CASH AND CASH EQUIVALENTS
Beginning 252,188 295,830
Ending $ 351,201 $ 252,188
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of Business
The Company markets proprietary wound care products; primarily wound
closure strips,
specialty fasteners, and net
dressings. Sales are made primarily to medical supply distributors
throughout the United
States and in foreign countries,
mainly Europe, utilizing independent sales representatives. The
manufacturing of the
products is contracted out utilizing
specifications provided by the Company. See Note 5 for major
customers and supplier.
Significant Accounting Policies
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 income taxes totaled $44,076 and $74,554 for the
years ended May 31,
1997 and 1996, respectively.
Cash payments for interest totaled $884 for the year ended May 31,
1997.
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 five to seven years.
Fair Value of Financial Instruments:
The financial statements include the following financial instruments:
cash and cash
equivalents, trade accounts receivable,
note payable, and accounts payable. The fair value of notes payable
is estimated based
upon interest rates for arrangements
with similar terms. No separate comparison of fair values versus
carrying values is
presented for the aforementioned
financial instruments since their fair values are not significantly
different than their balance
sheet carrying amounts at May
31, 1997 or May 31, 1996.
Revenue Recognition:
The Company recognizes revenue upon shipment of its product to its
customers. Orders
are generally shipped the same day
they are received or the next business day.
Use of Estimates:
The preparation of the Company's financial statements in conformity
with generally
accepting accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets
and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported
amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
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 the deductible
temporary differences and operating loss or tax credit carry forwards
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, 1997 and 1996 the Company has no significant temporary
differences on which to
recognize deferred tax assets or
liabilities. Tax credits are accounted for by the flow-through method
thereby reducing
taxes payable and the provision for
income taxes in the period utilized.
Issued But Not Yet Adopted Standard:
The FASB has issued Statement No. 128, Earnings per Share, which
supersedes APB
Opinion No. 15. Statement No. 128
requires the presentation of earnings per share by all entities that
have common stock or
potential common stock., such as
options, warrants and convertible securities, outstanding that trade
in a public market.
Those entities that have only common
stock outstanding are required to present basic earnings per share
amounts. All other
entities are required to present basic and
diluted per share amounts. Diluted per share amounts assume the
conversion, exercise or
issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase
the income per common
share from continuing operations.
All entities required to present earnings per share amounts must
initially apply Statement
No. 128 for annual and interim
periods ending after December 15, 1997. Earlier applications is not
permitted.
The adoption of Statement No. 128 would have no material effect on
reported earnings per
share for the years ended May 31,
1997 and 1996.
Note 2. Stock Option Plans
The Company has two qualified incentive option plans which authorize
the granting of
options to officers and employees to
purchase shares of common stock. 575,000 shares have been reserved
for issuance under
the plans. These options are
granted at the discretion of the Board of Directors. All options
must be granted at no less
than 100% of the 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
market value, or a combination of the
two. All options outstanding at May 31, 1997 are exercisable.
The Company has adopted the disclosure-only provisions of Statement
of Financial
Accounting Standards No. 123
"Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has
been recognized for the stock option
plans. Had compensation cost for the Company's stock option plan been
determined based
on the fair value at the grant date
for awards in 1997 and 1996 consistent with the provisions of
Statement of Financial
Accounting Standards No. 123, there
would have been no material effect on the Company's reported net
earnings and net
earnings per share.
Additional information relating to all outstanding options as of May
31, 1997 and 1996 is
as follows:
1997
1996
Weighted Avg.
Weighted Ave.
Shares Exercise Price Shares
Exercise Price
Options outstanding, beginning of year 145,750 $ 0.32
223,950 $ .30
Options granted 31,600 0.46 -
-
Options canceled - - (3,200)
.36
Options exercised (750) 0.38 (75,000)
0.30
Options outstanding, end of year 176,600 $ 0.35
145,750 $ 0.32
Weighted average fair value of options
granted during the year $ 0.39 $
-
,
The following table summarizes information about stock options
outstanding at May 31,
1997:
Options Outstanding
Options Exercisable
Range of Exercise Prices NumberWeighted Avg. Weighted Avg.
Number Weighted
Avg.
Outstanding at RemainingExercise Price Exercisable at Exercise
Price
May 31, 1997 Contractual May 31,1997
Life (Years)
$ .25 to .49 154,150 6.0 .32 154,150
.32
$ .50 to .625 22,450 6.6 .53 22,450
.53
176,600 6.1 .35 176,600
.35
Note 3. Commitments
Operating Leases:
The Company leases office and production facilities under a lease
expiring March 2002.
Total rental
expenses of $66,635 and $57,298 were charged to operations for the
years ended May 31,
1997 and 1996
respectively.
Future Minimum rental payments are:
Year Ending May 31, Amount
1998 $59,100
1999 $59,100
2000 $59,535
2001 $61,305
2002 $47,025
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 may match employee
contributions
subject to certain limitations. The
Company contributed $18,256 and $24,460 to the plan in the years ended May
31, 1997 and
1996, respectively.
Compensation Agreements:
The Company has Employment Agreements with three individuals for total
aggregate annual
base
compensation of $193,300. Two of the individuals are directors with total
aggregate annual
base
compensation of $98,700. The third individual is an officer with total
aggregate annual base
compensation of $94,600.
The agreements with the two directors provide that in the event of a
change of control of the
Company
the two directors, if terminated, would be paid cash as severance equal to
all future amounts
owed under
those agreements for the remainder of the terms. All three agreements
expire June 30, 1998.
The Company has deferred compensation agreements with an officer and an
employee which
provide benefits payable at age
65. The estimated liability under the agreements will be accrued starting
in fiscal 1998 over
the years of employment. The
Company has purchased single premium life insurance policies which are
expected to fully
fund the Company's future
obligations under these agreements.
Note 4. Financing Agreements
Revolving Credit Agreement:
The Company has a revolving credit agreement with a bank which allows the
Company to
borrow up to $200,000.
Borrowings bear interest at the bank's prime interest rate plus 1.5%,
(10.0% at May 31, 1997).
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 and prohibits the
payment of dividends.
The agreement terminates on
October 31, 1997. No amounts were outstanding under the agreement at May
31, 1997 or
1996.
Note Payable:
The Company borrowed $18,000 from a local bank for the purchase of a new
phone system in
October of 1996. The loan is
for three years at 9% interest with monthly payments of $573. At May
31,1997 the
outstanding balance was $14,870.
Scheduled Annual Maturities Are as Follows:
Year Ending May 31 Amount
1998 $5,760
1999 6,308
2000 2,802
$ 14,870
Note 5. Customers and Supplier
Major Customers:
During the years ended May 31, 1997 and 1996 one customer accounted for
more than ten
percent of the Company's net
revenues. This customer accounted for approximately $355,722, 12.2% and
$378,272, 15.5%
of net revenues for the years
ended May 31, 1997 and 1996, respectively. Accounts receivable from the
customer totaled
$41,265 and $30,870 as of May
31, 1997 and 1996, respectively.
Exports:
The Company sells directly to foreign distributors located mainly in
Europe. Total export
sales accounted for approximately
15% and 19% of net revenues for the years ended May 31, 1997 and 1996,
respectively.
Accounts receivable at May 31,
1997 and 1996 included amounts due from foreign customers of approximately
$80,000 and
$73,000, respectively.. All
foreign sales require payment in U.S. funds.
Supplier:
The Company has utilized one supplier to manufacture a majority of its
products, which
represented approximately 70% and
84% of net revenues for the years ended May 31, 1997 and 1996,
respectively. The Company
has a good working
relationship with this supplier and plans to continue to do business with
this supplier.
Note 6. Income Taxes
The Company's effective tax rate varies from the statutory Federal Income
Tax rate for the
following reasons:
1997 1996
Statutory income tax rate 35.0% 35.0%
State income taxes, net of federal tax benefits 3.2
.7
Non-deductible expenses -
1.6
Benefit of income taxed at lower rates (9.9) (4.5)
Tax credits (2.4) (1.5)
Effective tax rate 25.9% 31.3%
Note 7. Royalty Agreement
On June 26, 1995, the Company sold its rights, title and interest in
a royalty agreement
with BioVascular, Inc., for $164,213.
The royalty agreement was due to terminate in July 1995.
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, hereunto duly
authorized.
GENETIC LABORATORIES WOUND CARE, INC.
August 25, 1997 By: /s/ Arthur A. Beisang
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/ Arther A. Beisang Chief Executive
Officer August 25, 1997
Arthur A. Beisang Director
/s/ H. James Thompson President,
August 25, 1997
H. James Thompson Chief Financial Officer
/s/ Robert A. Ersek Director, Secretary
August 25,1997
Robert A. Ersek
/s/ John H. Olson Director
August 25, 1997
John H. Olson
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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This schedule contains summary financial information extracted from the May
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<FISCAL-YEAR-END> MAY-31-1997
<PERIOD START> JUN-01-1996
<PERIOD-END> MAY-31-1997
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0
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<OTHER-SE> 1,128,180
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