<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 1996.
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _______.
0-16864
------------------------
(Commission File number)
GULL LABORATORIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
UTAH 87-0404754
- ------------------------ ------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
1011 EAST MURRAY HOLLADAY ROAD
SALT LAKE CITY, UTAH 84117
- --------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(801) 263-3524
-------------------------------
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of common stock outstanding as of November 1, 1996 was
6,563,934.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 259,830 $ 219,415
Receivables-net 2,234,728 2,778,952
Net investment in sales-type leases 256,470 145,200
Income tax refund receivable 264,506
Inventories 3,961,270 3,393,924
Prepaid expenses 216,775 242,088
Deferred income taxes 105,000 124,000
------------------ -----------------
Total current assets 7,034,073 7,168,085
------------------ -----------------
Property, plant and equipment - net 3,538,604 3,572,899
Net investment in sales-type leases 1,043,724 507,018
Other assets - net 1,012,432 1,069,628
------------------ -----------------
Total assets $ 12,628,833 $ 12,317,630
------------------ -----------------
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,218,573 $ 2,286,123
Accounts payable 1,414,509 1,693,480
Accrued expenses 826,095 1,221,990
Income tax payable 65,945
Current portion of long-
term obligations 256,825 1,841,629
------------------ -----------------
Total current liabilities 4,781,947 7,043,222
------------------ -----------------
Long-term obligations 2,221,224 131,826
Deferred income taxes 360,000 304,600
Other long-term liabilities 96,503 96,503
------------------ -----------------
Total liabilities 7,459,674 7,576,151
------------------ -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 6,564 6,564
Additional paid-in capital 6,910,908 6,910,908
Foreign currency translation adjustment (113,378) (185,828)
Accumulated deficit (1,634,935) (1,990,165)
------------------ -----------------
Total stockholders' equity 5,169,159 4,741,479
------------------ -----------------
Total liabilities and stockholders' equity $ 12,628,833 $ 12,317,630
------------------ -----------------
------------------ -----------------
</TABLE>
1
<PAGE>
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three months ended
---------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
Sales $ 4,066,381 $ 4,392,988
Cost of goods sold 1,931,022 1,950,773
------------ ------------
Gross Profit 2,135,359 2,442,215
------------ ------------
Expenses:
Selling, general and administrative 1,782,177 1,882,092
Research and development 361,854 257,078
------------ ------------
Total expenses 2,144,031 2,139,170
------------ ------------
Operating income (loss) (8,672) 303,045
------------ ------------
Other income (expense):
Interest expense (128,622) (172,416)
Other (127,623) 42,012
------------ ------------
Total other income (expense) (256,244) (130,404)
------------ ------------
Income (loss) before provision for
income taxes (264,916) 172,641
Income tax provision 30,084 233,780
------------ ------------
Net loss $ (295,000) $ (61,139)
------------ ------------
------------ ------------
Earnings per common and common
equivalent share $ (0.04) $ (.01)
------------ ------------
------------ ------------
2
<PAGE>
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Nine months ended
-----------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
Sales $13,182,212 $14,175,317
Cost of goods sold 5,761,295 6,861,497
----------- -----------
Gross Profit 7,420,917 7,313,820
----------- -----------
Expenses:
Selling, general and administrative 5,110,878 5,666,834
Research and development 1,075,351 634,257
----------- -----------
Total expenses 6,186,229 6,301,091
----------- -----------
Operating income 1,234,688 1,012,729
----------- -----------
Other income (expense):
Interest expense (388,924) (488,384)
Other (66,109) 913,452
----------- -----------
Total other income (expense) (455,033) 425,068
----------- -----------
Income before provision for income taxes 779,655 1,437,797
Income tax provision 424,424 652,935
----------- -----------
Net income $ 355,231 $ 784,862
----------- -----------
----------- -----------
Earnings per common and common
equivalent share $ 0.05 $ 0.12
----------- -----------
----------- -----------
3
<PAGE>
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
<TABLE>
Nine Months Ended
-----------------------------------------
September 30, 1996 September 30, 1995
(Unaudited) (Unaudited)
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 355,231 $ 784,862
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 542,749 535,460
Loss (gain) on sale of fixed assets 26,003 (440,736)
Changes in assets and liabilities:
Net receivables (166,143) (700,131)
Inventories (622,482) (381,522)
Prepaid expenses 17,761 (4,197)
Other assets (63,829) (338,241)
Accounts payable (215,156) 912,483
Line of credit (42,635) (552,793)
Income taxes payable 330,451 29,723
Accrued expenses (351,270) 32,281
Deferred taxes 74,400 (64,600)
----------- -----------
Net cash provided by operating activities (114,920) (187,411)
----------- -----------
Cash flows from investing activities:
Disposition of property, plant
and equipment 4,434 981,735
Purchase of property, plant and equipment (433,475) (362,446)
----------- -----------
Net cash used in investing activities (429,041) 619,289
----------- -----------
Cash flows from financing activities:
Proceeds from long-term obligations 2,449,684
Principal payments on long-term obligations (1,855,266) (1,386,381)
Proceeds from issuance of common stock 491,198
----------- -----------
Net cash provided from (used in) financing activities 594,418 (895,183)
----------- -----------
Foreign currency translation adjustment (10,042) 147,431
----------- -----------
Net increase (decrease) in cash 40,415 (315,874)
Cash at beginning of period 219,415 368,153
----------- -----------
Cash at end of period $ 259,830 $ 52,279
----------- -----------
----------- -----------
</TABLE>
4
<PAGE>
GULL LABORATORIES, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated condensed financial statements of Gull
Laboratories, Inc. (the "Company") as of September 30, 1996 and for the three
months and nine months ended September 30, 1996 and 1995 were prepared by the
Company without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. These financial statements and related notes should
be read in conjunction with the Company's audited financial statements for
the year ended December 31, 1995 contained in its Annual Report on Form 10-K.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, all necessary adjustments to
the financial statements have been made to present fairly the financial
position and results of operations and cash flows. The results of operations
for the periods presented are not necessarily indicative of the results for
the respective complete years.
2. INVENTORIES
Inventories consisted of the following:
September 30, December 31,
1996 1995
------------ ------------
Raw materials $ 944,306 $1,141,163
Work-in-process 1,051,911 176,624
Finished goods 1,965,053 2,076,137
---------- ----------
Total $3,961,270 $3,393,924
---------- ----------
---------- ----------
3. EARNINGS PER SHARE
Earnings per share amounts are computed by dividing net income by the
weighted average number of common and common equivalent shares outstanding
during each period. The weighted average number of shares used in computing
earnings per share for the three months ended September 30, 1996 and 1995 was
6,563,934. For the nine months ended September 30, 1996 and 1995, the
weighted average number of shares outstanding were 6,563,934 and 6,561,857,
respectively.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
The mortgage on the Company's headquarters was due July 1, 1996. As such,
the mortgage was classified as part of the current maturities of long-term
debt and included in current liabilities at December 31, 1995. In June 1996,
the Company borrowed $1,800,000 from a bank with interest at 10.04% payable
in equal monthly installments of approximately $19,000 to refinance the
mortgage. Principally as a result of refinancing the mortgage, the Company's
ratio of current assets to current liabilities increased from 1.02 at
December 31, 1995 to 1.47 at September 30, 1996. Working capital also
increased from $124,863 to $2,252,126.
The Company sells and leases laboratory equipment to its customers in
order to help customers gain operating efficiencies through automating their
operations and to compete with industry practices. This equipment is
normally placed with a customer for a 90 day evaluation period. Following
the evaluation, the equipment may be sold, leased or rented to the customer
or returned to the Company. This program has required and will continue to
require significant capital investment by the Company. During the third
quarter of 1996, the Company secured equipment lines of credit totaling
$2,500,000 with two separate leasing companies to continue funding the
instrumentation program. Approximately $650,000 of the proceeds from the new
line of credit were used to repay debt that was already outstanding. The
remaining $1,850,000 is available to finance future instrumentation purchases.
As the Company continues to grow, there may be a need to obtain additional
financing to fund the Company's operations and instrumentation program and to
increase building and equipment capacity. Although the Company does not have
any funding commitments, to the extent that working capital needs cannot be
financed through internally generated funds, the Company believes that
additional debt, equity and lease financing can be obtained.
RESULTS OF OPERATIONS
Sales for the third quarter of $4,066,381 were $326,607 or 7% less than
sales in the third quarter of 1995 of $4,392,988. For the nine months ended
September 30, 1996, sales were $13,182,212 compared to $14,175,317 in the
first nine months of 1995. This represents a 7% decrease. Sales of the
Company's operations in the United States decreased 5% compared to the prior
year and sales of the Company's European operations decreased 14%. Sales to
domestic custmers of the United States operations increased approximately
8%, principally due to increased sales of the Company's proprietary DUET-TM-
instrumentation and the Company's ELISA and bioreagent product lines. Sales
of the College of American Pathologists also increased compared to the prior
year. Sales of the Company's IFA product line continue to decrease as
customers shift to the more cost effective ELISA format. Export sales to
international customers of the Company's United States operations as well as
sales of the Company's European Operations decreased over 22% due to
healthcare cost reduction pressures in Europe, increased competition and
changes in the reimbursement policies of the French and the Belgian
governments. Also, during the first nine months of 1995, the Company's
European
6
<PAGE>
operations sold approximately $390,000 of instrumentation to Fresenius AG,
Gull's majority shareholder. Instrumentation sales to Fresenius during the
first nine months of 1996 were approximately $148,000. Changes in sales were
principally due to changes in volume. There were no significant changes in
the selling prices of the Company's products.
Gross profits as a percentage of sales for the three months and the nine
months ended September 30, 1996 were 53% and 56%, respectively, compared to
56% and 52% in the three months and the nine months ended September 30, 1995.
The decrease in the gross profit margin for the three months ended September
30, 1996 was due to costs incurred outsourcing the European Operation's
manufacturing to a third party manufacturer and due to temporary
manufacturing inefficiencies encountered in manufacturing the Company's IFA
product. The increase in the gross profit percentage for the nine months
ended September 30, 1996 is due to successful programs to reduce
manufacturing costs, including backward integration with the Company's
Bioresearch operations. Also, in the fourth quarter of 1995, the Company
entered into an exclusive licensing agreement to market the DUET-TM-
instrumentation. This unit has a higher gross profit margin than other
instrumentation that the Company sells.
Selling, general and administrative costs decreased from $1,882,092 to
$1,782,177 in the third quarter of 1996. For the nine months ended September
30, 1996, selling, general and administrative costs decreased from $5,666,834
or 40% of sales to $5,110,878 or 36% of sales. Approximately $115,000 of the
decrease was a result of reversing excess termination costs that had been
recorded in the third and fourth quarters of 1995. The Company has also
benefited from related personnel cost reductions in Europe that were
implemented in the last half of 1995.
Reflecting the Company's increased focus on developing new products,
including cardiovascular diagnostic and DNA based infectious disease
technologies, research and development costs increased 41% from $257,078 in
the third quarter of 1995 to $361,854 in the third quarter of 1996 and for
the nine months ended September 30, 1996 research and development costs were
$1,075,351 compared to $634,257 in 1995 which represents a 70% increase.
Other income/(expense) decreased from net other income of $425,068 in the
first nine months of 1995 to a net other expense of $455,033 in the first
nine months of 1996. In January 1995, the Company sold its German operations
to its majority shareholder, Fresenius AG, which resulted in the recognition
of a gain of approximately $134,500. In June 1995, the Company's European
operations sold its headquarters facility, recognizing a gain of
approximately $550,000. There were no similar other income items that
occurred during 1996. Interest expenses in 1996 also decreased due to the
proceeds from the sale of the building being used to repay debt.
There were no other material changes in the Company's operations during
the first nine months of 1996.
7
<PAGE>
PART II. OTHER INFORMATION
No material matter occurred during the three months ended September 30,
1996 that requires disclosure in Part II of this filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GULL LABORATORIES, INC.
Date 11-13-96 /s/ MICHAEL B. MALAN
---------------- ---------------------------------
Michael B. Malan, CPA
Secretary/Treasurer and
V.P. of Finance (Duly authorized
officer and principal financial
officer)
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED FINANCIAL STATEMENTS OF GULL LABORATORIES, INC. AS OF
SEPTEMBER 30, 1996 AND FOR THE THREE MONTHS AND NINE MONTHS THEN ENDED, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 259,830
<SECURITIES> 0
<RECEIVABLES> 3,620,962
<ALLOWANCES> 86,040
<INVENTORY> 3,961,270
<CURRENT-ASSETS> 7,034,073
<PP&E> 6,893,273
<DEPRECIATION> 3,354,669
<TOTAL-ASSETS> 12,628,833
<CURRENT-LIABILITIES> 4,781,947
<BONDS> 2,221,224
0
0
<COMMON> 6,564
<OTHER-SE> 5,162,595
<TOTAL-LIABILITY-AND-EQUITY> 12,628,833
<SALES> 13,147,636
<TOTAL-REVENUES> 13,182,212
<CGS> 5,761,294
<TOTAL-COSTS> 6,127,980
<OTHER-EXPENSES> 66,109
<LOSS-PROVISION> 58,250
<INTEREST-EXPENSE> 388,924
<INCOME-PRETAX> 779,655
<INCOME-TAX> 424,424
<INCOME-CONTINUING> 355,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 355,231
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
