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, 1998 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 $3,122,945.
Aggregate market value of voting stock held by nonaffiliates
of Company as of June 30, 1998 was approximately $1,000,000.
The number of shares of each class of common stock outstanding on
June 30, 1998 was:
Common Stock $.01 par value 2,403,150 Shares
DOCUMENTS INCORPORATED BY REFERENCE
None
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 generally contracts out the manufacture of its products having
control over 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.
On May 11,1998 the Board signed a Letter of Intent to merge with Derma
Sciences, Inc. The Company would become a subsidiary of
Derma Sciences, Inc. and with shareholders receiving .7 shares of Derma
Sciences, Inc. stock for each share of Genetic Laboratories
Wound Care, Inc. stock. On July 7, 1998 the Board signed an agreement
and Plan of Merger with Derma Sciences, Inc. Shareholders of
record on August 3, 1998 were mailed a proxy, a notice of special
shareholders meeting to be held September 9, 1998, and the Agreement
and Plan of Merger to vote on the merger (also see Management'S Discussion
and Analysis or Plan of Operation).
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:
1998 1997 1996
$ % $ % $ %
Wound Closure Strips $1,611,810 51.6 $1,617,728 55.7 $1,634,252
66.9
Specialty Fasteners 1,199,750 38.4 980,874 33.8 516,980 21.2
Net Dressings 271,131 8.7 273,782 9.4 263,392 10.8
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
14% and 13% of net revenues for the years ended May 31, 1998
and 1997, 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, 1998. The Company believes its
relationship with this distributor is strong. During the year
ended May 31, 1998 the Company's 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 $576 and $19,290 of research and development
costs for the years ended May 31, 1998 and 1997,
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, 1998, the Company employed nineteen employees of which eighteen
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 $545,000 and $427,000 to foreign distributors
during the year ended May 31, 1998 and 1997,
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, 1998 and 1997.
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, 1998, there were 2,403,150
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, 1998, there were approximately 900 shareholders of record.
The bid and ask prices were as follows:
Quarter Ending: Bid Ask
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
Fiscal 1998
August 31, 1997 3/8 5/8
November 30, 1997 3/8 5/8
February 28, 1998 7/16 11/16
May 31, 1998 7/8 1 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 OR PLAN OF OPERATION
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, 1998, 1997, and
1996.
1998 1997 1996
Net Revenues
Domestic Sales $ 2,577,534 $ 2,479,392 $ 1,980,699
International Sales 545,411 426,823 462,179
Total $ 3,122,945 $2,906,215 $2,442,878
Gross Profit $ 1,972,280 $1,834,564 $1,440,122
Operating Income $ 152,604 $ 147,147 $ 27,618
COMPARISON OF THE YEAR ENDED MAY 31, 1998 WITH THE YEAR ENDED MAY 31, 1997
Revenues
Net revenues increased 7.5% to $3,122,945 for fiscal 1998 from $2,906,215 for
fiscal 1997. Domestic sales increased by 4.0% to $2,577,534 for
fiscal 1998 from $2,479,392 for fiscal 1997. International sales increased
27.8% to $545,411 for fiscal 1998 from $426,823 for fiscal 1997. The
growth in domestic sales is attributable to unit sales growth in the Company's
specialty fasteners.
Net revenues from wound closure strips decreased by 1.0% to $1,611,810 for
fiscal 1998 from $1,617,728 for fiscal 1997. The decrease was the
result of greater unit sales to international customers at a lower price than
domestic customers and lower unit sales to domestic customers. Unit sales
were flat.
Net revenues from specialty fasteners increased by 22.3% to $1,199,750 for
fiscal 1998 from $980,874 for fiscal 1997. The increase was in units
sold for the following specialty fasteners; NG Strip, UC Strip, and Percu-Stay.
Percu-Stay, a new product for the Company in fiscal 1996, revenues
were $562,718 in fiscal 1998 compared to $353,673 in fiscal 1997, representing
the majority of the increase in revenues of specialty fasteners.
Net revenues from net dressings decreased to $271,131 for fiscal 1998 from
$273,782 for fiscal 1997. The decrease was due to a decrease in units
sold.
Gross Profit
The gross profit percentage remained constant at 63.15% for fiscal 1998 from
63.13% for fiscal 1997. The cost of product remained constant from
fiscal 1997 to fiscal 1998.
Operating Expenses
Operating expenses increased to $1,819,676, 58.3% of net revenues, for fiscal
1998 from $1,687,417, 58.1% of net revenues, for fiscal 1997.
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 $6,235 and interest expense of $1,121
for fiscal 1998. Other income consisted of $6,024 and interest
expense of $884 for fiscal 1997.
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 in 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 63.13% for fiscal 1997 from 58.95% 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $1,123,580 on May 31, 1998 and a working
capital ratio of 6.5 to 1 compared to working capital of
$1,067,892 and a working capital ratio of 5.9 to 1 on May 31, 1997.
The Company's cash and cash equivalents decreased to $310,015 on May 31, 1998
compared to $351,201 on May 31, 1997. Operating activities
provided $34,534, while $59,242 was spent for equipment. The Company made loan
principal payments of $5,760.
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 1998, the Company intends to
renew the line for another year.
MERGER WITH DERMA SCIENCES, INC.
On May 11,1998 the Board signed a Letter of Intent to merge with Derma
Sciences, Inc. The Company would become a subsidiary of Derma
Sciences, Inc. and with shareholders receiving .7 shares of Derma Sciences,
Inc. stock for each share of Genetic Laboratories Wound Care, Inc.
stock. On July 7, 1998 the Board signed an agreement and Plan of Merger with
Derma Sciences, Inc. Shareholders of record on August 3, 1998
were mailed a proxy, a notice of special shareholders meeting to be held
September 9, 1998, and the Agreement and Plan of Merger to vote on the
merger.
The Board has determined that the Merger is in the best interests of the
Company and its shareholders. The merger affords company shareholders
the opportunity to participate in a larger more diverse entity. In addition,
certain synergies and economic benefits result from the merger. The
Merger Agreement was negotiated by the directors and management of the Company
with the consultation and legal advice from the firm of
Mackall, Crounse & Moore PLC.
Following the Merger, Derma Sciences plans to maintain Genetic Labs as a
separate business unit of Derma Sciences. Derma Sciences intends to
conduct an evaluation of existing administrative functions, such as finance,
human resources, information technology, legal and general overhead
costs of both companies with a view to consolidating certain of these functions
where operationally feasible.
The directors of the Company will be Edward J. Quilty, Arthur A. Beisang and
Robert A. Ersek, M.D. The officers of the company will be Edward
J. Quilty, Chairman of the Board of Directors, Arthur A. Beisang, Chief
Executive Officer, H. James Thompson, President and Chief Operating
Officer, and Robert A. Ersek, M.D., Medical Director.
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.
YEAR 2000 COMPLIANCE
Computer programs using a two-digit format, as opposed to four digits, to
indicate the year will be unable to interpret dates beyond the year 1999,
which could cause a system failure or other computer errors, leading to
possible disruptions in operations. This has been called the Year 2000
(Y2K) issue. The Company believes there are three major areas to be addressed
to ensure the Company is Y2K compliant: (1) financial and
informational system applications, (2) manufacturing applications and (3)
third party relationships. For the financial application the Company
recently upgraded its software program to a Y2K compliant program.
Informational system applications are being upgraded now and will be
completed by December 31, 1998. For manufacturing the Company utilizes
contract manufacturers. One supplier manufactures a majority of the
Company's products. This manufacturer has stated that it has a Y2K plan and
intends to be compliant by December 31, 1999. For third-party
relationships the Company has only begun to examine the Y2K issues that would
have adverse effects on the Company. Most of the parties the
Company deals with are larger and have more resources. The Company believes
third-parties will be Y2K compliant. The Company believes it
will cost less than $10,000 to become Y2K compliant.
RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130 Reporting Comprehensive Income
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components. Statement 130 requires unrealized
gains or losses on available-for-sale securities and certain other items, which
prior to adoption were reported separately in shareholders equity, to
be included in other comprehensive income. The Company has no other
comprehensive income as defined by SFAS 130.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
Disclosures About Segments of an Enterprise and Related
Information. This Statement requires public enterprises to report selected
information about operating segments in annual and interim reports
issued to shareholders. It is effective for financial statements for fiscal
years beginning after December 15, 1997, but it is not required to be applied
to interim financial statements in the initial year of its application. The
adoption of this Statement will have no impact on the Company's financial
condition or results of 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 15
Balance sheets at May 31, 1998 and 1997 16,17
Statements of operations for the years ended May 31, 1998 and 1997 18
Statements of stockholders' equity for the years ended May 31, 1998 and 1997
19
Statements of cash flows for years ended May 31, 1998 and 1997 20
Notes to Financial Statements 21-25
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
Certain information concerning directors and executive officers of the Company
is set forth below.
Arthur A. Beisang (age 66) has served C.E.O. since May 1992 and as
Chairman of the Board of Directors since January 1988. He served as
President from January 1988 to May 1992. Mr. Beisang has done post-graduate
work at Wayne State University and the University of Minnesota.
Mr. Beisang is a member of the American Association of Tissue Banks. Mr.
Beisang was a founder of Bioplasty, Inc. (formerly Genetic
Laboratories, Inc.)
H. James Thompson (age 56) has served as President since May 1992. He
served as Executive Vice President from January 1990 to May 1992,
and Vice President of Sales from 1988 to January 1990. He is originally from
Albert Lea, Minnesota and graduated from the University of North
Dakota. His sales management experience prior to 1984 includes eight years
with Baxter/Travenol Laboratories during which he advanced from a
Twin Cities based sales representative to National Sales Manager of Hyland
Division. Mr. Thompson was Director of Domestic Sales and Vice
President of Sales at Bioplasty, Inc. from 1984 to 1988.
Robert A. Ersek, MD (age 60) has served as Secretary since November 1992
and as Medical Director since January 1988. Dr. Ersek holds a
degree from Morris Harvey College (B.S.) and Hahneman Medical College (M.D.).
Dr. Ersek has done post-graduate work at the University of
Minnesota, Tulane University, and the University of Mississippi. He is a
member of the International Society of Cryosurgery, American Society for
Artificial Internal Organs and American Medical Association, among others. Dr.
Ersek has engaged in the private practice of plastic surgery in
Austin, Texas since completing his residency in that specialty in 1978.
John H. Olson (age 55) has served as a Director since November 1992. He
holds a degree from Macalester College (B.A.). He has also done
post-graduate work at the University of Minnesota, University of North Dakota
(MST), Genetic Institute and Mankato State University. Mr. Olson
has been the President and an Executive Director of Cryogenic Laboratories,
Inc. (Tissue Bank, Roseville) for over fifteen years. Mr. Olson is a
member of the American Fertility Society, Society for Cryobiology, American
Association of Tissue Banks, American Society of Andrology and
New York Academy of Sciences.
Brian R. Gardow (age 35) was appointed C.F.O. in July 1998. He served as
Controller from November 1988 to July 1998. He holds a Bachelor
of Business Administration degree from the University of Wisconsin-Eau Claire.
He passed the Certified Public Accountant exam in July 1990.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors, its executive officers, and any persons holding
more than 10% of the outstanding Common Stock are required to
file reports concerning their initial ownership of Common Stock and any
subsequent changes in that ownership. The Company believes that the
filing requirements were satisfied. In making this disclosure, the Company has
relied solely on written representations of its directors, executive
officers and beneficial owners of more than 10% of Common Stock and copies of
the reports that they have filed with the Securities and Exchange
Commission.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and noncash compensation paid for
services rendered to the Company during the last three fiscal years by the
Company's Chief Executive Officer and the executive officers of the Company
whose total annual salary and bonus compensation for the most
recent year exceeded $100,000.
Summary Compensation Table
Long Term
Compensation
Annual Compensation
Awards Payout
Other Restricted Securities
Annual Stock
Underlying LTIP All Other
Name and Principal Fiscal
Compen- Award(s) Options/SARs Payouts Compensation
Position Year Salary($) Bonus($)
sation($) ($) (#)
($) ($)(1)
Arthur A. Beisang 1998 $68,792 $5,000 $0
$0 23,000 $0 $1,348
Chief Executive 1997 $65,997 $5,000 $0
$0 4,000 $0 $1,320
Officer 1996 $65,192 $5,000 $0 $0
0 $0 $1,253
H. James Thompson 1998 $93,952 $21,521 $0 $0
15,000 $0 $8,899
President 1997 $86,008 $19,320 $0 $0
10,000 $0 $5,425
1996 $85,084 $26,316 $0 $0
0 $0 $8,716
(1) All other Compensation consists of matching fund contributions to the
Company 401(k) plan.
Compensation Of Directors
Mr. Olson receives $500.00 a month Director fee. No other board member
receives compensation for being a board member.
The following table provides information with respect to incentive stock option
exercises in fiscal 1998 under the two Incentive Stock Option Plans
by the named executive officers and the value of such officers unexercised
options at May 31, 1998.
Aggregated Option Exercises in Last Fiscal Year
and May 31, 1998 Option Value
Number of Securities Value of
Unexercised
Underlying Unexercised In-the-Money
Options
Options at May 31, 1998 (#) (1)
at May 31, 1998 ($) (2)
Shares
Name Acquired Value
on Exercise Realized ($)
Exercisable Unexercisable Exercisable
Unexe
rcisable
Arthur A. Beisang -0- $0 27,000 -0-
$11,599 $ -0-
Chief Executive Officer
H. James Thompson -0- $0 80,000 -0-
$43,888 $ -0-
President
(1) There are no outstanding stock appreciation rights.
(2) Calculated on the basis of the number of shares subjecto to such options
multiplied by the excess of the closing price of a share of Common Stock of
$.875 on
the Local Over the Counter market at May 31, 1998 over the exercise
price of such options.
Option/SAR Grants During 1998 Fiscal Year
The following table sets forth the options that have been granted to the
executive officers listed in the Summary Compensation Table
during the Company's last fiscal year ended May 31,1998.
Percent of Total
Number of Securities Underlying Options/SARs Granted to
Exercise or Base Expiration
Name Options/SARs Granted Employees in Fiscal Year
Price
($/Share) Date
Arthur A. Beisang 27,000 26.7%
$ .48 5-1-03
Chief Executive Officer
H. James Thompson 15,000
17.4% $ .44 5-1-08
President
Employment Contracts and Termination Of Employment
and Change-In-Control Arrangements
In May 1998, the Company entered into employment agreements with Messrs.
Beisang, Thompson and Ersek. Each of the agreements has
a term of three years. Each agreement provides for an annual cost-of-living
increase in the base salary. Additional compensation based on pre-tax
profits of the Company may be paid to the executives as determined by the
Compensation Committee. The agreements with Messrs. Beisang and
Ersek provide that the executive may terminate his employment upon the
occurrence of any of the following events: (i) a change in majority
ownership or control of the Company which occurs as a result of a merger; a
sale of all or substantially all of the Company's assets; or the
acquisition of a majority of the Company's outstanding stock by a single party
or a group acting in concert; (ii) any attempted termination of the
executives employment by the Company prior to expiration of the agreement not
in accordance with any termination event as set forth in the
agreement; or (iii) any material diminution of, or any adverse change in the
terms or conditions of the executive's employment duties,
responsibilities or authority. In the event of such termination by Mr. Beisang
or Mr. Ersek, the Company shall pay said executive a severance
payment equal to their gross base salary payable over the remaining term of the
agreement. Mr. Beisang and Mr. Ersek are currently paid a base
annual salary of $70,600 and $32,000, respectively. The agreements with
Messrs. Beisang and Ersek provide that each executive retains the right to
new products or patents which the executive develops and contain a covenant not
to complete by the executive during the employment period and
for one year thereafter.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 30, 1998 certain information
regarding the current beneficial ownership of shares of Genetic Labs
Common Stock by: (i) each person known by Genetic Labs to own veneficially
more than 5% of the outstanding shares of Common Stock, (ii)
each director of Genetic Labs, (iii) each officer of Genetic Labs, and (iv)
all directors and officers of Genetic Labs as a group:
Number of Shares Percent
Name and Address of Beneficial Owner (1) Beneficially Owned Beneficiall
y Owned (9)
Robert A. Ersek, M.D. (2) 481,898
19.72%
Arthur A. Beisang (3) 412,000
16.91%
H. James Thompson (4) 143,650
5.78%
Patrick W. Hopper (5) 129,898
5.40%
Brian Gardow (6) 29,000
1.20%
John H. Olson (7) 26,100
1.07%
All directors and executive officers as a group (5persons) (8)
1,092,648 42.09%
(1) Except as otherwise noted, the address of each of the persons listed is
2726 Patton Road, St. Paul, MN 55113.
(2) Includes 442,898 shares held by various trusts deemed to be beneficially
owned by Dr. Ersek. Also includes 39,000 shares subject to options
currently exercisable. No additional shares are exercisable within 60 days of
June 30, 1998.
(3) Includes 178,920 shares owned jointly by Mr. Beisang and his wife with
respect to which Mr. Beisang may be deemed to have shared voting
and investment power. Also includes 27,000 shares subject to options currently
exercisable. No additional shares are exercisable within 60
days of June 30, 1998.
(4) Includes 80,000 shares subjecto to options currently exercisable. No
additional shares are exercisable within 60 days of June 30, 1998.
(5) Mr. Hopper can be reached at: 2624 Pebblegold Avenue, Henderson, Nevada
89014.
(6) Includes 20,000 shares subject to options currently exercisable. No
additional shares are exercisable within 60 days of June 30, 1998.
(7) Mr. Olson can be reached at: 1944 North Lexington, Roseville, Minnesota
55113. Includes 26,000 shares subject to options currently
exercisable. No additional shares are exercisable with 60 days of June 30,
1998.
(8) Includes 192,000 shares subject to options currently exercisable. No
additional shares are exercisable within 60 days of June 30, 1998.
(9) The percent beneficially owned by each entity or individual assumes the
exercisable options (including those that would be exercisable within
60 days of June 30, 1998).
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, 1998 and 1997
Statement of operations for the years ended May 31, 1998 and 1997
Statements of stockholders' equity for the years ended May 31, 1998 and 1997
Statements of cash flows for the years ended May 31, 1998 and 1997
Notes to financial statements
(b) Reports on Form 8-K
Merger Letter of Intent between Genetic Laboratories Wound Care, Inc. and
Derma Sciences, Inc. dated May 11, 1998
(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) to Company's Form 10
(File No. 000-16664)
dated March 25, 1998
(10) Material Contracts
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, 1996
Arthur A. Beisang (File No. 0-16664) dated August 23, 1996
10.3 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
10.4 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
10.5 Genetic Laboratories Wound Care, Inc. Form 14-A Proxy Statement
1996 Incentive Stock Option Plan (File No. 0-16664) dated September
20, 1996
10.6 Executive Agreement with Form 8-K dated July 14, 1998
Arthur A. Beisang
10.7 Executive Agreement with Form 8-K dated July 14, 1998
Dr. Robert Ersek
10.8 Executive Agreement with Form 8-K dated July 14, 1998
H. James Thompson
10.9 Agreement and Plan of Form S-4 dated July 15, 1998
Merger with Derma Sciences, Inc.
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, 1998
and 1997 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, 1998 and 1997, 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 25, 1998 (July 7, 1998 as to Note 7)
GENETIC LABORATORIES WOUND CARE, INC.
BALANCE SHEETS
MAY 31, 1998 and 1997
ASSETS
1998 1997
CURRENT ASSETS
Cash and cash equivalents $310,015 $351,201
Receivables
Trade, less allowance for doubtful accounts
$9,000 and $7,000 respectively (Notes 4 and 5) 407,318 412,919
Income taxes - 5,930
Inventories (Note 4) 547,640 478,711
Prepaid expenses 64,435 35,128
Total current assets 1,329,408 1,283,889
PROPERTY AND EQUIPMENT (Notes 3 and 4)
Production equipment and tooling 60,140 60,140
Office equipment 253,795 194,552
313,935 254,692
Less accumulated depreciation 197,545 166,363
116,390 88,329
OTHER ASSETS, net 13,252 5,087
$1,459,050 $1,377,305
GENETIC LABORATORIES WOUND CARE, INC
BALANCE SHEETS (continued)
May 31, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
CURRENT LIABILITIES
Current maturities of long term debt $6,308 $5,760
Accounts payable 67,460 122,443
Accrued expenses 129,022 87,794
Income taxes payable 3,038 -
Total current liabilities 205,828 215,997
LONG TERM DEBT, less current maturities (Note 4) 2,802 9,110
COMMITMENTS (Note 3)
STOCKHOLDERS' EQUITY (Note 2)
Common stock, $.01 par value; 12,000,000 shares authorized,
issued 2,403,150 and 2,401,850
shares, respectively 24,031 24,018
Additional paid-in capital 647,371 646,880
Retained earnings 579,018 481,300
1,250,420 1,152,198
$1,459,050 $1,377,305
See Notes to Financial Statements
GENETIC LABORATORIES WOUND CARE, INC.
STATEMENTS OF OPERATIONS
Years Ended May 31, 1998 and 1997
1998 1997
Net revenues (Note 5) $3,122,945 $2,906,215
Cost of revenues 1,150,665 1,071,651
Gross profit 1,972,280 1,834,564
Selling, general and administrative expenses 1,819,676 1,687,417
Operating income 152,604 147,147
Other income, net 5,114 5,140
Income before income taxes 157,718 152,287
Provision for income taxes (Note 6) 60,000 39,500
Net income $97,718 $112,787
Net income per common share, basic and diluted $.04 $.05
Weighted average number of common
shares outstanding
2,402,880 2,401,379
Weighted average number of common and common
equivalent shares outstanding 2,455,272 2,444,780
See Notes to Financial Statements
GENETIC LABORATORIES WOUND CARE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 31, 1998 and 1997
Common Stock Additional
Paid in Retained
Shares Amount Capital Earnings Total
Balance, May 31, 1996 2,401,100 $24,011 $646,605 $368,513 $1,039,129
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
Stock issued (Note 2) 1,300 13 491 - 504
Net Income - - -
97,718 97,718
Balance, May 31, 1998 2,403,150 $24,031 $647,371 $579,018
$1,250,420
See Notes to Financial Statements
GENETIC LABORATORIES WOUND CARE, INC.
STATEMENTS OF CASH FLOWS
Years Ended May 31, 1998 and 1997
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $97,718 $112,787
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 34,238 18,692
Changes in current assets and liabilities:
Receivables 5,601 (88,070)
Inventories (68,929) 153,023
Prepaid expenses (29,307) 34,326
Accounts payable (54,983) (93,321)
Accrued expenses 41,228 18,275
Income taxes payable 8,968 -
Net cash provided by operating activities 34,534 155,712
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in cash surrender value (7,957) -
Purchases of other assets (3,265) -
Purchases of property and equipment (59,242) (71,851)
Net cash used in investing activities (70,464) (71,851)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (5,760) (3,130)
Proceeds from note payable - 18,000
Proceeds from stock issuance 504 282
Net cash provided by (used in) financing activities (5,256) 15,152
Net increase (decrease) in cash and cash equivalents (41,186) 99,013
CASH AND CASH EQUIVALENTS
Beginning 351,201 252,188
Ending $ 310,015 $ 351,201
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 $51,000 and $44,076 for the years ended
May 31, 1998 and 1997, respectively. Cash
payments for interest totaled $1,121 and $884 for the years ended May 31, 1998
and 1997, respectively.
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, 1998 or May
31, 1997.
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:
The Financial Accounting Standards Board 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. (Basic per-share amounts are
computed by dividing net income (the numerator) by the weighted-average number
of common shares outstanding (the
denominator). 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 the loss or increase
the income per common share from continuing operations. The Company initially
applied Statement No. 128 for the year ended
May 31, 1998 and as required by the Statement, has restated all per share
information for the prior year to conform to the
Statement. Basic and diluted earnings per share were the same for the years
ended May 31, 1998 and 1997, respectively.
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, 1998 and 1997 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.
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, 1998 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
costs for the options been determined using the fair value method required by
FASB Statement No. 123 the Company's net income per
common share on a pro forma basis would have been as follows:
Year Ended
Net Income: 1998 1997
As reported $97,718 $112,787
Pro forma 65,728 100,334
Net Income per common share, basic and diluted:
As reported $.04 $.05
Pro forma .03 .04
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants: risk-free interest
rates of 7.0 and 6.1 percent in 1998 and 1997,
respectively; expected lives of 9 years; and expected volatility of 87 and 84
percent in 1998 and 1997, respectively.
Additional information relating to all outstanding options as of May 31,
1998 and 1997 is as follows:
1998
1997
Weighted Avg.
Weighted Avg
Shares Exercise Price
Shares Exercise Price
Options outstanding, beginning of year 176,600
$ 0.35 145,750
$ 0.32
Options granted 86,300 0.42
31,600 0.46
Options canceled (700) 0.48
- -
Options exercised (1,300) 0.39
(750) 0.38
Options outstanding, end of year 260,900 $
0.37 176,600 $ 0.35
Weighted average fair value of options
granted during the year $
0.37 $ 0.39
The following table summarizes information about stock options at May 31, 1998
and 1997:
Options Outstanding
Options Ecercisable
Range of Exercise Prices Number Weighted Avg. Number Number
Outstanding
at Remaining Weighted Avg. Exercisable at Weighted Avg.
Excersibleat Weighted Avg.
May 31, 1998 Contractual Exercise Price May 31, 1998
Exercise Price May 31, 1997 Exercise Price
Life (Years)
$ .25 to .49 231,850 5.3 $ .36
231,850 $ .36 154,150 $ .32
$ .50 to .625 29,050 6.5 .52 29,050
.52 22,450 $ .53
260,900 5.5 $ .37
260,900 $ .37 176,600 $ .35
Note 3. Commitments
Operating Leases:
The Company leases office and production facilities under a lease expiring
March 2002. Total rental
expenses of $90,090 and $66,635 were charged to operations for the years ended
May 31, 1998 and 1997 respectively.
Future Minimum rental payments are:
Year Ending May 31, Amount
1999 $59,100
2000 59,535
2001 61,305
2002 47,025
$226,965
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
$33,066 and $18,256 to the plan in the years ended May 31, 1998 and 1997,
respectively.
Compensation Agreements:
The Company has Employment Agreements with three individuals for total
aggregate annual base
compensation of $202,200. Two of the individuals are directors with total
aggregate annual base
compensation of $102,600. The third individual is an officer with total
aggregate annual base
compensation of $99,600.
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
April 30, 2001.
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 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, 1998).
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, 1998. No amounts were
outstanding under the agreement at May 31, 1998 or 1997.
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 31,1998 the
outstanding balance was $9,110.
Scheduled Annual Maturities Are as Follows:
Year Ending May 31 Amount
1999 $6,308
2000 2,802
$ 9,110
Note 5. Customers and Supplier
Major Customers:
During the years ended May 31, 1998 and 1997 one customer accounted for more
than ten percent of the Company's net revenues.
This customer accounted for approximately $352,592, 11.3% and $355,722, 12.2%
of net revenues for the years ended May 31, 1998
and 1997, respectively. Accounts receivable from the customer totaled $34,752
and $41,265 as of May 31, 1998 and 1997,
respectively.
Exports:
The Company sells directly to foreign distributors located mainly in Europe.
Total export sales accounted for approximately
17% and 15% of net revenues for the years ended May 31, 1998 and 1997,
respectively. Accounts receivable at May 31,1998
and 1997 included amounts due from foreign customers of approximately $72,000
and $80,000, 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 both the years ended May 31, 1998 and 1997. 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:
1998 1997
Statutory income tax rate 35.0% 35.0%
State income taxes, net of federal tax benefits 3.5 3.2
Non-deductible expenses 4.9 -
Benefit of income taxed at lower rates (3.1) (9.9)
Tax credits (2.3) (2.4)
Effective tax rate 38.0% 25.9%
Note 7. Subsequent Event
On July 7, 1998 the Company signed an agreement and plan of merger with Derma
Sciences, Inc., a Pennsylvania corporation
(Derma Sciences). Each share of the Company's common stock will be converted
into the right to receive .7 shares of Derma
Sciences common stock, subject to stockholder approval, for which a meeting has
been scheduled on September 9, 1998.
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 27, 1998 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/ Arthur A. Beisang Chief Executive Officer August 27, 1998
Arthur A. Beisang Director
/s/ H. James Thompson President, August 27, 1998
H. James Thompson Chief Operating Officer
/s/ Robert A. Ersek Director, Secretary August 27,1998
Robert A. Ersek
/s/ John H. Olson Director August 27, 1998
John H. Olson
/s/ Brian R. Gardow Chief Financial Officer August 27, 1998
Brian R. Gardow
1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extacted from the May 31,
1998 10KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 310,603
<SECURITIES> 0
<RECEIVABLES> 407,318
<ALLOWANCES> 0
<INVENTORY> 547,640
<CURRENT-ASSETS> 1,329,408
<PP&E> 313,935
<DEPRECIATION> 197,545
<TOTAL-ASSETS> 1,459,050
<CURRENT-LIABILITIES> 205,828
<BONDS> 0
0
0
<COMMON> 24,031
<OTHER-SE> 1,226,389
<TOTAL-LIABILITY-AND-EQUITY> 1,459,050
<SALES> 3,122,945
<TOTAL-REVENUES> 3,122,945
<CGS> 1,150,665
<TOTAL-COSTS> 1,819,676
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 157,718
<INCOME-TAX> 60,000
<INCOME-CONTINUING> 97,718
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97,718
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
