SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
[x] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box: [ ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only
(as Permitted by Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule
14a-11(c) or Rule 14a-12
GULL LABORATORIES, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing: (Check the appropriate box)
[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
Common stock, $.001 par value per share
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(2) Aggregate number of securities to which transaction applies:
1,320,000 shares
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
(Set forth the amount on which the filing fee is calculated and state how
it was determined):
$8.29 per share, the average per share value for the twenty trading day
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period before and twenty trading day period after the announcement of the
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transaction which is the subject of this proxy statement.
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(4) Proposed maximum aggregate value of transaction: $10,942,800
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(5) Total fee paid: $2,188.56
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[x] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid: $2,188.56
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(2) Form, schedule or registration statement no.: Proxy statement
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(3) Filing party: Registrant
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(4) Date filed: May 7, 1997
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<PAGE>
GULL LABORATORIES, INC.
Annual Meeting of Stockholders
July 21, 1997
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned constitutes and appoints George R. Evanega and
Michael B. Malan and proxies, with full power of substitution and revocation to
each, for and in the name, place, and stead of the undersigned, to vote, and
act with respect to all shares of Common Stock, par value $.001 per share of
Gull Laboratories, Inc. (the "Corporation"), standing in the name of the
undersigned or with respect to which the undersigned is entitled to vote and
act, at the Annual Meeting of Shareholders to be held at the Homewood Suites,
844 East North Union Avenue, Midvale, Utah 84047, on Monday, July 21, 1997 at
10:00 a.m. Mountain Daylight Time, and at any adjournment(s) thereof, and
especially to vote as follows:
1. In the election of seven (7) directors as set forth in the Proxy
Statement:
[ ] For all nominees listed below (except as marked to the
contrary below)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below
DR. MYRON W. WENTZ, ANNE-MARIE RICART, DR. MATTHIAS SCHMIDT, RAINER BAULE, DR.
ULRICH WAGNER, PETER GALDKIN, AND DR. GEORGE EVANEGA
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below:)
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2. With respect to the appointment of KPMG Peat Marwick LLP as
independent certified public accountants for the Corporation for
the 1997 fiscal year:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. With respect to the approval and ratification of the adoption by
the Board of Directors of the Asset Purchase Agreement and the
purchase of certain of the assets of the Fresenius Diagnostics
Business Unit of the Intensive Care and Diagnostics Division of
Fresenius AG:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, any other matters as may properly come
before the meeting or any adjournment(s) thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED ABOVE. IF NO
DIRECTIONS IS INDICATED, IT WILL BE VOTED FOR THE ELECTION OF THE SEVEN (7)
DIRECTORS AS SET FORTH IN THE PROXY STATEMENT, FOR THE APPOINTMENT OF KPMG
PEAT MARWICK, LLP, AND FOR THE APPROVAL AND RATIFICATION OF THE ASSET PURCHASE
AGREEMENT.
Dated:__________________, 1997 _________________________________
Signature
_________________________________
Signature if held jointly
Please date this proxy and sign your name exactly as it appears hereon. When
there is more than one owner, each owner should sign. When signing as an
agent, attorney, administrator, executor, guardian or trustee, please indicate
your title as such. If executed as a corporation, the proxy should be signed
in the corporate name by a duly authorized officer who should indicate his
title. Please date, sign, and mail this proxy in the enclosed envelope.
<PAGE>
GULL LABORATORIES, INC.
Notice of Annual Meeting of Shareholders
to be held July 21, 1997
To the Shareholders:
The 1997 Annual Meeting of Shareholders of Gull Laboratories, Inc.
(the "Company") will be held at the Homewood Suites, 844 East North Union
Avenue, Midvale, Utah 84047, on Monday, July 21, 1997 at 10:00 a.m. MDT, for
the following purposes:
1. To elect seven directors, each to serve until the next annual
meeting of shareholders or until their successors are elected and shall
qualify;
2. To approve the appointment of KPMG Peat Marwick LLP as
independent certified public accountants and auditors of the Company for its
1997 fiscal year;
3. To approve and ratify the adoption by the Board of Directors of
the Asset Purchase Agreement dated as of April 21, 1997 (the "Agreement")
among the Company, Gull GmbH, (the "Purchaser") and Fresenius
Aktiengesellschaft ("Fresenius AG"), pursuant to which the Purchaser will
acquire certain of the assets of the Fresenius Diagnostics Business Unit of
the Intensive Care and Diagnostics Division of Fresenius AG (the "Business").
The Purchaser has assigned all of its rights under the Agreement to the
Company; and
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Information regarding the matters to be acted upon at the meeting
is contained in the Proxy Statement attached to this Notice. The Company's
audited financial statements, together with certain other information covering
the Company, are contained in Appendix "A" to the Proxy Statement. The
audited financial statements of the Business, together with certain
information concerning the Business, are contained in Appendix "B" to the
Proxy Statement. The text of the Agreement is contained in Appendix "C" to
the Proxy Statement. Only shareholders of record at the close of business on
June 15, 1997, will be entitled to notice of and to vote at the meeting or any
adjournment thereof.
Your vote is important. Please sign and date the enclosed Proxy
and return it promptly in the enclosed return envelope whether or not you
expect to attend the meeting. The envelope requires no postage if mailed in
the United States. You may revoke your Proxy and vote in person should you
decide to attend the meeting.
By Order of the Board of Directors
/s/ George R. Evanega
George R. Evanega
Chief Executive Officer and President
Salt Lake City, Utah
July 9, 1997
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CONFIDENTIAL
For Use of the Commission Only
PROXY STATEMENT
1997 Annual Meeting of Shareholders
of
Gull Laboratories, Inc.
GENERAL
This Proxy Statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of Gull Laboratories, Inc.,
a Utah corporation (the "Company"), for the 1997 Annual Meeting of
Shareholders of the Company to be held at 10:00 a.m. MDT on July 21, 1997 at
the Homewood Suites, 844 East North Union Avenue, Midvale, Utah 84047
(telephone number (801) 561-5999). At the meeting, the shareholders will
consider and vote upon the proposals described herein and referred to in the
Notice of Annual Meeting of Shareholders accompanying this Proxy Statement.
The close of business on June 15, 1997, has been fixed as the
record date for the determination of the shareholders entitled to notice of,
and to vote at, the Annual Meeting (the "Shareholders"). On such date there
were outstanding and entitled to vote 6,616,784 shares of common stock (the
"Common Stock"). Each share of Common Stock is entitled to one vote on each
matter to be considered at the meeting. For a description of the principal
holders of Common Stock, see "Security Ownership of Certain Beneficial Owners
and Management."
Shares of Common Stock (the "Shares") represented by properly
executed proxies will be voted in accordance with the specifications made
thereon by the Shareholders. Any properly executed proxy not specifying how
the Shares are to be voted will be voted IN FAVOR of management's nominees for
directors of the Company, FOR the appointment of KPMG Peat Marwick LLP as the
Company's independent certified public accountants and auditors, and FOR the
approval and ratification of the Asset Purchase Agreement pursuant to which
Gull GmbH , a subsidiary of the Company (the "Purchaser"), will acquire
certain of the assets of the Fresenius Diagnostics Business Unit (the
"Business"), part of the Intensive Care and Diagnostics Division (the "I+D
Division") of Fresenius Aktiengesellschaft, the majority shareholder of the
Company ("Fresenius AG"). The Purchaser has assigned all of its rights under
the Agreement to the Company. Following the closing of the acquisition, the
Company intends to transfer the assets of the Business that it acquires to the
Purchaser in exchange for nonvoting stock of the Purchaser. A total of
1,320,000 shares of the Company's common stock will be issued to Fresenius AG
as consideration for the assets of the Business. The aggregate value of the
consideration will depend on the stock price at the Closing Date (as defined
below). The closing price for a share of the Company's common stock on June
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27, 1997 was 9 15/16. Accordingly, as determined by the value on June 27,
1997 of the 1,320,000 shares to be issued to Fresenius, the value of the
Business to be acquired was $13,117,500.
On June 15, 1997, Fresenius AG held 3,610,693 shares of Common
Stock. See "Security Ownership of Certain Beneficial Owners and Management."
The expenses of preparing, printing, and mailing the materials
used in the solicitation of proxies will be borne by the Company.
The proxies may be revoked by any Shareholder giving a proxy at
any time prior to the Annual Meeting by giving notice of such revocation to
the Company, in writing, at the address of the Company provided below, or by
filing a newly executed proxy bearing a later date. A proxy may also be
revoked by any Shareholder giving such proxy who appears in person at the
Annual Meeting and advises the Chairman of the Meeting of his intent to revoke
the proxy.
As of the date hereof, management of the Company has no knowledge
of any business other than that described in the notice for the meeting. If
any other business should come before the meeting, the persons appointed by
the enclosed proxy shall have discretionary authority to vote the proxy.
The principal executive offices of the Company are located at 1011
East Murray Holladay Road, Salt Lake City, Utah 84117. Its telephone number
is (801) 263-3524. This Proxy Statement, the enclosed Proxy and Notice of
Annual Meeting of Shareholders are first being furnished to Shareholders on or
about July 9, 1997. The Company's 1996 Annual Report is being mailed
concurrently with this Proxy Statement. The Annual Report is not to be
regarded as proxy soliciting material or as a communication by means of which
any solicitation of proxies is to be made.
The Business is part of the I+D Division of Fresenius AG. Dr.
Gerd Krick and Dr. Matthias Schmidt, directors of the Company, are the
Chairman and a member, respectively, of the Management Board of Fresenius AG,
and Mr. Rainer Baule, a nominee to become a director, has been a member of the
Management Board of Fresenius AG and President of the I+D Division since June
1, 1997. Mr. Gerhard Krammer, who was a director of the Company during 1996,
was a member of the Management Board of Fresenius AG and President of the I+D
Division until November 7, 1996. See "Proposal 1--Election of Directors--
Certain Relationships and Related Transactions."
Risk Factors
Shareholders should consider the following risk factors in
executing a proxy or casting a vote for the approval and ratification of the
Asset Purchase Agreement:
A. Conflict of Interest
Fresenius AG is the controlling shareholder of the Company. The
Board of Directors appointed a special committee of disinterested directors
(the "Special Committee") to approve the transaction and received a fairness
opinion regarding the fairness of the transaction to the non-affiliated
shareholders. Nevertheless, Fresenius AG will retain the ability to control
the Company after the Closing. See "Voting Securities and Principal Holders
Thereof" and "Proposal 3--Acquisition of Certain Assets of the Business--
Background of the Transaction and Opinion of The Company's Financial Advisor."
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B. Conflicting Interests of Directors
Because of their positions with Fresenius AG, certain directors of
the Company could be deemed to have conflicting interests in the transaction
under Utah corporate law. Utah law provides protection for corporations and
directors involved in transactions in which directors may have conflicting
interests if proper directors' action is taken, proper shareholders' action is
taken or the transaction is fair to the corporation involved. The Company has
taken steps to assure that proper directors' and shareholders' actions have
been taken and that the transaction is fair to the Company. See "Proposal
3--Acquisition of Certain Assets of the Business--Certain Effects on the
Company's Common Stock." Accordingly, if the transaction is approved by a
majority of the minority shareholders present and voting at the Annual
Meeting, no shareholder will have a claim against the Company or the directors
solely because of the conflicting interests of certain of the directors.
C. Profitability Concerns
The Business was unprofitable in 1996, and while profitable in the
first quarter of 1997, did not meet budgeted revenue projections. Operating
results for the first three months of 1997 are not necessarily indicative of
the results to be expected for the full year. See "Appendix B--Selected
Financial Data of Fresenius Diagnostics." If losses are incurred by the
Business, it could cause a cash flow drain on the Company. The Company
believes that through the reduction of overlapping costs and functions, and
with a short-term loan from Fresenius AG, the Business can remain profitable
and have positive cash flow.
D. Effect on Common Stock
The issuance of 1,320,000 of Common Stock as the consideration for
the transaction will increase Fresenius AG's beneficial ownership of the
Company's Common Stock from 54.6% to 62.1%, thus increasing its concentration
of ownership. In addition, in the event Fresenius AG exercises the
registration rights to be granted pursuant to the Registration Rights
Agreement, the "market overhang" created by the registration of a significant
block of the Company's Common Stock could adversely affect its price. See
"Proposal 3--Acquisition of Certain Assets of the Business--Certain Effects on
the Company's Common Stock."
Voting Securities and Principal Holders Thereof
As of the close of business on June 15, 1997, the Company has
issued and outstanding 6,616,784 shares of common stock, par value $.001 per
share. Each share is entitled to one vote on matters brought before the
shareholders of the Company. Shareholders are not allowed to cumulate their
shares in voting for directors.
The following table sets forth, as of June 15, 1997 ("Before"),
and after giving effect to the acquisition of the Business ("After"), the name
and share holdings of any person known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock and the name and share
holdings of (i) each director or nominee to become a director of the Company
and each officer named in the Summary Compensation Table below, and (ii) all
officers and directors of the Company as a group:
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Security Ownership of Certain Beneficial Owners and Management
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Amount and Nature of Percentage of
Name/Address Beneficial Ownership (1)(2) of Class (2)
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Before After Before After
Principal Shareholders:
Fresenius AG
Borkenberg 14
61440 Oberursel, Germany 3,610,693(3) 4,930,693(3) 55% 62%
Anne-Marie Ricart
La Grande Buissiere 25
1380 Ohain
Belgium 852,155 852,155 13% 11%
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Officers and Directors:
Myron W. Wentz
Director/Chairman
c/o Gull Laboratories, Inc.
1011 East Murray Holladay Road
Salt Lake City, UT 84117 10,000(4) 10,000(4) * *
Matthias Schmidt
Director
Fresenius AG
Borkenberg 14
61440 Oberursel, Germany -0- -0- * *
Gerd Krick(5)
Director
Fresenius AG
Borkenberg 14
61440 Oberursel, Germany -0- -0- * *
Rainer Baule
Nominee to become Director
Fresenius AG
Borkenberg 14
61440 Oberursel, Germany -0- -0- * *
Anne-Marie Ricart
Director See Above
Ulrich Wagner
Director
O'Melveny & Myers LLP
153 East 53rd Street
New York, NY 10022 -0- -0- * *
Peter Gladkin
Director
Health Data Sciences
268 West Hospitality Lane
3rd Floor
San Bernadino, CA 92408 -0- -0- * *
George R. Evanega
President/CEO/Director
Gull Laboratories, Inc.
1011 East Murray Holladay Road
Salt Lake City, UT 84117 200,000(6) 200,000(6) 3% 3%
Andrew Taylor
Vice President-Sales/Marketing
Gull Laboratories, Inc.
1011 East Murray Holladay Road
Salt Lake City, UT 84117 -0- -0- * *
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All officers and directors as a
group (13 persons) (7) 1,193,605 1,193,605 17% 14%
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* Less than 1%.
(1) Except as provided below, each person listed exercises sole voting and
investment power over the shares of common stock listed for such person
in this table.
(2) Number of shares and percentages include shares issuable upon exercise of
all options to purchase common stock exercisable within sixty days of June
15, 1997 held by each listed person. See "Executive Compensation." All
percentages have been rounded to the nearest whole percentage point.
(3) The share capital of Fresenius AG consists of ordinary shares and non-
voting preference shares ("Fresenius AG Ordinary Shares" and "Fresenius AG
Preference Shares," respectively), both of which are issued only in bearer
form. Accordingly, Fresenius AG has no way of determining who its
shareholders are or how many shares any particular shareholder owns.
However, under the German Securities Exchange Law, holders of voting
securities of a German company listed on a stock exchange within the
European Union are obligated to notify the company of the level of their
holding whenever their holding reaches or exceeds thresholds of 5%, 10%,
25%, 50% and 75%. In addition, under the German Stock Corporation Law,
notification to a company is required upon acquisition of 25% and 50% of
the voting securities of that company.
The Else Kroner-Fresenius-Stiftung (the "Foundation") has informed
Fresenius AG that it owns 55.96% of the Fresenius AG Ordinary Shares. The
Foundation serves to promote medical science, primarily in the fields of
research and treatment of illnesses, including the development of
apparatuses and preparations, e.g. artificial kidneys. The Foundation may
promote only those research projects the results of which will be
generally accessible to the public. The Foundation further serves to
promote the education of physicians or of others concerned with the
treatment and care of sick persons, primarily those working in the field
of dialysis, as well as to promote the education of particularly gifted
pupils and students. The administrative board of the Foundation consists
of Mr. Hans Goring, Frankfurt/Main, Professor Dr. Volker Lang, Gauting,
Mr. Hans Kroner, and Dr. Karl Schneider. Pursuant to the terms of the
will of the late Mrs. Else Kroner, under which the Foundation acquired
most of its shares, Mrs. Kroner's executors exercise voting and
dispositive power over the shares held by the Foundation. The executors
under Mrs. Kroner's will are Mr. Kroner, Dr. Schneider, and Dr. Alfred
Stiefenhofer. Mr. Kroner's address is Dipl. Volkswirt Hans Kroner,
Postfach 1852, 61288 Bad Homburg v.d.H., Germany. Dr. Schneider's address
is Werderstrasse 42, 68165 Mannheim, Germany. Dr. Stiefenhofer's address
is Norr, Stiefenhofer & Lutz, Brienner Strasse 28, 80333 Munich, Germany.
Mr. Kroner is the Honorary Chairman of the Fresenius AG Supervisory Board.
Dr. Schneider is a member of the Fresenius AG Supervisory Board. Dr.
Stiefenhofer is Chairman of the Fresenius AG Supervisory Board. In
addition, on March 28, 1995, AW Beteiligungs-GmbH ("AW") informed
Fresenius AG that it owns 9% of the Fresenius AG Ordinary Shares and 15%
of the Fresenius AG Preference Shares, and on May 4, 1995 , H.O.F.-
Beteiligungs-GmbH ("HOF") informed Fresenius AG that it owns 22.4% of the
Fresenius AG Ordinary Shares. According to published reports, HOF is 50%
owned by Dresdner Bank AG and 50% owned by the Foundation. Pursuant to a
pooling agreement relating to the shares held by the Foundation, AW and
HOF, the Foundation has voting power over the shares held by AW and HOF.
Accordingly, through (i) their dispositive power over the shares of
Fresenius AG held by the Foundation and (ii) their power to direct the
vote of the shares held by the Foundation (including the shares subject to
the pooling agreement), Dr. Stiefenhofer and Mr. Kroner may be deemed,
under the rules of the Securities and Exchange Commission (as
distinguished from the German concept of beneficial ownership), to
beneficially own 87.36% of the voting shares of Fresenius AG.
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(4) Represents 10,000 shares issuable upon exercise of options as described in
note (2) above.
(5) Dr. Krick has elected not to stand for re-election as a director at the
Annual Meeting.
(6) Represents 200,000 shares issuable upon exercise of options as described
in note (2) above.
(7) Includes all shares subject to exercisable options referred to in note (2)
above, and 95,000 additional shares held or subject to options exercisable
by officers and directors of the Company not named in the table.
The Company is not aware of any arrangement which may at a subsequent date
result in any change of control of the Company.
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PROPOSAL I
ELECTION OF DIRECTORS
The Company's Bylaws provide that the Board of Directors shall be
selected each year at the Annual Meeting of Shareholders of the Company. The
Board of Directors has nominated Dr. Myron W. Wentz, Anne-Marie Ricart, Rainer
Baule, Dr. Matthias Schmidt, Dr. Ulrich Wagner, Peter Gladkin, and Dr. George
R. Evanega for election as directors of the Company at the 1997 Annual
Meeting. Upon election, the directors will serve until the next Annual
Meeting of Shareholders or until their respective successors have been
elected and qualified.
In the absence of instructions to the contrary, the persons
designated in the proxy will vote the proxies "FOR" the election of the
nominees listed below. The Board of Directors has no reason to believe that
any nominee will be unable to serve, but if any nominee should become unable
to serve, the proxies will be voted for such other person as the Board of
Directors shall recommend.
Certain information concerning the nominees to the Board of
Directors is set forth below:
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Has Served
as Director
Name of Nominee Age Company Position Held Since
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Myron W. Wentz 56 Director 1974
Chairman of the Board
Matthias Schmidt 38 Director 1997
Anne-Marie Ricart 55 Director 1993
Rainer Baule 44 Nominee to become N/A
Director
Ulrich Wagner 53 Director 1994
Peter Gladkin 49 Director 1995
George R. Evanega 61 Director 1995
Chief Executive Officer
President
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In 1994, Fresenius AG purchased a controlling interest in the
Company from Gull Holdings Ltd. ("GHL"), an Isle of Man corporation wholly
owned by Dr. Myron W. Wentz, a Director and Chairman of the Company.
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In connection with the purchase, Fresenius AG agreed, to the
extent allowed by applicable law and the fiduciary responsibilities of
Fresenius AG, to cause Dr. Wentz to be nominated to the Board of Directors and
to endeavor to cause Dr. Wentz to be elected as Chairman of the Board of
Directors.
GHL agreed that, for a period of seven years commencing on the date
of the sale, GHL and its affiliates would not, without the prior written
consent of Fresenius AG:
(a) make or participate in any solicitation of proxies, or seek
to advise or influence any person with respect to the voting of any securities
of the Company;
(b) form, join or in any way participate in a "group" within the
meaning of sec. 13(d)(3) of the Securities Exchange Act with respect to the
voting securities of the Company;
(c) induce or attempt to induce or give encouragement to any
other person to initiate any proposal or tender or exchange offer for equity
securities or change of control of the Company; or
(d) otherwise act, alone or in concert with others, to seek to
control or influence the management, Board of Directors or policies of the
Company.
There are no family relationships among any of the nominees or
among the nominees and the current management of the Company.
Nominees
Myron W. Wentz Myron W. Wentz, Ph.D., has been Chairman and a Director of
the Company since 1974, and continues to serve in those
positions. Until 1992, Dr. Wentz was President of the
Company. He developed the IFA products currently being
manufactured and marketed by the Company. From 1969 to 1973,
Dr. Wentz served as Director of Microbiology for three
hospitals in Illinois. Dr. Wentz received a Ph.D. in
microbiology, with a specialty in immunology from the
University of Utah, a M.S. degree in microbiology from the
University of North Dakota and a B.S. degree in biology from
North Central College. Dr. Wentz is also Chairman and
President of USANA, Inc., a publicly-traded company that
manufactures and distributes nutritional products.
Matthias Schmidt Dr. Matthias Schmidt became a director and vice chairman of
the Company in January 1997. Dr. Schmidt has been Chairman
of the Supervisory Board of Fresenius Medical Care AG
("Fresenius Medical Care"), the world's largest integrated
provider of renal dialysis products and services, since
September 1996. Fresenius AG owns 50.3% of the outstanding
Ordinary Shares of Fresenius Medical Care, which is listed on
the New York Stock Exchange. Dr. Schmidt has served as
president of the Pharmaceuticals Division of Fresenius AG
since September 1986, interim president of the I+D Division
of Fresenius AG since November 1996, and a member of the
Management Board of Fresenius AG since July 1985. Dr. Schmidt
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is also a director of Hemosol Inc., a Canadian development
stage biopharmaceutical company listed on the Toronto Stock
Exchange and engaged in development of a human blood
substitute and stem cell research.
Anne-Marie Ricart Anne-Marie Ricart became a Director of the Company in June
1993. Ms. Ricart founded Biolab SA, a subsidiary of the
Company now known as Gull Diagnostics SA, with Dr. J. A.
Engels in 1971, and still serves as a Director of Gull
Diagnostics SA. Previously, Ms. Ricart co-owned and was
Administrateur-Delegue of a private endocrinology laboratory
and held laboratory positions in Belgium and Salt Lake City,
Utah. She studied chemistry for two years at the Institute
Meurice in Belgium.
Rainer Baule Rainer Baule has been a member of the Management Board and
President of the I+D Division of Fresenius AG since June 1,
1997. Mr. Baule was Managing Director and Chairman of the
Board of Directors of Professor Dr. Berthold GmbH & Co. KG
from 1996 until 1997. From 1979 to 1996, Mr. Baule gained a
broad range of senior management experience in several
functions with Carl Zeiss AG, Oberkochen, Germany. Mr. Baule
received a degree in business administration and mechanical
engineering from the Technlsche Hochschule Darmstadt,
Germany.
Ulrich Wagner Dr. Ulrich Wagner has been a partner of O'Melveny &
Myers LLP, a law firm which represents Fresenius AG, since
1982. He served as a director of Fresenius USA, Inc., a
manufacturer and distributor of dialysis products ("FUSA"),
from October 1987 through October 1989 and from March 1992
until September 1996, when FUSA became a wholly-owned
subsidiary of Fresenius Medical Care. Dr. Wagner received
his J.D. degree at the University of Frankfurt (Germany) and
holds L.L.M. and J.D. degrees from the University of
California at Berkeley.
Peter Gladkin Peter Gladkin was elected to the Board in 1995. For the
past three years, Mr. Gladkin was President and Chief
Operating Officer of Health Data Sciences Corporation
("HDS"). Prior to joining HDS, he gained a broad range of
senior management experience in twenty-three years at
Hewlett Packard Company's domestic and European operations.
Mr. Gladkin's most recent position at Hewlett Packard was
General Manager of the Healthcare Information Systems unit.
He obtained B.S. degrees in chemistry and physics from the
University of Illinois and an M.B.A. degree from the
Northwestern Graduate School of Business.
George R Evanega George R. Evanega, Ph.D. was appointed Chief Executive
Officer, President and a Director of Gull in October 1995.
He came to Gull from Oncor, Inc., where he had served since
1991 as President, Chief Operating Officer and Director. He
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was also President of Oncor Image Instruments from 1993 until
October 1995. Previously Dr. Evanega was Corporate Vice
President and Chief Administrative Officer and Director with
Miles, Inc. He earned a B.S. degree in chemical engineering
from Lehigh University, and M.S. and Ph.D. degrees in organic
chemistry from Yale University. Dr. Evanega's experience in
the biomedical industry includes positions as Vice President
of research, marketing and sales, as well as a broad range of
management positions with Boehringer Mannheim, Pfizer
Pharmaceutical and Union Carbide.
The Company has adopted a policy of paying outside Board members
compensation of $8,000 per year for service as a Board member. Total Board
compensation for 1996 was $40,000.
During 1996, there were five meetings of the Board of Directors.
All members of the Board of Directors attended at least 75% of the meetings
except for Dr. Gerd Krick and Dr. Wagner.
The Company has an Executive Committee, a Compensation Committee
and an Audit Committee of the Board of Directors. The Company does not have a
standing Nominating Committee.
During 1996, the Executive Committee included Dr. Wentz and Mr.
Gerhard Krammer. The Executive Committee exercises the powers of the Board to
the extent permitted by law during intervals between meetings of the Board.
The Executive Committee did not meet during 1996.
During 1996, the Compensation Committee included Dr. Wentz,
Mr. Krammer and Dr. Wagner. The Compensation Committee reviews the
compensation paid to officers and key employees of the Company and administers
the Company's Stock Option Plan. The Compensation Committee met once during
1996.
During 1996, the Audit Committee included Mr. Krammer, Ms. Ricart,
Mr. Gladkin, and Dr. Wagner. The Audit Committee reviews the preparation of
the Company's financial statements and the Company's internal accounting
controls with the officers of the Company and the Company's independent public
accountants. The Audit Committee held one meeting during 1996.
In connection with his resignation as President of the I+D Division
and member of the Management Board of Fresenius AG, effective
November 7, 1996, Mr. Krammer resigned as a director of the Company effective
December 31, 1996. He has been replaced as a director and a member of the
Executive, Compensation, and Audit Committees by Dr. Schmidt.
Executive Officers
The executive officers of the Company are as follows:
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<PAGE>
--------------------------------------------------------------------
Name Age Position with the Company
--------------------------------------------------------------------
Myron W. Wentz 56 Chairman of the
Board of Directors
George R. Evanega 61 Chief Executive Officer
and President
Fred Rachford 56 Senior Vice President
Ernest Sumsion 50 Senior Vice President
Operations
Michael B. Malan 41 Secretary/Treasurer
John Turner 50 European General Manager
and Vice President
Andrew Taylor 54 Vice President
Sales and Marketing
Linxian Wu, Ph.D. 42 Vice President
Research and Development
------------------------------------------------------------------
Each officer has been elected to hold office until his successor
has been duly elected or he sooner resigns or is removed in accordance with
law and the Company's bylaws.
For biographical information with respect to Dr. Wentz and Dr.
Evanega, see "Nominees."
Fred Rachford
Fred Rachford, Ph.D., joined the Company in October 1983. Dr.
Rachford directs the Regulatory Affairs and Quality Assurance departments of
the Company and administers the contracts with the College of American
Pathologists. Prior to joining the Company, he was employed by Baxter-Travenol
Laboratories in Research and Development. Dr. Rachford received his Ph.D. and
M.S.P.H. degrees from the University of North Carolina and a B.A. degree from
Chico State College.
Ernest Sumsion
Mr. Sumsion has been employed by the Company since August 1984 and
has been in charge of Operations since 1993. Mr. Sumsion became a Senior Vice
President of the Company in 1996. He served as Interim President of the
Company from May to October 1995. He earned a B.S. degree in microbiology
from Brigham Young University and a M.B.A. degree from the University of Utah.
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<PAGE>
Michael B. Malan
Michael B. Malan, M.B.A., C.P.A., joined the Company as its
Director of Finance in January 1992 and became its Secretary and Treasurer in
February 1992. From 1988 to 1991, Mr. Malan was the Chief Financial Officer
of Professional Lithographers, Inc. in Provo, Utah. From 1981 to 1988, Mr.
Malan was employed with a national accounting firm. Mr. Malan received M.B.A.
and B.A. degrees in accounting and finance from the University of Utah.
John Turner
Mr. Turner joined the Company in January 1997. He previously held
several executive positions with the Diagnostics Division of Beckman
Instrumentation from 1990 to December 1996, most recently as the General
Manager of its French operations. Mr. Turner also has sales and marketing
experience with Pharmacia Diagnostics and Technicon International. He earned
a degree in biochemistry from the Bromley School of Technology in Kent,
England.
Andrew Taylor
Mr. Taylor joined the Company in 1993. From 1986 to 1993 he was
Vice President of Sales and Marketing for Mountain Medical, Inc. He has
twenty-five years of experience in medical products sales and marketing,
holding executive and management positions with such companies as Mountain
Medical, Becton Dickinson Immunodiagnostics, United States Surgical, and
Pfizer Diagnostics. Mr. Taylor received a B.S. degree in science education
from East Carolina University.
Linxian Wu, Ph.D.
Dr. Wu obtained his Ph.D. degree in microbiology and infectious
disease from the University of Alberta, Edmonton, Canada, and his B.S. degree
in microbiology from Amoy University, China. He served in several scientific
posts for the governments of China and the United States and performed post-
doctoral work in molecular virology at the Medical College of Pennsylvania.
He joined Gen Trak, Inc. in March 1992, as Senior Scientist and subsequently
was named Director of Research and Development. Dr. Wu joined the Company in
May 1994.
An additional, significant employee is Holly Scribner.
-------------------------------------------------------------------
Name Age Position with the Company
-------------------------------------------------------------------
Holly Scribner 40 President and Director
Biodesign, Inc.
-------------------------------------------------------------------
Holly Scribner
Ms. Scribner has been President and a Director of Biodesign since
its inception in 1987. The Company acquired Biodesign in February 1993. She
founded Biodesign and is responsible for the management and daily operations
of the Company. From 1979 to 1986, she was employed by Ventrex Laboratories
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<PAGE>
(Hycor) in various marketing and scientific management positions in relation
to diagnostics and biotechnology products. She received her B.S. degree (cum
laude) in biological sciences from the University of Maine. Ms. Scribner also
serves as an advisory board member for the Center for Innovation in Biomedical
Technology, established by the State of Maine to promote the biomedical
industry.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, affiliates and persons who own more than 10%
of the Company's common stock, to file reports of ownership and changes in
ownership with the Securities Exchange Commission. Specific due dates for
these reports have been established and the Company is required to report any
failure to file by such dates. Based solely on review of the copies of such
forms furnished to the Company, the Company believes that during its 1996
fiscal year, all Section 16(a) filings applicable to its officers, directors
and greater than 10% beneficial owners were made as required except that the
forms relating to the issuance of options to purchase an aggregate of 100,000
shares of the Company's common stock were filed late by Dr. Rachford, Mr.
Sumsion, Mr. Malan and Dr. Wu.
Executive Compensation
The following table sets forth the compensation of the Company's
chief executive officer for the periods indicated and the only other executive
officer of the Company who received total annual salary and bonus in excess of
$100,000 during the fiscal year ended December 31, 1996 (collectively, the
"Named Executive Officers").
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Summary Compensation
- --------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
- --------------------------------------------------------------------------------------------------------------
Other
Annual Restricted Securities All Other
Name/ Compen- Stock Underlying LTIP Compen-
Principal Position Year Salary Bonus sation Award(s) Options (#) Payouts sation
- --------------------------------------------------------------------------------------------------------------
George Evanega(1) 1996 $180,000 $ -0- -0- $ 9,000 (2)
CEO/President
1995 $ 29,187 $ 50,000 200,000 $50,000 (3)
1994 _______ ______ _______ ______
Andrew Taylor 1996 $107,977 $ 4,750 _______ $ 7,000 (2)
Vice President
Sales/Marketing 1995 $104,446 $ 5,000 _______ $ 7,000 (2)
1994 $ 84,344 -0- _______ $ 7,000 (2)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Dr. Evanega joined the Company in October 1995.
(2) Represents an amount paid as a car allowance.
(3) Amount represents allowance for relocation costs of which $5,266 was paid
in 1995 and $44,734 was paid in 1996.
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<PAGE>
No options were granted to any of the Named Executive Officers in
1996. The following table presents information concerning stock options
exercised during 1996 and the value of unexercised stock options held by the
Named Executive Officers at December 31, 1996.
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Option Exercises in Last Fiscal Year and
Value of Stock Options at December 31, 1996
- ------------------------------------------------------------------------------------------------------
Name of Securities Value of Unexercised
Underlying In-the-Money
Unexercised options Options at
at December 31, 1996 December 31, 1996 ($)
Shares on
Acquired Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------
George R. Evanega -0- $-0- 150,000/50,000 $881,750/$293,750
Andrew Taylor -0- $-0- 18,750/7,500 $121,875/$48,750
- ------------------------------------------------------------------------------------------------------
</TABLE>
Vesting of the options awarded to Dr. Evanega has been accelerated
because the average daily closing price of the Company's common stock exceeded
certain levels for a consecutive thirty calendar day period as provided in his
employment agreement with the Company. In addition, in February 1996, the
Board of Directors ratified the reduction of the exercise price of the shares
covered by the options awarded to Dr. Evanega to $4.50 per share from $5.625
per share.
All stock options held by Dr. Evanega and Mr. Taylor at December
31, 1996 were "in-the-money."
The following table sets forth information regarding the repricing
of options held by executive officers during the preceding ten years.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Ten-Year Option Repricings
- ---------------------------------------------------------------------------------------------
Length
Number of Market Original
Securities Price of Exercise Option
Underlying Stock at Price at Term
Option Time of Time of New Remaining
Repriced or Repricing or Repricing or Exercise at Date of
Amended Amendment Amendment Price Repricing or
Name Date (#) ($) ($) ($) Amendment
George R. Evanega 11/6/95 200,000 $4.50 $5.625 $4.50 9 years
President and 11 months
Chief Executive
Officer
- ---------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Board Compensation Committee Report on Repricing of Option
As part of the compensation package agreed to by Dr. Evanega and
the Company upon Dr. Evanega's appointment as President and Chief Executive
Officer, the Company granted Dr. Evanega an option to purchase 200,000 shares
of the Company's Common Stock. The Company and the Compensation Committee
believe that stock options are an effective incentive for optionees to create
value for the Company's shareholders. See "Board Compensation Committee
Report on Executive Compensation." At the time Dr. Evanega and the Company
executed his employment agreement with the Company, on or about October 13,
1995, the market price of a share of Common Stock was $5.625 per share and
under the terms of the employment agreement, that was set as the exercise
price of the option. When Dr. Evanega began his employment with the Company
on or about November 6, 1995, the market price of the stock had dropped to
$4.50 per share. Dr. Evanega requested that the exercise price of his option
be adjusted to reflect the actual market value of the Common Stock on the day
he began his employment. Since the decline in market price occurred prior to
the commencement of Dr. Evanega's tenure as Chief Executive Officer and was
neither within Dr. Evanega's control nor related to his activities as
President of the Company, the Compensation Committee (which, at the time
consisted of Dr. Wentz, Mr. Krammer, and Dr. Wagner) recommended to the Board
of Directors that the exercise price of Dr. Evanega's option be reduced to the
market price on the day Dr. Evanega's employment began or $4.50. The Board of
Directors approved the reduction on February 22, 1996.
Members of the Compensation Committee: Dr. Myron W. Wentz, Chairman
Dr. Matthias Schmidt
Dr. Ulrich Wagner
The Company has an employment agreement with Dr. George Evanega,
its President and Chief Executive Officer and a member of its Board of
Directors. Under the terms of the agreement, Dr. Evanega is paid an annual
salary of $180,000,with cost-of-living adjustments, and, commencing with the
Company's 1996 fiscal year, was eligible to receive an annual "targeted"
performance bonus of up to $50,000. The performance bonus is contingent upon
the achievement of a level of "Net Earnings Before Income Taxes" that has been
agreed upon by the Company's Board of Directors for the fiscal year. The
performance bonus could range from nothing to $50,000 plus $1,000 for every 1%
that the Company's "Net Earnings Before Income Taxes" exceeds the agreed upon
target. Dr. Evanega did not receive a bonus in 1996 because the Company did
not meet its projected target of "Net Earnings Before Income Taxes."
Dr. Evanega also receives a monthly car allowance of $750.
Additionally, in 1995, Dr. Evanega received a $50,000 bonus for
entering into his employment agreement, received a stock option, expiring
October 2005, to purchase 200,000 shares of the Company stock at $4.50, and
became eligible to receive reimbursement for relocation costs of up to
$50,000, of which $5,266 was paid in 1995 and $44,734 was paid in 1996.
Dr. Evanega's employment agreement can be canceled by either party
upon the occurrence of certain events. If the Company terminates the
employment agreement for certain reasons, including for cause, Dr. Evanega
will not be entitled to any additional compensation. Otherwise, he will be
entitled to the continuation of his base compensation for a one year period
from the date of termination.
-15-
<PAGE>
The Company also entered into an employment agreement with Ernest
Sumsion, its Senior Vice President in May 1996. The term of the agreement is
two years with options to renew annually for additional two year periods. If
at the expiration of the first two year period the Company does not renew Mr.
Sumsion's employment, Mr. Sumsion is entitled to receive severance payments
for nine months. The Company's Chief Executive Officer has the discretion to
extend the severance payments for an additional three months if Mr. Sumsion
has not found employment during the nine month period.
Under the terms of the agreement, Mr. Sumsion is paid an annual
salary of $120,000 per year, a bonus for "targeted" performance, and an annual
car allowance of $6,000. Mr. Sumsion was also granted an option to purchase
30,000 shares of the Company's stock, with vesting to occur at the rate of 25%
per year for the four years following the grant of the option. The Company
has also agreed to grant Mr. Sumsion options to purchase 200,000 shares of the
Company's stock over a ten year period with 20,000 shares vesting per year
with the first option to be granted on January 1, 1998.
The Company agreed to terms of a severance agreement with Michael
B. Malan, its Secretary/Treasurer on February 28, 1997. If Mr. Malan's
employment is terminated, he will be entitled to receive severance payments
for nine months. The Company's Chief Executive Officer has the discretion to
extend the severance payments for an additional three months if Mr. Malan has
not found employment during the nine month period.
The Company does not have employment agreements with any of its
other executive officers. See "Certain Relationships and Related
Transactions" for information regarding a bonus agreement proposed to be
entered into between the Company and Dr. Wentz. The Company does not have any
other compensatory plans or arrangements which would result from the
resignation, retirement or other termination of an executive officer of the
Company due to a change in control of the Company or a change in the executive
officer's responsibilities due to a change in control of the Company.
Compensation Committee Interlocks and Insider Participation;
Certain Relationships and Related Transactions
Dr. Wentz, a former President and Chief Executive Officer of the
Company, is a member of the Company's Compensation Committee. Mr. Krammer,
who was a member of the Compensation Committee during 1996, was a member of
the Managing Board of Fresenius AG until December 1996. Dr. Schmidt, who is
currently a member of the Compensation Committee, is currently a member of the
Fresenius AG Managing Board. In 1996, sales by the Company to Fresenius AG
represented 9% of total sales. See "Certain Relationships and Related
Transactions."
Fresenius AG, beneficial owner of approximately 55% of Gull's
outstanding Common Stock, distributes certain of the Company's products in
Europe and is a major customer of the Company. During the years ended
December 31, 1996, 1995, and 1994 sales of Company products to Fresenius
totaled $1,535,943, $2,370,977, and $1,106,528, or approximately 9%, 13% and
7%, respectively, of total sales. Dr. Gerd Krick and Dr. Matthias Schmidt,
directors of the Company, are the Chairman and a member, respectively, of the
Management Board of Fresenius AG, and Mr. Rainer Baule, a nominee to become a
director, has been a member of the Management Board of Fresenius AG and
President of the I+D Division since June 1, 1997. In January 1995, the
Company sold all of the intangible assets relating to its German operations to
-16-
<PAGE>
Fresenius AG for approximately $313,500. The intangible assets had no
recorded cost on the Company's financial records. The transaction was
negotiated between the Company's management and representatives from the
Business. These intangible assets are part of the assets being acquired by
the Company from the Business. See "Proposal 3--Acquisition of the Assets of
Fresenius AG Diagnostics Business--Description of the Agreement."
The Board of Directors of the Company and Dr. Wentz have discussed
the terms of a bonus agreement. Under the terms of the proposed bonus
agreement, for a period of seven years from the date of the bonus agreement,
Dr. Wentz would be paid a performance bonus of 2% of the net receipts from
sales of certain new tests for coronary artery disease. Consideration for the
payment of the performance bonus would be based, among other things, upon the
assignment to the Company by Dr. Wentz of all improvements and inventions
hereafter developed by Dr. Wentz and Dr. Wentz's agreement to continue to
provide the Company with the benefit of his experience, knowledge and skill.
Under the bonus agreement, the Company would be required to provide reasonable
support for research, development and testing with respect to these tests
until such time as the Company commences commercial production of products
using the tests or notifies Dr. Wentz that it has abandoned development
thereof. In the latter event, Dr. Wentz would have a first right to acquire
ownership of all related inventions, patents, copyrights, discoveries, etc.,
relating to the tests on terms to be negotiated by Dr. Wentz and the Company.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee, which is responsible for setting and
administering the policies which govern executive compensation programs for
the Company, has furnished the following report on executive compensation.
This report covers executive compensation paid in 1996, during which the
members of the Compensation Committee were Dr. Wentz (Chairman), Mr. Krammer,
and Dr. Wagner:
Determination of Executive Officer Compensation
The Company's compensation program for executive officers consists
of three key elements: a base salary, discretionary and performance based
bonuses, and periodic grants of stock options. The Company believes that this
approach serves the interests of the shareholders by ensuring that executives
are compensated for promoting both the long-term and short-term interests of
the shareholders. Annual bonuses are based on the Company's performance for
the year. Stock options link a portion of the executive officers'
compensation to the stock price appreciation realized by the Company's
shareholders. Thus, a significant portion of the executive officers'
compensation is related to the performance of the Company.
A. Base Salary
The base salaries for executive officers are reviewed by the
Committee annually. The Committee considers the relative experience and level
of responsibility of the officer, the officer's past and projected
contributions to the success of the Company, and information obtained from
independent sources regarding compensation levels paid by comparable companies
in the industry.
-17-
<PAGE>
B. Performance Based and Discretionary Bonuses
In conjunction with the Company's annual budgeting process, the
Committee determines a performance bonus amount, ranging from up to $20,000 to
up to $40,000 in 1996, to be awarded to each officer (other than the Chief
Executive Officer, whose bonus is determined in accordance with his employment
agreement) upon the attainment of agreed upon objectives for the Company. The
objectives are established annually by the Committee and are based upon total
revenue and net income projected to be attained by the Company. The
performance bonus amount actually awarded at the end of the year fluctuates
based on the Company's level of revenue and income attainment. However, no
performance bonuses are awarded if the level of revenue and income attainment
is less than 80% of the objective. No performance-based bonuses were awarded
in 1996 other than to the Company's former European general manager who
received a $4,500 bonus for meeting a portion of his stated objectives. In
addition, a discretionary non-plan performance-based bonus was paid to the
president of the Company's Biodesign subsidiary, whose operations exceeded the
Company's business plan.
The Committee is also authorized to award discretionary bonuses to
officers based upon their individual contributions to the Company during the
year if no performance bonuses are earned.
C. Stock Options
In 1992, the Company adopted the Gull Laboratories, Inc. 1992
Stock Option Plan to provide officers and other key employees with an
additional incentive to promote the long-term success of the Company and to
encourage them to remain in its employ. Since the value of an option is
directly related to the Company's stock price, the Committee believes that
stock options are an effective incentive to create value for the Company's
shareholders.
Stock option awards are based upon the officers' relative level of
responsibility in the Company and upon the level of attainment of the
Company's objectives. As of June 15, 1997, nine employees held options to
purchase a total of 430,650 shares of the Company's stock. See also, the
"Summary Compensation Table."
1996 CEO Compensation
Dr. George Evanega was hired by the Company, effective October
1995. His base salary and stock option award were determined through arms-
length negotiations prior to his employment. Dr. Evanega did not receive a
performance bonus in 1996 because the Company did not meet its objectives.
He is eligible to receive a performance bonus in 1997.
Members of the Compensation Committee: Dr. Myron W. Wentz, Chairman
Dr. Matthias Schmidt
Dr. Ulrich Wagner
-18-
<PAGE>
Performance Graph
The following graph compares the cumulative return to shareholders
of the Company's Common Stock from January 1, 1993 (the first point shown on
the graph) through December 31, 1996 with the Standard and Poor's Smallcap 600
Index and the Standard and Poor's Medical Products and Supplies Index for the
same period. The comparison assumes $100 was invested on December 31,1991 in
the Company's common stock and in each of the comparison groups and assumes
reinvestment of dividends (the Company paid no cash dividends during the
periods):
-19-
<PAGE>
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Company has engaged KPMG Peat Marwick LLP as its independent
certified public accountants and auditors for its current fiscal year and is
presenting this selection to the shareholders for ratification. KPMG Deutsche
Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprufungsgesellschaft, a
member of the KPMG group, currently serves as the independent certified public
accountants and auditors of Fresenius AG.
Ratification by the shareholders of this appointment is not required
by law or the Company's articles of incorporation or bylaws. However, the
Company believes such ratification is desirable. If KPMG Peat Marwick LLP
declines to act, becomes incapable of acting, or if its engagement is
otherwise terminated by the Audit Committee (none of which events are
currently anticipated), the Board of Directors will appoint other auditors for
the current fiscal year. It is anticipated that a representative of KPMG Peat
Marwick LLP will be present at the Annual Meeting to respond to appropriate
questions from shareholders in attendance and to make a statement if desired.
The Board of Directors recommends a vote "FOR" the proposal to
ratify the appointment of KPMG Peat Marwick LLP as the Company's independent
certified accountants and auditors for fiscal year 1997. It is intended that,
in the absence of contrary specification, votes will be cast pursuant to
properly executed proxies for ratification of KPMG Peat Marwick LLP as the
Company's independent certified public accountants and auditors for fiscal
year 1997.
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<PAGE>
PROPOSAL 3
ACQUISITION OF CERTAIN ASSETS OF THE BUSINESS
Summary of the Proposed Transaction
On April 2, 1997, the Board of Directors of the Company, upon the
recommendation of the Special Committee (as defined below) and subject to the
completion of certain conditions to the satisfaction of the Special Committee
discussed below, and after receiving an opinion from a nationally-recognized
investment banking firm to the effect that the Negotiated Aggregate
Consideration Value (as defined below) was fair, from a financial point of
view, to the Company, authorized the execution of an Asset Purchase Agreement
(the "Agreement") among Fresenius AG, the Company, and the Purchaser. The
Board of Directors received an oral opinion and a written opinion of Vector
Securities International, Inc. ("Vector Securities") on April 2, 1997, and the
Agreement was executed on April 21, 1997. A copy of the Agreement is attached
to this Proxy Statement as Appendix C, which is incorporated herein by
reference, and the description of the Agreement contained herein is qualified
in its entirety by reference to the actual text thereof. The written opinion
of Vector Securities is attached to this Proxy Statement as Appendix D, and
the description of such opinion contained herein is qualified in its entirety
by reference to the actual text thereof.
Subject to satisfaction of a number of conditions (including the
approval of a majority of the Company's Shareholders, other than Fresenius AG,
actually voting at the Annual Meeting), the Agreement provides for the
purchase by the Purchaser of certain of the assets of the Business for
1,320,000 shares of the Common Stock of the Company. The Purchaser has
assigned all of its rights under the Agreement to the Company. After the
Closing of the acquisition of the assets of the Business, the Company will
contribute the assets to the Purchaser in exchange for non-voting stock of the
Purchaser. The purchase price for the assets was based on the average closing
price of the Company's Common Stock during the twenty trading day period
preceding and the twenty trading day period following the first public
announcement of the execution of the Letter of Intent (as defined below)
relating to the acquisition on December 13, 1996. This average was $8.29 per
share. Based on the agreed upon value of a share of Common Stock of $8.29 per
share, the aggregate value of the 1,320,000 shares to be issued to Fresenius
was set at $10,942,800 (the "Negotiated Aggregate Consideration Value"). The
actual value of the transaction will be 1,320,000 shares multiplied by the per
share closing price of the Company's Common Stock on the Closing Date.
Certain business and financial information relating to the Company and the
Business is set forth in Appendices A and B, respectively, which are
incorporated herein by reference.
Background of the Transaction
In 1994, Fresenius AG acquired approximately 55% of the Company's
issued and outstanding shares of Common Stock from GHL, an Isle of Man
corporation wholly owned by Dr. Myron Wentz, the Chairman of the Board and
former President of the Company, and certain other shareholders. Through
purchases by the Business, Fresenius AG has been a major customer of the
Company. However, after the acquisition of the Business by the Company,
Fresenius AG will not be a customer of the Company, and the financial results
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<PAGE>
of the Business will be combined with the financial results of the Company.
The Business's customers will then become customers of the combined entity.
As a result, the Company will lose a significant affiliated customer and will
be directly responsible for customer relationships with users of the Company's
products, who were formerly customers of Fresenius AG. See "Proposal 1--
Election of Directors--Certain Relationships and Related Transactions."
The Company believes that the acquisition of the Business will
enable it to coordinate and centralize its marketing efforts in Europe. Some
of the Company's distributors distribute both the Company's products and the
Business's products. This has led to confusion about the relationship between
the Company and the Business. Based upon its review of its operations and the
Business's operations, the Company also believes that there are a substantial
number of overlapping functions and costs, which could be combined or
eliminated, with a potential savings of annual costs which the Company
presently estimates to be in excess of $300,000 after the combined entities
are fully integrated. This estimate of cost savings assumes the successful
integration of the Business into the Company and other factors which may be
out of the control of the Company. Accordingly, there can be no assurance
that the cost savings will be achieved. In addition, the Business has
expertise in sales and marketing in Europe, which the Company believes it can
use in developing its European markets. Fresenius AG has determined that
combination of the Company with the Business could enhance the ability of the
Company to compete in the European diagnostics market, thereby increasing the
value of the Company. Fresenius AG further believes that the sale of the
Business will lead to the coordination and centralization of marketing efforts
in Europe, eliminate distributor confusion about the relationship between the
Company and the Business, and eliminate overlapping functions leading to cost
savings. See "Management's Discussion and Analysis" in Appendix A and
Appendix B for a discussion of the financial results of the Company and the
Business, respectively.
A proposal for the possible sale of the Business by Fresenius AG
to the Company was initially made in September 1995. The Company had sold
certain intangible assets of its European operations, including customer lists
and goodwill, to Fresenius AG for use by the Business in January 1995 for DM
480,000. See "Proposal 1--Election of Directors--Certain Relationships and
Related Transactions." The assets sold by the Company to the Business in 1995
are included in the assets purchased as part of the transaction. However,
inasmuch as the assets have no recorded value or historical cost and the
transaction is between entities under common control, no value will be
recorded on the books of the consolidated entities and no specific value was
allocated to the assets as part of the consideration to be paid for the
Business.
Historically, the Company had considered the possibility of
entering the German market with its own direct sales force but considered the
implementation costs to be prohibitive. Fresenius AG has received other
offers to buy the Business; however, Fresenius AG did not consider any
alternatives to a sale of the Business to the Company, since as the Company's
majority stockholder, Fresenius AG did not want to sell the Business to a
competitor of the Company. Accordingly, the Company and Fresenius AG
determined that it would be in the best interests of the Company, Fresenius
AG, and the minority shareholders of the Company if the Company could purchase
the Business from Fresenius AG for a fair price.
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In July 1996, the Company's Board of Directors appointed a special
committee composed of George Evanega, Anne-Marie Ricart, and Peter Gladkin,
all deemed to be disinterested directors (the "Special Committee"), to
independently review and analyze the terms of the acquisition and make a
recommendation to the full Board of Directors. The Company and Fresenius AG
executed a letter of intent, dated December 13, 1996 (the "Letter of Intent"),
setting forth the basic terms of their Agreement. The Special Committee
subsequently retained Vector Securities as an investment banker to assist it
in determining the fairness, from a financial point of view, of the
transaction to the Company, and has retained legal counsel to assist it with
legal matters.
Negotiations of the Agreement were initially conducted by officers
of the Company and representatives of Fresenius AG. The Special Committee did
not participate in the negotiation of the purchase price. The Letter of
Intent provided that the Company would acquire the assets of the Business if
the Business had a value of $9,000,000 to $11,000,000. The parties agreed to
arrive at a value of the business and then divide the value by the agreed upon
per share price to determine the number of shares to be issued to Fresenius
AG. The agreed upon per share price was to be the average closing sales price
of the Company's Common Stock for the twenty trading days preceding the
execution of the Letter of Intent. That average was $6.2994 per share.
Shortly after the announcement of the signing of the Letter of Intent, the per
share market price of the Company's Common Stock rose significantly. With the
significant increase in the market price of the Company's Common Stock,
management of the Company became concerned about the dilutive effect of
issuing shares to Fresenius AG at the agreed upon $6.2994 price per share.
The Company and Fresenius AG discussed the price on numerous occasions. To
help resolve the matter, the Company engaged Vector Securities to assist it in
negotiating the number of shares to be issued by the Company to Fresenius AG
for the assets. The Company and Fresenius AG agreed, with the assistance of
Vector Securities, that the Company would issue 1,320,000 shares, reflecting
the average closing price of the Company's Common Stock during the twenty
trading day period preceding and the twenty trading day period following the
first public announcement of the execution of the Letter of Intent, which
average was $8.29 per share. The number of shares to be issued was determined
on the basis of the $8.29 average closing price of the stock and the agreed
upon range of value of the Business of $9,000,000 to $11,000,000.
In appointing the Special Committee, the Company's Board of
Directors provided that the Special Committee had to unanimously recommend the
acquisition of the Business to the full Board of Directors. The Special
Committee discussed the proposed transaction in great detail over the past
several months. On April 2, 1997, the Special Committee met with officers of
the Company and with representatives of Vector Securities to review the
proposed transaction. At the meeting, representatives of Vector Securities
presented their analysis of the proposed acquisition, including an overview of
the negotiations that had occurred between the Company and Fresenius AG.
Vector Securities' representatives explained that the day prior to the
announcement of the proposed acquisition, the Company's stock closed at $6.50
per share, and that within days following the announcement, the price of the
Company's stock increased, with then current trades in the $10.00 to $10.50
range. Members of the Special Committee discussed their view that the per
share price referred to in the Letter of Intent was inadequate in light of the
then current stock price, and their decision to renegotiate the price per
share as well as the price of the Business, which was renegotiated with the
help of Vector Securities. The Special Committee discussed the adequacy of
the revised purchase price of 1,320,000 shares of the Company's stock, with an
agreed upon price of $8.29 per share, which represented the average daily
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price per share for the twenty trading days prior to and twenty trading days
following the announcement of the proposed transaction. The Special Committee
also discussed the value of the Business to be acquired and reviewed the value
ranges presented by Vector Securities, including a review of the Business's
sales, profit margin, prospects, and working capital needs. For additional
discussion as to the methodology employed by Vector Securities, see "Opinion
of the Company's Financial Advisor." Vector Securities also reviewed pro
forma effects of the acquisition on the Company, using projections provided to
it by the Company.
The Special Committee reviewed management's reasons for recommending
the proposed transaction, including obtaining centralization and coordination
of management and sales efforts, elimination of overlapping and competing
product lines, obtaining highly qualified personnel at the Business with the
ability to assist with product entry into Europe through their regulatory
expertise, positive name recognition, and expected positive tax and accounting
treatment of the transaction and future earnings. The Special Committee also
discussed certain potentially negative aspects of the transaction, including
cash flow demands, management requirements, and the uncertainty involving one
of the Business's suppliers. At the meeting, management provided a detailed
assessment of the cash flow requirements of the combined business entity, as
well as the cash flow requirements of the Company, and addressed questions
raised by members of the Special Committee regarding financing requirements and
options for obtaining financing in the future.
After this review and discussion with the members of the Special
Committee, Vector Securities advised the Special Committee that it was
prepared to opine that the Negotiated Aggregate Consideration Value was fair
to the Company from a financial point of view. Based upon these discussions
and the opinion of Vector Securities, the Special Committee determined that it
was prepared to recommend the acquisition to the full Board of Directors if
certain conditions were met. These conditions included: (i) that a majority
of the minority Shareholders (Shareholders other than Fresenius AG) actually
present and voting at the meeting approve the acquisition; (ii) that an
agreement be reached with Fresenius AG to provide up to $2,500,000 in
financing for the needs of the Company and the Purchaser; (iii) that
registration rights be granted to Fresenius AG covering only the 1,320,000
Shares to be issued in this acquisition and that expenses payable for the
registration by the Company be capped at $20,000; and (iv) that an appropriate
number of the Shares being issued to Fresenius AG be escrowed or another
appropriate arrangement be made to account for the possible loss to the
Business of sales of certain products if a certain supplier to the Business
terminated its relationship with the Business. See "Description of the
Agreement--Purchase Price" below.
Following this meeting of the Special Committee, a meeting of the
full Board of Directors was held. A representative of Vector Securities gave
a shortened presentation of the material he had presented to the Special
Committee and the Special Committee reviewed its conditions with the Board of
Directors. The Board of Directors discussed the conditions and members of the
Board of Directors who were also directors of Fresenius AG agreed, subject to
approval by the appropriate board of Fresenius AG, with conditions (i) and
(iii), approval by a majority of the minority Shareholders actually present
and voting at the meeting and the limitations on the registration rights to be
granted to Fresenius AG. The Special Committee met again on April 17, 1997 to
discuss the transaction. At the meeting the committee members discussed
conditions (ii) and (iv) set forth above. Fresenius AG agreed to provide up
to $1,000,000 to the Company upon the terms set forth below. See "Continued
Participation by Fresenius AG--Financing." The Company's chief financial
officer explained that he had reviewed the Company's cash flow requirements
and had concluded that $1,000,000 should cover the Company's anticipated
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working capital needs in the foreseeable future, at least through the end of
1998. The Special Committee also reviewed the arrangement negotiated by
management for the return of up to 33,000 shares if the Business loses
revenues from the sale of a certain supplier's products if the supplier ceases
to provide products to the Business following its acquisition by the Company.
See "Description of the Agreement--Purchase Price." The Special Committee
concluded that these conditions were met to their satisfaction, and authorized
George Evanega to execute the Agreement on behalf of the Company. The
Agreement was executed on April 21, 1997. Subsequent to the execution of the
Agreement, the parties entered into a Transfer, Assignment and Assumption
Agreement which provided that the Purchaser would assign its rights under the
Agreement to the Company, which would acquire the assets of the Business at
the closing. The Company intends to transfer the assets to the Purchaser.
The Transfer, Assignment and Assumption Agreement was entered into in order to
enable the Company to acquire the Business in a more efficient manner.
Material Factors Considered by the
Special Committee and the Board of Directors
The Special Committee considered the following factors in approving
the transaction and recommending shareholder approval:
Advantages
A. Centralization and Coordination of Effort
The Special Committee believes, based upon information that it
received from management of the Company, that the elimination of overlapping
functions and costs could result in a potential cost savings of approximately
$300,000. In addition, because there has been some confusion in the European
marketplace about the relationship between the Company and the Business, the
Special Committee expects that distributors will be able to more efficiently
market the Company's products after consummation of the transaction.
B. Well Qualified Employees
Employees of the Company and the Business have worked together for
the past several years. The Special Committee believes, based upon information
that it received from management of the Company, that the employees of the
Business are well qualified and will complement the Company's employees.
C. Accounting and Tax Treatment
The transaction will be accounted for as a transaction between
entities under common control, which is similar to a pooling-of-interests.
All assets and liabilities will be recorded at their historical cost and there
will be no goodwill with related amortization on the books. In contrast, the
income tax treatment is such that the excess of consideration paid for the
Business over the value of the net assets acquired will result in goodwill and
amortization for German income tax purposes. This will permit the Company to
offset a significant amount of taxable income.
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D. Fresenius Name and Reputation
Under the Agreement, the Company has the right to use Fresenius
product names in certain countries where Fresenius AG already has diagnostic
product sales for a period of three years. Fresenius AG is well respected in
Germany and other European countries and the Company's image should be
enhanced.
E. Sales and Marketing
The Business has significant expertise in sales and marketing.
The acquisition will give the Company an immediate direct sales presence in
Germany, the single largest market in Europe, and give the Company the benefit
of this expertise in other European countries. In addition, the Business has
distributors in Eastern European and Middle Eastern markets, in which the
Company currently does not have representation.
Disadvantages
A. Profitability Concerns
The Business was unprofitable in 1996, and while profitable in the
first quarter of 1997, did not meet projected revenues. If losses are
incurred by the Business, it could cause a cash flow drain on the Company.
The Special Committee believes that through reduction of overlapping functions
and costs, the Business can be profitable.
B. Cost
Even though the Company received an opinion from Vector Securities
that the transaction was fair to the minority shareholders from a financial
point of view, the transaction nonetheless requires a significant investment
by the Company.
C. Disruption to Management
The negotiation and completion of the transaction has put a
significant strain on the Company's managerial capabilities. This strain will
continue during the integration period and could prevent the Company's
management from engaging in other endeavors.
D. Research and Development
In 1996 by mutual agreement between Fresenius AG and the Company,
the Business ceased its research and development efforts. Certain of the
Business's products are in very competitive markets. To remain competitive
and grow, the Business needs new products, either those developed from
research and development or obtained from third parties.
The Board of Directors adopted the analyses and conclusions of the
Special Committee in approving the transaction and recommending shareholder
approval.
Description of the Agreement
The following description is qualified in its entirety by reference
to the actual text of the Agreement attached hereto as Appendix C.
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A. Assets Being Sold
The Company, through the Purchaser, has agreed to purchase, and
Fresenius AG has agreed to sell, all fixed assets, all inventory stocks, and
all rights belonging to the Business as of the date of the Agreement
(collectively, the "Assets"), as well as certain industrial property rights,
copyrights, and other intangible assets related thereto. "Assets" shall not
include receivables, checks, cash or credit balances existing or accrued as of
the Effective Date (December 31, 1996). Certain of the assets being acquired
are those that the Company sold to the Business in January 1995. See
"Proposal 1--Election of Directors--Certain Relationships and Related
Transactions."
B. Closing Date
The consummation of the sale of the Business (the "Closing") is
presently anticipated to occur after all of the conditions to the Closing set
forth in the Agreement have been satisfied or waived (the "Closing Date"), and
if appropriate, at the end of a fiscal quarter. Either Fresenius AG or the
Company can waive any of the conditions to the Closing set forth in the
Agreement that the other is required to fulfill and does not fulfill.
However, most conditions reflect legal or compliance requirements and are
unlikely to be waived. The Company and Fresenius AG will not waive any
condition related to the proposed accounting treatment of the transaction
because accounting treatment for business combinations of entities under
common control, which is similar to accounting for pooling-of-interests is
required by US GAAP.
C. Purchase Price
The purchase price for the Business will be 1,320,000 shares of
Common Stock of the Company. On December 12, 1996, the day before the public
announcement of the execution of the Letter of Intent, the closing sales price
of a share of Common Stock was $6.50. Management of the Business and the
Company expect that the infectious disease business of a supplier of the
Business may be sold in the near future. The Business currently distributes
products manufactured by the supplier. Sales from these products in 1994,
1995, 1996, and for the quarter ended March 31, 1997, were approximately DM
532,000, DM 485,000, DM 526,000, and DM 236,000, respectively. This
represents approximately 3.7%, 3.4%, 2.9%, and 8.3%, respectively of the
Business's sales. Upon such a sale, products from the supplier could become
unavailable until products of a replacement supplier are available. To take
into account the risk to the Company from the short-term loss of business that
could result from a termination of the current relationship with the supplier,
the Company, the Purchaser and Fresenius AG have agreed that if the current
relationship between the supplier and the Business is terminated on or before
December 31, 1997, that Fresenius AG will return 33,000 shares of the
Company's Common Stock to the Company. If only a certain portion of the
business with the supplier terminates prior to December 31, 1997, Fresenius AG
will return 18,721 shares of Common Stock to the Company. See "Sources and
Availability of Raw Materials" in Appendix B for a discussion of the impact of
the potential loss of the supplier. If within two years after such
termination, the Purchaser or the Company or an affiliate enters into a
commercial agreement with the supplier that is in quality and volume
comparable with the terminated relationship, the Company and the Purchaser
shall transfer the 33,000 or 18,721 shares, as applicable, to Fresenius AG.
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D. Liabilities
The Purchaser and the Company have agreed to assume all liabilities
pertaining to the operations of the Business arising after December 31, 1996
(the "Effective Date"), including any tax liabilities, liabilities towards
employees or pension and social insurance companies, and trade accounts payable
as well as debts resulting from warranty claims for goods manufactured or
distributed after the Effective Date and pensions and lease agreements
existing at the Effective Date. The Purchaser has agreed to hold Fresenius
AG harmless against any and all claims arising from liabilities occurring
after the Effective Date. Fresenius AG shall remain liable for all liabilities
and contingent liabilities which have accrued or occurred as of or prior to the
Effective Date, other than liabilities under the pensions and lease agreements
discussed above, and has agreed to hold the Purchaser and the Company harmless
against any such claims.
E. Covenants and Conditions
During the period from the Effective Date to the Closing Date, the
Business shall be deemed to have been conducted on behalf of and for the
account of the Purchaser. Profits and losses during this period will be due
to or borne by the Purchaser. Fresenius AG has established a separate
account to reflect its investments in the Business or distributions to
Fresenius AG by the Business. Until the Closing Date, Fresenius AG shall also
advance working capital to the Business as needed by the Business in
accordance with past practice. All cash advanced to the Business shall be
credited to Fresenius AG and charged to the Business. All cash or other
assets transferred by the Business to or for the benefit of Fresenius AG shall
be credited to the Business and charged to Fresenius AG in the separate
account. Balances under the separate account shall bear interest at the rate
of 5% per annum. Within ninety days of the Closing Date, Fresenius AG shall
prepare and deliver to the Purchaser and the Company a final report of any net
balance due to Fresenius AG or due to the Business. Unless the Purchaser
requests an audit of the final report, within fifteen days of the delivery of
the final report, Fresenius AG shall pay to the Purchaser or the Purchaser
shall pay to Fresenius AG, as the case may be, any amount due as reflected by
the final report.
Fresenius AG has also agreed that from April 21, 1997 to the
Closing Date, it will conduct the operations, activities, and practices of the
Business in the ordinary course of business, consistent with past practices.
In addition, Fresenius AG agreed to comply with the following covenants as
they relate to the Business, unless otherwise consented to by the Purchaser:
(1) To refrain from taking action to liquidate or dissolve the
Business;
(2) To refrain from granting any irrevocable power of attorney
regarding the Business;
(3) To refrain from changing any accounting practices;
(4) To refrain from entering into any lease, contract, agreement
or commitment related to the Business or the Assets, except for:
(a) transactions in the ordinary course of business which do
not involve payments of more than DM 120,000 per transaction from the
Effective Date to April 21, 1997, or more than DM 70,000 from April 21, 1997
to the Closing Date; or
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(b) transactions which are terminable without penalty or fully
performable within ninety days of the Closing Date;
(5) To refrain from granting any increases in salary or benefits to
officers or employees of the Business, subject to certain exceptions;
(6) To refrain from, except in the ordinary course of business:
(a) incurring additional debt, other than intercompany debt under
the separate account described above;
(b) incurring any other liability;
(c) mortgaging or pledging the Assets; or
(d) modifying any contracts.
(7) To refrain from taking any action that would be a breach
of any existing Business agreement;
(8) To maintain complete and accurate records of receivables
and liabilities of the Business accrued from January 1, 1997 to the Closing
Date;
(9) To refrain from making any distributions of assets
related to the Business to itself or its affiliates unless reflected in the
separate account described above;
(10) To refrain from settling or agreeing to settle any suit,
claims, actions or other legal, administrative or arbitration proceeding
involving the Business or the Assets, or waive any right other than in the
ordinary course of business consistent with past practices; and
(11) To notify the Purchaser and the Company of any event,
condition or circumstance outside the ordinary course of business or that
could result in a material adverse effect on the Business.
F. Approvals and Conditions Precedent
The consummation of the sale of the Business is subject to receipt
of the following approvals: (i) Fresenius AG Supervisory Board approval;
(ii) approval of the Company's Board of Directors; (iii) the unanimous
approval of the Special Committee; (iv) approval of a majority of the non-
Fresenius AG shareholders voting at the Annual Meeting; and (e) approval for
listing of the shares to be issued to Fresenius AG by the American Stock
Exchange. All of the foregoing approvals other than shareholder and American
Stock Exchange approval have been obtained. Conditions precedent include:
(i) receipt of a satisfactory opinion of Vector Securities; (ii) non-denial by
the German Federal Cartel Office (see "Regulatory Approvals" below); and
(iii) execution of a registration rights agreement. See "Registration Rights"
below. The fairness opinion was dated as of April 2, 1997. Since the
Agreement requires that the representations and warranties of Fresenius AG
relating to the Business be true and correct as of the Closing Date and since
any and all items which could cause a change in conditions are covered by the
representations and warranties, the Company or Fresenius AG could refuse to
close the transaction in the event of material changes. The Special Committee
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and the Board of Directors discussed this possibility. Neither the Company
nor Fresenius AG anticipate any such material change in the matters addressed
in such representations and warranties.
G. Indemnification
Fresenius AG has agreed to reduce the purchase price in the event
of a breach of any of Fresenius AG's representations and warranties in the
Agreement, to the extent such breach of representation and warranty claims
exceed $50,000, up to a maximum of $4,000,000. The reduction of the purchase
price may be made in cash or shares of the Company's Common Stock owned by
Fresenius AG and valued at $8.29 per share. The representations and
warranties shall survive for a period of twelve months after the Closing Date
and shall thereafter be statute-barred, except that claims by either Fresenius
AG or the Purchaser directly related to the "Liabilities" provision of the
Agreement shall be statute-barred after five years.
H. Termination
The Agreement may be terminated at any time prior to the Closing by:
(a) The mutual consent of the parties;
(b) By the Purchaser if there is a material, uncured breach of a
representation, warranty, covenant or other agreement by Fresenius AG;
(c) By Fresenius AG if there is a material, uncured breach of a
representation, warranty, covenant or other agreement by the Purchaser or the
Company; or
(d) By either Fresenius AG or the Purchaser if the Closing shall
not have occurred on or before July 31,1997. In the event of termination,
other than for breach of a representation, warranty, covenant or agreement,
all obligations of the parties thereunder shall terminate.
I. Registration Rights
The Company has agreed to grant Fresenius AG rights to register the
1,320,000 shares it will acquire at Closing. Under the terms of a registration
rights agreement to be executed at Closing (the "Registration Rights
Agreement"). Fresenius AG shall have the right on two separate occasions to
demand registration of all or a portion of the shares. The Company is obligated
to use its best efforts to cause that a registration statement covering the
number of shares requested by Fresenius AG shall be filed and declared
effective. The filing of the registration statement may be delayed if a
committee of disinterested directors of the Company deems that registration
would at that time be materially detrimental (without taking into account costs
or effect on market price, unless the effect would be materially detrimental to
a transaction in which securities of the Company are to be issued) to the
Company. The Company is obligated to pay the expenses related to the exercise
of the first of the two demand rights up to a limit of $20,000.
In addition, under the Registration Rights Agreement Fresenius AG
will have incidental or "piggy-back" registration rights covering the
1,320,000 shares. If the Company proposes to file a registration statement
for itself or for another person having demand registration rights (other than
in connection with a registration involving the Company's Common Stock in
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connection with an acquisition in which the shares cannot be registered, a
Form S-8 or as a result of the exercise of a demand right) it must notify
Fresenius AG and permit Fresenius AG to include the shares or a portion
thereof in the proposed offering. If the proposed offering is an underwritten
offering and the managing underwriter informs Fresenius AG that the inclusion
of the shares will interfere with the successful marketing of the securities
to be offered by the Company, then the Company may exclude from the number of
shares that Fresenius AG wishes to have included, the number of shares
specified by the managing underwriter.
Continued Participation by Fresenius AG
A. Financing
Fresenius AG has agreed to make up to DM 1,700,000 (approximately
$1,000,000) available to the Purchaser to provide working capital for the
combined operation of the Purchaser and the Business. Funds will be provided
as needed and will bear interest at the rate of 8% per annum, payable
quarterly. The amount of the commitment will decrease by DM 340,000 on each
of December 31, 1997, June 30, 1998, and December 31, 1998. All amounts
advanced to the Purchaser, plus accrued interest, shall be due and payable on
or before June 30, 1999, or upon the closing of a registered public offering
of the Company's Common Stock. Advances will be secured by a pledge of the
Purchaser's stock by the Company.
B. Lease of Real Property
The executive offices and principal manufacturing facilities of the
Business are located in two buildings totaling 1,442 square meters in
Oberursel and Bad Homburg, Germany. These buildings house offices,
production, and product development facilities. The land and buildings are
owned by Fresenius AG. The Business has rented the facilities from Fresenius
AG under an intercompany contract for approximately DM 17,750 per month
(approximately $11,000). The Company will continue to rent the facilities
from Fresenius AG on the same terms until December 31, 1997.
C. Services
Fresenius AG will continue to provide certain services to the
Business, including administrative, accounting, automobile leasing, logistics,
human resources, management information systems, repairs and maintenance and
insurance services, pursuant to agreements between Fresenius AG and the
Business, which will terminate no later than December 31, 1997.
Reasons for the Transaction
As discussed above in "Background of the Transaction," the Company
believes that due to the reputation of Fresenius AG in Germany and other
European countries and the Business's experience in bringing new products to
market in Europe, acquisition of the Business will improve its market
presence in Europe. The Company also believes that because of the more than
$300,000 of estimated potential cost savings that could be realized from a
consolidation of functions of the Business and the Company's European
operations, it can improve its profitability and the profitability of the
Business. There can be no assurance that such cost savings can be realized.
Fresenius AG believes it will benefit from the transaction for similar
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reasons. See "Background of the Transaction" above.
Certain Effects on the Company's Common Stock
The issuance of 1,320,000 shares of Common Stock as the consideration
is not subject to any pre-emptive rights held by the shareholders of the
Company. The effect of the issuance will be to increase Fresenius AG's
beneficial ownership of the Company's Common Stock from 54.6% to 62.1%, thus
increasing its concentration of ownership. In addition, in the event
Fresenius AG exercises the registration rights to be granted pursuant to the
Registration Rights Agreement, the "market overhang" created by the
registration of a significant block of the Company's Common Stock could
adversely affect its price.
Sections 16-10a-850 et seq. of the Utah Revised Business
Corporation Act set forth parameters for transactions in which directors may
have conflicting interests. A director has a conflicting interest if the
transaction in question involves another entity in which he is an officer or
director or to which he owes a fiduciary duty. Because of their relationship
with Fresenius AG, Dr. Schmidt and Dr. Krick have, and Dr. Wagner could be
deemed to have, a conflicting interest. See "Proposal 1--Election of
Directors" above.
A transaction in which directors have conflicting interests may
not be enjoined or set aside or give rise to an award for damages solely
because a director had an interest in the transaction if any one of the
following three procedures takes place:
(a) Proper directors' action is taken. If the directors with
conflicting interests make the required disclosure (the existence of the
conflict and the facts surrounding the conflict and the transaction) and then
only qualified directors, directors without conflicting interests, or a
committee comprised solely of qualified directors approves the transaction by
a majority vote, then the directors' action is proper. The Company's Board of
Directors appointed the Special Committee, all of whom the Company believes
are qualified directors, to approve the transaction.
(b) Proper shareholders' action is taken. If the conflicting
interests of the directors are disclosed to the shareholders and a majority of
the shareholders approve the transaction, then the shareholders' action is
proper. There is no requirement under Utah law that Fresenius AG abstain from
voting on Proposal 3 if proper disclosure of the conflicting interests of the
directors is made. Nevertheless, the Special Committee believed that it would
be in the best interests of the minority shareholders if Proposal 3 had to be
approved by a majority of the minority shareholders. Fresenius AG agreed with
the Special Committee and Proposal 3 is subject to the approval of a majority
of the minority shareholders actually present and voting at the annual
meeting. Disclosure of the conflicting interests has been made in this Proxy
Statement. See "General" and "Proposal 1--Election of Directors--Compensation
Committee Interlocks and Insider Participation; Certain Relationships and
Related Transactions."
(c) The transaction, judged according to the circumstances at
the time of the commitment, is established to have been fair to the company.
The Act permits a director to rely on opinion of legal counsel, accountants or
other persons as to matters the director reasonably believes to be within the
person's professional or expert competence. The Company has obtained a
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fairness opinion from an independent investment banking firm, which is
described below.
The Company took all three of the actions described above.
Accordingly, if the majority of the minority shareholders present and voting
at the Annual Meeting approve the transaction, no shareholder will have a
claim against the Company or the directors solely because of the conflicting
interests of certain of the directors.
Opinion of The Company's Financial Advisor
On April 2, 1997 Vector Securities rendered its written opinion to
the Board of Directors relating to the fairness of the consideration to be
paid by the Company in the acquisition of the Business (the "Transaction").
The complete text of the opinion, which sets forth certain
assumptions made, factors considered and limits on the review undertaken by
Vector Securities is attached to this Proxy Statement as Appendix D and is
incorporated herein by reference. The summary of the opinion set forth in
this Proxy Statement is qualified in its entirety by reference to the full
text of the opinion. The Company's Shareholders are urged to read such
opinion carefully and in its entirety. The opinion of Vector Securities was
directed to the Company's Board of Directors in connection with and for the
purpose of their evaluation of the Transaction and did not constitute a
recommendation to the Board of Directors with respect to the approval of the
Transaction nor does it constitute a recommendation to any Shareholder of the
Company as to how such Shareholder should vote with respect to the
Transaction.
In arriving at its opinion, Vector Securities, among other things:
(i) subject to the assumptions described below, reviewed the financial terms
of the Transaction as set forth in the April 1, 1997 Draft Agreement (the
"Draft Agreement"); (ii) held discussions with certain members of the
management of the Company and the Business concerning their respective
businesses, operations and prospects, as well as other matters it believed
relevant to its inquiry; (iii) reviewed certain business and financial
information of the Company and the Business, including financial forecasts
prepared and provided by the respective managements of the Company and the
Business; (iv) compared certain financial data of the Company and the Business
with financial data of such other publicly traded companies as Vector
Securities deemed reasonably comparable; (v) compared the Negotiated Aggregate
Consideration Value (as defined below) with those terms of other transactions
which Vector Securities deemed reasonably comparable; (vi) reviewed the pro
forma impact of the Transaction on the Company's financial results and
condition; (vii) reviewed certain documents filed by the Company with the
Securities Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended; and (viii) performed such other studies, analyses and
investigations as Vector Securities deemed appropriate.
In connection with its opinion, Vector Securities neither
attempted independently to verify nor assumed any responsibility for
independent verification of any information publicly available or supplied or
otherwise made available to it regarding the Company or the Business and
Vector Securities assumed and relied on such information being accurate and
complete in all respects. Vector Securities has not made or obtained, or
assumed any responsibility for making or obtaining, any independent evaluation
or appraisal of the assets or liabilities (contingent or otherwise) of the
Company or the Business, nor has Vector Securities been furnished with any
such evaluations or appraisals. For the purposes of its opinion, Vector
Securities was asked by the management of the Company to evaluate the
Transaction using an aggregate value for the 1,320,000 shares of Company
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<PAGE>
Common Stock to be issued in the Transaction (the "Transaction Shares") of
$10,942,800 (the "Negotiated Aggregate Consideration Value"). Vector
Securities was informed that such Negotiated Aggregate Consideration Value was
determined by agreement of the Company and Fresenius AG, based on the average
closing price of the Company Common Stock during the twenty trading day period
preceding and the twenty trading day period following the first public
announcement of the execution of a Letter of Intent relating to the
Transaction on December 13, 1996. The actual aggregate value of the
Transaction Shares to be issued to Fresenius in the Transaction will be based
on the market price at the time of the closing of the Transaction. The
closing market price on April 1, 1997, the last trading day prior to the date
Vector Securities rendered its opinion to the Board, was $10.50 per share.
With respect to the financial projections of the Company and the Business
referred to above, Vector Securities assumed that they have been reasonably
prepared on bases reflecting the best available estimates and educated
judgments of the managements of the Company and the Business as to the future
financial performance of the Company and the Business, respectively, and that
the Company and the Business will perform substantially in accordance with
such projections. Vector Securities assumes no responsibility for and
expresses no view as to such forecasts or the assumptions under which they
were prepared. Vector Securities has also taken into account its assessment
of general economic, market and financial conditions and its knowledge of the
diagnostic industry, as well as its experience in connection with similar
transactions and securities valuation generally. The conclusions of Vector
Securities are based solely on information available to it on or before the
date of the opinion and reflect economic, market, and other conditions as of
such date. In rendering its opinion, Vector Securities has also assumed that
the Transaction will qualify as a combination of entities under common control
at historical cost in a manner similar to a pooling of interests under the
United States generally accepted accounting principles. It should be
understood that, although subsequent developments may affect its opinion,
Vector Securities assumes no responsibility and does not have any obligation
to update, revise, or reaffirm its opinion. Vector Securities also assumed
that the Transaction will be consummated on the terms described in the Draft
Agreement, subject to the assumptions made in the opinion, without any
material waiver of or modification by the Company or the Business, and that
obtaining any necessary regulatory approvals for the Transaction will not have
an adverse effect on the Company or the Business.
The summary set forth in this section does not purport to be a
complete description of the analyses performed by Vector Securities in
arriving at its opinion. The preparation of a fairness opinion is a complex
process that involves various determinations as to the most appropriate and
relevant methods of financial and comparative analysis and the application of
those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to partial analysis or summary description. In
arriving at its opinion, Vector Securities considered the results of all
analyses taken as a whole. Furthermore, in arriving at its opinion, Vector
Securities did not attribute any particular weight to any analysis or factor
considered by it, but rather made its determination on the basis of
qualitative judgments as to the significance and relevance of each analysis
and factor taken as a whole. Accordingly, Vector Securities believes that
considering any portions of such analyses and the factors considered, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying its opinion. With respect to the comparable
publicly traded company analysis and comparable transaction analysis
summarized below, no public company or transaction utilized as a comparison is
identical to the Business or the Transaction and such analyses necessarily
involve complex considerations and judgments concerning the differences in
financial and operating characteristics of the companies and other factors and
could affect the acquisition or public trading values of the companies
concerned. In its analyses, Vector Securities made numerous assumptions with
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<PAGE>
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control
of the Company and the Business and involve the application of complex
methodologies and judgments. Any estimates and financial projections used in
these analyses are inherently uncertain and are, therefore, not necessarily
indicative of actual value or predictive of future results or values, which
may be significantly more or less favorable than suggested by such analyses.
Accordingly, because such estimates are inherently subject to uncertainty,
being based on numerous factors and events beyond the control of the Company,
the Business or Vector Securities, Vector Securities assumes no responsibility
for their accuracy. The analyses were prepared solely for purposes of Vector
Securities providing its opinion to the Company's Board of Directors and do
not purport to be appraisals or to reflect the prices at which the businesses
or securities actually may be sold. As described above, Vector Securities'
opinion to the Company's Board of Directors was one of many factors considered
by the Company's Board of Directors in making its determination to approve the
Transaction. Although Vector Securities evaluated the fairness of the
Negotiated Aggregate Consideration Value, the actual amount of the
consideration was determined by negotiations between the Company and
Fresenius.
The following is a summary of the material financial and
comparative analyses performed by Vector Securities in arriving at its
fairness opinion.
Discounted Cash Flow Analysis. Vector Securities analyzed the
implied equity value of the Business utilizing an unlevered discounted cash
flow analysis. This analysis was based solely upon information, including
certain projected financial information, prepared or provided by the
management of the Business. The projections were based on assumptions that
were made by the management of the Business.
Vector Securities calculated a range of implied equity values for
the Business by adding the present value of: (i) the Business's projected
five year stream of unlevered after tax cash flows, and (ii) its fiscal 2001
terminal values based upon a range of multiples of the Business's projected
earnings before interest and taxes ("EBIT") for fiscal 2001, assuming the
Business were to perform on a stand-alone basis and in accordance with
management's projections (without giving effect to the Transaction). Vector
Securities utilized discount rates ranging from 10% to 20% and terminal value
multiples of 2001 EBIT ranging from 10x to 15x. Vector Securities deducted
the business's net debt (debt minus cash) from the sum of the present values
calculated above to obtain a range of implied equity values for the Business.
Based on this analysis, Vector Securities indicated a range of implied equity
values of the Business of $8.0 million to $12.0 million
Selected Comparable Company Analysis. Using publicly available
information, Vector Securities compared selected financial data of the
Business with similar data of selected publicly traded companies engaged in
businesses considered by Vector Securities to be reasonably comparable to
those of the Business for the purpose of its analysis. Vector Securities
included the following companies in its analysis: Bio-Rad Laboratories, Inc.;
BioWhittaker, Inc.; Diagnostics Products Corporation; Gamma Biologicals, Inc.;
Hycor Biomedical, Inc.; Immucor, Inc.; INCSTAR Corporation; International
Murex Technologies Corporation; Life Technologies, Inc.; Meridian Diagnostics,
Inc.; Quidel Corporation (collectively, the "Comparable Companies"). For each
of the Comparable Companies, Vector Securities calculated, among other things,
current market price per share as a multiple of the latest twelve months
("LTM") earnings per share ("EPS"), current fiscal year EPS estimate, next
fiscal year EPS estimate and the latest reported tangible book value per
share. The current fiscal year EPS and next fiscal year EPS estimates were
based on the mean of publicly available earnings estimates made by research
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<PAGE>
analysts as provided by Zacks Investment Research, Inc., I/B/E/S International,
Inc. and Nelson Publications, Inc. For each of the Comparable Companies,
Vector Securities also calculated total market value plus net debt as a
multiple of, among other things, each of LTM net revenues, LTM EBIT and LTM
EBIT plus depreciation and amortization expenses ("EBITDA"). Mean multiples of
LTM EPS, current fiscal year EPS, next fiscal year EPS, tangible book value,
LTM net revenues, LTM EBIT and LTM EBITDA for the Comparable Companies were
21.8x, 19.9x, 17.1x, 2.2x, 1.5x, 14.5x and 9.7x, respectively. The range of
multiples of LTM EPS, current fiscal year EPS, next fiscal year EPS, tangible
book value, LTM net revenues, LTM EBIT and LTM EBITDA for the Comparable
Companies were 10.7x - 35.8x, 9.3x - 28.8x, 8.4x - 28.8x, 1.0x - 3.6x, 0.7x -
2.3x, 7.6x - 26.5x, and 5.3x-13.8x, respectively. The multiples derived from
this analysis were applied to similar financial data for the Business to
determine a range of implied equity values for the Business. Because the
Business incurred net and operating losses for the fiscal year ended
December 31, 1996, application of certain multiples did not provide meaningful
results. The analysis of Comparable Companies yielded a range of implied
equity values for the Business of $9.0 million to $12.0 million. Vector
Securities noted that although the Comparable Companies were considered similar
to the Business, none of the Comparable Companies has the same management,
makeup, size or combination of business as the Business. Because of the
inherent differences between the Business and the Comparable Companies, Vector
Securities believed that it was inappropriate to, and therefore, did not, rely
solely on the quantitative results of the analysis. Accordingly, Vector
Securities also made qualitative judgments concerning the differences between
the characteristics of the Comparable Companies and the Business that would
affect the value of the Business and the Comparable Companies.
Selected Comparable Transactions Analysis. Vector Securities
reviewed thirteen recent merger and acquisition transactions occurring since
1988 involving diagnostic companies considered by Vector Securities to be
reasonably comparable to the Business and for which information was publicly
available. Vector Securities included, among others, the following
transactions in its analysis: Hoechst Behring Diagnostics/Dade International,
Inc.; INCSTAR Corporation/American Standard, Inc.; BioWhittaker, Inc.'s
autoimmune, diagnostic test kit line/ Wampole Laboratories; Baxter
Diagnostics, Inc./Bain Capital; U.S. Biochemical Corporation/Amersham
International PLC; Wellcome Diagnostics/International Murex Technologies
Corporation; Ventrex Laboratories, Inc./Hycor Biomedical, Inc.; Biotech
Research Laboratories, Inc./ Cambridge BioScience Corporation;
INCSTAR Corporation/Bioengineering International BV; International Reagents
Corporation/Green Cross Corporation; Technogenetics, Inc./Leeco Diagnostics,
Inc.; Electro-Nucleonics, Inc./Pharmacia AB; Leeco Diagnostics, Inc./Recordati
International Holding SA (collectively, the "Comparable Transactions"). For
each of the Comparable Transactions, Vector Securities calculated, among other
things, total transaction value as a multiple of LTM net income and latest
reported tangible book value and total transaction value plus net debt as a
multiple of LTM net revenues, LTM EBIT and LTM EBITDA. Mean multiples of LTM
net income, latest reported tangible book value, LTM net revenues, LTM EBIT
and LTM EBITDA for the Comparable Transactions were 16.7x, 2.4x, 1.9x, 23.4x
and 16.3x, respectively. The ranges of multiples of LTM net income, latest
reported tangible book value, LTM net revenues, LTM EBIT, and LTM EBITDA for
the Comparable Transactions were 5.8x - 22.5x, 1.1x - 4.4x, 0.6x - 3.8x, 16.7x
- - 30.2x, 11.4x - 19.2x, respectively. The multiples derived from this
analysis were applied to similar financial data for the Business to determine
a range of implied equity values for the Business. The analysis of Comparable
Transactions yielded a range of implied equity values for the Business of $5.0
million to $15.0 million. However, because the reasons for and the
circumstances surrounding the Comparable Transactions were specific to each
transaction and because of the inherent differences between the businesses,
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<PAGE>
operations and the prospects of the Business and the businesses, operations
and prospects of the companies in the Comparable Transactions, Vector
Securities believed that it was inappropriate to, and therefore, did not, rely
solely on the quantitative results of the analysis. Accordingly, Vector
Securities also made qualitative judgments concerning differences between the
characteristics of the Comparable Transactions and the Transaction that would
affect the acquisition values of the Business and such acquired companies.
Based on Vector Securities' evaluation of the various information
and materials it considered, including the various assumptions and limitations
set forth herein, and based upon such other matters as it considered relevant,
Vector Securities rendered its written opinion to the Board of Directors of
the Company that as of April 2, 1997, the date of such opinion, the Negotiated
Aggregate Consideration Value is fair to the Company from a financial point of
view.
Vector Securities is an internationally recognized investment
banking firm and is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and corporate and other purposes. The
Company selected Vector Securities to act as its financial advisor on the
basis of Vector Securities' expertise and its reputation in investment banking
and mergers and acquisitions.
Pursuant to an engagement letter dated January 6, 1997 and an
amendment thereto dated March 24, 1997, between the Company and Vector
Securities, the Company has agreed to pay Vector Securities a fee of $275,000
for acting as a financial advisor in connection with the transaction,
including the rendering of its opinion, $200,000 of which is payable upon the
closing of the Transaction. In addition, the Company has agreed to reimburse
Vector Securities for its reasonable out-of-pocket expenses and to indemnify
Vector Securities against certain liabilities arising out of the rendering of
its opinion. Vector Securities is a full service securities firm and in the
course of its normal trading activities may from time to time effect
transactions and hold positions in securities of the Company.
The Company and the Special Committee have been informed that
Vector Securities has been retained by Fresenius AG to provide financial
advisory services to the Pharmaceutical Division of Fresenius AG for a one
year period in connection with certain possible transactions unrelated to the
Company. Fresenius AG has agreed to pay Vector Securities: (i) a non-
refundable retainer, payable in part upon execution of the engagement letter
(which has been paid) and upon execution of a letter of intent with respect to
a transaction or, if no letter of intent is executed, upon execution of a
definitive agreement, and (ii) an additional fee upon consummation of a
transaction referred to in the engagement letter during such one year
engagement or within two years thereafter. Fresenius AG has also agreed to
reimburse Vector Securities' out-of-pocket expenses incurred in connection
with its services and to indemnify Vector Securities against certain
liabilities (including liabilities under federal securities laws).
Regulatory Approvals
Section 23 of the German Act Against Restraints of Competition
requires the parties to file a notification with the German Federal Cartel
office of the acquisition contemplated by the Agreement for its approval. The
approval is a condition precedent to the consummation of the acquisition. If
the German Federal Cartel Office denies the merger, the Agreement shall be
dissolved.
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<PAGE>
Tax Consequences and Accounting Treatment of the Transaction
The following is a summary in general terms of the material
accounting and United States and German federal income tax consequences of the
transaction:
Accounting Treatment. The acquisition of the Business by the
Company will be accounted for as a combination of entities under common
control in a manner similar to a pooling of interests. The combined entity
records its assets and liabilities at the recorded historical cost on the
separate companies' financial statements. The results of operations of the
combined entities are combined from the beginning of the periods presented in
the financial statements. The effects of intercompany transactions on current
assets, current liabilities, revenues and expenses are eliminated for the
periods presented.
United States Federal Income Tax Treatment. For United States
federal income tax purposes, the acquisition of the Business will be treated
as the purchase of assets in exchange for the Company's common stock. Under
Section 1032 of the United States Internal Revenue Code, the purchase of
assets using the Company's common stock does not result in a taxable gain to
the Company. Therefore, the Company believes that there will be no federal
tax consequences due to the transaction. For a discussion of a Transfer,
Assignment and Assumption Agreement entered into to enable the Company to
structure the transaction in a more efficient manner, see "Proposal 3--
Acquisition of Certain Assets of the Business--Background of the Transaction."
German Income Tax Treatment. Under German income tax law, the
purchase price of the acquisition will be allocated to the net assets acquired
as part of the transaction. The difference between the purchase price and the
fair value of the separately identifiable assets acquired as part of the
business combination will be allocated to goodwill and may be amortized over a
fifteen year period.
Neither Fresenius AG nor the Company requested tax opinions in
connection with the sale of the Business to the Company.
Certain Financial and Other Information
Appendices A and B to this Proxy Statement contain certain
financial and other information about the Company and the Business.
Certain Summary Pro Forma Financial Information
The following table presents certain unaudited pro forma financial
information for the quarter ended March 31, 1997, and for the years ended
December 31, 1996, 1995, and 1994 for the Company and the Business on a
combined basis prepared as if the Business had been combined on January 1,
1994 with respect to income statement information, and on March 31, 1997 with
respect to balance sheet information. This table should be read in
conjunction with the historical financial statements and notes thereto of the
Company and the Business appearing in Appendices A and B hereto, respectively,
and the pro forma financial information under "Unaudited Pro Forma Condensed
Consolidated Financial Statements."
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<PAGE>
- ---------------------------------------------------------------------
Summary Pro Forma Information (in 000's)
- ---------------------------------------------------------------------
Quarter Ended
Year Ended December 31, March 31,
1996 1995 1994 1997
- ---------------------------------------------------------------------
Net Sales $24,480 $26,287 $23,652 $ 6,226
Net income (loss) (50) 467 266 58
Earnings per share .01 .06 .03 .01
Total assets -- -- -- 16,388
Long-term debt -- -- -- 3,260
- ---------------------------------------------------------------------
There were no cash dividends declared or paid in the periods presented.
Unaudited Pro Forma Condensed Consolidated Financial Statements
The following unaudited pro forma condensed consolidated financial
statements (the "Statements") are presented to provide the reader with
information regarding the combined company under certain assumptions. The
following balance sheet presents unaudited pro forma financial information at
March 31, 1997 and the following income statements present unaudited pro forma
financial information for the quarter ended March 31, 1997 and the years ended
December 31, 1994, 1995 and 1996 for the Company and the Business prepared as
if the Business had been combined on March 31, 1997 with respect to balance
sheet information and on January 1, 1994 with respect to income statement
information. These pro forma statements should be read in conjunction with
the historical financial statements and notes contained elsewhere in this
Proxy Statement.
The combination is being accounted for as a combination of
entities under common control at historical cost in a manner similar to a
pooling of interests.
The following Statements give effect to the acquisition by the
Company of the assets of the Business for 1,320,000 shares of the Company's
Common Stock.
The Statements do not purport to present the actual financial
position and results of operations which would have been achieved had the
combination been consummated as of the dates indicated above, nor do they
necessarily reflect the financial position and results of operations which may
be achieved after the consummation of the combination. The actual financial
position and results of operations of the combined Company in the future will
depend on a number of factors. The information provided in the Statements and
in the notes thereto is qualified in its entirety by the historical financial
statements of the Company and the Business appearing elsewhere in this Proxy
Statement.
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Gull Laboratories, Inc.
Pro Forma Combined Balance Sheet (in 000's)
March 31, 1997
- --------------------------------------------------------------------------------------------------
Business(4) Business(4) Gull Labo- Eliminating Consoli-
(DM) ($) ratories(5) Total Entries(1) dated
- --------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash -0- $ -0- $ 408 $ 408 $ 408
Accounts receivable, net 1,210 725 3,455 4,180 $ (167)(2) 4,013
Net investment in sales
type leases -0- -0- 248 248 248
Inventories 3,068 1,839 3,507 5,346 (195)(2) 5,151
Prepaid expenses -0- -0- 523 523 (83)(5) 440
Deferred income taxes 51 31 108 139 139
-------- -------- -------- -------- -------- --------
Total current assets 4,329 2,595 8,249 10,844 (445) 10,399
Property, plant, equipment, net 1,077 646 3,572 4,218 4,218
Net investment in sales type
leases -0- -0- 752 752 752
Other assets -0- -0- 1,019 1,019 1,019
-------- -------- -------- -------- -------- --------
TOTAL ASSETS 5,406 $ 3,241 $ 13,592 $ 16,833 $ (445) $ 16,388
======== ======== ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Notes payable -0- $ -0- $ 2,042 $ 2,042 $ $ 2,042
Accounts payable 422 253 1,996 2,249 (167)(2) 2,082
Accrued expenses 598 358 273 631 517(5) 1,148
Income taxes payable 76 46 57 103 103
Deferred income taxes 442 265 -0- 265 265
Current portion long-term debt 225 135 584 719 719
-------- -------- -------- -------- -------- --------
Total current liabilities 1,763 1,057 4,952 6,009 350 6,359
Long-term debt 274 164 3,096 3,260 3,260
Separate account -0- -0- -0- -0- 216(1) 216
Deferred income taxes -0- -0- 298 298 298
Other long-term liabilities 507 304 97 401 401
-------- -------- -------- -------- -------- --------
TOTAL LIABILITIES 2,544 1,525 8,443 9,968 566 10,534
-------- -------- -------- -------- -------- --------
COMMITMENTS(6)
STOCKHOLDERS' EQUITY
Common stock -0- -0- 7 7 1(1) 8
Additional paid in capital/net
assets 1,621 972 7,221 8,183 (217)(1,2) 7,966
Currency translation adjustment (95) (188) (283) (283)
Retained earnings
(accumulated deficit) 1,241 839 (1,881) (1,042) (795)(2,5) (1,837)
-------- -------- -------- -------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 2,862 1,716 5,149 6,865 (1,011) 5,854
-------- -------- -------- -------- -------- --------
TOTAL LIABILITIES & EQUITY 5,406 $ 3,241 $ 13,592 $ 16,833 $ 445 $ 16,388
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Pro Forma combined Financial Statements.
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Gull Laboratories, Inc.
Pro Forma Combined Income Statement (in 000's)
Year Ended December 31, 1994
- --------------------------------------------------------------------------------------------------
Business(4) Business(4) Gull Labo- Eliminating Consoli-
(DM) ($) ratories(5) Total Entries(1) dated
- --------------------------------------------------------------------------------------------------
Sales 14,468 $ 8,918 $ 15,841 $ 24,759 (1,107)(2) $ 23,652
Cost of Sales 6,885 4,244 7,159 11,403 $ (1,100)(2) 10,303
-------- -------- -------- -------- -------- --------
7,584 4,674 8,682 13,356 7 13,349
-------- -------- -------- -------- -------- --------
Expenses
Selling, general and
administrative 5,592 3,447 6,101 9,548 9,548
Research and development 88 54 1,220 1,274 1,274
Restructuring charge -0- -0- 775 775 775
-------- -------- -------- -------- -------- --------
Total Expenses 5,680 3,501 8,096 11,597 -0- 11,597
-------- -------- -------- -------- -------- --------
Operating income 1,904 1,173 586 1,759 7 1,752
Other income (expense)
Interest expense -0- -0- (589) (589) (589)
Other 35 22 258 280 280
-------- -------- -------- -------- -------- --------
Total other income (expense) 35 22 (331) (309) -0- (309)
-------- -------- -------- -------- -------- --------
Income before income taxes 1,939 1,195 255 1,450 (7) 1,443
Income tax expense (991) (611) (566) (1,177) (1,177)
-------- -------- -------- -------- -------- --------
Net income 948 $ 584 $ (311) $ 273 $ (7) $ 266
======== ======== ======== ======== ======== ========
Earnings per share (3) $ (0.05) $ 0.03
======== ========
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements.
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Gull Laboratories, Inc.
Pro Forma Combined Income Statement (in 000's)
Year Ended December 31, 1995
- --------------------------------------------------------------------------------------------------
Business(4) Business(4) Gull Labo- Eliminating Consoli-
(DM) ($) ratories(5) Total Entries(1) dated
- --------------------------------------------------------------------------------------------------
Sales 14,081 $ 9,830 $ 18,828 $ 28,658 (2,371)(2) $ 26,287
Cost of Sales 7,391 5,160 9,020 14,180 $ (2,265)(2) 11,915
-------- -------- -------- -------- -------- --------
6,690 4,670 9,808 14,478 (106) 14,372
-------- -------- -------- -------- -------- --------
Expenses
Selling, general and
administrative 5,664 3,954 7,415 11,369 11,369
Research and development 253 177 902 1,079 1,079
Restructuring charge -0- -0- 505 505 505
-------- -------- -------- -------- -------- --------
Total Expenses 5,917 4,131 8,822 12,953 12,953
-------- -------- -------- -------- -------- --------
Operating income 773 539 986 1,525 (106) 1,419
Other income (expense)
Interest expense (1) (1) (648) (649) (649)
Other 136 95 732 827 827
-------- -------- -------- -------- -------- --------
Total other income (expense) 135 94 84 178 178
-------- -------- -------- -------- -------- --------
Income before income taxes 908 633 1,070 1,703 (106) 1,597
Income tax expense (391) (273) (857) (1,130) (1,130)
-------- -------- -------- -------- -------- --------
Net income 517 $ 360 $ 213 $ 573 $ (106) $ 467
======== ======== ======== ======== ======== ========
Earnings per share (3) $ 0.03 $ 0.06
======== ========
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements.
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Gull Laboratories, Inc.
Pro Forma Combined Income Statement (in 000's)
Year Ended December 31, 1996
- --------------------------------------------------------------------------------------------------
Business(4) Business(4) Gull Labo- Eliminating Consoli-
(DM) ($) ratories(5) Total Entries(1) dated
- --------------------------------------------------------------------------------------------------
Sales 12,196 $ 8,107 $ 17,909 $ 26,016 (1,536)(2) $ 24,480
Cost of Sales 7,048 4,685 8,395 13,080 $ (1,480)(2) 11,600
-------- -------- -------- -------- -------- --------
5,148 3,422 9,514 12,936 (56) 12,880
-------- -------- -------- -------- -------- --------
Expenses
Selling, general and
administrative 5,804 3,858 6,856 10,714 10,714
Research and development 135 90 1,423 1,513 1,513
-------- -------- -------- -------- -------- --------
Total Expenses 5,939 3,948 8,279 12,227 12,227
-------- -------- -------- -------- -------- --------
Operating income (792) (526) 1,235 709 (56)(2) 653
Other income (expense)
Interest expense (22) (15) (536) (551) (551)
Other 135 90 1,423 1,513 74
-------- -------- -------- -------- -------- --------
Total other income (expense) 39 26 (503) (477) (477)
-------- -------- -------- -------- -------- --------
Income before income taxes (753) 500 732 232 (56) 176
Income tax expense 399 265 (491) (226) (226)
-------- -------- -------- -------- -------- --------
Net income (loss) (354) $ (235) $ 241 $ 6 $ (56) $ (50)
======== ======== ======== ======== ======== ========
Earnings (loss)per share (3) $ 0.04 $ (.01)
======== ========
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements.
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Gull Laboratories, Inc.
Pro Forma Combined Income Statement (in 000's)
For Quarter Ended March 31, 1997
- --------------------------------------------------------------------------------------------------
Business(4) Business(4) Gull Labo- Eliminating Consoli-
(DM) ($) ratories(5) Total Entries(1) dated
- --------------------------------------------------------------------------------------------------
Sales 2,850 $ 1,720 $ 4,506 $ 6,226 (194)(2) $ 6,032
Cost of Sales 1,034 624 1,872 2,496 $ (112)(2) 2,384
-------- -------- -------- -------- -------- --------
1,816 1,096 2,634 3,730 (82) 3,648
-------- -------- -------- -------- -------- --------
Expenses
Selling, general and
administrative 1,244 751 1,895 2,646 2,646
Research and development 14 8 394 402 402
-------- -------- -------- -------- -------- --------
Total Expenses 1,258 759 2,289 3,048 3,048
-------- -------- -------- -------- -------- --------
Operating income 558 (337) 345 682 (82) 600
Other income (expense)
Interest expense -0- -0- (145) (145) (145)
Other -0- -0- (3) (3) (3)
-------- -------- -------- -------- -------- --------
Total other income (expense) -0- -0- (148) (148) (148)
-------- -------- -------- -------- -------- --------
Income before income taxes 558 337 197 534 (82) 452
Income tax expense (343) (207) (187) (394) (394)
-------- -------- -------- -------- -------- --------
Net income 215 $ 130 $ 10 $ 140 $ (82) $ 58
======== ======== ======== ======== ======== ========
Earnings per share (3) Nil $ 0.01
========
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements.
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<PAGE>
Gull Laboratories, Inc.
Notes to Pro Forma Combined Financial Statements (Unaudited)
(1) Certain of the Business's assets and liabilities, including accounts
receivable, other assets, accounts payable, accrued expenses, and other
long-term liabilities existing as of December 31, 1996, will not be
acquired as part of the business combination. All assets and liabilities
added after December 31, 1996 will be acquired as part of the Business.
The cumulative cash flow advanced by or paid to Fresenius AG for the
Business from December 31, 1996 through the Closing Date will be accounted
for in a "separate account." The net balance of the separate account as
of the date of close will be repaid to the advancing party within ninety
days from the date of close. At March 31, 1997, the balance in the
separate account was approximately DM 360,000. The balance sheet of the
Business at March 31, 1997 does not include any material assets or
liabilities that would have been retained by Fresenius AG if the closing
had occurred on March 31, 1997.
(2) To eliminate intercompany sales for the quarter ended March 31, 1997 and
for the years ended December 31, 1994, 1995 and 1996 and balances
outstanding at March 31, 1997, including deferred gross profit on the
Company's inventories held by the Business. Also to recognize the
issuance of 1,320,000 shares of the Company's common stock in connection
with the acquisition of the Business. See "Description of the Agreement--
Purchase Price" for a discussion of the potential 33,000 or 18,721 share
reduction in the number of shares issued if a certain supplier ceases to
provide products to the Business on or before December 31, 1997.
(3) The computation of earnings per common and common equivalent share
includes the actual weighted average number of common and common
equivalent shares outstanding for the Company. The computation of Pro
Forma earnings per common and common equivalent share includes the actual
weighted average number of the Company's common and common equivalent
shares outstanding for the period plus 1,320,000 shares of the Company's
common stock assumed to be issued at the beginning of each period
presented.
(4) Assets and liabilities of the Business are translated at 0.5994, the
exchange rate in effect at the close of business on March 31, 1997, and
statements of operations are translated at the average exchange rates for
the period presented. For the years ended December 31, 1994, 1995, and
1996, the average exchange rates of Deutsche Marks to dollars were
1 DM = $ 0.6164, 0.6981, and 0.6647, respectively. For the quarter ended
March 31, 1997, the average exchange rate was 1 DM = $ 0.6035. The
Business's reporting currency is the Deutsche Mark.
(5) The Company has estimated that total expenses to be incurred in connection
with this business combination will amount to approximately $600,000. Of
this amount, approximately $83,000 was incurred prior to March 31, 1997
and has been deferred. The Company will charge this expense in the period
that the business combination is consummated.
(6) As part of the Asset Purchase Agreement, the Company has committed to
implement a data processing system by December 31, 1997. See "Liquidity
and Capital Resources" in Appendix A for a discussion of the Company's
capital resources.
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<PAGE>
Unaudited Comparative Per Share Data
The following table presents historical per share data of the
Company and combined per share data on an unaudited pro forma basis, after
giving effect to the transaction as a combination of entities under common
control in a manner similar to a pooling of interests assuming the issuance of
1,320,000 shares of Gull Laboratories common stock in exchange for the
Business. Historical amounts for the Business have not been included inasmuch
as the Business was a division of Fresenius AG and not a separately
incorporated entity. The unaudited pro forma financial combined information
are not necessarily indicative of the result that would have been achieved had
the transaction been in effect at the beginning of the periods presented and
should not be construed as representative of future operations. This data
should be read in conjunction with the selected financial data, the unaudited
pro forma combined financial statements and the separate financial statements
of the Company and the Business and the notes thereto included elsewhere
herein.
- ---------------------------------------------------------------------------
Unaudited Comparative Per Share Data
===========================================================================
Year Ended Quarter Ended
December 31, March 31
-------------------------------------------
1996 1995** 1994 1997
(Restated)
- ---------------------------------------------------------------------------
Historical-Gull Laboratories
Net Income $0.04 $0.03 $(0.05) Nil
Book Value -- -- $0.78
Pro Forma Combined
Net Income $(0.01) $0.06 $ 0.03 $0.01
Book Value -- -- $0.74
- ---------------------------------------------------------------------------
** See note 11 to the Company's financial statements.
Market for Common Equity and Related Stockholder Matters
A. Market Information
The Company's common stock is listed on the American Stock
Exchange where it is traded under the symbol "GUL."
The following table sets forth, for the periods indicated, the
prices of the Company's common stock, based on the closing sale quotation
without markup, markdown, commissions or adjustments.
------------------------------------------------
Prices of Common Stock
================================================
Quarter Ended Low High
------------------------------------------------
1995
March 31, 4.000 6.375
June 30, 5.000 5.875
September 30, 5.000 6.500
December 31, 4.250 5.875
------------------------------------------------
1996
March 31, 3.625 5.500
June 30, 4.250 5.500
September 30, 4.125 7.125
December 31, 5.875 12.500
------------------------------------------------
1997
March 31, 8.625 11.125
------------------------------------------------
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<PAGE>
B. Security Holders
On June 15, 1997 there were approximately 1,000 beneficial owners
of the Company's common stock.
C. Dividends
No cash dividends have been paid by the Company since its
inception. The Company intends to use future earnings to finance additional
growth and, therefore, does not anticipate paying dividends in the foreseeable
future.
Experts
The financial statements of Gull Laboratories, Inc. as of December
31, 1996 and 1995 (restated), and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1996 and for the years then ended, have been included
in this Proxy Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of the Diagnostics Business of Fresenius
AG as of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended, have been
included in the Proxy Statement in reliance upon the report of KPMG Deutsche
Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprufungsgesellschaft,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
Recommendation of the Board of Directors and Vote Required
The Agreement requires the approval of a majority of the votes
cast by the holders of the shares of Common Stock present at the annual
meeting of the Company's shareholders, including a majority of the votes
actually cast by shareholders other than Fresenius AG. Proxies will be voted
for or against such approval in accordance with the specifications marked
thereon, and, if no specification is made, will be voted in favor of such
approval. Fresenius AG intends to vote all shares of Common Stock owned by it
for approval and ratification of the Agreement. Accordingly, the Agreement
will be approved if a majority of the votes cast by shareholders other than
Fresenius AG vote in favor of approval and ratification of the Agreement.
Anne-Marie Ricart, a director of the Company and a member of the Special
Committee and the owner of 852,155 shares of Common Stock has informed the
Company that she intends to vote in favor of the Agreement.
The Board of Directors of the Company, including all members of
the Special Committee, recommends a vote FOR approval and ratification of the
Agreement.
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<PAGE>
SOLICITATION AND VOTE OF PROXIES
All shares represented by duly executed proxies will be voted as
specified therein. If no specification is made, proxies will be voted FOR the
election of the Board's nominees named herein as Directors unless authority to
vote for the proposed slate of directors or any individual Director has been
withheld, FOR approval of KPMG Peat Marwick LLP as the Company's independent
certified public accountants and auditors for the 1997 fiscal year, and FOR
approval and ratification of the Agreement and the resulting acquisition of
the Business. If any other matter should come before the meeting, then the
persons named in the enclosed form of proxy will have discretionary authority
to vote all proxies with respect thereto in accordance with their best
judgment.
Consistent with state law and under the Company's bylaws, a
majority of the shares entitled to be cast on a particular matter, present in
person or represented by proxy, constitutes a quorum as to such matter. Votes
cast by proxy or in person at the Annual Meeting will be counted by one or
more persons appointed by the Company to act as Inspectors of Election for the
meeting. The seven nominees for election as directors at the Annual Meeting
who receive the greatest number of votes properly cast for the election of
directors shall be elected directors. The vote of a majority of the shares
present at the Annual Meeting, including a majority of the votes actually cast
by shareholders other than shares held by Fresenius AG is required for
approval of the acquisition of the Business. Failure to attend the meeting or
abstention will not be counted as a vote against approval and ratification of
the Agreement.
By virtue of its ownership of a majority of the Company's
outstanding common stock, an affirmative vote by Fresenius AG will result in
the approval of any matter which comes before the 1997 Annual Meeting , even
if all shares of Common Stock currently outstanding that are not held by
Fresenius AG vote against the proposals, except for the proposal to approve
and ratify the Agreement and the resulting acquisition of the Business, which
requires a majority vote of the shares present and actually voting at the
Annual Meeting other than shares held by Fresenius AG.
The Inspectors of Election will count the total number of votes
cast FOR approval of proposals, other than the election of directors, for
purposes of determining whether sufficient affirmative votes have been cast.
The Inspectors of Election will count shares represented by proxies that
withhold authority to vote for a nominee for election as a director or that
reflect abstentions and "broker non-votes" (i.e., shares represented at the
Annual Meeting held by brokers or nominees as to which (i) instructions have
not been received from the beneficial owners or persons entitled to vote and
(ii) the broker or nominee does not have the discretionary voting power on a
particular matter) only as shares that are present and entitled to vote on the
matter for purposes of determining the presence of a quorum, but neither
abstentions or "broker non-votes" will have any effect on the outcome of
voting on the matter.
The expenses of preparing, printing and mailing the materials used
in the solicitation of proxies will be borne by the Company. In addition to
the solicitation of proxies by use of the mails, the Company may utilize the
services of some of its officers and employees (who will receive no
compensation therefor in addition to their regular salaries) to solicit
proxies personally and by telephone and facsimile from brokerage houses and
other shareholders. Services will be provided by Progressive Transfer Company
in soliciting banks and brokers holding stock in their names or custody, or in
the names of nominees for others. The Company does not anticipate paying any
additional fee for such services.
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<PAGE>
SHAREHOLDER PROPOSALS
No proposals have been submitted by shareholders of the Company
for consideration at the Annual Meeting. It is anticipated that the next
Annual Meeting of Shareholders will be held during May 1998. Shareholders may
present proposals for inclusion in the proxy statement to be mailed in
connection with the 1998 annual meeting of shareholders of the Company,
provided such proposals are received by the Company no later than January 31,
1998, and are otherwise in compliance with applicable laws and regulations and
the governing provisions of the articles of incorporation and bylaws of the
Company.
MISCELLANEOUS
Availability of Information
THE COMPANY IS PROVIDING TO EACH SHAREHOLDER TO WHOM THIS PROXY
STATEMENT IS DELIVERED, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1996, INCLUDING THE FINANCIAL STATEMENTS, AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. WRITTEN OR ORAL REQUESTS FOR
ADDITIONAL COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1996 SHOULD BE DIRECTED TO MR. MICHAEL MALAN, CORPORATE
SECRETARY, GULL LABORATORIES, INC., 1011 EAST MURRAY HOLLADAY ROAD, SALT LAKE
CITY, UTAH 84117.
GULL LABORATORIES, INC.
/s/ George R. Evanega
By Order of the Board of Directors
George R. Evanega, CEO/President
July 9, 1997
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<PAGE>
APPENDIX A
CERTAIN INFORMATION CONCERNING GULL LABORATORIES, INC.
BUSINESS OF GULL LABORATORIES, INC.
Diagnostic Products
Gull Laboratories, Inc. (the "Company") started doing business in
1974. It develops, manufactures and markets diagnostic test kits and
materials designed to detect past or present infection caused by certain
microbial agents such as viruses, bacteria, and protozoa and to detect certain
autoimmune disorders. The products are based on established immunological
assay methods including indirect immunofluorescent antibody assay (IFA),
enzyme-linked immunosorbent assay (ELISA), immunodiffusion and Western Blot.
The Company's diagnostic products are used by private laboratories and
hospital clinical laboratories worldwide.
The Company has direct sales forces in the United States, Belgium,
France and the Netherlands to sell its diagnostic products. In other areas
throughout the world, the Company uses a network of distributors and OEM
relationships to market its products.
The Company uses a systems approach to market its diagnostic
products, coupling diagnostic reagents with instrumentation obtained from
equipment manufacturers. A private or hospital clinical laboratory is able to
gain operating efficiencies by automating its test methods and the Company is
able to secure a long-term commitment for the sale of its products.
The Company has an exclusive worldwide distribution agreement to
market an automated clinical laboratory sample processor called DUET , which
addresses the needs of the moderate to high volume laboratory testing market.
The Company's other instrumentation offerings focus on the low and the high
volume markets.
In March 1996, the Company announced that it was developing a new
diagnostic test system, called GeneSTAR , that uses DNA based technology.
The GeneSTAR technology is expected to be able to detect five separate
genetic targets simultaneously without favoring any individual target and also
confirm performance with a genetic internal control. Current commercially
available products have only been able to detect up to two targets. The
GeneSTAR technology also provides more rapid sample processing and can
easily be adapted to instrumentation already in use in many private and
hospital clinical laboratories.
The Company expects to launch the first GeneSTAR product in
Europe and to begin clinical trials in the United States in late 1997.
The initial application of the technology will focus on the
detection of up to five different gastrointestinal pathogens in fecal samples
which are extremely difficult to isolate and assay and contain large amounts
of interfering substances. Additional applications are planned for
respiratory infections and systemic blood infections. GeneSTAR is designed
to detect infectious agents in a wide range of specimens, including serum,
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<PAGE>
whole blood, sputum, bronchial lavage tissue culture, fecal samples, and
cerebral spinal fluid.
In July 1996, the Company released XTRAX, a patented component of
its GeneSTAR technology that extracts genomic DNA from patient samples. In
January 1997, the Company announced that it had entered into an exclusive
distribution agreement with Genaco Biomedical Products to market XTRAX into
the People's Republic of China for use in the medical laboratory market for
cancer screening, diagnosis of infectious disease, and prenatal screening.
While the People's Republic of China is a large potential market for the
Company, sales to Genaco are not expected to have a material impact on the
Company's revenues in 1997.
In 1996, Gull also entered into three strategic alliances in order
to broaden its product offerings and strengthen its distribution channels.
In June 1996, the Company entered into a collaborative arrangement
with Associated Regional Pathologists, Inc., a reference laboratory
specializing in esoteric testing, to develop new diagnostic products and to
provide Gull with clinical evaluations of new technology.
In August 1996, the Company entered into an agreement with Shield
Diagnostics ("Shield") to distribute Shield's autoimmune products and for
Shield to distribute certain of Gull's DNA products in the United Kingdom.
In September 1996, Gull entered into two agreements with American
Biogenetic Sciences ("ABS") to manufacture and distribute, in various
automated microELISA formats, ABS's proprietary Thrombus Precursor Protein
("TpP") assay, which measures blood levels of soluble fibrin polymer, the
immediate precursor to a blood clot. The Company is currently sponsoring
clinical trials to evaluate the effectiveness of TpP in detecting the
formation of thrombus in dialysis and surgical patients.
Because these strategic alliances are in their developmental
stages, the Company does not believe that any of these strategic alliances
will have a material impact on the Company's revenues in 1997.
Bioreagents
Through its wholly owned subsidiary, Biodesign, Inc.
("Biodesign"), which the Company acquired in 1993, the Company also
distributes, manufactures and sells bioreagents and other related products to
both the industrial and scientific communities throughout the world.
Biodesign has its own direct sales force for sales to key customers in the
United States but principally uses telemarketing and direct mailings to market
its products worldwide.
College of American Pathologists
The Company also supplies proficiency challenge materials to the
College of American Pathologists ("CAP") which provides the principal
proficiency and accreditation service for U.S. clinical laboratories. Sales
to CAP in 1996, 1995, and 1994 ran $2,776,045, $2,718,761, and $1,922,373 or
16%, 14%, and 12% of the Company's sales, respectively. The benefits of the
CAP contracts go beyond increased direct sales. The Company's management
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<PAGE>
believes that the Company's reputation for high quality products is enhanced
in clinical laboratories which participate in CAP proficiency testing
programs. As such, the Company will devote significant resources to securing
additional commitments to supply materials for future CAP surveys as well as
other contract manufacturing business.
Other
A controlling interest in the Company is held by Fresenius AG, a
multinational manufacturer and distributor of pharmaceutical, diagnostic and
medical systems products. Fresenius AG also owns a majority of the voting
shares of Fresenius Medical Care AG, the world's largest fully integrated
dialysis products and services company. Fresenius AG has marketed the
Company's products in Germany through the Business and is its single largest
customer of non-CAP related products. In 1996, 1995, and 1994 the Company's
sales to Fresenius AG totaled $1,535,943, $2,370,977, and $1,106,528, or 9%,
13%, and 7% of the Company's consolidated sales, respectively.
Dr. George R. Evanega was hired as the Company's Chief Executive
Officer and President in October 1995 and Jacques Bagdasarian was named as the
general manager of the Company's European operations in January of 1996. Mr.
Bagdasarian resigned effective December 31, 1996 due to health reasons. He
has been replaced by John Turner.
The geographic distribution of the Company's sales is as follows:
Year Ended December 31
-----------------------------
Area 1996 1995 1994
---------------------------------------------
United States 57% 48% 42%
Europe 36% 42% 49%
Pacific Rim 6% 6% 5%
Other 1% 4% 4%
Total 100% 100% 100%
---------------------------------------------
No customer or distributor other than CAP and Fresenius AG
accounted for more than 10% of the Company's consolidated sales during any
period.
The Company's common stock is listed on the American Stock
Exchange where it is traded under the symbol "GUL."
COMPETITION
The Company competes in a diversified market characterized by a
few strong companies and numerous smaller companies that manufacture and sell
diagnostic tests similar to those sold by the Company. Many of these
competitors have greater financial, technological and personnel resources than
the Company. The primary bases of competition include price, product quality,
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<PAGE>
and labor saving potential to the client through instrumentation and the
breadth of a company's overall product offering.
In response to worldwide healthcare cost containment pressures,
there has been a trend toward the consolidation of suppliers and customers
within the diagnostics industry. This trend could lead to a few large
companies supplying the majority of the diagnostics market to a smaller number
of larger private laboratories and hospital clinical laboratories with many
smaller niche companies supplying the remaining needs of the market.
Management believes that the future success of the Company will be contingent
upon its ability to identify and exploit such market niches and new product
opportunities, to continue supplying quality, cost effective solutions to its
customer's needs, and to strengthen its worldwide distribution network.
Newly designed diagnostic methods and product innovations are
important potential sources of change in market share in the biomedical
industry. Competing companies with greater resources can be expected to spend
substantially greater amounts than the Company on research and development
activities and on marketing their products. The Company believes, however,
that it currently possesses sufficient capabilities through the development
and rapid market introduction of innovative new products to maintain or
improve its market position.
The Company's competitors are also responding to healthcare cost
containment pressures by moving their product lines rapidly toward full
automation which is less labor intensive. Many of these companies are already
offering instrumentation to customers, while the Company entered that area of
the diagnostics market at the end of 1993. The Company believes, however,
that by automating its high quality diagnostic tests with instrumentation
obtained through alliances with manufacturers it will be able to expand its
market position.
In addition to competitors with the same type of products, the
Company also competes with companies which manufacture and sell devices that
detect antibodies and disease agents by alternate methods. For example,
radioimmunoassay (RIA), which uses radioactive isotopes for detection, may be
used instead of the Company's current products. The Company's products have
been competitive with these and other alternative tests methods for several
years.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Although certain raw materials and key components of the Company's
products are now purchased from a single supplier, the Company has not
experienced difficulty in obtaining the raw materials necessary to manufacture
its products. Alternative sources of supply for all of the Company's raw
materials or key components are available and the Company would not sustain a
significant interruption to its business if it were unable to obtain a certain
item from one of its current suppliers.
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<PAGE>
TRADEMARKS AND PATENTS
The Company relies upon its technical expertise and trade secrets
to maintain its position in the industry and uses its best efforts, where
appropriate, to obtain patents on new processes and techniques as they are
developed. The Company has filed for several patents and trademarks and has
received one patent relating to its new GeneSTAR technology, which is
currently under development.
The Company has also received registration of the trademark and
trade name "Gull" in the United States and other countries throughout the
world through the Intellectual Property Organization.
REGULATION
Regulatory Approval
The diagnostic products manufactured or distributed in the United
States by the Company for use by private laboratories and hospital clinical
laboratories are subject to the requirements imposed by the Food, Drug and
Cosmetic Act, as amended by the Medical Device Amendments Act of 1976, which
requires that any company proposing to market a medical device must notify the
Food and Drug Administration ("FDA") of its intentions at least 90 days before
doing so. Historically, the Company could generally expect approval to market
a new diagnostic product intended for use outside of the human body 90 to 120
days after notifying the FDA of its intent to do so, providing such product
was substantially equivalent to one already on the market. Currently, the FDA
is taking from 120 to 180 days to approve products for market. This has the
impact of delaying the introduction of any new products into the United States
market 120 to 180 days from the time that they can be introduced into certain
other foreign markets.
The Company must also comply with certain regulations imposed by
foreign government agencies comparable to the FDA in the various foreign
countries that it markets its products. Most of these regulations are less
stringent than those imposed by the FDA and the Company has not experienced
any significant problems complying with the regulations.
Good Manufacturing Practices
In the United States, the Company must operate its manufacturing
operations in conformity with Good Manufacturing Practices ("GMP") as
prescribed in U.S. Code of Federal Regulations ("CFR") governing the
manufacture of medical devices. The Company's facilities and its operations
are subject to inspection by the FDA. The Company believes that it is in
conformity with all such regulations.
Additionally, member nations of the European Community are
developing a standardized quality system similar to GMP called EN 29000 that
is anticipated to be effective no sooner than 1998 and will allow a three year
period to conform to the directive. The Company will also be required to
conform to the EN 29000 regulations for any product sold in the European
Community. EN 29000 is not expected to be any more stringent that the FDA's
GMP.
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<PAGE>
Healthcare Cost Containment
Governments and other third party payors of healthcare costs
worldwide are examining methods to control the rising costs of providing
healthcare. Decreasing or eliminating reimbursements for costs that are
determined to be discretionary or non-essential is one method that is being
discussed or has already been implemented. Regulations and market trends such
as the above could affect the Company's ability to sell its products and, to
the extent that the Company is unable to effect commensurate cost reductions,
could decrease the Company's profitability.
Environmental Regulations
There have been no significant incremental costs incurred by the
Company to comply with environmental regulations. As part of its compliance
with GMP requirements, the Company has already implemented what it believes to
be prudent and effective programs to ensure a high level of environmental
safety. The Company has no plans to increase expenditures for environmental
control capability in the foreseeable future.
RESEARCH AND DEVELOPMENT
The Company has ongoing research and product development programs
in the area of medical diagnostics, focusing primarily on methods that
clinical laboratories use to detect the body's immune response to specific
disease agents, cardiovascular diseases, and autoimmune disorders. The
Company's new GeneSTAR technology also uses DNA based methods to directly
detect specific infectious agents of numerous other diseases.
During 1996, the Company continued its research and development
focus on developing tests which use ELISA methods. Several other tests for
the detection of infectious disease agents are currently under consideration
for development. Additionally, tests for the detection of noninfectious
diseases with new methodologies are being explored.
For the years ended December 31, 1996, 1995, and 1994, the Company
expended approximately $1,423,000, $902,000, and $1,220,000, respectively, for
research and development. This represented approximately 8% of sales in 1996,
5% of sales in 1995, and 8% in 1994. The 1995 decrease in research and
development expenditures was directly attributable to cutbacks in the
Company's European operations, while research and development expenditures in
the United States increased. Management anticipates research and development
expenditures will remain constant or increase slightly as a percentage of
sales in 1997. The Company has also taken over the research and development
activities of the Business.
EMPLOYEES
At December 31, 1996, the Company had 144 employees of which 10
were part time. Pursuant to the terms of the Agreement, 38 employees of the
Business will become employees of the Company. None of the Company's current
employees are unionized although the Company's 38 new employees in Germany
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<PAGE>
will be unionized. After the acquisition of the Business, the Company will
have 182 employees.
DESCRIPTION OF PROPERTY
The Company's executive offices and principal United States
manufacturing facilities are located in two buildings totaling 33,000 square
feet in Salt Lake City, Utah. The facilities house modern offices, production
and product development facilities. The headquarters facilities are financed
by a long-term mortgage with an unrelated third party that is secured by the
land and the buildings.
In 1994, the Company received zoning approval to construct a
30,000 square foot addition to its manufacturing facilities on 2.17 acres of
undeveloped property adjacent to the building that has been reserved for
future expansion. The Company has not yet determined whether or when the new
addition might be constructed. The approval extends through the end of 1997
and can be extended again if allowed to expire.
In 1996, the Company relocated its European operations
headquarters to Louvain-La-Neuve, Belgium where it rents approximately 5,800
square feet of a facility that houses administration, distribution, and
limited manufacturing facilities. The Company also rents a small sales office
in France.
LEGAL PROCEEDINGS
The Company is a party to various legal proceedings incidental to
its business. Management currently believes that none of the proceedings will
have a material adverse effect on the Company's business or financial
condition. There are no material legal proceedings known to be contemplated
by any governmental authority.
SELECTED FINANCIAL DATA OF GULL LABORATORIES, INC.
The following table sets forth selected consolidated financial
information with respect to the Company for the periods indicated. This
information should be read in conjunction with the Company's consolidated
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing herein.
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<PAGE>
- -------------------------------------------------------------------------------
Statement of Operations
(000's Omitted)
- -------------------------------------------------------------------------------
Quarter Ended
Year Ended December 31, March 31,
- -------------------------------------------------------------- ---------------
1996 1995 1994 1993 1992 1997 1996
-------------------------------------------- ---------------
Sales $17,909 $18,828 $15,842 $15,406 $14,646 $4,506 $4,892
Net Income (loss) 241* 353* (311) (401) (507) 10 226
Net income (loss)
per common and
common equivalent
share 0.04 0.05 (0.05) (0.06) (0.08) Nil 0.03
- -------------------------------------------------------------- ---------------
* See "1996 Compared to 1995" in "Results of Operations" below.
There were no cash dividends declared in the periods presented above.
- -------------------------------------------------------------------------------
Balance Sheet Data
(000's Omitted)
- -------------------------------------------------------------------------------
Quarter Ended
Year Ended December 31, March 31,
- -------------------------------------------------------------- ---------------
1996 1995 1994 1993 1992 1997 1996
-------------------------------------------- ---------------
Working capital $ 2,740 $ 125 $ 1,910 $ 2,064 $ 933 $ 3,297 $ 3,945
Total assets 12,353 12,318 11,502 10,446 11,336 13,592 13,212
Total long-term
obligations 2,786 132 2,478 2,347 3,549 3,096 160
Stockholder's
equity 4,975 4,741 4,080 4,493 3,177 5,149 5,002
- -------------------------------------------------------------- ---------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF GULL LABORATORIES, INC.
This Proxy Statement contains both historical facts and
forward-looking statements. Any forward-looking statements involve risks and
uncertainties, including but not limited to risk of product demand, market
acceptance, government regulation, economic conditions, competitive products
and pricing, difficulties in product development, commercialization and
technology and other risks detailed in this filing. Although the Company
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<PAGE>
believes it has the product offerings and resources for continuing success,
future revenue and margin trends cannot be reliably predicted. Factors
external to the Company can result in volatility of the Company's Common Stock
price. Because of the foregoing factors, recent trends should not be
considered reliable indicators of future stock prices or financial
performance.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, working capital increased by $2,615,028 to $2,739,891, as
compared to $124,863 in 1995. The Company's current ratio of current assets
divided by current liabilities increased from 1.0 in 1995 to 1.7 in 1996 and
the Company's ratio of total liabilities to equity decreased from 1.6 to 1 in
1995 to 1.5 to 1 in 1996.
The mortgage on the Company's headquarters facility became due in
July 1996. As such, the mortgage was classified as part of the current
maturities of long-term debt and included in current liabilities. The Company
obtained a new mortgage in 1997. Without reflecting the balloon payment as a
current liability, working capital at December 31,1995 would have been
$1,910,604 or approximately $725,000 less than the 1996 working capital level
and the current ratio of current liabilities divided by current assets would
have been 1.4.
The Company sells and leases laboratory equipment in order to help
customers gain operating efficiencies through automating their operations and
to compete with industry practices. 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 a significant
capital investment by the Company.
At December 31,1996, the Company had approximately $725,000
available under lines of credit with its banks and had commitments of
approximately $430,000 for the purchase of capital assets. The Company
believes that cash flow generated from operations and its existing lines of
credit will be sufficient to meet its short-term working capital requirements.
However, as part of the Asset Purchase Agreement, the Company has committed to
implement a data processing system which the Company believes can be
implemented at a cost of less than $100,000. The cost of implementing this
data processing system was contemplated as part of the financing discussed in
the Proxy Statement. See "Continued Participation by Fresenius AG--Financing"
in the Company's Proxy Statement." As the Company continues to grow, and if
losses in the Company's European operations increase, the Company will 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 other than the
commitment discussed above and in the Proxy Statement, 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 to meet the Company's long-term financing needs.
The Business had net income of approximately $360,000 in 1995 and
$130,000 for the first quarter of 1997. In 1996, the Business lost
approximately $235,000, due to severance costs of approximately $325,000
incurred to restructure the Business.
-9-
<PAGE>
Under the terms of the Asset Purchase Agreement, the Company is
not acquiring certain assets and liabilities that existed at December 31,
1996, including accounts receivable, accounts payable, and certain accrued
expenses. In order to pay for combination and capital asset acquisition costs
and to meet the working capital needs of the Business after the merger,
Fresenius AG has agreed to provide financing to the Company. See "Continued
Participation by Fresenius AG--Financing" in the Company's Proxy Statement for
a discussion of the financing that has been arranged in connection with the
acquisition of the Business. Funds borrowed from Fresenius AG will be used to
acquire the new data processing system that is required to be implemented by
the Asset Purchase Agreement and to provide forecasted working capital needs
of the Business. Based upon its projections, the Company believes that cash
flow generated by the Business will be sufficient to repay the loan by June
30, 1999.
INDUSTRY TRENDS
There is an increasing effort by governmental agencies worldwide
to control rising healthcare costs. Decreasing or eliminating reimbursements
to patients for medical expenses that are determined to be discretionary or
non-essential is one of the methods that is being discussed or has already
been implemented. These efforts are causing the diagnostics market to shift
away from the Company's more profitable IFA (Immuno Florescence Assay)
products to the less profitable ELISA (Enzyme Linked Immuno-Sorbent Assay)
products, which are less expensive for private laboratories and hospital
clinical laboratories to perform on a cost per test basis to the customer and
can be automated. IFA tests are more profitable because there is less
competition in the marketplace and because the manufacturing cost per test is
lower for IFA products than for ELISA products. The trend toward
consolidation into larger volume laboratories has also increased the level of
automation and related volume discounts. This trend, which is likely to
continue, is expected to put pressure on the Company to maintain or decrease
the prices of many of its existing products. The Company is aggressively
moving to offset these pressures through programs to increase productivity,
lower manufacturing costs and expand its distribution network.
As mentioned above, the Company assists its customers in
automating their operations to gain operating efficiencies by offering
laboratory equipment under sales, lease or rental agreements. Under the terms
of the lease and rental agreements, the customer commits to purchase a minimum
monthly level of product from the Company in exchange for the Company placing
the instrument in the laboratory. The customer is charged for the reagents
plus a charge for the use of the instrument on a pay-as-you-use basis. This
type of program enables the Company to sell to larger clinical and hospital
laboratories. However, the program causes downward pressure on gross profit
margins on reagent sales due to larger volume purchase discounts. Also
because the Company does not manufacture the instrumentation, the Company
realizes a smaller gross profit on the sale of the equipment than on its
reagent sales.
-10-
<PAGE>
RESULTS OF OPERATIONS
First Quarter 1997 Compared to First Quarter 1996
Sales for the first quarter of 1997 of $4,505,774 were 8% lower
than sales in the first quarter of 1996 of $4,891,780. Sales of the Company's
United States' operations were comparable to the prior year and sales of the
Company's European operations decreased 32% due to the loss of customers due
to production problems encountered in 1996. Also, sales decreased
approximately $32,000 due to the loss of a significant distributed product
line. Increased sales of the Company's IFA product line and of the Company's
Bioresearch operations were offset by lower sales of the Company's ELISA
product line, instrumentation and to the College of American Pathologists.
Changes in sales were principally due to changes in volume. There were no
significant changes in the sales prices.
Gross profits as a percentage of sales increased to 58% in the
first quarter of 1997 compared to 56% in the first quarter of 1996. The
increase in the gross profit percentage is due to product sales mix and
manufacturing efficiencies.
Selling, general and administrative and research and development
costs in the first quarter of 1997 were consistent with the first quarter of
1996.
Other expenses increased from $99,988 in the first quarter of 1996
to $148,557 in the first quarter of 1997 resulting from increased debt
incurred to finance the Company's instrumentation program. Also, the
Company's European operations realized foreign currency losses due to the
strength of the United States dollar in the first quarter of 1997 compared to
the first quarter of 1996.
There were no other material changes in the Company's operations
during the first quarter of 1997.
1996 Compared to 1995
In 1996, the Company had net income of $240,712 compared to net
income of $212,456 in 1995. In 1995, the Company had nonrecurring income of
approximately $520,000 resulting from the sale of its European Operations'
headquarters. This gain was recorded as "Other Income." Without this
one time gain, the Company would have lost approximately $310,000 in 1995.
There were no such items in 1996.
Consolidated sales in 1996 decreased 5% to $17,908,752 compared to
$18,827,853 in 1995. The sales decrease was due to changes in volume rather
than changes in prices. Sales of the United States' operations in 1996 were
comparable to the sales level in 1995. A 26% increase in the sales of the
Company's Bioresearch Operations (Biodesign) and a 12% increase in
instrumentation and domestic ELISA reagent sales were offset by decreases in
worldwide IFA reagent sales and export ELISA sales. Export sales from the
United States in 1996 decreased 17% compared to 1995 sales. Sales to
unaffiliated customers of the Company's European Operations decreased 13%,
principally due to the loss of significant distribution product lines, product
shortages and increased competition. The loss of distribution product lines
resulted in a sales decrease of approximately $190,000 in 1996 as compared to
1995. The Company found a replacement vendor for some of the products but the
-11-
<PAGE>
vendor was not able to adequately supply products to meet the Company's needs.
Product shortages also occurred when the Company contracted with an outside
vendor for the production of a product that it had previously manufactured in
Europe. The technology transfer process took longer than anticipated and the
Company was placed in a back order position for approximately seven months.
The effect on sales of the product shortages cannot be specifically
quantified.
The Company's gross profit margin increased from 52% in 1995 to
53% in
1996. The increase in the gross profit margin, caused by manufacturing
efficiencies and lower inventory write offs, was partially offset by the
continued shift from the Company's IFA products to less profitable ELISA
products. Also, the Company's new DUET instrument has higher gross profit
margins than other instrument offerings. In 1995, the Company wrote off over
$200,000 of excess and obsolete inventories in its European operations due to
the discontinuation of its internally developed autoimmune product line and
shortfalls in forecasted product demand.
Selling, General and Administrative expenses of $6,856,018 or 38%
of sales in 1996 were comparable with the 1995 cost level of $7,415,244 or 39%
of sales.
Research and development costs increased from $901,633 or 5% of
sales in1995 to $1,422,926 or 8% of sales in 1996. The Company shifted
substantially all of its research and development efforts to the United States
in 1995, causing a decrease in research and development costs both in absolute
dollar terms as well as on a percentage of sales basis. Expenditures for
research and development increased substantially in 1996 as the Company
increased its efforts to identify and develop technologies, such as GeneSTAR,
that will give it a sustainable competitive advantage.
1995 Compared to 1994
In 1995, the Company had net income of $212,456 compared to a
$311,102 net loss in 1994.
Consolidated sales increased 19% to $18,827,853 in 1995 compared
to $15,841,606 in 1994. The sales increase was due to changes in volume
rather than changes in prices. Sales of the United States' operations
increased 27% due to a 20% increase in ELISA sales and a 41% increase in sales
to the College of American Pathologists. Instrumentation sales increased from
$25,572 in 1994 to $877,431 or 5% of consolidated sales in 1995. Sales of the
Company's European operations decreased 13%, principally due to the loss of a
significant distributed product line and due to increased competition in the
Netherlands autoimmune market.
The Company's gross profit margin decreased from 55% in 1994 to
52% in 1995. The decrease in gross profit margins in 1995 is due to the
continued shift from the Company's IFA products to less profitable ELISA
products, the increase in less profitable instrumentation sales as a
percentage of total sales and due to a $200,000 write off of excess and
obsolete inventories in Europe. Also, the Company's new DUET instrument has
higher gross profit margins than other instrument offerings.
-12-
<PAGE>
Selling, General and Administrative costs increased 22% from
$6,101,852 or 39% of sales in 1994 to $7,415,244 or 39% of sales in 1995.
Approximately $200,000 of the increase was due to recruiting and relocation
costs incurred in hiring a new Chief Executive Officer and President. The
increase was also caused by increases in distribution and hazardous material
packaging costs, consulting fees, new product validations and promotion and
advertising costs associated with the launch of the Company's new DUET
instrumentation. Additionally, the Company incurred significant travel costs
associated with monitoring its European operations while it was hiring new
European management.
Research and development costs decreased from $1,219,582 or 8% of
sales in 1994 to $901,633 or 5% of sales in 1995. The Company shifted
substantially all of its research and development efforts to the United States
in 1995, causing a decrease in research and development costs both in absolute
dollar terms as well as on a percentage of sales basis.
In an effort to bring its European operations to profitability,
the Company incurred restructuring charges of $371,225 and $775,000 in 1993
and 1994, respectively. Due to continuing large losses in 1995, it became
apparent that additional restructuring of the European operations was
required. Therefore, the Company terminated the management of its European
operations and decreased the European head count from 31 employees to 18. The
Company recorded $505,260 in restructuring costs relating to the additional
reduction in head count in 1995.
Other income in 1995 included approximately $520,000 of gain
realized on the sale of its European Operations' headquarters. Interest income
also increased approximately $73,500 in 1995 due to interest earned on notes
receivable arising from the sale of instruments.
Inflation
The Company believes that inflation has not had a material impact
on its operations or liquidity to date.
FINANCIAL STATEMENTS
The financial statements of the Company are attached hereto.
<PAGE>
GULL LABORATORIES, INC.
Consolidated Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Gull Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Gull
Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows (as restated) for each of the years in the three-year period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gull
Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah
January 28, 1997, except for
the last paragraph of note 11
which is as of July 3, 1997
F-1
<PAGE>
GULL LABORATORIES, INC.
Consolidated Balance Sheets
<TABLE>
<S> <C> <C> <C>
March 31, December 31,
Assets 1995
1997 1996 (note 11)
(unaudited)
------------- ------------ -----------
Current assets:
Cash $ 408,309 301,033 219,415
Accounts receivable, less allowance for doubtful
accounts of $234,988 at March 31, 1997, and
$314,194 and $253,747 at December 31, 1996 and 3,454,593 2,406,222 2,778,952
1995 respectively (note 5)
Net investment in sales-type leases
(notes 6, 7, and 8) 247,858 262,831 145,200
Income tax refund receivable (note 9) - 134,743 264,506
Inventories (notes 3 and 5) 3,506,879 3,324,408 3,393,924
Prepaid expenses 523,439 399,774 242,088
Deferred income taxes (note 9) 108,000 108,000 124,000
------------- ------------ -----------
Total current assets 8,249,078 6,937,011 7,168,085
------------- ------------ -----------
Property, plant, and equipment, net
(notes 4, 6, and 7) 3,571,622 3,616,171 3,572,899
Net investment in sales-type leases
(notes 6, 7, and 8) 751,650 810,419 507,018
Other assets, net (note 2) 1,019,542 989,101 1,069,628
------------- ------------ -----------
$13,591,892 12,352,702 12,317,630
============= ============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable (note 5) $ 2,041,895 1,675,322 2,286,123
Accounts payable 1,996,347 1,648,036 1,693,480
Accrued expenses 272,986 471,825 1,221,990
Income tax payable 56,564 - -
Current installments of long-term debt
and capital lease obligations (notes 6 and 7) 583,902 401,937 1,841,629
------------- ------------ -----------
Total current liabilities 4,951,694 4,197,120 7,043,222
Long-term debt and capital lease obligations,
excluding current installments (notes 6 and 7) 3,096,357 2,785,893 131,826
Deferred income taxes (note 9) 298,000 298,000 304,600
Other long-term liabilities 96,503 96,503 96,503
------------- ------------ -----------
Total liabilities 8,442,554 7,377,516 7,576,151
------------- ------------ -----------
Commitments and contingencies (notes 7 and 16)
Stockholders' equity (note 12):
Preferred stock, $.01 par value. Authorized
5,000,000 shares; no shares issued or outstanding - - -
Common stock, $.001 par value. Authorized
50,000,000 shares; 6,604,444 shares issued and
outstanding at March 31, 1997 and 6,563,934 at
December 31, 1995 and 1996 6,605 6,564 6,564
Additional paid-in capital 7,210,544 7,051,345 7,051,345
Foreign currency translation adjustment (187,841) (192,833) (185,828)
Accumulated deficit (1,879,970) (1,889,890) (2,130,602)
------------- ------------ -----------
Total stockholders' equity 5,149,338 4,975,186 4,741,479
------------- ------------ -----------
$13,591,892 12,352,702 12,317,630
============= ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Operations
<TABLE>
<S> <C> <C> <C> <C> <C>
Three months ended
March 31, Year ended December 31,
1997 1996 1996 1995 (Note 11) 1994
(unaudited) (unaudited)
------------- ------------ ------------ ------------ ------------
Sales $ 4,505,774 4,891,780 17,908,752 18,827,853 15,841,606
Cost of sales 1,871,993 2,137,788 8,395,238 9,020,172 7,159,067
------------- ------------ ------------ ------------ ------------
2,633,781 2,753,992 9,513,514 9,807,681 8,682,539
------------- ------------ ------------ ------------ ------------
Expenses:
Selling, general, and
administrative 1,895,365 1,843,918 6,856,018 7,415,244 6,101,852
Research and development 393,309 387,495 1,422,926 901,633 1,219,582
Restructuring charge
(note 14) - - - 505,260 775,000
------------- ------------ ------------ ------------ ------------
Total expenses 2,288,674 2,231,413 8,278,944 8,822,137 8,096,434
------------- ------------ ------------ ------------ ------------
Operating income 345,107 522,579 1,234,570 985,544 586,105
------------- ------------ ------------ ------------ ------------
Other income (expense):
Interest expense (145,137) (118,728) (535,786) (647,656) (588,626)
Other (note 11) (3,420) 18,740 32,697 731,868 258,044
------------- ------------ ------------ ------------ ------------
Total other income
(expense) (148,557) (99,988) (503,089) 84,212 (330,582)
------------- ------------ ------------ ------------ ------------
Income before provision
for income taxes 196,550 422,591 731,481 1,069,756 255,523
Income tax expense (note 9) 186,630 196,651 490,769 857,300 566,625
------------- ------------ ------------ ------------ ------------
Net income (loss) $ 9,920 225,940 240,712 212,456 (311,102)
============= ============ ============ ============ ============
Income (loss) per common and
common equivalent share $ - 0.03 0.04 0.03 (0.05)
============= ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Stockholders' Equity
Three months ended March 31, 1997 (unaudited) and years ended
December 31, 1996, 1995, and 1994
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Foreign Total
Additional currency stock-
Common stock paid-in translation Accumulated holders'
Shares Amount capital adjustment deficit equity
--------- -------- ---------- ----------- ----------- ---------
Balances, December 31, 1993 6,513,267 $ 6,513 6,408,467 110,424 (2,031,956) 4,493,448
Stock options exercised 41,667 42 58,083 - - 58,125
Tax benefit from exercise of
stock options - - 59,000 - - 59,000
Net loss - - - - (311,102) (311,102)
Foreign currency translation
adjustment - - - (219,439) - (219,439)
--------- -------- ---------- ----------- ----------- ---------
Balances, December 31, 1994 6,554,934 6,555 6,525,550 (109,015) (2,343,058) 4,080,032
Stock options exercised 9,000 9 15,178 - - 15,187
Sale of Biolab Germany (note 11) - - 313,500 - - 313,500
Tax benefit from exercise of
stock options - - 197,117 - - 197,117
Net income (note 11) - - - - 212,456 212,456
Foreign currency translation
adjustment - - - (76,813) - (76,813)
--------- -------- ---------- ----------- ----------- ---------
Balances, December 31, 1995
(note 11) 6,563,934 6,564 7,051,345 (185,828) (2,130,602) 4,741,479
Net income - - - - 240,712 240,712
Foreign currency translation
adjustment - - - (7,005) - (7,005)
--------- -------- ---------- ----------- ----------- ---------
Balances, December 31, 1996
(note 11) 6,563,934 6,564 7,051,345 (192,833) (1,889,890) 4,975,186
Stock options exercised
(unaudited) 40,510 41 159,199 - - 159,240
Net income (unaudited) - - - - 9,920 9,920
Foreign currency translation
adjustment (unaudited) - - - 4,992 - 4,992
--------- -------- ---------- ----------- ----------- ---------
Balances, March 31, 1997
(unaudited) 6,604,444 $ 6,605 7,210,544 (187,841) (1,879,970) 5,149,338
========= ======== ========== =========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<S> <C> <C> <C> <C> <C>
Three months ended
March 31, Year ended December 31,
1997 1996 1996 1995 (Note 11) 1994
(unaudited) (unaudited)
------------- ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 9,920 225,940 240,712 212,456 (311,102)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 198,511 180,193 660,097 667,196 778,832
Loss (gain) on disposal of property,
plant, and equipment - 20,208 11,214 (371,176) 24,118
Provision for losses on accounts
receivable 7,260 113,450 63,754 93,649 127,616
Provision for losses on leases 7,505 22,230 65,470 86,765 -
Provision for inventory reserve 15,000 15,000 163,613 302,123 -
Provision for warranty reserve (612) 25,180 84,515 84,609 -
Tax benefit from exercise of stock
options - - - 197,117 59,000
(Loss) gain on sales-type leases (23,750) 17,200 (246,484) (275,662) -
Amortization of unearned income on
sales-type leases (42,954) (23,862) (100,892) (53,448) -
Changes in assets and liabilities:
Accounts receivable (1,215,642) (991,192) 233,625 (154,109) (332,355)
Income taxes 191,307 216,589 129,765 (110,681) 116,673
Inventories (185,977) (110,826) (492,999) (805,879) (871,498)
Prepaid expenses (142,281) 6,716 (166,370) (6,834) 135,533
Other assets 25,520 27,270 5,541 (206,905) (125,323)
Accounts payable and accrued
expenses 261,422 587,133 (743,719) 216,585 (190,732)
Other liabilities - - - - 96,500
Deferred income taxes - - 9,400 29,700 10,400
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities (894,771) 331,229 (82,758) (94,494) (482,338)
------------- ------------ ------------ ------------ ------------
Cash flows from investing activities:
Decrease (increase) in sales-type
leases 42,863 (222,300) (233,960) (344,854) -
Payments received on sales-type
leases 89,915 49,600 421,966 226,384 -
Proceeds from sale of property,
plant, and equipment 360 2,000 24,889 989,127 70,814
Purchase of property, plant, and
equipment (160,904) (203,695) (681,924) (663,766) (668,858)
Proceeds from the sale of Gull GmbH - - - 313,500 -
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities (27,766) (374,395) (469,029) 520,391 (598,044)
------------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt
and capital lease obligations (256,607) (21,697) (2,057,957) (1,394,241) (1,371,652)
Net increase (reduction) in line-of-
credit 404,737 86,742 (634,583) 469,346 1,014,693
Proceeds from issuance of long-term
debt and capital lease obligations 853,005 92,637 3,167,095 180,866 1,302,466
Proceeds from issuance of common
stock 159,240 - - 15,187 58,125
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 1,160,375 157,682 474,555 (728,842) 1,003,632
------------- ------------ ------------ ------------ ------------
</TABLE>
F-5
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
Three months ended
March 31, Year ended December 31,
1997 1996 1996 1995 (Note 11) 1994
(unaudited) (unaudited)
------------- ------------ ------------ ------------ ------------
Effect of foreign exchange rate
changes on cash $ (130,562) (4,361) 158,850 154,206 38,989
------------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash 107,276 110,155 81,618 (148,739) (37,761)
Cash at beginning of period 301,033 219,415 219,415 368,154 405,915
------------- ------------ ------------ ------------ ------------
Cash at end of period $ 408,309 329,570 301,033 219,415 368,154
============= ============ ============ ============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $ 117,545 82,883 533,554 644,009 611,194
Income taxes - 8,225 321,624 1,050,800 372,000
Supplemental Disclosures of Noncash Investing and Financing Activities
Note payable incurred for equipment 555,005 - 127,808 60,491 -
Transfer of inventory to net
investment in sales-type leases 35,606 101,577 327,133 236,605 -
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
and March 31, 1997 (unaudited)
(1)Summary of Significant Accounting Policies
(a) Business Presentation
Gull Laboratories, Inc. (the Company or Gull) is in the business
of developing, manufacturing, and selling medical diagnostic kits and
bioreagents. The Company operates in a global market with direct
sales representatives in the United States, Belgium, France, and the
Netherlands and distributors in approximately 30 other foreign
countries. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany transactions and accounts
have been eliminated in consolidation. Fresenius AG, a German
company, owns 55 percent of the outstanding common stock of the
Company. Although the Company purchases certain raw materials from a
single supplier, alternative sources of supply are available for all
raw materials.
The unaudited consolidated condensed financial statements of the
Company as of March 31, 1997, and for the three month periods ended
March 31, 1997 and 1996 were prepared by the Company without audit
pursuant to the rules and regulations of the Securities and Exchange
Commission. 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 (consisting only of normal
recurring adjustments) have been made to present fairly the financial
position and results of operations and cash flows for these periods.
The results of operations for the period ended March 31, 1997 is not
necessarily indicative of the results for the entire year ending
December 31, 1997.
(b) Accounts Receivable
As a general policy, collateral is not required for receivables,
but customers' financial condition and credit worthiness are
regularly evaluated and historical losses have not been material.
The Company maintains an allowance for losses based upon the expected
collectibility of all accounts receivable.
(c) Inventories
Inventories are stated at the lower of cost or market using the
first-in, first-out method.
F-7
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(d) Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost and are
depreciated on the straight-line method over their estimated useful
lives of twenty to thirty-two years for buildings and improvements
and three to eight years for all other classes of depreciable
property.
(e) Other Assets
Other assets include the excess of cost over fair value of
assets acquired (goodwill), marketing rights, deposits, and certain
deferred costs. Goodwill is amortized on the straight-line basis
over ten years and other assets are amortized on the straight-line
basis over their estimated lives of five to ten years.
(f) Research and Development, and Advertising
Research and development, and advertising costs are expensed as
incurred.
(g) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and deferred tax liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
deferred tax liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and deferred tax liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(h) Earnings Per Common and Common Equivalent Share
Earnings per share is based on the weighted average number of
common shares and dilutive common stock equivalents (stock options)
outstanding during the period. The weighted average number of shares
used in computing earnings per share for the three months ended March
31, 1997 and the years ended December 31, 1996, 1995, and 1994, were
6,771,126, (unaudited) 6,651,902, 6,559,245, and 6,538,176,
respectively. Primary and fully diluted earnings per share are the
same for 1996.
(i) Foreign Currency Translation
Assets and liabilities of foreign operations are translated at
exchange rates in effect at year-end, and statements of operations
are translated at the average exchange rates for the year.
Adjustments resulting from translation are reported as a separate
component of stockholders' equity until the foreign entity is sold or
liquidated. Gains and losses resulting from foreign currency
transactions are generally included in income.
F-8
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(j) Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(k) Disclosure About Fair Value of Financial Instruments
At December 31, 1996, the book value of all of the Company's
financial instruments approximates fair value except for long-term
debt. The fair value of the Company's long-term debt was estimated
by discounting the future cash flows of each instrument at prevailing
rates currently offered for similar debt instruments of comparable
maturities. The estimated fair value of the long-term debt,
excluding capital leases as disclosed in note 6, at December 31, 1996
and 1995, was approximately $2,220,000 and $2,133,000, respectively.
The fair value of the Company's financial instruments are based
on judgments regarding current economic conditions, risk
characteristics of financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined
with precision. Changes in assumption could significantly affect the
estimates.
(l) Stock-Based Compensation
Effective January 1, 1996, the Company adopted the footnote
disclosure provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No.
123 encourages entities to adopt a fair-value based method of
accounting for stock options or similar equity instruments. However,
it also allows an entity to continue measuring compensation cost for
stock-based compensation using the intrinsic-value method of
accounting prescribed by Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has elected to continue to apply the provisions of APB 25 and
provide pro forma footnote disclosures required by SFAS No. 123.
(m) Impairment of Long-Lived Assets
Management periodically reviews long-lived assets including
intangible assets for possible impairment. Recoverability of assets
is measured by comparison of the carrying amount of the asset to net
future cash flows expected to be generated from the asset. No
impairment has been recognized in the accompanying consolidated
financial statements.
(n) Reclassification
Certain amounts in 1995 and 1994 have been reclassified to conform
with the 1996 presentation.
F-9
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(2) Other Assets
Other assets consist of the following at December 31:
1996 1995
------------ ------------
Goodwill $ 897,166 897,166
Deposits 26,372 111,029
Patents, organizational costs,
and marketing rights 288,135 77,671
Other 153,949 262,900
Less accumulated amortization (376,521) (279,138)
------------ ------------
$ 989,101 1,069,628
============ ============
(3) Inventories
Inventories consist of the following at December 31:
Three months
ended March Years ended December
31, 31,
1997 1996 1995
(unaudited)
------------ ------------ -----------
Raw materials $ 1,004,035 945,795 1,141,163
Work-in-process 798,580 822,576 176,624
Finished goods 1,255,162 858,540 1,625,523
Equipment held for lease
or sale 449,102 697,497 450,614
------------ ------------ -----------
$ 3,506,879 3,324,408 3,393,924
============ ============ ===========
(4) Property, Plant, and Equipment
Property, plant, and equipment consist of the following at December 31:
1996 1995
------------ ------------
Land and improvements $ 649,835 649,835
Building and improvements 2,841,102 2,734,237
Machinery and equipment 2,033,393 1,685,018
Office furniture and equipment 1,426,579 1,463,401
Transportation equipment 70,812 78,784
Construction-in-progress 3,610 16,216
7,025,331 6,627,491
Less accumulated depreciation
and amortization 3,409,160 3,054,592
------------ ------------
$ 3,616,171 3,572,899
============ ============
F-10
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(5)Notes Payable
Notes payable consist of the following at December 31:
1996 1995
------------ ------------
Line of credit $ 1,601,116 1,492,128
Bank overdraft facility 74,206 293,995
Equipment line of credit - 500,000
------------ ------------
Total notes payable $ 1,675,322 2,286,123
============ ============
The Company maintains lines of credit with banks totaling approximately
$2,400,000 which are either due on demand or expire in May 1997.
Borrowings under the lines of credit are limited to certain levels of
accounts receivable and inventories. The rates of interest charged
range from the bank's reference rate plus .25 percent to the banks
reference rate plus .4 percent (effective rates from 7.15 to 8.65
percent at DecemberE31, 1996). The lines of credit are secured by
accounts receivable and inventories. Among other restrictions, debt
covenants related to the line of credit require the Company to maintain
certain levels of tangible net worth.
(6)Long-term Debt
Long-term debt consists of the following at December 31:
1996 1995
------------ ------------
Mortgage notes payable to a bank at 10%
interest, payable in monthly installments of
$17,115, including interest, based on a 30-
year amortization with a balloon payment in
July 1996. The note is secured by land and a
building $ - 1,785,741
Mortgage note payable to a bank at 10.06%
interest, payable in monthly installments of
$19,605, including interest, based on a 15-
year amortization with a balloon payment in
June 2006. The note is secured by land and a
building 1,776,499 -
Note payable to a bank at 9.38% interest,
payable in monthly installments of $3,391,
including interest, through October 1999.
The note is secured by equipment 100,769 130,270
Mortgage note payable to a bank at 8.81%
interest, payable in monthly installments of
$572, including interest, based on a 20-year
amortization with a balloon payment in
February 2001. The note is secured by a
building 62,792 -
F-11
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(6) Long-term Debt (continued)
1996 1995
------------ ------------
Note payable to lending institution at 11%
interest, payable in monthly payments of
$15,798 through August 1997 and decreasing
thereafter incrementally through May 2001.
The note is secured by equipment and the
proceeds of certain sales-type leases $ 452,746 -
Capitalized lease obligations (note 7) 795,024 -
Other - 57,444
------------ ------------
Total long-term debt 3,187,830 1,973,455
Less current portion 401,937 1,841,629
------------ ------------
Long-term debt, excluding current
installments $2,785,893 131,826
============ ============
Principal maturities of long-term debt and capital lease obligations for
the years subsequent to December 31, 1996 are as follows:
1997 $ 401,937
1998 335,788
1999 347,456
2000 355,032
2001 254,972
Thereafter 1,492,645
-----------
$3,187,830
===========
(7) Lease Obligations
Capital Leases - The Company leases equipment under a master capital
lease agreement with a financial institution and under other capital
lease agreements. At December 31, 1996, the obligation under the master
lease agreement was $713,000 (increasing to $1.1 million subsequent to
year-end). Minimum rentals of these leases have been capitalized at the
present value of the rentals at the inception of the lease and the
obligation for such amount is recorded as a liability. Interest is
accrued on the basis of the outstanding lease obligation. Assets
securing such leases had an approximate net book value of 829,000 at
December 31, 1996.
Operating Leases - The Company leases administrative offices,
manufacturing facilities, and certain equipment under noncancelable
operating lease agreements expiring through August 2005. Total rent
expense approximated $81,000, $44,000, and $68,000 in 1996, 1995, and
1994, respectively.
F-12
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(7)Lease Obligations (continued)
Required future minimum lease payments and the present value of the
future minimum capital lease payments at December 31, 1996 are as
follows:
Capital Operating
leases leases
Year ending: --------- ---------
1997 $ 298,604 92,004
1998 282,324 84,804
1999 282,324 70,404
2000 275,346 70,404
2001 217,137 70,404
Thereafter 6,403 258,148
--------- ---------
Total future minimum lease payments 1,362,138 $ 646,168
===========
Less amount representing interest and
executory costs 567,114
---------
Present value of future minimum
lease payments (see note 6) $ 795,024
=========
(8) Net Investment in Sales-Type Leases
The Company has invested in certain equipment financing agreements under
sales-type leases. Each sales-type lease is collateralized by a
security interest in the financed equipment. At December 31, 1996 and
1995, the net investment reflected in the accompanying consolidated
balance sheets for these sale-type leases consisted of the following:
1996 1995
------------ ------------
Gross minimum sales-type lease $ 1,605,283 921,038
receivables
Less allowance for uncollectible (128,622) (86,765)
receivables
------------ ------------
Net minimum sales-type lease receivables 1,476,661 834,273
Unearned interest income (403,411) (182,055)
------------ ------------
Net investment in sales-type leases 1,073,250 652,218
Less current portion (262,831) (145,200)
------------ ------------
Net investment in sales-
type leases, excluding
current portion $ 810,419 507,018
============ ============
F-13
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(8)Net Investment in Sales-Type Leases (continued)
Minimum gross receipts from sales-type lease receivables for the next
five years are as follows:
Year ending December 31:
1997 $ 420,882
1998 379,380
1999 368,731
2000 305,657
2001 130,633
------------
Total $ 1,605,283
============
(9)Income Taxes
Income tax expense for the years ended December 31, 1996, 1995, and 1994
is as follows:
1996 1995 1994
---------- ---------- ----------
Current:
Federal $ 404,369 695,600 467,225
State 77,000 132,000 89,000
---------- ---------- ----------
481,369 827,600 556,225
---------- ---------- ----------
Deferred:
Federal 7,900 24,700 8,400
State 1,500 5,000 2,000
---------- ---------- ----------
9,400 29,700 10,400
---------- ---------- ----------
Total provision $ 490,769 857,300 566,625
========== ========== ==========
Income tax expense differs from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to income from operations as
follows:
1996 1995 1994
---------- ---------- ----------
Computed "expected" tax expense $ 249,000 364,000 87,000
Increase (decrease) in income taxes
resulting from:
Goodwill amortization 31,000 31,000 31,000
Exclusion of loss from foreign
subsidiary 142,000 315,000 396,000
Foreign sales corporation exclusion (2,900) (32,000) (43,000)
State taxes, net of federal benefits 41,000 90,000 60,000
Other 30,669 89,300 35,625
---------- ---------- ----------
Provision for income taxes $ 490,769 857,300 566,625
========== ========== ==========
F-14
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(9)Income Taxes (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995, are presented below:
1996 1995
Domestic Foreign Domestic Foreign
---------- --------- ---------- ----------
Deferred tax assets:
Tax losses $ - 2,477,000 - 2,118,000
Research and development expenses - - - 15,000
Warranty reserve 45,000 - 28,000 -
Vacation reserve 38,000 - 33,000 -
Bad debt reserve 35,000 - 13,000 -
Inventory reserve 21,000 - 50,000 -
Technology amortization 14,000 - 8,000 -
Capitalized interest - - 300 -
Other items 6,000 - 4,000 -
---------- --------- ---------- ----------
Total gross deferred tax assets 159,000 2,477,000 136,300 2,133,000
Less valuation allowance - (2,448,000) - (2,093,000)
---------- --------- ---------- ----------
Deferred tax assets 159,000 29,000 136,300 40,000
---------- --------- ---------- ----------
Deferred tax liabilities:
Patents (35,000) - (12,000) -
Sales leases (92,000) - (54,000) -
Other payables - (29,000) - (40,000)
Equipment, principally due to
differences in depreciation (167,000) - (182,000) -
Deferred revenue (55,000) - (55,000) -
Other - - (13,900) -
---------- --------- ---------- ----------
Total gross deferred tax (349,000) (29,000) (316,900) (40,000)
liabilities
Net deferred tax liability $(190,000) - (180,600) -
Net current deferred tax asset $ 108,000 - 124,000 -
Net noncurrent deferred tax
liability (298,000) - (304,600) -
---------- --------- ---------- ----------
$(190,000) - (180,600) -
========== ========= ========== ==========
The domestic valuation allowance for deferred tax assets as of January
1, 1995 was zero. There was no change in the total domestic valuation
allowance for the years ended December 31, 1996 and 1995. The valuation
allowance of $2,448,000 and $2,093,000 at December 31, 1996 and 1995,
respectively, is solely attributable to the foreign jurisdiction.
F-15
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(9)Income Taxes (continued)
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that all or a portion of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over
the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the
benefits of these deductible differences.
(10) Employee Benefit Plans
The Company has an Employee Stock Ownership Plan (ESOP) and 401(k) plan
that covers all United States employees who have been employed for one
month. The ESOP contributions are used to purchase Company securities.
The Board of Directors approved discretionary contributions to the ESOP
totaling $11,587 and $40,000 for 1995 and 1994, respectively. No
discretionary contribution was made to the ESOP during the year ended
December 31, 1996.
The Company matches 25 percent of employee contributions to the 401(k)
plan up to a maximum individual employee contribution of four percent of
the employee's cash compensation. These matching contributions vest
over a seven-year period. Employer matching contributions totaled
$45,273, $38,413, and $33,204 for 1996, 1995, and 1994, respectively.
Gull Diagnostics S.A. has a contract with an insurance company under
which certain foreign employees may receive lump-sum payments or annuity
payments at retirement. The Company pays two-thirds of the monthly
premiums and the employee pays the remaining one third. The Company's
contribution to the plan was approximately $14,500, $17,000, and $13,500
during 1996, 1995, and 1994, respectively.
(11) Other Income and Related Party Transactions
Other income consisted of the following approximate amounts for the
years ended December 31,:
1996 1995 1994
---------- ---------- ----------
Gain on sale of building $ - 516,533 -
Currency transaction gains (losses) (38,496) 155,116 257,431
Interest income 132,981 92,083 18,549
Other nonoperating expenses (61,788) (31,864) (17,936)
---------- ---------- ----------
$ 32,697 731,868 258,044
========== ========== ==========
Sales to Fresenius AG, which holds a 55 percent ownership interest in
the Company's common stock, totaled $1,535,943, $2,370,977, and
$1,106,528 during 1996, 1995, and 1994 respectively.
F-16
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(11) Other Income and Related Party Transactions (continued)
In January 1995, the Company sold all of the intangible assets relating
to its German operations to Fresenius AG for approximately $313,500 of
cash proceeds. The Company recognized a gain on the transaction of
$140,437 equal to the minority interest percentage. The remaining
$173,063 was recognized as a contribution to capital by Fresenius. The
1995 financial statements have been restated to show the entire $313,500
as a contribution of capital and reducing other income and net income by
$140,437. This restatement decreased earnings per common and common
equivalent share by $.02.
(12) Stock Compensation Plans
Under the 1984 Gull Laboratories, Inc. fixed Stock Option Plan, the
Company may grant options to its employees for up to 833,333 shares of
common stock. Under the Company's fixed 1992 Stock Option Plan, the
Company may grant options to its officers, directors, and key management
personnel for up to 500,000 shares of common stock. Under both plans,
the exercise price of each option equals the market price of the
Company's stock on the date of grant, and an optionOs maximum term is
ten years. Options are granted at the discretion of the compensation
committee of the Company's Board of Directors and vest 25 percent per
year.
A summary of the activity under the plans is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Years ended December 31,
1996 1995 1994
------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------------------------------------------------------
Outstanding at
beginning of
year 386,000 $ 4.64 270,000 $ 4.88 341,667 $ 4.51
Granted 130,000 4.68 200,000 4.50 - -
Exercised - - (9,000) 1.69 (41,667) 1.39
Forfeited (10,000) 5.50 (75,000) 5.50 (30,000) 5.50
-------- -------- --------
Outstanding at
end of year 506,000 $ 4.63 386,000 $ 4.64 270,000 4.88
======== ======== ========
Options
exercisable at
year-end 269,750 70,000 55,500
Weighted-average
fair value of
options granted
during the year $ 3.34 $2.77
</TABLE>
F-17
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(12) Stock Compensation Plans (continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
Options outstanding Options exercisable
------------------------------------- ------------------------
Weighted-
Number average Weighted- Number Weighted-
Range of outstanding at remaining average exercisable average
exercise December 31, contractual exercise at December exercise
prices 1996 life price 31, 1996 price
------------ --------- ---------- -------- ---------- --------
$1.125 21,000 1.0 yrs. $1.125 21,000 1.125
3.50 - 4.50 225,000 8.6 4.431 118,750 4.401
4.63 - 5.00 130,000 9.2 4.683 - -
5.50 130,000 5.5 5.500 130,000 5.500
--------- ----------
1.125 - 5.50 506,000 7.6 4.633 269,750 4.676
========= ==========
Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
Net income: ---------- ----------
As reported $ 240,712 212,456
Pro forma (49,909) 177,831
Primary and fully diluted earnings per
share:
As reported $ 0.04 0.03
Pro forma (0.01) 0.03
The effect that calculating compensation cost for stock-based
compensation under SFAS No. 123 has on the pro forma net income (loss)
as presented above may not be representative of the effects on reported
net income or losses for future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1996 and 1995, respectively:
expected volatility of 66.2 and 49.5 percent; risk free interest rates
of 6.1 and 6.3 percent; no dividend yield for any year; and expected
lives of 7.5 years.
On May 9, 1996, the Company granted an option to purchase 15,000 shares
of the Company's common stock to a nonemployee. The option is
exercisable 5,000 shares at $6 per share, 5,000 shares at $8.50 per
share, and 5,000 shares at $11 per share and becomes exercisable when
the Company's stock closes for twenty consecutive trading days at an
average price of $6, $8.50, and $11, respectively. Compensation expense
related to these options was not material.
F-18
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(13) Foreign Operations, Export Sales, and Major Customer
Operations by geographic area:
Sales
--------------------------------------------
1996 1995 1994
-------------- ------------ ------------
United States $ 15,217,860 15,272,576 12,033,290
Europe 4,082,743 4,667,311 5,363,998
Eliminations (1,391,851) (1,112,034) (1,555,682)
-------------- ------------ ------------
$ 17,908,752 18,827,853 15,841,606
============== ============ ============
Income (loss) before income taxes
--------------------------------------------
1996 1995 1994
-------------- ------------ ------------
United States $ 1,440,433 2,421,498 2,124,466
Europe (214,100) (510,272) (662,346)
Eliminations 40,934 (53,377) (617,971)
-------------- ------------ ------------
1,267,267 1,857,849 844,149
Interest expense (535,786) (647,656) (588,626)
-------------- ------------ ------------
$ 731,481 1,210,193 255,523
============== ============ ============
Identifiable assets
--------------------------------------------
1996 1995 1994
-------------- ------------ ------------
United States $ 22,046,305 20,842,948 16,858,516
Europe 1,734,504 2,484,998 2,709,153
Eliminations (11,428,107) (11,010,316) (8,065,528)
-------------- ------------ ------------
$ 12,352,702 12,317,630 11,502,141
============== ============ ============
United States export sales to unaffiliated customers by destination of sale:
1996 1995 1994
-------------- ------------ ------------
Europe $ 2,669,400 3,272,380 2,809,508
Pacific Rim (Australia, New
Zealand, and the Far East) 1,154,586 1,293,038 905,028
Other 149,310 221,276 594,338
-------------- ------------ ------------
$ 3,973,296 4,786,694 4,308,874
============== ============ ============
Sales to one customer amounted to 16 percent, 14 percent, and 12 percent
of total sales in 1996, 1995, and 1994, respectively. No single country
in Europe or the Pacific Rim account for more than ten percent of sales.
F-19
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(14) Restructuring Charge
In an effort to bring its European operations to profitability, the
Company incurred restructuring charges of $505,260 and $775,000 in 1995
and 1994, respectively, substantially all of which relate to personnel
termination costs. The restructuring plans were completed in 1995.
(15) Merger
On December 13, 1996, the Company entered into a letter of intent to
acquire the diagnostic business of the Intensive Care and Diagnostic
division of Fresenius AG, the Company's majority stockholder subject to
the execution of a definitive acquisition agreement, receipt of a
fairness opinion from an investment banker, and approval of the
Company's stockholders and the Fresenius AG's Board of Directors. As of
the date of these consolidated financial statements, no definitive
purchase price for the acquisition had been determined.
(16) Commitments and Contingencies
The Company is involved in legal actions arising in the ordinary course
of business. In the opinion of management, ultimate disposition of
these matters will not materially affect the consolidated financial
position or results of operations of the Company. As of December 31,
1996, the Company had capital expenditure purchase commitments
outstanding of approximately $430,000.
F-20
APPENDIX B
CERTAIN INFORMATION CONCERNING FRESENIUS DIAGNOSTICS
BUSINESS OF FRESENIUS DIAGNOSTICS
Fresenius Diagnostics (the "Business") is a business unit within
the Intensive Care and Diagnostics Division (the "I+D Division") of Fresenius
AG. Fresenius AG is a German corporation, listed on the Frankfurt, Dusseldorf
and Munich stock exchanges, which develops, manufactures and distributes
pharmaceuticals and medical systems products and services on a global basis.
Fresenius AG's majority-owned subsidiary, Fresenius Medical Care AG, is the
world's largest integrated provider of renal dialysis products and services.
The Business develops, manufactures and distributes diagnostic
test kits and materials designed to detect past or present infections caused
by certain microbial agents such as viruses, bacteria, and protozoa, and
distributes diagnostic test kits and materials for detection of certain
autoimmune disorders. The Business is also the largest single customer for
the Company's non-CAP related diagnostic products. Sales by the Company to
Fresenius AG decreased in 1996 compared to 1995. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of the Company
elsewhere in this Proxy Statement. The Business's products for the diagnosis
of infectious and autoimmune diseases are based on established immunological
assay methods which quantify, identity and/or characterize antibodies and
disease agents. Such methods include indirect immunofluorescent antibody
assay (IFA), enzyme-linked immunosorbent assay (ELISA), immunodiffusion and
Western Blot. The Business's products are designed to detect evidence of the
body's immune response to infection, indicating presence of the disease agent.
Effective November 7, 1996, Mr. Gerhard Krammer resigned from his
position as President of the I+D Division of Fresenius AG and Dr. Matthias
Schmidt, President of Fresenius AG's Pharmaceuticals Division, was named
Interim President of the I+D Division. Dr. Schmidt was also elected to
replace Mr. Krammer as a member of the Company's Board of Directors. Mr.
Rainer Baule, a nominee for election as a director at the Annual Meeting,
became President of the I+D Division on June 1, 1997. See
"Proposal No. 1--Election of Directors" elsewhere in this Proxy Statement.
Dr. Silke Humberg is the acting general manager of the Business.
The principal executive offices of the Business are located at
Borkenberg 14, 61440 Oberursel, Germany. Its telephone number is
011-49-6171-60-0.
Development of the Business
Fresenius AG started its diagnostics business more than twenty
years ago with a focus on bloodgrouping reagents and human lymphocyte antigen
("HLA") tissue-typing reagents, which continue to be the core competencies of
the Business in both research and manufacturing. The HLA product line was
recently expanded by the development of the innovative Post-PCR DNA-based ONLi
DRB/DQB test for tissue typing, mainly for bone marrow transplantation
purposes, and Disease Scan for screening of rheumatic diseases.
-1-
<PAGE>
The Business sells its diagnostic products through direct sales
forces in Germany and through a network of distributors in other countries.
Since 1994, the Business has marketed its products in Italy through the direct
sales force of Biofil S.r.l., a subsidiary of Fresenius AG. The Business is
currently seeking a well known local distributor to market its products in
Italy.
In 1994, the Business initiated a systems approach to the
marketing of its diagnostic products that couples sales of its diagnostic
reagents with the placement at customers of instrumentation leased by the
Business from other equipment manufacturers ("OEMs"). Through the use of this
instrumentation, a clinical or hospital laboratory gains operating
efficiencies by automating its operations and the Business secures a long-term
commitment for the sale of its diagnostic products for use with such
instrumentation. Providing instrumentation products to customers requires
additional capital investment by the Business. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of Fresenius
Diagnostics.
In January 1995, the Business acquired substantially all the
assets relating to the Company's German operations for approximately $313,500.
In 1996, Fresenius AG augmented the instrumentation offerings of the Business
when it entered into an agreement with the Company to market a recently
developed automated clinical laboratory sample processor called DUET . In
Europe, the DUET processor addresses the needs of the moderate-volume
laboratory testing market.
The Business's diagnostic products are used by clinical and
hospital laboratories and blood donor centers primarily in Germany, as well as
in other countries throughout Europe. The following table shows, for the
years indicated, the geographic distribution of the Business's net sales, with
sales to affiliates shown separately.
- ------------------------------------------------------------------------------
Year Ended December 31
(000's omitted)
(US GAAP)
- ------------------------------------------------------------------------------
Area 1996** 1995** 1994
(Unaudited)
- ------------------------------------------------------------------------------
Germany DM 11,356 DM 13,240 DM 13,155
Export 535 614 1,282
Affiliates* 305 227 31
--------- --------- ---------
Total DM 12,196*** DM 14,081*** DM 14,468***
--------- --------- ---------
* "Affiliates" includes intercompany business within Fresenius AG as
well as sales to the Company.
** The audited financial statements of the Business for 1996 and 1995, and
the unaudited financial statements for 1994 have been prepared in
accordance with United States generally accepted accounting principles
("US GAAP"). See "Summary of Certain Significant Differences Between
German and U.S. Generally Accepted Accounting Principles."
*** The reporting currency of the Business is the Deutsche Mark (DM). During
1996, 1995 and 1994, the average exchange rate for Deutsche Marks
("DM") to U.S. dollars ($U.S.) was approximately DM 1 = $U.S. .6647, DM
1 = $U.S. .6981 and DM 1 = $U.S. .6164, respectively.
-2-
<PAGE>
No single customer, including distributors, accounted for more
than 10% of the Business's net sales during the three year period and no
single product or group of related products accounted for 15% or more of net
sales except for the EBV products (IFA and ELISA kits and reagents) currently
produced by the Company, which accounted for 37%, 42%, and 43% of the domestic
net sales in 1996, 1995, and 1994, respectively.
The Business has been financed, since inception, from the working
capital of Fresenius AG. In connection with the Company's acquisition of the
Business, the Company and Fresenius AG will enter into certain financing
arrangements for the Business and the Company. For a description of such
arrangements, see "Continued Participation by Fresenius AG--Financing."
In addition to its working capital, as a business unit within the
I+D Division, the Business has obtained administrative and other services from
Fresenius AG headquarters and from other divisions and subsidiaries of
Fresenius AG. These services relate to, among other things, data processing,
financial and management accounting and audit, human resources, legal, risk
management and logistics. For 1996, approximately DM 1,660,000 was charged to
the Business for these services. See Note 2 of "The Diagnostics Business of
Fresenius AG--Notes to Financial Statements."
The Purchaser and Fresenius AG have agreed that Fresenius AG will
continue to provide certain of the foregoing services to the Purchaser until
December 31, 1997. The Asset Purchase Agreement provides that the other
services will terminate at the closing. See "Continued Participation by
Fresenius AG--Services."
Competition
The Business competes in a diversified market characterized by a
few global diagnostics companies and numerous smaller competitors which
manufacture and sell diagnostics tests similar to those sold by the Business
as well as certain immunohematology products. The global diagnostics
companies have been formed through acquisitions and mergers in the last decade
and include Behring/Dade, Beckman/Sanofi, Dade/DuPont, Roche/Boeringer
Mannheim, and Sorin/American Standard. In addition, the Business competes
against other major competitors in each of the following key markets: blood
grouping, HLA (serological techniques and DNA-based methods) and infectious
diseases. The Business has a strong market position in Germany, particularly
in the blood grouping market. In addition, few other companies offer OEM
instruments (open systems), together with a reagent package of standard
analytes. However, many competitors possess greater financial, technological,
research and development, and personnel resources than the Business.
Management believes that in the diagnostic test kit market,
companies compete primarily on the basis of product performance, cost
effectiveness, reliability and continued product innovation. Management
believes that its products are highly competitive in all of these areas. In
addition, the Business offers customers financial consulting services for
laboratory management as well as technical support services.
In response to worldwide cost containment pressures, there has
been a trend toward the consolidation of suppliers and customers within the
diagnostics industry. This trend could lead to a few large companies
supplying the majority of the diagnostics market with many smaller niche
companies supplying the remaining needs of the market. Management of the
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<PAGE>
Business believes that the future success of the Business will be contingent
upon its ability to identify and exploit such market niches and new product
opportunities, to continue supplying quality, cost effective solutions to its
customers' needs and to strengthen its worldwide distribution network.
Newly designed diagnostic methods and product innovations are
important potential sources of change in market share in the biomedical
industry. Competing companies with greater resources can be expected to spend
substantially greater amounts than the Business on research and development
activities and on product marketing.
The Business and its competitors are responding to cost
containment pressures in part by moving their product lines rapidly toward
full automation, which is less labor intensive, and in part by offering
instrumentation to customers. While the Business has only recently begun
offering instrumentation to customers, management believes that by automating
its production and selling its high quality diagnostic tests with
instrumentation obtained through alliances with manufacturers, it will be able
to expand its market position.
In addition to competitors with the same type of products, the
Business also competes against companies which manufacture and sell devices
that detect antibodies and disease agents by alternate methods. For example,
DNA probes, which use genetic markers to detect pathogenic organisms, and
radioimmunoassay (RIA), which uses radioactive isotopes for disease detection,
may be used instead of the Business's current products. The Business's
products have been competitive with these and other alternative test methods
for several years, however.
Sources and Availability of Raw Materials
Although certain raw materials and key components of the
Business's products are purchased from a few key suppliers, the Business has
not experienced any difficulties in obtaining the raw materials necessary to
manufacture its products. Monoclonal bloodgrouping reagents are purchased
from a single supplier with a very strong position in the global market who is
also the supplier for the Business's main global competitors. There are
readily available alternate sources of supply, however, for all of the
Business's other raw materials and key components. Management believes that
the Business would not be significantly affected by the loss of any of its
current suppliers of raw materials or key components.
In addition to distributing products which it manufactures, the
Business distributes certain products manufactured by other suppliers.
Management of the Business expects that the infectious disease business of a
supplier to the Business may be sold in the near future. Sales of these
products in 1994, 1995, 1996 and for the quarter ended March 31, 1997 were
approximately DM 532,000, DM 485,000, DM 526,000, and DM 236,000,
respectively. This represents approximately 3.7%, 3.4%, 2.9%, and 8.3% of the
Business's sales, respectively. Upon such a sale, products from the supplier
could become unavailable until products of a replacement supplier are
available. To take into account the risk to the Company from the short-term
loss of business that could result from a termination of a current
relationship with the supplier, Fresenius AG and the Company have agreed to
certain adjustments in the purchase price of the Business if the supplier is
sold and its products are no longer available to the Business. See "Proposal
3--Acquisition of Certain Assets of the Business--Description of the
Agreement--Purchase Price."
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<PAGE>
Intellectual Property
The Business relies upon its technical expertise and trade secrets
to maintain its position in the industry and uses its best efforts, when
appropriate, to obtain patents on new processes and techniques as they are
developed. The Business has filed for one patent and several trademarks. The
Business has also registered the trademark and trade name "Fresenius
Diagnostik" in Germany and other countries throughout the world through the
Intellectual Property Organization.
Under the Asset Purchase Agreement, the assets of the Business to
be acquired by the Purchaser include all of the Business's rights with respect
to inventions, technical know how, trade secrets, procedures, formulas and
other intangible property. The Purchaser will also acquire the right to the
product names of the Business and the exclusive right to use the product name
or mark "FRE" for specific products in designated countries for a period of
three years from the Effective Date. The Purchaser will also acquire the
right to use the name "Fresenius" on finished goods, inventory, advertising
and promotional materials and training and services literature for a period
ending on December 31, 1997 or six months from the Closing Date, whichever is
later.
Government Regulation
A. Regulatory Approval
The diagnostic products manufactured or distributed in Germany by
the Business for use by clinical and hospital laboratories are subject to the
requirements imposed by the Arzneimittelgesetz ("AMG"), the German Drug Law.
The AMG sets forth the requirements for the authorization of a company to
manufacture pharmaceuticals. One such requirement is that a manufacturer
appoint pharmacists or physicians to be responsible for the manufacture of the
pharmaceuticals. At least three such responsible persons must be appointed:
a quality assurance manager, a head of the manufacturing department, and a
person responsible for notifying authorities of any reported side effects and
authorized to recall the products in question.
Certain products of the Business also need approval from the Paul-
Ehrlich-Institute in Germany (based upon requirements of the AMG) and all
infectious disease and autoimmune products to be distributed in Switzerland
must be licensed by the Bundesamt fur Gesundheitswesen ("BAG"). Distribution
of diagnostic products in France is contingent on a license from the Agence du
Medicament ("AdM").
The Business must also comply with certain regulations imposed by
foreign government agencies comparable to the U.S. Food and Drug
Administration ("FDA") in the various countries in which it markets its
products. Most of these regulations are less stringent than those imposed by
the FDA and the Business has not experienced any significant problems in
complying with the regulations.
B. Good Manufacturing Practices
The Business also conducts its manufacturing operations in Germany
in conformity with Good Manufacturing Practices ("GMP") as prescribed in the
U.S. Code of Federal Regulations governing the manufacture of medical
devices. Management of the Business believes that the Business is in
conformity with all such regulations.
-5-
<PAGE>
Additionally, member nations of the European Union are developing
a standardized quality system based upon the In Vitro Diagnostics Directive,
to be implemented in Germany through the Medizinproduktegesetz (Medical
Devices Act). Under the directive, which is expected to be effective in 2002,
a company's quality management system can be certified by a "notified body"
(i.e., a group accredited and monitored by governmental agencies that inspects
manufacturing facilities and quality control systems at regular intervals and
is authorized to carry out unannounced inspections) charged with supervising
the quality management system. Upon certification of the quality management
system for a facility, a company is permitted to assess and declare whether
products developed and manufactured as the facility conform to European Union
requirements for safety, physical and biological properties, and construction
and environmental standards.
C. Health Care Cost Containment
On a worldwide basis, governments and other third party payors of
health care costs are examining methods to control the rising costs of
providing health care. Decreasing or eliminating reimbursements for costs
that are determined to be discretionary or non-essential, such as diagnostic
testing, is one method that is being discussed or has already been
implemented. Regulations and market trends such as the above could affect the
demand for, as well as the pricing of, the Business's products and, to the
extent that the Business is unable to develop additional markets or effect
commensurate cost reductions, such trends could decrease the Business's
profitability.
D. Environmental Regulations
No significant incremental costs have been incurred by the
Business in order to comply with environmental regulations. Management of the
Business believes its programs to be prudent and effective to ensure a high
level of environmental safety. The Business has no present plans to increase
expenditures for environmental control in the foreseeable future, and does not
anticipate that any future capital expenditures for environmental compliance
will materially affect its earnings or competitive position.
Research and Development
The Business has research and product development programs in the
area of medical diagnostics, focusing primarily on methods that clinical
laboratories use to detect the body's immune response to specific disease
agents and autoimmune disorders. During 1996, the Business continued to focus
its research and product development on developing tests which use enzyme-
linked immunosorbent assay (ELISA) methods. Tests for the detection of
disease agents including selected bacteria are currently under development.
In 1996, and in anticipation of the sale of the Business to the
Purchaser, the Business ceased its independent research and development
activities in the area of infectious diseases and autoimmune disorders in
favor of the concentration of research efforts at the Company.
For the years ended December 31, 1996 and 1995, the Business
expended approximately DM 135,000 and DM 253,000, respectively, on research
and development. This represented approximately 1.1% and 1.8% of sales in
1996 and 1995, respectively, determined in accordance with US GAAP.
-6-
<PAGE>
Employees
At December 31, 1996, the Business had 45 employees, including 7
part-time employees. Fresenius AG is a member of the Chemical Industry
Employers Association in Germany and is bound by an industry wide employment
agreement negotiated with union representatives in that industry. Fresenius
AG is also a party to additional labor agreements negotiated with works
councils in individual facilities relating to those facilities. Management
believes that the Business's relations with its employees are good.
Under the Asset Purchase Agreement, the employees of the Business
will become employees of the Purchaser, and from and after the Closing Date,
the Purchaser will assume Fresenius AG's obligations to such employees,
including its obligations for pensions, bonuses and perquisites. The
Purchaser will also become a party to the Chemical Industry basic collective
bargaining agreement and the works council agreement for the Business.
Property
The executive offices and principal manufacturing facilities of
the Business are located in two buildings totaling 1,442 square meters in
Oberursel and Bad Homburg, Germany. These buildings house offices,
production, and product development facilities. The land and the buildings
are owned by Fresenius AG and the Business is currently leasing its facilities
for approximately DM 17,750 per month under an intercompany contract.
In connection with the transfer of the Business on the Closing
Date, the Purchaser and Fresenius AG will enter into a lease for the premises
used by the Business. See "Proposal 3--Acquisition of the Assets of Fresenius
AG's Diagnostics Business--Lease of Real Property" in the Proxy Statement of
the Company.
Legal Proceedings
Fresenius AG is not involved in any material legal proceedings
concerning the Business and, to the knowledge of Fresenius AG, no material
legal proceedings relating to the Business and contemplated by any
governmental authority. The Business's products are covered by Fresenius AG's
product liability insurance. From and after the Closing Date, the Purchaser
will be responsible for maintenance of product liability insurance for the
products of the Business.
SELECTED FINANCIAL DATA OF FRESENIUS DIAGNOSTICS
The following selected financial data of the Business should be
read in conjunction with the financial statements of the Business and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Business" included elsewhere in the Proxy Statement of the
Company. The US GAAP selected financial information as of and for the years
ended December 31, 1995 and 1996 have been derived from the Business's
financial statements prepared in accordance with US GAAP and audited by KPMG
Deutsche Treuhand Gesellschaft Aktiengesellschaft
Wirtschaftsprufungsgesellschaft, Frankfurt am Main, Germany, independent
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<PAGE>
accountants. The US GAAP selected unaudited financial information as of and
for the year ended December 31,1994 and as of and for the quarters ended March
31, 1996 and March 31, 1997 have been derived from the Business's unaudited
financial statements prepared in accordance with US GAAP and, in the opinion
of management of the Business, have been prepared substantially consistent
with the audited US GAAP financial statements of the Business included
elsewhere in the Proxy Statement of the Company. The German GAAP selected
financial data as of and for each of the years in the five year period ended
December 31, 1996 have been derived from the unaudited financial statements of
the Business prepared in accordance with German GAAP and, in the opinion of
management of Fresenius AG have been prepared on a basis substantially
consistent with that of audited German GAAP financial statements of Fresenius
AG as of and for such periods. As described elsewhere in this Appendix B, the
Business operates as a business unit of the I+D Division of Fresenius AG. US
GAAP information for the Business as of and for the years ended December 31,
1992, 1993 and 1994 is not available. German GAAP differs in certain
significant respects from US GAAP. For a description of certain of these
significant differences see "Summary of Certain Significant Differences
Between German and U.S. Generally Accepted Accounting Principles."
All figures presented below are based on German GAAP/US GAAP.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
Statement of Operations
(in '000 DM)
Year Ended December 31,
- --------------------------------------------------------------------------------------
German GAAP US GAAP US GAAP
(Unaudited) (Unaudited) (Audited)
- ---------------------------------------------------------- --------- -----------------
1992* 1993* 1994 1995 1996 1994 1995 1996
-------------------------------------------- --------- -----------------
Sales 14,947 15,432 14,461 14,120 12,284 14,468 14,081 12,196
Gross profit N/A N/A 7,841 6,722 5,766 7,584 6,690 5,148
Operating N/A N/A 2,296 731 (258) 1,904 773 (792)
income
(loss)
Net income
(loss) N/A N/A 1,378 493 (197) 1,208 517 (354)
- ---------------------------------------------------------- --------- -----------------
</TABLE>
*Financial information for the Business (other than Sales) is not available
for years prior to 1994.
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<PAGE>
--------------------------------------------------------------
Unaudited Statement of Operations Data
(in '000 DM)
Quarter Ended March 31,
--------------------------------------------------------------
U.S. GAAP
1996 1997
--------------------------
Sales 3,181 2,850
Gross profit 1,486 1,816
Operating income (loss) 221 558
Net income (loss) 166 215
--------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
Balance Sheet Data
(in '000 DM)
Year Ended December 31,
- --------------------------------------------------------------------------------------
German GAAP US GAAP US GAAP
(Unaudited) (Unaudited) (Audited)
- ---------------------------------------------------------- --------- -----------------
1992* 1993* 1994 1995 1996 1994 1995 1996
-------------------------------------------- --------- -----------------
Working N/A N/A 2,627 2,589 2,382 2,886 3,100 2,594
Capital
Total assets N/A N/A 4,012 4,689 4,226 5,385 5,966 5,361
Long-term N/A N/A -- -- -- -- -- --
obligations
Capital lease N/A N/A -- -- -- -- 165 552
obligations
- ---------------------------------------------------------- --------- -----------------
</TABLE>
*Financial information for the Business (other than Sales) is not available
for years prior to 1994.
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<PAGE>
--------------------------------------------------------------
Unaudited Balance Sheet Data
(in '000 DM)
Quarters Ended March 31,
--------------------------------------------------------------
U.S. GAAP
1996 1997
--------------------------
Working capital 2,840 2,514
Total assets 6,060 5,355
Long-term obligations -- --
Capital lease obligation 318 498
--------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE BUSINESS
This Appendix B contains both historical information and forward-
looking statements. These forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Business. Any forward-looking statements involve risks and uncertainties,
including but not limited to risk of product demand, market acceptance,
government regulation, economic conditions, competitive products and pricing,
difficulties in product development (currently under the responsibility of the
Company), commercialization and technology and other risks mentioned in this
Appendix B. Although management of the Business believes it has the product
offerings and resources for continuing success, future revenue and margin
trends cannot be reliably predicted. Because of the foregoing factors, recent
trends should not be considered reliable indicators of financial performance.
OVERVIEW
Basis of Presentation of Financial Information
The Business currently operates as a business unit of the I+D
Division of Fresenius AG. The historical financial statements of the Business
included in this Appendix B have been prepared in accordance with United
States generally accepted accounting principles ("US GAAP"), on a basis which
reflects the historical financial statements of the Business assuming that it
was organized as a separate legal entity, owning certain net assets of
Fresenius AG for all periods presented.
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Shared Services
As a business unit of the I+D Division of Fresenius AG, the
Business has obtained administrative and other services from Fresenius AG
headquarters and from other divisions of Fresenius AG. At or prior to the
Closing Date, the Business and the Purchaser intend to enter into transitional
agreements for continuation of many of such services. For a discussion of
arrangements for such services in the future, see "Proposal 3--Acquisition of
the Assets of Fresenius AG's Diagnostics Business--Continued Participation by
Fresenius AG--Services" in the Proxy Statement of the Company.
Real Estate
The Business conducts its operations in facilities owned by
Fresenius AG. Subsequent to the Closing Date, the Business will enter into a
lease for such premises with Fresenius AG. For a discussion of the terms of
the lease see "Proposal 3--Acquisition of the Assets of Fresenius AG's
Diagnostics Business--Continued Participation by Fresenius AG--Lease of Real
Property" in the Proxy Statement of the Company.
Currency Exchange Rates and Currency Risks
Currency exchange rates have represented a minor risk to the
Business as the Business conducts its operations primarily in Germany. In
addition, any business conducted outside Germany has been primarily invoiced
using German currency. The risk occurs due to the fact that a significant
portion of products distributed by the Business is currently produced by the
Company and charged to the Business in U.S. dollars. Exchange rates could
represent a greater risk after the Business is acquired by the Company,
because the Company's reporting currency is the U.S. dollar. Accordingly, a
decrease in the value of the U.S. dollar relative to the Deutsche Mark will
increase the revenue and income of the Business as reported in dollars. An
increase in the value of the U.S. dollar relative to the Deutsche Mark will
have the opposite effect. Although such exchange rate risk is not a business
risk, it could affect the Company's financial reporting. Fluctuations in the
exchange rates will impact comparisons of the Business's (and the Company's)
results of operations.
The exchange rate for Deutsche Marks to U.S. dollars as of the
close of business on June 9, 1997 was 0.5853. A summary of the high and low
exchange rates of Deutsche Marks to U.S. dollars and the average exchange
rates for the last five years and for the quarter ended March 31, 1997 is set
forth below.
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<PAGE>
----------------------------------------------------------------------
Exchange Rate
Deutsche Mark to U.S. Dollar
======================================================================
Y E A R
======================================================================
Ending
December 31 High Low Average Close
----------------------------------------------------------------------
1992 0.7185 0.5959 0.6421 0.6176
1993 0.6377 0.5736 0.6051 0.5759
1994 0.6703 0.5663 0.6164 0.6452
1995 0.7384 0.6415 0.6981 0.6987
1996 0.6987 0.6384 0.6647 0.6489
======================================================================
Q U A R T E R
======================================================================
Ending
March 31 High Low Average Close
----------------------------------------------------------------------
1997 0.6489 0.5818 0.6035 0.5994
----------------------------------------------------------------------
Inflation
The effects of inflation during the periods covered by the
financial statements have not been significant to the Business's results of
operations. As discussed below under "Industry Trends," a significant portion
of the Business's net revenues is received from customers whose revenues are
subject to reimbursement rates which are regulated by governmental
authorities. Non-governmental payors are also exerting downward pressure on
reimbursement rates. Increased operating costs that are subject to inflation,
such as labor and supply costs, may not be recoverable through price increases
in the absence of a compensating increase in reimbursement rates payable to
customers of the Business, and could materially adversely affect the Business
and results of operations of the Business.
LIQUIDITY AND FINANCIAL RESOURCES
The Business currently operates as a business unit of the I+D
Division of Fresenius AG. Therefore, the Business does not maintain its own
cash balances. Rather, Fresenius AG receives and pays cash on behalf of the
Business. Due to these circumstances, the effects of the Business's cash
receipts and cash payments by Fresenius AG have been accounted for within net
assets as "net activity with Fresenius AG." In 1996, the balance amounted to
approximately DM 408,000 in favor of the Business in comparison to DM 86,000
in favor of Fresenius AG in 1995. During such periods, the Business invested
in property and equipment DM 238,000 and DM 620,000, respectively. At the end
of the first quarter of 1997, the balance amounted to approximately DM 410,000
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in comparison to DM 130,000 in favor of the Business in the first quarter of
1996. During such periods, the Business invested in property and equipment
approximately DM 1,000 and DM 13,000, respectively.
Under the Asset Purchase Agreement, accounts receivable and
payable occurring in 1996 will not be transferred to the Purchaser.
In 1996, working capital decreased by approximately DM 506,000 to
DM 2,594,000, as compared to DM 3,100,000 in 1995. In the first quarter of
1997, working capital decreased by approximately DM 327,000 to DM 2,513,000,
as compared to DM 2,840,000 in the first quarter of 1996. An inventory
reduction plan was the primary cause of these decreases. The Business's
working capital has been provided, since inception, by Fresenius AG, and
management believes that, in the absence of the effects of the Asset Purchase
Agreement in which the accounts receivable and payable occurring in 1996 will
not be transferred with the assets of the Business, the Business would be able
to fund its own operations and future growth. See "Proposal 3--Acquisition of
the Assets of Fresenius AG's Diagnostics Business--Continued Participation by
Fresenius AG--Financing" in the Proxy Statement of the Company for a
discussion of the financing that has been arranged for working capital and
acquisition of a data processing system, in connection with the Purchaser's
acquisition of the Business.
The Business sells and leases laboratory equipment in order to
help customers gain operating efficiencies through automating their operations
and to compete with industry practices. Equipment is normally placed with a
sale and lease-back procedure after a thirty day evaluation period. Following
the evaluation, the equipment may be sold, leased or rented to the customer or
returned to the Business. The program has required and will continue to
require a significant capital investment by the Business. Capital investment
under the program amounted to DM 552,000 in 1996 and no investments have been
made for the first quarter of 1997. Management believes that the total amount
for 1997 will exceed the investment for 1996. As mentioned above, the
Business will continue to place the equipment under a sale and lease-back
procedure.
INDUSTRY TRENDS
There is an increasing effort by governmental agencies worldwide
to control rising healthcare costs. Decreasing or eliminating reimbursements
to patients for medical expenses that are determined to be discretionary or
non-essential is one of the methods that is being discussed or has already
been implemented. These efforts are causing the diagnostics market to shift
away from the Business's more profitable IFA products (Immuno Florescence
Assay) to the less profitable ELISA (Enzyme Linked Immuno-Sorbend Assay)
products, which are less expensive on a cost per test basis to the customer
and can be automated. The trend toward consolidation into larger volume
laboratories has also increased the level of automation and related volume
discounts. This trend will continue to put pressure on the Business to
maintain or decrease the prices of many of its existing products. The
Business is aggressively moving to offset these pressures through programs to
increase productivity, lower manufacturing costs and expand its distribution
network.
As mentioned above, the Business assists its customers in
automating their operations to gain operating efficiencies by offering
laboratory equipment under sales, lease or rental agreements. Under the terms
of the lease and rental agreements, the customer commits to purchase a minimum
monthly level of product from the Business in exchange for the Business
placing the instruments in the laboratory. Also, because the Business does
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<PAGE>
not manufacture the instrumentation, the Business realizes a smaller gross
profit on the sale of the equipment than on its reagent sales.
The German "Gesundheitsreform," implemented by the German
government, is causing a continuous decrease in the reimbursement for all
diagnostics products and innovative techniques like PCR (Polymerase Chain
Reaction) will not be reimbursed as routine tests in 1997.
RESULTS OF OPERATIONS
1996 Compared to 1995
In 1996, the Business reported a net loss of DM 354,000 compared
to net income of DM 517,000 in 1995. This result was primarily caused by
approximately DM 491,000 in severance payments to restructure the organization
of the Business to improve the profitability of its operations.
In 1996, consolidated sales decreased by 15% to DM 12,196,000
compared to DM 14,081,000 in 1995. The decrease in Germany was due to the
technology switch from IFA to ELISA technology mainly in the EBV product line
(Epstein Barr Virus). (The Business has been a market leader in EBV for more
than ten years.) However, product shortages due to quality problems in the
EBV ELISA line (produced by the Company) meant that the Business was not able
to fill the orders of its customers. The Business lost market share mainly in
the segment of high throughput customers.
Gross profit margin decreased from 47.5% in 1995 to 42.2% in 1996.
The decrease in gross profit margin was caused by higher cost of goods due to
changes in product mix (ELISA as compared to IFA, see "Industry Trends"),
exchange rates (derived from product purchases in U.S. dollars from the
Company), and decreases of average selling prices in the market. Also, the
new DUET from the Company and Standard Engineering has lower gross profit
margins than other instrument offerings.
Selling, General and Administrative expenses amounted to DM
5,804,000 or 48% of sales in 1996 in comparison to DM 5,664,000 or 40% of
sales in 1995. Taking into account the abovementioned extraordinary expenses
for severance payments, the expense level in 1997 is not expected to exceed
the amount of 1996.
Research and development costs decreased from DM 253,000 (2% of
net sales) to DM 135,000 (1% of net sales). The transfer of the Business's
research and development activities to the Company has already been effected.
See "Research and Development."
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Quarter Ended March 31, 1997
Compared to Quarter Ended March 31, 1996
For the first quarter of 1997, the Business reported net income of
DM 216,000 compared to net income of DM 166,000 in the first quarter of 1996.
In the first quarter of 1997, net sales decreased by 10% to DM
2,850,000 compared to DM 3,181,000 in the first quarter of 1996. The decrease
was primarily due to the technology switch from IFA to ELISA technology mainly
in the EBV product line. (The Business has been a market leader in EBV for
more than ten years). In addition, as mentioned above, product shortages
caused by quality problems in the EBV ELISA line (produced by the Company) and
an ongoing public discussion about the German Healthcare Cost Containment
System resulted in a loss of business in the first quarter of 1997. The
Business lost market share mainly in the segment of high throughput customers.
Gross profit margin increased from 46.7% in the first quarter of
1996 to 63.7% in the first quarter of 1997. The increase in gross profit
margin was caused by lower cost of goods due to a reorganization of
production, the effects of changes in exchange rates, and lower inventory
reserves in the first quarter of 1997 compared to the first quarter of 1996.
Selling, General and Administrative expenses amounted to DM
1,244,000 or 44% of sales in the first quarter of 1997 in comparison to DM
1,236,000 or 39% of sales in the first quarter of 1996. Research and
development costs decreased from approximately DM 29,000 to DM 13,000. The
transfer of the Business's research and development activities to the Company
has already been effected. See "Research and Development."
SUMMARY OF CERTAIN SIGNIFICANT
DIFFERENCES BETWEEN GERMAN AND U.S.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Certain of the summary and selected financial data as of and for
each of the years in the five year period ended December 31, 1996 included in
this Appendix B have been prepared in accordance with the German Commercial
Code which represents German generally accepted accounting principles ("German
GAAP"). German GAAP differs in certain significant respects from US GAAP.
The following represents a summary of certain of the significant
differences between German GAAP and US GAAP. The summary has been prepared to
assist a reader in understanding the nature of the differences between German
GAAP and US GAAP as they would relate to a multinational corporation. This
summary may not provide a description of all of the significant differences
between German GAAP and US GAAP which would arise when preparing the financial
statements of a multinational corporation. Further, the following differences
may not represent differences or all of differences which would affect the
financial position or results of operations of the Business as of and for such
periods referred to above.
-15-
<PAGE>
Goodwill and Business Acquisitions
In accordance with German GAAP, the difference between the
purchase price and fair value of net assets acquired as part of a business
combination (goodwill) may be charged directly to additional paid in capital
or retained earnings or capitalized and amortized through the statement of
operations over its useful life, generally ranging from five to fifteen years.
Under US GAAP, goodwill must be capitalized and amortized through the
statement of operations over its useful life not to exceed forty years.
Capitalization of Interest
Under German GAAP, only under limited circumstances is the
capitalization of interest on capital expenditures permitted. Under US GAAP,
interest incurred as part of the cost of constructing fixed assets is required
to be capitalized and amortized over the life of the assets.
Leasing
Under German GAAP, lease transactions are generally, in practice,
recorded as operating leases without balance sheet impact. Under US GAAP,
leases which meet certain prescriptive criteria designed to determine whether
substantially all of the risks and rewards of ownership of leased assets are
transferred to the lessee are accounted for as capital leases. Under a
capital lease, the leased assets and obligations of the lessee are recorded on
the lessee's balance sheet. Conversely, on a lessor's balance sheet, assets
under a capital lease are not recorded as leased assets but as capital lease
receivables.
Recording of Provisions, Reserves, Valuation Adjustments
Since under German law a company's financial statements prepared
for a commercial purpose are also the basis of its tax accounts, tax
considerations heavily influence their preparation. Companies therefore may
tend to apply more conservative valuation methods in their financial
statements than they might otherwise report. German GAAP permits the
recognition of accruals or provisions for uncertain liabilities and loss
contingencies. The amount of such accruals or provisions represents the
anticipated expense to the group. Accruals for losses on open production
orders take into consideration all internal costs, including indirect selling
and administrative expenses. Restructuring accruals for obligations to third
parties are recorded at the earliest time that an expense is known and
reasonably possible. In addition, accruals may also be established for
expenses which are known by type of expense and are reasonably possible at the
balance sheet date but uncertain in respect of the amount or the timing of
when this accrual will be paid. Under US GAAP, an accrual for loss
contingency is recorded by a charge to income if it is both probable that an
asset has been impaired or liability has been incurred and the minimum amount
of loss can be reasonably estimated. Unspecified liability reserves for
future losses, costs or risks do not meet the condition for accrual under US
GAAP. Application of German GAAP may lead to higher accrual balances and
reserves for possible risks than allowed under US GAAP. However, under German
GAAP, provisions, reserves and valuation adjustments previously established
may also be released in subsequent periods with a resultant increase in
reported profits in the period released.
-16-
<PAGE>
Pensions and Similar Obligations
Under German GAAP, pension costs and similar obligations including
post-retirement benefits are accrued over the service lives of the employees
based upon actuarial studies using the entry age method as defined in the
German tax code. US GAAP is more prescriptive particularly as to the use of
actuarial assumptions and requires that a difference actuarial method (the
projected unit credit method) be used.
Foreign Currency
Under German GAAP, receivables and payables stated in foreign
currency are translated at each balance sheet date into the respective local
currency exchange rate on the transaction date or the balance sheet date, in
the case of payables. Under US GAAP, assets and liabilities denominated in a
foreign currency are recorded at balance sheet rates with any resulting gain
or loss recognized in the income statement.
Deferred Taxes
Under German GAAP, deferred tax assets and liabilities are
generally recognized on a net basis and to the extent that the entity is in a
net deferred tax asset position, the deferred tax asset is not required to be
recognized. Under US GAAP, deferred taxes are provided in the period of
origination for all temporary differences, including net operating loss carry
forwards where it is more likely than not that the tax benefit will be
realized in future periods, based upon enacted tax rates.
FINANCIAL STATEMENTS
The financial statements of the Business are attached hereto.
-17-
<PAGE>
The Diagnostics Business of Fresenius AG
Index of Financial Statements
Independent Auditors' Report F-2
Statements of Operations for the years ended
December 31, 1995 and 1996 F-3
Balance Sheets at December 31, 1995 and 1996 F-4
Statements of Cash Flows for the years ended
December 31, 1995 and 1996 F-5
Notes to Financial Statements F-6
<PAGE>
Independent Auditors' Report
The Board of Directors
Fresenius Aktiengesellschaft
Bad Homburg v.d. Hohe, Germany
We have audited the accompanying balance sheets of the Diagnostics Business,
a business unit of Fresenius Aktiengesellschaft, Bad Homburg v.d. Hohe,
Germany, as of December 31, 1995 and 1996 and the related statements of
operations 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 in the United States of America. 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 the Diagnostics Business
of Fresenius AG as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for years then ended in conformity with
generally accepted accounting principles in the United States of America.
March 27, 1997 KPMG Deutsche Treuhand-Gesellschaft
Frankfurt am Main, Germany Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
F-2
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Statement of Operations
Years ended December 31, 1995 and 1996
(DM in thousands)
1995 1996
-------- --------
Net sales 14,081 12,196
Cost of sales (7,391) (7,048)
-------- --------
Gross profit 6,690 5,148
-------- --------
Operating expenses:
Selling (2,598) (2,414)
General and administrative (3,066) (3,390)
Research and development (253) (135)
-------- --------
Operating income (loss) 773 (792)
Other income (expense) 136 61
Interest expense on capital lease obligations (1) (22)
Income (loss) before income taxes 908 (753)
-------- --------
(Provision) benefit for income taxes (391) 399
Net income (loss) 517 (354)
-------- --------
Net assets at beginning of year 3,225 3,829
Acquisition of licencing right (480) -
Net activity with Fresenius 567 (409)
-------- --------
Net assets at end of year 3,829 3,066
======== ========
See accompanying notes to financial statements.
F-3
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Balance Sheet
Years ended December 31, 1995 and 1996
(DM in thousands)
1995 1996
------ ------
Current assets:
Trade accounts receivable, less allowance of 10 in 1996 and 10 1,080 1,198
in 1995
Intercompany amounts due from affiliates 113 104
Inventories net 3,468 2,766
------ ------
Total current assets 4,661 4,068
------ ------
Property and equipment, at cost less accumulated depreciation 1,038 770
Rental equipment under capital leases, net 128 453
Intangible assets, less accumulated amortization 1 -
Deferred taxes 138 70
------ ------
Total assets 5,966 5,361
====== ======
Current liabilities:
Accounts payable 194 65
Intercompany amounts due to affiliates 46 34
Accrued expenses 402 708
Current portion of capital lease obligations 53 221
Deferred income taxes 660 273
Other current liabilities 206 173
------ ------
Total current liabilities 1,561 1,474
------ ------
Capital lease obligations 112 331
Pension obligation 439 419
Other liabilities 25 71
------ ------
Total liabilities 2,137 2,295
Net assets 3,829 3,066
------ ------
Total liabilities and net assets 5,966 5,361
====== ======
See accompanying notes to financial statements.
F-4
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Statements of Cash Flows
Years ended December 31, 1995 and 1996
(DM in thousands)
1995 1996
------- -------
Operating activities:
Net income 517 (354)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 563 688
(Gain)/loss on sale of equipment 1 4
Deferred tax provision (254) (319)
Changes in assets and liabilities:
Accounts receivable 332 (118)
Accounts receivable from related parties (79) 10
Inventories (471) 702
Accounts payable 11 (129)
Accounts payable from related parties 46 (11)
Pension liability (68) (20)
Accrued expenses (141) 306
Other assets and liabilities 82 13
------- -------
Net cash provided by operating activities 538 770
------- -------
Investing activities:
Purchases of property and equipment (620) (238)
------- -------
Net cash used in investing activities (620) (238)
------- -------
Financing activities:
Repayment of capital lease obligations (4) (123)
Net activity with Fresenius AG 86 (408)
------- -------
Net cash provided by (used in) financing activities 82 (532)
------- -------
Net change in cash - -
Cash at beginning of period - -
------- -------
Cash at end of period - -
======= =======
See accompanying notes to financial statements.
F-5
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Notes to Financial Statements
(in thousands of DM)
(1) Basis of Presentation and Summary of Accounting Policies
--------------------------------------------------------
The Business -- Diagnostics Business of Fresenius AG (the "Business")
represents a business unit of Fresenius AG (OFreseniusO) engaged in the
business of diagnostic test kits and material designed to detect past
and present infection with kits and materials based on established
immunological assay methods. The Business has one principal
manufacturing facility which is located in Bad Homburg, Germany.
Basis of Presentation -- The accompanying Financial Statements represent
the assets and liabilities ("Net Assets") and the associated revenues,
expenses and cash flows of the Business assuming that the Business,
currently a business unit of Fresenius, was organized for all periods as
a separate legal entity, owning certain Net Assets of Fresenius. The
Business does not maintain its own cash balances, rather Fresenius
receives and pays its cash on behalf of the Business. Separate
identification of the BusinessOs cash position within Fresenius is not
practicable. Accordingly, the effects of the BusinessOs cash receipts
and cash payments by Fresenius have been accounted for within net asset
as "net activity with Fresenius". The Business has not been charged
interest expense, nor has it received interest income, on any balances
with Fresenius.
The accompanying Financial Statements have been prepared in accordance
with United States generally accepted accounting principles ("U.S. GAAP").
Inventory Valuation -- Inventory has been valued at the lower of cost or
market, cost being determined on the basis of an average or first-in,
first-out method. Manufacturing costs comprise direct material and
labor and applicable manufacturing overheads, including depreciation
charges.
Property and Equipment -- Property and equipment have been valued at
acquisition or manufacturing cost, less depreciation calculated on a
straight-line basis over the assets' useful lives, principally as
follows: site improvements - ten years; technical installations and
machinery - five to eight years; and other factory and office equipment-
five to ten years.
Intangible Assets -- Intangible assets have been valued at acquisition
cost, less depreciation calculated on a straight-line basis over the
assets' useful lives.
Revenue Recognition -- Revenue is recognized when title passes or
services are rendered, net of discounts, customer bonuses and rebates
granted.
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Notes to Financial Statements
(in thousands of DM)
Research and Development -- Costs of research and development are
expensed as incurred.
Taxation -- The Business represents a business unit of Fresenius AG and
as such does not file separate income tax returns. The income tax
provision included in the accompanying Statements of Operations have
been computed as if the Business were a separate business.
Deferred tax assets and liabilities have been recognized for the future
consequences attributable to differences between the Financial
Statements carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
periods in which those temporary differences are expected to be
recovered or settled. Current taxes are computed on the basis of the
assumption that all current earnings are distributed. Deferred taxes
are calculated using the "undistributed earnings" rate.
Pensions -- The Business recognizes all actuarial gains and losses in
the Statement of Operations as realized.
Use of Estimates -- The preparation of the Financial Statements requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent amounts
at the date of the Financial Statements and reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Concentration of Credit Risk -- The Business is engaged principally in
the manufacture and sale of medical products to health care providers in
Germany. The Business performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral
from its customers.
(2) Related Party Transactions
--------------------------
Fresenius has historically provided certain services to the Business,
including but not limited to administrative services, management
information services, employee benefit administration, legal and
environmental consultation and administration, insurance, central
purchasing, tax services, treasury services and accounting and financial
reporting. The costs for services by Fresenius to the Business was
1,660 and 1,462 for the years ended December 31, 1995 and 1996,
respectively. The foregoing amounts were determined based upon service
contracts between the relevant parties.
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Notes to Financial Statements
(in thousands of DM)
The Business conducts its manufacturing in a facility leased by
Fresenius and used by other business units of Fresenius. The
accompanying statements of operations include 232 and 231 for the years
ended December 31, 1995 and 1996, respectively, of costs associated with
the Business's share of the rental, utilities and other operating costs
of the facility.
In the opinion of management of the Business, the foregoing expenses are
indicative of the actual expenses that would have been incurred if the
Business had been operating as an independent entity.
For the years ended December 31, 1995 and 1996, the Business recognized
net sales of 237 and 305, respectively, related to products sold to
other Fresenius entities, and purchased 4,063 and 2,550, respectively,
of products from other Fresenius entities.
An analysis of the Business's intercompany amounts due to and due from
affiliates as well as the net activity with Fresenius follows:
Due from Due to
affiliates affiliates Net
---------- ---------- -------
Balance at January 1, 1995 34 - 34
Purchases from affiliates - (4,063) (4,063)
Sales to affiliates 237 - 237
Administrative services purchased - (1,660) (1,660)
Payments (158) 5,677 5,519
---------- ---------- -------
Balance at December 31, 1995 113 (46) 67
Purchases from affiliates - (2,550) (2,550)
Sales to affiliates 305 - 305
Administrative services purchased - (1,462) (1,462)
Payments (314) 4,024 3,710
---------- ---------- -------
Balance at December 31, 1996 104 (34) 70
========== ========== =======
Year ended
December 31,
1995 1996
------- -------
Payments made to affiliates - net 5,519 3,710
Payments received from third- parties (4,952) (4,119)
------- -------
Net activity with Fresenius 567 (409)
======= =======
During 1995 and 1996 the Business' average net balances due to
affiliates were 136 and 70, respectively.
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Notes to Financial Statements
(in thousands of DM)
In 1995 the Business acquired from Gull GmbH, another consolidated
subsidiary of Gull Laboratories Inc., the right to distribute GullOs
products in Germany. In connection with acquiring such right, the
Business paid 480 to Gull. Since Gull Laboratories, Inc. is a
consolidated subsidiary of Fresenius and Gull had no recorded book value
for such right; such transaction was accounted for at cost rather than
fair value. Accordingly, the amount paid by the Business in connection
with the transaction has been accounted for entirely as an equity
transaction.
(3) Inventories
-----------
As of December 31, 1995 and 1996 inventories consisted of:
At December 31,
------------------
1995 1996
------- -------
Raw materials and purchased supplies 1,519 1,297
Finished goods 2,297 1,908
------- -------
3,816 3,205
Reserves 348 439
------- -------
Inventories, net 3,468 2,766
======= =======
(4) Property and Equipment
----------------------
As of December 31, 1995 and 1996 property and equipment consisted of:
At December 31,
------------------
1995 1996
------- -------
Cost:
Machinery and equipment 904 904
Other factory and office equipment 2,774 2,984
------- -------
3,678 3,888
Construction in progress 43 -
------- -------
3,721 3,888
Accumulated depreciation 2,683 3,118
------- -------
1,038 770
======= =======
Depreciation expense charged in the statements of operations was 521 in
1995 and 502 in 1996.
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Notes to Financial Statements
(in thousands of DM)
(5) Intangible Assets
-----------------
As of December 31, 1995 and 1996 intangible assets consisted of:
At December 31,
-----------------
1995 1996
------- -------
Cost 69 29
Accumulated depreciation 68 29
------- -------
1 -
======= =======
Amortization expense charged in the statements of operations was 6 in
1995 and 1 in 1996.
(6) Rental Equipment Under Capital Leases
-------------------------------------
Rental equipment under capital leases represents diagnostic equipment
purchased by the Business, sold to third-party financing companies and
leased back under capital lease arrangements of generally 36 months.
As of December 31, 1995 and 1996 rental equipment under capital leases
consisted of the following:
At December 31,
----------------
1995 1996
------- -------
Cost 170 680
Accumulated depreciation 42 227
------- -------
128 453
======= =======
At December 31, 1995 and 1996 the Business had deferred 37 and 121,
respectively, of gains on the sale and leaseback of rental equipment
under capital leases. Such amounts are being amortized to income over
the term of the capital lease. Identification of rental income from the
BusinessOs leasing of the diagnostic machines is not practicable as the
BusinessOs return on the machines is received through contractual
arrangements whereby a premium is charged for other support equipment
sold during the life of the lease.
Capital lease liabilities at December 31, 1996, are due as follows:
Lease payments:
1997 249
1998 244
1999 103
------
596
Less amount representing interest 44
------
552
======
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Notes to Financial Statements
(in thousands of DM)
(7) Accrued Expenses
----------------
As of December 31, 1995 and 1996 accrued expenses consisted of the following:
At December 31,
----------------
1995 1996
------- -------
Accrued payroll and employee benefits 284 503
Provisions for goods return 62 53
Discount 18 15
All other 38 137
------- -------
402 708
======= =======
(8) Income Taxes
------------
Income tax expense (benefit) for the years ended December 31, 1995 and
1996 consisted of the following:
At December 31,
-----------------
1995 1996
------- -------
Current 375 (80)
Deferred 16 (319)
------- -------
Income tax expense (benefit) 391 (399)
======= =======
German corporate tax law applies a split rate, imputation system to the
income taxation of a corporation and its stockholders. Upon distribution of
retained earnings in the form of a dividend, stockholders subject to German
tax receive an income tax credit in the amount of federal income taxes
(presently 30 percent) previously paid by the corporation on such
distributed earnings. In addition, the corporation receives a tax refund to
the extent such earnings had been initially subjected to a corporation
income tax in excess of 30%. The tax refund is also distributed to the
shareholder.
In general, retained German corporate income is initially subject to a
federal corporation tax of 45 percent plus a surcharge of 7.5 percent on
the federal corporate tax rate. After giving effect to the surcharge,
the federal corporate tax rate increases to 48.375 percent.
Upon distribution of retained earnings to stockholders, the corporate
income tax rate on the distributed earnings is adjusted to 30 percent
(the "distributed earnings rate") by receiving a refund for taxes
previously paid in excess of 30 percent. This refund is passed on to
the stockholders through a gross up of the dividend from the
corporation.
For purposes of computing income tax expense for the Business, a
complete distribution of each year's earnings is assumed. As such, the
refund of tax described above is reflected in the income tax expense
reconciliation presented below.
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Notes to Financial Statements
(in thousands of DM)
A reconciliation of income taxes determined using the German federal
statutory rate of 48.375 percent is as follows:
Year ended
December 31,
---------------
1995 1996
------- -------
Expected income tax expense (benefit) 439 (364)
Trade income taxes, net of German federal corporation
tax benefit 73 (60)
Tax credit for assumed dividend distribution of each
years' earnings (96) 60
Other (25) (35)
------- -------
Actual provision for income taxes 391 (399)
======= =======
Year ended
December 31,
-----------------
1995 1996
------- -------
Deferred tax assets relating to:
Property and equipment 118 70
Rental equipment under capital leases, net of
related receivables 37 124
Pension liability 20 29
------- -------
Total deferred tax assets 175 223
------- -------
Deferred tax liabilities relating to:
Inventory 664 391
Receivables 19 24
Accrued expenses 14 11
------- -------
Total deferred tax liabilities 697 426
------- -------
Net deferred tax liability (522) (203)
======= =======
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Notes to Financial Statements
(in thousands of DM)
(9) Employee Benefit Plans
----------------------
The Business participates in the Fresenius AG defined benefit pension
plan. Plan benefits are based upon years of service and final salary.
Consistent with normal business custom in the Federal Republic of
Germany, Fresenius'pension obligations are unfunded.
The net periodic pension cost comprised:
1995 1996
------- -------
Service cost:
Present value of benefits earned during the year 81 69
Interest cost on projected benefit obligation 36 32
Amortization of transition obligation 1 1
Actuarial gain recognized (173) (123)
------- -------
Net periodic pension cost (55) (21)
======= =======
The funded status of the Business's retirement plan follows:
1995 1996
------- -------
Actuarial present value of benefits:
Vested 122 182
Nonvested 207 157
------- -------
Accumulated benefit obligation 329 339
Effect of projected future salary increase 122 90
------- -------
Projected benefit obligations 451 429
Transition obligation (11) (10)
------- -------
Pension liability 439 419
======= =======
Assumed discount rates and rates of increase in remuneration used in
calculating the projected benefit obligations were as follows:
1995 1996
------ ------
Discount rate 7% 7%
Long-term rate of increase
in remuneration employees < 35 years 5% 5%
employees > 35 years 4% 4%
<PAGE>
THE DIAGNOSTICS BUSINESS OF FRESENIUS AG
Notes to Financial Statements
(in thousands of DM)
(10) General and Administrative Expenses
-----------------------------------
General and Administrative expenses in 1995 and 1996 include the following
amounts:
1995 1996
------ ------
Severance Payments 43 491
Implementation of SAP/R3 111 76
------ ------
154 567
====== ======
(11) Subsequent Events
-----------------
In December, 1996 Fresenius entered into a letter of intent to transfer
the Business to Gull Laboratories, Inc. The transaction is subject to
closing conditions including approval of the transaction by the Gull
Laboratories' shareholders.
<PAGE>
Appendix C
ASSET PURCHASE AGREEMENT
By and among
Fresenius AG, Borkenberg 14, 61440 Oberursel, registered with the Commercial
Register Bad Homburg HRB 2617 and represented by Frank Simon, acting according
to the power of attorney dated 16. April 1997, "Seller" - and Gull GmbH,
registered with the Commercial Register Koln, HRB 24160 and represented by Mike
Malan as its Managing Director with full authority to represent the company
alone, - "Purchaser" - and Gull Laboratories Inc., a Utah corporation,
represented by George Evanega, as its Chief Executive Officer and President
with full authority to represent the company alone - "Gull" -.
PREAMBLE
The Seller is engaged in the business of developing, manufacturing and
marketing of diagnostic test kits and material designed to detect past and
present infection with kits and materials based on established immunological
assay methods (the "Business"), including indirect immunofluorescent antibody
assay ("IFA"), enzyme-linked immunosorbent assay ("ELISA"), blood grouping
reagents ("BG"), tissue typing products ("HLA"), immunodiffusion and Western
Blot (collectively referred to herein as the "products") through its
unincorporated Intensive Care and Diagnostic Division as reflected in its
business unit diagnostics. The Seller desires to sell and the Purchaser desires
to purchase all of the assets and properties held in connection with, necessary
for, or material to the Business as a going concern but excluding claims and
liabilities of the Business incurred prior to the Effective Date as defined in
Article 9 (2).
Now, therefore, the Parties hereto agree as follows:
Article 1
Assets and Properties
(1) The Seller hereby agrees to sell to the Purchaser all fixed assets within
the meaning of Sec. 266 sub-sec. 2A of the German Commercial Code [HGB]
belonging to the Business as of the Closing Date as set forth in Article 9, all
inventory stocks within the meaning of Sec. 266 sub-sec. 2 B I HGB belonging to
the Business as of this date, and all rights belonging to the Business as of
this date which form the basis of any accrued and deferred items within the
meaning of Sec. 266 sub-sec. 2 C HGB. This also includes down-payments already
effected.
The Seller hereby agrees to sell to the Purchaser all books of accounting
records, files, invoices, customer lists, supplier lists, designs, drawings,
business records and plans, computer print-outs, plans and specifications,
trade correspondence, sales or promotional literature, operating data and other
books and records or parts of the above mentioned documents related exclusively
to the Business, including, without limitation, those required to be kept under
applicable law, and other data or information associated with, used or employed
in connection with the Business. The Purchaser shall be obliged to store all
sold documents as required by applicable law and shall transfer this obligation
to any successor in the rights and obligation of the sold assets and
properties. The Seller shall be entitled to have free access to these documents
at any time during normal business hours and cost-free as far the Seller has a
justified interest. This right includes the right to copy the documents and
borrow the documents for an appropriate period of time if necessary.
(2) The fixed assets sold according to para. (1) above shall include, in
particular, the assets listed in Exhibit 1 hereto existing as of the Effective
Date.
<PAGE>
The assets listed in Exhibit 1 which have been alienated or in any other
way withdrawn from the Company within the ordinary course of business in the
period between the Effective Date and prior to the Closing Date ("Interim
Period") shall not be deemed sold under this Agreement. Any assets produced,
acquired or in any other way added to the Business in the period between
December 31, 1996 and the Closing Date within the ordinary course of business
as a substitute of or addition to the assets listed in the list of assets shall
be deemed sold under this Agreement.
(3) Except as set forth in Article 14, section (1), any receivables and other
assets within the meaning of Sec. 266 sub-sec. 2 B II HGB, any securities
within the meaning of Sec. 266 sub-sec. 2 B III HGB as well as any checks, cash
assets, credit balances with the Federal Bank, on a postal giro account and
with any credit institutions within the meaning of Sec. 266 sub-sec. 2 B IV HGB
which have accrued or exist as of the Closing Date shall not belong to the
assets sold according to para. (1) above, even if they are part of the
Business.
Article 2
Industrial Property Rights, Copyrights
and other Intangible Assets
(1) The Seller hereby agrees to transfer to the Purchaser all product names
as listed in Exhibit 2 hereto, including but not limited to the exclusive right
to use, to sell or otherwise to exploit these product names.
With respect to the product names listed in Exhibit 3 which contain the
partial name of "FRE", the Seller hereby agrees to grant to the Purchaser the
exclusive right to use such product names but only within those countries as
listed in Exhibit 3 and only for a period of three years after the Effective
Date. The Purchaser is not entitled to create or use new product names or other
product names already in existence which contain the partial word "FRE". The
right to usage in any form whatsoever of the Fresenius name or the Fresenius
logo shall not be transferred or licensed in any form whatsoever under this
Agreement, except as provided in Article 2 (4).
Trademarks which contain the partial word "FRE" do not belong to the
assets sold to the Purchaser.
Seller waives its right to claim against the Purchaser's use of the
listed product names which contain "FRE" as used on the Effective Date in
product names listed in Exhibit 2 in the countries listed in Exhibit 3 and only
for a period of 3 years. If any other third party will use product names or
marks which are similar to the listed product names which contain the partial
name of "FRE", both parties will agree on coordinated actions against such
third parties; either Purchaser or Seller may at its own cost, and for its own
recovery take independent action to protect the use of such product name or
marks if the other does not do so.
(2) The parties hereto agree that the assets sold under Article 1 para. (1)
hereof shall include all rights relative to the Business to inventions,
technical know-how, trade secrets, procedures, formulas and other intangible
objects not already covered by industrial property rights as well as any
embodiments of such objects such as, for example, written descriptions, sample
drawings, designs, etc.. The assets sold under Article 1 para. (1) hereof shall
equally include all rights of usage and similar rights in and to the rights
mentioned in the preceding sentence.
(3) The parties hereto further agree that the assets sold under Article 1
para. (1) hereof shall also include all rights relative to the Business to
commercial know-how, business secrets as well as administration and
distribution procedures such as any documents regarding the administrative and
distribution organization, documents on and correspondence with suppliers and
customers as well as other business records.
(4) As defined in this section, Purchaser shall be entitled to use the
Seller's name to the extent the trademark, service mark, brand name, or
<PAGE>
corporate name of Seller is used by the Business on finished goods, advertising
and promotional materials, product, training and service literature and
materials or appear on inventory at the Closing. Purchaser may use such
materials or sell such inventory after the Closing for a period of six (6)
months but at least until December 31, 1997 without altering or modifying such
materials or inventory or removing such trademarks, service marks, brand names,
or trade or business names, but the Purchaser shall not thereafter use such
trademarks, service marks, brand names, or trade names in any manner without
the prior written consent of Seller, except as provided in Article 2. Section
(1) hereof.
Article 3
Purchaser's Takeover of Agreements and Offers
Seller shall assign to Purchaser, and Purchaser shall take over and
assume and agree to perform all agreements and offers to enter into agreements
which are listed in Exhibit 4 hereto and belong to the Business as of the
Closing Date, i.e. the Purchaser shall take over from the Seller all rights and
duties under such agreements and offers to enter into agreements by way of a
takeover, with a releasing effect for the Seller. Article 6 below shall apply
with respect to the approvals of third parties necessary for such takeover.
The parties agree that they will delimit the rights and duties out of the
abovementioned agreements on the Effective Date in accordance with generally
accepted accounting principles according to German law.
Article 4
Liabilities
(1) Except for the liabilities and contingent liabilities listed in Exhibit 5
hereto and except as contemplated by Article 14, the Purchaser will not assume
any other liabilities or contingent liabilities of the Seller which have
accrued as of the Effective Date or which relate to the operations of the
Business prior to the Effective Date. Any liabilities or contingent liabilities
not listed in Exhibit 5 shall remain with the Seller. The Seller shall fully
hold harmless the Purchaser against any claims arising from such liabilities
which remain with the Seller.
(2) Any and all liabilities pertaining to the operations of the Business
after the Effective Date, including any tax liabilities, liabilities towards
employees or pension and social insurance companies, trade accounts payable as
well as any debts resulting from warranty claims for goods manufactured or
distributed after the Effective Date, shall be assumed by the Purchaser. The
Purchaser shall fully hold harmless the Seller against any and all claims
arising from liabilities which have occurred after the Effective Date within
the meaning of sentence 1 of this paragraph.
Article 5
Transfer of Employment Relationships
(1) The parties agree that on the Closing Date the employment relationships
with the Seller which are attributable to the Business and are listed in
Exhibit 6 hereto shall transfer to the Purchaser pursuant to Section 613 a of
the German Civil Code [BGB] together with all rights and duties.
(2) Together with the employment relationships of the working employees the
obligations existing for these employees as of the Closing Date under the
company pension scheme as listed in Exhibit 7 hereto shall transfer to the
Purchaser.
(3) Any obligations attributable to the Business under current benefits of
the company pension scheme as listed in Exhibit 7 shall be transferred to the
Purchaser. The Purchaser undertakes toward the Seller to hold the Seller
harmless against any claims under such current benefits.
(4) The Purchaser undertakes to take over, effective as of the Closing Date,
the works agreement attached hereto as Exhibit 8 and to ensure the rights
resulting for the employees therefrom.
<PAGE>
(5) The Purchaser further undertakes to grant to the employees taken over by
it the Company's bonuses and perquisites granted to the employees so far and
listed in Exhibit 9 hereto also after the Closing Date.
(6) The Purchaser shall be obligated to join, effective as of the Closing
Date, the Chemical Industry's basic collective agreement as attached in Exhibit
10.
(7) It is agreed that the employees taken over by the Purchaser will still be
represented by the Seller's workers' council until the employees taken over
elect their own workers' council after the Closing Date.
Article 6
Approval of Third Parties
(1) As far as the approval of any third parties, in particular, the approval
of debtors of receivables, creditors of certain liabilities or contracting
parties, is necessary for the transfer of the assets, the takeover of
obligations, liabilities and contingent liabilities, the takeover of the
agreements and offers to enter into agreements, the parties hereto will jointly
endeavor to obtain any such approval.
(2) If it is impossible or improper to obtain such approval, the Parties
hereto will, with respect to their internal relationship, act and allow to be
treated in such a way as if the transfer of the obligations and liabilities,
the takeover of the agreements or offers to enter into agreements had been
validly effected on the Closing Date. In such case, the Seller will, in the
external relationship, remain the owner of the asset item concerned, debtor of
the respective obligation, liability or contingent liability and party to the
respective agreement or offer for an agreement. In the internal relationship,
however, the Seller shall hold, assume and implement the respective asset item,
obligation, liability or contingent liability or the respective agreement or
offer for an agreement for the account of the Purchaser.
Article 7
Transfer of Ownership, Grant of Possession
(1) The parties hereto agree that the ownership in the assets sold under
Article 1 hereof (including the property rights and intangible assets
listed in Article 2) shall transfer to the Purchaser on the Closing Date.
To the extent that on the Closing Date any third parties have any title
retention rights in the sold assets or these assets are transferred to any
third parties by way of security, the Seller shall transfer to the
Purchaser as of the Closing Date the expectant right due to the Seller. All
the liens and title retention rights other than title retention rights as
customary in the ordinary course of the business (those which extinguish
upon payment for the goods purchased) are listed in Exhibit 11.
(2) The Seller shall on the Closing Date grant to the Purchaser
possession of the tangible assets sold according to Article 1 hereof. To
the extent that the Purchaser is not yet granted possession of any fixed
asset items as of the Closing Date, the delivery necessary for the transfer
of ownership shall be replaced by the agreement that such items will be
kept in custody by the Seller for the Purchaser as from the Closing Date.
With respect to any assets which on the Closing Date are in possession of a
third party, the delivery shall be replaced by the Seller assigning to the
Purchaser its claim for return of such assets against such third party.
(3) Effective as of the Closing Date, the Purchaser will take over all
obligations, liabilities and contingent liabilities assumed under Article 4
hereof, and, effective as of the Closing Date, will take over all
agreements and offers to enter into agreements taken over under Article 3
hereof.
<PAGE>
(4) The assignment of any assets, the transfer of the rights as well as
the takeover of the agreements shall be subject to the condition precedent
that the full purchase price according to Article 8 of this Agreement shall
be paid.
Article 8
Purchase Price
(1) The Purchaser shall pay to the Seller on the Closing Date as full
payment for the assets and properties, liabilities and agreements belonging
to the Business 1,320,000 shares of the common stock of Gull with $.001 par
value per share (the "Shares").
(2) The parties assume that since it constitutes a transfer of a separate
part of a business, the sale of all assets of the Business will not be
subject to turnover tax pursuant to Sec. 1 sub-sec. 1a of the Turnover Tax
Law. If, despite this assumption, any turnover tax is to be paid, such tax
shall be borne by the Purchaser.
(3) In case of a failure of payment, including a failure to transfer
shares in accordance with para. (1), default interest in cash or shares as
determined by the Seller at a rate of 5% above the Bundesbank's discount
rate shall be paid. This shall not affect the assertion of damage claims in
excess thereof.
(4) Beside the Purchaser Gull hereby assumes the joint and several
liability for the payment of the Purchase Price according to the preceding
paragraphs.
Article 9
Closing Date
(1) The Parties agree that the Closing Date shall be after all conditions
precedent as defined in Article 18 have been satisfied, including the
obtaining of shareholder approval and all required governmental approvals,
and if appropriate and whenever possible, at the end of a fiscal quarter.
The Parties may at any time jointly determine another date as the Closing
Date.
(2) The Effective Date as defined in this Agreement shall be December 31,
1996, 12:00 midnight.
Article 10
Seller's Warranties
(1) The Seller is a corporation duly organized, validly existing and in
good standing under the laws of the Federal Republic of Germany. The Seller
is authorized or licensed to do business in each jurisdiction in which the
character and location of its assets or the nature of its business makes
such qualification necessary, except in those cases in which a failure to
be so authorized or qualified would not have a material adverse effect on
the Business. The Seller has all requisite power and authority to execute,
deliver and perform this Agreement and to consummate the transactions
contemplated hereby and has all requisite power and authority, licenses,
permits and franchises to carry on the Business as it is presently being
conducted.
(2) This Agreement has been duly and validly executed and delivered by
the Seller. This Agreement constitutes valid and binding obligations of the
Seller, each enforceable in accordance with its terms.
(3) The Seller has delivered to the Purchaser, and included as Exhibit 12
hereto, a true copy of:
unaudited monthly statements of the Business' revenues from the
Effective Date through March 1997.
The monthly statements are in accordance with the books and records
of the Seller, fairly present the financial results of the Business for the
periods indicated and based on management accounting methods of Seller.
<PAGE>
(4) To the best of Seller's knowledge neither the Seller, any officer,
employee or agent of the Seller, or any other person acting on its behalf,
has, directly or indirectly, within the last two (2) years given or agreed
to give any gift or similar benefit to any customer, supplier, governmental
employee or other person who is or may be in a position to help or hinder
the Business (or assist Seller in connection with any actual proposed
transaction relating to the Business) (a) which subjected or might have
subjected Seller to any damage or penalty in any civil, criminal or
governmental litigation or proceeding, (b) which, if not given in the past,
might have had a material adverse effect on the Business, (c) which, if not
continued in the future, might have a material adverse effect or subject
Seller to suit or penalty in any private or government litigation or
proceeding, or (d) for the purpose of establishing or maintaining any
concealed fund or concealed bank account.
(5) Except as set forth in Exhibit 13, the execution, delivery and
performance of this Agreement by the Seller and consummation by the Seller
of the transactions contemplated hereby and thereby, will not, with or
without giving of notice and lapse of time, or both: (a) violate any
provision of law, statute, rule, regulation or executive order to which the
Seller, the Business or the Assets is subject; (b) violate any judgment,
order, writ or decree of any court to which the Seller, the Business or the
Assets is subject; or (c) result in the breach of or conflict with any
material term, convenant, condition or provision or result in or permit any
other party to cause the modification or termination of, constitute a
default under, or result in the creation or imposition of any lien,
security interest, charge or encumbrance upon any of the assets pursuant to
any partnership agreement, corporate charter or bylaws, commitment, lease,
mortgage, contract or other agreement or instrument to which the Seller is
a party or by which any of the assets of the Business are bound or affected
or from which the Business derives benefit except as set forth otherwise in
this agreement.
(6) Except as set forth in Exhibit 14, the Seller is not a party to any
contract, commitment or agreement, nor is the Seller or any of the Assets
subject to, or bound by, any order, judgment, degree, law, statute,
ordinance, rule, regulation or other restriction of any kind or character,
which would prevent the Seller from entering into this Agreement or from
consummating in all material aspects the transactions contemplated hereby.
(7) Except as set forth in Exhibit 15, to the best of Seller's knowledge
no consent, authorization or approval of or exemption by or filing with any
foreign or domestic governmental, public or self-regulatory body or
authority is required in connection with the execution, delivery and
performance by the Seller of this Agreement, the taking of any action
herein contemplated.
(8) To the best of Seller's knowledge, there are no proposed laws, rules,
regulations, ordinances, orders, decrees, or other proceedings which would
be applicable to the business, operations, or properties of the Business
which might adversely affect the properties, assets, operations or
prospects of the Business, either before or after the Closing Date.
(9) Except as set forth on Exhibit 16, since December 31, 1996, the
Seller has not: (a) to the best of Seller's knowledge suffered any material
adverse change in, or the occurence of any events, which had or might
reasonably be expected to have a material adverse effect on the Business;
(b) to the best of Seller's knowledge incurred damage to or destruction of
any of the material assets of the Business by casualty, whether or not
covered by insurance, or suffered or became subject to any pending or
threatened condemnation of property of the Business; (c) incurred any
material obligations or liabilities (fixed or contingent) with respect to
the Business except (i) in the ordinary course of business, (ii)
obligations and liabilities under the agreements mentioned in Art. 3 to the
<PAGE>
extent required thereby, and (iii) obligations and liabilities under this
Agreement; (d) made any change in the nature of the Business; (e)
mortgaged, pledged, assigned, hypothecated or subjected to lien or any
other encumbrance any of the assets of the Business; (f) sold, transferred
or leased any of the assets, except in each case in the ordinary course of
business; (g) sold, assigned, transferred, or granted any rights under or
with respect to any of its licenses, agreements, patents, inventions,
trademarks, trade names, copyrights or formulae or with respect to know-how
or any other intangible asset in each case to the extent related to the
Business and, in each case, other than in the ordinary course of business;
(h) amended or terminated any of its contracts, relating to the Business
other than in the ordinary course of business; (i) waived or released any
other rights with respect to the Business having a value in excess of
$10,000 in the aggregate; (j) to the best of Seller's knowledge had work
performed which could give rise to liens with respect to any of the Assets
which has not been paid or which payment has not been provided for; or (k)
entered into any other transaction with respect to the Business not in the
ordinary course of business and having a materially adverse effect on the
Business.
(10) Seller is acquiring the shares for its own account and not with a
view to their distribution within the meaning of section 2 (11) of the
United States Securities Act of 1933.
(11) Except as disclosed in Exhibit 17, to the best of Seller's knowledge
the Seller has complied and is in compliance in all material respects with
all applicable laws and rules and regulations of foreign, federal, state
and local governments and all agencies thereof and other regulatory bodies
which affect the Business or the Assets. There are no pending claims which
have been filed against the Seller or any affiliate (relating to the
operation of the Business or the ownership of the Assets) alleging a
material violation of any such law or regulation. No notice has been
received by the Seller with respect to any such violation of any such legal
requirements.
(12) Except as set forth in Exhibits 1 and 11 the Seller has good and
valid title to, and owns outright, the assets as described in Article 1
free and clear of all mortgages, claims, liens, charges, leases, subleases,
encumbrances, security interests, restrictions on use or transfer or other
defects of any nature, whether or not recorded, and the sale and delivery
of the assets pursuant hereto will vest in the Purchaser good and valid
title to the assets free and clear of all mortgages, claims, liens,
charges, encumbrances, leases, subleases, security interests, restrictions
on use or transfer, or other defects of any nature. All of the leases and
other agreements or instruments included as part of the assets listed on
Exhibit 1 are assignable to the Purchaser only with the consent of any
third party.
(13) The contracts listed on Exhibit 4 are all of the material contracts
(material in the meaning of this section are all contracts which include a
payment obligation of more than US$ 10,000.00 p.a.) with respect to the
Business the Seller is a party to and no other material contracts with
respect to the Business are in existence.
Except as set forth on Exhibit 18 hereto and except as not having
materially adverse effect, each of the contracts is valid, in full force
and effect and enforceable by the Seller in accordance with its terms,
subject to third party consent.
Except as indicated in Exhibit 19, there has not occurred any default
by the Seller or to best of Seller's knowledge any event which, with the
giving of notice or the lapse of time or both, and/or the election of any
person other than the Seller will become a material default, nor, to the
knowledge of the Seller has there occurred any default by others or any
event which, with the lapse of time and/or the election of any of the
<PAGE>
Seller, will become a default under any of the contracts. Neither the
Seller nor to the best of Seller's knowledge any other party is in arrears
in any material respect in the performance or satisfaction of any material
term or condition to be performed or satisfied by it under any of the
contracts, and, to the best knowledge of the Seller, no waiver or
indulgence has been granted by any of the parties thereto.
(14) The rental estates listed on Exhibit 20 are all of the rental estates
under which the Business is a lessee or sublessee of any real property or
interest therein used in connection with the operation of the Business or
where any of the assets of the Business are located.
The Seller agrees to conclude with the Purchaser on the Closing Date
the Lease contract attached hereto as Exhibit 21.
(15) To the best of Seller's knowledge Exhibit 15 sets forth all
governmental approvals and consents necessary for, or otherwise material
to, the conduct of the Business. To the best of Seller's knowledge except
as set forth in Exhibit 15, all such governmental approvals and consents
have been duly obtained and are in full force and effect, and Seller is in
compliance in all material respects with each approval and consent held by
it with respect to the assets and the Business.
(16) The customer list which has been provided is a correct and complete
list of the name and locations of each of the customers of the products or
services of the Business (the "Customer"). Exhibit 22 hereto contains a
correct and complete list of the names and locations of each of the
suppliers of the Seller who supplied goods and/or services (other than
utilities) to the Seller with respect to the Business in an aggregate
amount of DM 15,000.00 or more during 1996 and the amount and type of
supplies furnished by such suppliers during such period. Except as set
forth in Exhibit 23, the Seller has not received any notifications (whether
written or verbal) that any of such Customers or suppliers will cease to
continue such relationship with the Seller, or will substantially reduce
the extent of such relationship, at any time prior to or after the Closing
Date. The Seller has no knowledge of any other material modification or
change in the Business' business relationship with such Customers or
suppliers.
(17) Exhibit 6 hereto contains a true and correct schedule of the names
and job descriptions of all present officers, employees and agents of the
Seller with respect to the Business; as well as the aggregate amount of the
monthly benefits of these officers, employees and agents for the month of
January 1997. The employees listed on Exhibit 6 constitute all of the
employees of the Seller who perform services (other than insignificant
services) with respect to the Business except those employees whose
services are rendered by Seller according to the Service Contracts
described in Article 14 (4).
(18) To the best of Seller's knowledge the books of account and other
financial records of the Seller with respect to the Business are in all
material respects complete, correct and up to date and are maintained in
accordance with good business practices.
(19) No portion of the Business is conducted by any person or entity other
than the Seller. Except as set forth on Exhibit 24 hereto or as made
available under the Service Contracts described in Article 14, section (4),
the transferred assets as described in Article 1 and Exhibit 1 constitute
all of the assets necessary to, immediately following the Closing, operate
the Business in manner consistent with past practice.
(20) All inventory is recorded on the books of the Business at the lower
of cost or market value determined in accordance with GOB (Generally
accepted accounting principles according to German Law). All Inventory and
equipment is of good, usable and merchantable quality in all material
respects, and does not include obsolete or discontinued items except as
depreciated on the books of the Business. Except as set forth in Exhibit
<PAGE>
25, all Inventory is of such quality as to meet the quality control
standards of Seller and any applicable governmental quality control
standards. All inventory that is finished goods are saleable as current
inventories at the current prices thereof in the ordinary course of the
Business, except as depreciated in the books of the Business.
(21)Except as set forth in Exhibit 26 and for warranties under applicable
law, (a) there are no warranties expressed or implied, written or oral,
with respect to the Products of the Business, and (b) to the best of
Seller's knowledge there are no pending or threatened claims with respect
to any such warranty, and Seller has no liability with respect to any such
warranty.
(22) Exhibit 27 sets forth all insurance contracts concluded for the
Business. The Seller agrees to continue to maintain insurance coverage also
for the Business against reimbursement of the proportionate insurance
premiums until one week after Closing Date.
The Seller warrants that the insurance premiums for the insurance
coverage it has agreed to maintain through the dates specified in the
preceding paragraph have been paid fully and properly, subject to the final
annual accounts. The Seller warrants that, to the best of its knowledge and
belief, an underinsurance did not exist.
(23) Except as set forth on Exhibit 28 hereto, there are no claims,
actions, suits, proceedings, arbitrations, investigations or hearings or
notices of hearing pending or, to the best knowledge of the Seller,
threatened, before any court of governmental or administrative authority or
private arbitration tribunal against or relating to either: (a) the
transactions contemplated hereby; or (b) the Seller with respect to the
Business or any of the assets (including, without limitation, any Business
Agreement), nor, to the best knowledge of the Seller, circumstances or
conditions which are reasonably likely to give rise to any such claim,
action, suit, proceeding, arbitration, investigation or hearing. Except as
set forth on Exhibit 29 hereto, there is no continuing order, injunction,
suspension, exclusion or decree of any court, arbitrator or governmental or
administrative authority (domestic or foreign) which relates to the
operation of the Business or the ownership or use of the assets.
Article 11
Legal Consequences in Case of Breach
of Representations and Warranties
(1) In case of a breach of any of the representations and warranties
pursuant to Article 10, Seller shall have the right to cure such breach.
It is agreed that, as a rule, a period of sixty (60) days be sufficient for
this purpose.
(2) If the condition according to Contract cannot be achieved,
Purchaser shall be entitled to reduce the purchase price, excluding other
legal consequences. In case of a reduction, Purchaser shall be reimbursed
for the expenditure or paid for the decrease in value - at the option of
the Seller payable either in cash or in Gull common shares, valued at
US$ 8.29 each share -actually incurred by it including reasonable
attorneys' fees, with any advantages gained by the Purchaser in connection
with the expenditure accrued to be considered in the calculation.
(3) Section 460 German Civil Code (BGB) shall apply on the
representations and warranties pursuant to Article 10.
<PAGE>
Article 12
Limitation on Representation and Warranties,
Statue of Limitation
(1) Seller's liability with respect to the representation and
warranties assumed by Seller in Article 10 hereof, will arise only if and
to the extent that the warranty claims in their entirety exceed an amount
of US$ 50,000.00 (fifty thousand US Dollars). Seller's liability for the
representation and warranties assumed by Seller in Article 10 will be
limited to the total amount US$ 4,000,000.00 (four million US Dollars).
(2) In addition to the representation and warranties made under Article
10 hereto, any further warranty or representation of Seller, no matter for
what legal reason, shall be excluded to the legally permissible extent.
(3) Any claims of either party under this Agreement shall become
statute-barred twelve months after Closing Date, except for claims of the
Purchaser against the Seller under Art. 4 sec. (1) 3rd sentence and claims
of Seller against the Purchaser under Art. 4 sec. (2) 2nd sentence which in
each case will become statute-barred five years after Closing Date.
The period of limitation shall be interrupted through written assertion
of the claim on the merits and in terms of amount with registered letter /
return receipt provided that, within three (3) months following the service
of the written assertion of the claim, court proceedings according the
written assertion are instituted.
Article 13
Representation and Warranties of the Purchaser and Gull
Gull and the Purchaser hereby, jointly and severely, represent and warrant
to and agree with the Seller as follows:
(1) Gull is a corporation duly organized, validly existing and in good
standing under the laws of the state of Utah. The Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of the Federal Republic of Germany. Each of Gull and the Purchaser has
all requisite power and authority to execute, deliver and perform this
Agreement and consummate the transactions contemplated hereby.
(2) This Agreement has been duly and validly executed and delivered
each by Gull and the Purchaser. This Agreement constitutes valid and
binding obligations of Gull and the Purchaser, each enforceable in
accordance with its terms.
(3) The shares of Gull Common Stock to be issued at Closing will be
duly and validly issued, fully paid and nonassessable and subject to no
preemptive rights.
(4) Except as set forth in Exhibit 30 no consent, authorization or
approval of or exemption by or filing with any foreign or domestic
governmental, public or self-regulatory body or authority is required in
connection with the execution, delivery and performance by the Purchaser
and Gull of this Agreement, or the taking of any action herein
contemplated.
(5) Except as set forth in Exhibit 30a, the execution, delivery and
performance of this Agreement by the Purchaser and Gull and consummation of
the transactions contemplated hereby and thereby, will not, with or without
giving of notice and lapse of time, or both: (a) violate any provision of
law, statute, rule, regulation or executive order to which the Purchaser or
Gull is subject; (b) violate any judgment, order, writ or decree of any
court to which the Purchaser or Gull is subject; or (c) result in the
breach of or conflict with any material term, convenant, condition or
provision or result in or permit any other party to cause the modification
or termination of, constitute a default under, or result in the creation or
imposition of any partnership agreement, corporate charter or bylaws,
commitment, contract or other agreement or instrument to which the
Purchaser or Gull are a party.
<PAGE>
In case of breach of any of the representations and warranties pursuant
to Article 13, Purchaser and Gull shall have the right to cure such breach.
It is agreed that, as a rule, a period of sixty (60) days be sufficient for
this purpose.
(6) If the condition according to Contract cannot be achieved,
Purchaser and Gull shall fully indemnify Seller from all losses and damages
or if Purchaser and Gull fail to fulfil that indemnification within 30
days, Seller shall have the right to rescind the contract.
Article 14
Conduct of Business
(1) From the Effective Date and until the Closing Date, the Business
shall be deemed to have been carried on and further on will be carried on
on behalf and for the account of the Purchaser. The parties agree that the
profits or losses ascertained for the period from the Effective Date
through the Closing Date shall be due to or shall be borne by the
Purchaser.
The determination of any profits or losses shall be made in accordance
with the accounting principles as exercised by the Seller, consistent with
past practice.
(a) In order to determine the cash flow, including interest related to
the cummulative cash flow balance of the Business from the Effective Date
through the Closing ("the Interim Period") and allocate them to Purchaser,
Seller shall establish as of the Effective Date a separate account in
accordance with the outlined procedure on Exhibit 31 (the "Separate
Account") for the Business to reflect the investments by the Seller in, and
the distributions to the Seller by, the Business as a separate entity for
the period from January 1, 1997, through the Closing Date.
(b) During the Interim Period, Seller shall advance to the Business its
working capital needs in accordance with past practice. All cash so
advanced by the Seller shall be credited to the Seller and charged to the
Business. All cash or other assets transferred by the Business to or for
the benefit of Seller during the Interim Period (including, without
limitation, any payment or other satisfaction by the Business out of the
assets of any liabilities arising out of any business other than the
Business or relating to any assets other than the assets to be sold or
representing a return of invested capital) shall be credited to the
Business and charged to the Seller in the Separate Account. All such
charges and credits shall be allocated in accordance with GOB. Any
corporate service allocations to be charged to the Business shall be in
accordance with the terms of the service contracts described on Exhibit 32.
The quarterly balance of the Separate Account will be charged with an
interest rate of 5 % p.a.. The quarterly balance will be determined by the
amount due at the beginning of the quarter plus the balance at the end of
the quarter divided by 2.
(c) No later than ninety (90) days after the Closing, Seller shall
prepare and deliver to the Purchaser a final report of any net balance due
to the Seller by the Business or due to the Business as reflected in the
Separate Account as of the Closing Date. Unless an audit is requested under
Section (d) below, within fifteen (15) days after the delivery of the
foregoing report (the "Separate Account Closing Report") to the Purchaser,
Seller shall pay to Purchaser an amount equal to any net balance due the
Business from Seller as reflected in the Separate Account as of the Closing
Date. Any amount due to Seller from Purchaser shall be set off or paid to
the Seller accordingly.
(d) Purchaser shall have the right within thirty (30) days after the
delivery of the Separate Account Closing Report to the Purchaser, to have a
certified public accounting firm audit at Purchaser's expense the Separate
Account Closing Report. The decision of the certified public accounting
<PAGE>
firm with respect to such dispute shall be final and binding. Any resulting
adjustment to the final payment due to the Purchaser, on the one hand, or
the Seller, on the other hand, shall be promptly paid by the Purchaser or
the Seller, as the case may be, to the other party.
(2) The Seller agrees that on and after the date hereof and prior to
the Closing Date, the operations, activities and practices of the Business
shall be conducted in the ordinary course of the business and consistent
with past practice.
Without limiting the foregoing, Seller agrees that on and after the date
hereof and prior to the Closing Date and except as otherwise consented to
or approved by the Purchaser or as contemplated or required by this
Agreement, including the matters delegated to the committee referred to in
para. 5 below, Seller shall comply with the following covenants in regards
to the Business:
(a) The operations, activities and practices of the Business shall be
conducted in the ordinary course of business and consistent with past
practice, and the Seller shall use commercially reasonable efforts to: (i)
keep and maintain in good operating condition and repair, reasonable wear
and tear excepted, all of the Business's properties and assets (whether
owned or leased), (ii) preserve the organization of the Business intact,
(iii) keep available to the Business the present services of its employees,
and (iv) to preserve for the Business the goodwill of its suppliers and
customers and others with whom it has business relationships.
(b) No action shall be taken in furtherance of the liquidation or
dissolution of the Business.
(c) The Seller shall not grant any irrevocable powers of attorney or
comparable delegations of authority regarding to the Business.
(d) No change shall be made in the accounting methods or practices
followed by the Seller or in the depreciation or amortization policies or
rates heretofore adopted in regards to the Business or the Assets except as
indicated by German law.
(e) The Seller without prior consent of the Purchaser has not entered
since the Effective Date and shall not enter into or assume any lease,
contract, agreement or commitment related to the Business or the Assets,
except for any normal and ordinary contract, agreement or commitment for
the sale of products, the performance of services or the purchase of raw
materials, supplies, services or utilities which does not involve payments
or receipts of more than DM 120,000 per transaction for the time period
between Effective Date and signing of this Agreement and DM 70,000 from
signing until Closing Date and which is terminable by the Seller without
penalty or is to be fully performed on or before ninety (90) days after the
Closing.
(f) The Seller shall not grant any increase in the compensation payable
or to become payable by the Seller to any officer or employee involved with
the Business except as provided in already existing employment contracts,
in collective wage agreements or otherwise in the ordinary course of the
Business and consistent with past practice.
(g) The Seller shall not (i) incur any additional indebtedness for the
Business except for inter-company borrowings under the Separate Account
within the normal course of operations and trade accounts payable, (ii)
incur any liability other than as referenced under clause (i), contingent
or otherwise except in the ordinary and normal course of business of the
Business, (iii) mortgage, pledge or otherwise subject any of the Assets to,
or otherwise permit to exist, any lien or encumberance on any of the
Assets, other than liens or encumberances relating to real property taxes
and assessments not yet due and payable, or (iv) make any modification or
change in or terminate or renew any contracts, except in the ordinary and
normal course of its business.
<PAGE>
(h) The Seller shall not take any action that would constitute, or fail
to take any action that would prevent, a breach by Seller of or a default
by Seller under any Business agreement.
(i) The Seller shall maintain complete and accurate records of the
interim receivables and the interim liabilities incurred within the Interim
Period.
(j) The Seller shall not make any distribution of assets related to the
Business to itself or its affiliates other than reflected within the
Separate Account.
(k) The Seller will not settle, or agree to settle, any suit, action,
claim or other legal, administrative or arbitration proceeding, involving
the Business or any of the Assets, or waive or relinquish any right, claim
or cause of action other than in the ordinary course of the Business
consistent with past practice.
(l) The Seller shall notify the Purchaser in writing of any action,
event, condition or circumstance, or group of actions, events, conditions
or circumstances, relating to the Business that is out of the ordinary
course of business or that results in, or threatens to result in a material
adverse effect on the Business or of the commencement of any proceedings
seeking to enjoin or rescind the transactions contemplated hereby or to
which the Seller is a party or involving any of the Assets, or any breach
by the Seller of any representation or warranty or any covenant or
agreement contained in this Agreement, such notification to be made
promptly upon the Seller gaining knowledge of such breach, proceeding,
threat, event, action, condition or circumstance, or group thereof.
(3) Between the date of this Agreement and the Closing Date, the Seller
shall: (i) provide the Purchaser and its accountants, counsel and other
authorized representatives, full access, during reasonable business hours
and under reasonable circumstances, to any and all premises, properties,
contracts, commitments, books, records and other information (including tax
returns filed and those in preparation and any tax related agreements) of
the Seller related to the Business, and will cause its officers to furnish
to the Purchaser and such entities and its authorized representatives any
and all financial, technical and operating data and other information
pertaining to the Business, as the Purchaser shall from time to time
reasonably request and (ii) make available for inspection and copying by
its authorized representatives true and correct copies of all documents
referred to herein or in the Exhibits hereto; provided however that no
access to properties and records shall be given if such properties and
records do not exclusively refer to the Business. With respect to
properties and records which do not exclusively refer to the Business, the
Purchaser shall only have the right to obtain the relevant information as
necessary for the Purchaser. All such access, inspections, copying,
contacts and other investigations will be conducted in such a manner as not
to interfere unreasonably with the normal conduct of the business of the
Seller.
(4) In the past, Seller has provided various services for the Business.
Seller agrees to continue to provide for the Purchaser the services stated
in Exhibit 32 hereto for the period set forth on Exhibit 32. All other
services so far provided for the Business by Seller and stated in Exhibit
33 hereto will be discontinued without any further notification immediately
after closing of this transaction. As part of the service contracts
included in Exhibit 32, Seller will provide Purchaser with an unaudited
balance sheet and income statement of the Business as of the end of each
fiscal quarter, through and including the quarter ending 31/12/1997, within
thirty (30) business days after the end of such fiscal quarter. Seller
shall also provide information to Purchaser to adjust such statements to US
GAAP.
<PAGE>
Purchaser undertakes, by 31/12/1997, to implement a data processing
system which will meet its own business management system requirements.
Purchaser shall inform Seller prior August 30th, 1997 whether or not
Purchaser desires to use the data processing system of Seller beyond
December 31, 1997. For the current business year, Purchaser accepts the
separation of the business unit Diagnostics from the books of Seller as set
out in Exhibit 31. If and to the extent that Purchaser continues to use the
business management systems of Seller after the Closing, Purchaser shall
pay the agreed fees according to the service contracts. Audit costs, if
any, after the Closing shall be borne by the Purchaser.
(5) From signing of this Agreement until the Date of Closing, matters
relating to employment issues, capital asset acquisitions and operating
strategies will be decided by a steering committee, consisting of Dr. Silke
Humberg from Fresenius and John Turner from Gull.
(6) The Seller has delivered to the Purchaser the Financial Statements
of the diagnostic business of Fresenius AG including Independent Auditor's
Report, Statement of Operations and Net Assets for the years ended December
31, 1995 and 1996, Balance Sheets as of December 31, 1995 and 1996 and
Statements of Cash Flows for the years ended December 31, 1995 and 1996,
stated in accordance with US GAAP.
(7) During the period prior to the Closing Date, after the end of each
calender month, the Seller shall deliver to the Purchaser, as soon as
available, but in any event within ten (10) days, unaudited summary monthly
profit and loss statements of the Business for each calender month. All
such profit and loss statements shall be prepared in accordance with the
Seller's customary practice based on the management accounting and shall
fairly and accurately present the results of operations of the Business for
such month. Within thirty (30) days after the end of each fiscal quarter
after the date hereof and prior to the Closing Date, the Seller shall also
deliver to the Purchaser an unaudited balance sheet of the Business as of
the end of such fiscal quarter. Seller shall also provide information to
Purchaser to adjust such statements to US GAAP.
Article 15
Proxy Statement Provision
(1) As soon as practicable after the execution of this Agreement (but
subject to the financial statement age requirements of Regulation S-X of
the United States Securities and Exchange Commission ("SEC")), Gull will
prepare and file preliminary proxy materials with the SEC with respect to
the meeting of the Gull shareholders referred to in paragraph (2) of this
Article. Gull will use its best efforts to respond to comments of the SEC
Staff on such proxy materials and to mail definitive proxy materials to its
shareholders as soon thereafter as practicable. At the time the definitive
proxy statement is mailed to the shareholders of Gull soliciting proxies
for the approval of this Agreement and any related matters and at all times
subsequent to such mailing, up to and including the Closing Date, such
definitive proxy statement (including any supplements thereto), with
respect to all information relating to Gull (and its shareholders), this
Agreement, the Common Stock of Gull, and, as to Gull, the transactions
contemplated by this Agreement will:
(i) Comply in all material respects with applicable provisions of the
United States Securities Exchange Act of 1934 (the "Exchange Act") and
regulations thereunder and the rules and regulations of the American Stock
Exchange ("AMEX"); and
<PAGE>
(ii) not contain any statement which, at the time and in light of the
circumstances under which it is made, is an untrue statement of material
facts or omit to state any material fact necessary in order to make the
statements therein not misleading, or required to be stated therein or
necessary to correct any statement in an earlier communication with respect
to such matters which has become false or misleading.
(2) Gull will call a special meeting of its shareholders to consider
and vote upon, or the matters submitted to shareholders at Gull's 1997
annual meeting of shareholders will include, this Agreement and the
consummation of the transactions contemplated hereby and thereby. Subject
to the review and clearance of Gull's preliminary proxy materials and SEC
financial statement age requirements, the date of such annual or special
meeting shall be as soon as practicable after the date of this Agreement.
Subject to receipt of a favorable fairness opinion referred to in Art. 18
sec. 4, Gull will, through its Board of Directors, recommend that its
shareholders approve such matters and use its best efforts to solicit the
votes required for approval. Seller is not obligated to recommend the
approval of this transaction to its Supervisory Board if the afore-mentioned
fairness opinion is not considered favourable by Seller.
(3) Seller will cooperate in the preparation of the proxy statement of
Gull referred to in paragraph (1) above and furnish such financial
statements and other information with respect to Seller and the Business as
is required by the Exchange Act and the rules and regulations of the SEC
thereunder and/or the AMEX to be included in such proxy statement. Such
information furnished by Seller will comply in all material respects with
applicable provisions of the Exchange Act and regulations thereunder and
will not contain any statement which, at the time and under the
circumstances under which it is made, is an untrue statement of a material
fact or omits to state any material fact necessary in order to make the
statements made therein not misleading or is required to be stated therein
or necessary to correct any statement in an earlier communication with
respect to such matters which has become false or misleading.
(4) At the Gull shareholder meeting, provided that Seller's Supervisory
Board shall have approved this agreement, Seller and any of its Affiliates
will vote any securities of Gull owned by them and entitled to vote in
favor of the approval of this Agreement and the transactions contemplated
hereby.
Article 16
Publication / Confidentiality
(1) The parties shall concurrently coordinate the text of a publication
and/or announcement relating to the takeover agreed herein. The disclosure
of information to affiliated enterprises or advisers bound by their pro-
fessional duty of secrecy shall remain unaffected by the obligation of such
joint coordination.
(2) The parties agree that, subject to applicable securities law
disclosure obligations, neither of them will disclose the terms of this
Agreement without the prior written consent of the other, which consent
will not be unreasonably withheld. However, both Gull and Fresenius may
inform their employees regarding the existence of this Agreement.
Article 17
Costs
Each party shall bear its own expenses and costs accruing in connection
with the preparation, conclusion and performance of this Agreement and the
contracts and the Proxy Statement mentioned herein, including the fees for
legal and tax and/or financial advice.
<PAGE>
Article 18
Conditions Precedent, Approvals
(1) The obligations of the parties to consummate the transactions
contemplated by this Agreement shall be subject to the following
conditions:
- the approval of Seller's Supervisory Board and
- the approval of Gull's board of directors including the unanimous
approval of the members of the Special Committee of Independent Directors
of Gull appointed at the board of directors meeting of Gull held June 17,
1996 to be effective,
- the approval of Gull's shareholders, including the majority of Non-
Fresenius shareholders actually voting on the transaction, pursuant to the
proxy solicitation referred to in Article 15,
- the approval of the relevant stock exchange commission.
(2) Both parties agree to see to the necessary resolutions of their
respective supervisory boards or boards of directors being adopted without
delay and to immediately inform the other party thereof. Subject to the
limitations of Article 15, the parties agree to subsequently submit the
declarations of approval of their supervisory boards or boards of directors
to this instrument.
(3) As soon as practicable after the execution and delivery of this
Agreement, Gull will file a listing application with the AMEX for the
approval of the listing thereon of the Gull Common Stock issuable to Seller
as the consideration for the Business, and will use its best efforts to
cause such listing application to be approved. Seller's obligation to
consummate the transactions contemplated by this Agreement shall be subject
to the condition that the AMEX shall have authorized the listing of the
shares of Gull Common Stock to be issued as the consideration for the
Business, subject only to official notice of issuance.
(4) The obligations of the parties to consummate the transactions
required by this Agreement shall be subject to the conditions that (i) the
Special Committee of Gull's Board of Directors established on June 17, 1996
shall have received an opinion of Vector Securities, Inc., a nationally
recognized firm of investment bankers, in form and substance satisfactory
to Gull, Purchaser, and Seller, to the effect that the purchase price for
the Business and the other terms and conditions of this Agreement are fair
to the shareholders of Gull (other than Seller) from a financial point of
view, (ii) such firm shall have consented to the inclusion of its opinion,
and such opinion shall have been included, in Gull's definitive proxy
materials, and (iii) such opinion shall not have been withdrawn on or prior
to the Closing Date.
(5) The parties shall according to Sect. 23 GWB [German Act Against
Restraints of Competition] immediately file to the Federal Cartel Office
the notification of the merger constituting this Agreement; each party
hereto shall be obligated to promptly provide the correct and complete data
and information to be furnished by it under Sec. 23 sub-sec. 5, 6 GWB.
If the Federal Cartel Office denies the merger according to Sec. 24 sub
-sec. 2 sent. 1 GWB the agreement shall be dissolved.
If, as a result of the denial of the merger by the Federal Cartel
Office, this Agreement shall be dissolved, the statutory provisions
regarding the withdrawal from an agreement shall apply with respect to the
restoration of what has already been received by the parties in performance
of this Agreement. In case of the dissolution of this Agreement, each party
hereto shall bear the expenses it has incurred or will incur in connection
with the execution, performance and reversal, if any, of this Agreement.
(6) On the Closing Date Gull is obliged to enter into an agreement with
the Seller with respect to the right to register the shares owned by the
Seller under the U.S. Securities Act of 1933 according to Exhibit 34.
(7) The obligations of the Purchaser under this Agreement to consummate
its purchase of the Business shall be further subject to the satisfaction,
on or prior to the Closing Date, of each of the following conditions, each
<PAGE>
of which may be waived by the Purchaser as provided herein except as
otherwise provided by law.
(a) All corporate action necessary to authorize the execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby by the Seller shall have been duly and validly taken.
(b) None of the Seller, the Purchaser or Gull shall be subject to any
rule, regulation, order, decree or injunction of a court or agency of
competent jurisdiction which enjoins or prohibits the issuance of Gull
common stock.
(c) No litigation or proceeding shall have been instituted or, to the
parties' knowledge, threatened after the date of this Agreement by any
governmental agency or other person or entity seeking to restrain or
prohibit the performance of, or to obtain damages or other relief in
conjunction with this Agreement of any of the transactions contemplated
hereby that (a) has a reasonable possibility of success on the merits, and
(b) if decided in favor of the agency, person or entity who instituted the
same, would have a material adverse effect on the Seller or on the
Purchaser.
(d) The representation and warranties of the Seller contained in Art.
10 sec. (1), (2), (6), (7), (10), (12) and (15) shall have been true and
correct as of the date hereof and shall be true and correct in all material
respects as of the Closing Date with the same effect as though made as of
the Closing Date. If such representations or warranties are not true and
correct as of the closing date Seller has the right to cure it within a
period of 60 days. If such cure can not be reached Purchaser is no longer
obligated to consummate the transaction as contemplated in this Agreement.
Article 19
Termination
(1) This Agreement may be terminated at any time prior to the Closing;
(a) by mutual consent of the Seller and the Purchaser, (b) by the Purchaser
if there is a material breach by the Seller of any representation,
warranty, covenant or other agreement contained in this Agreement, which
breach is not cured after fifteen (15) days' written notice thereof is
given to the Seller by the Purchaser, (c) by the Seller if there is a
material breach by the Purchaser of any representation, warranty, covenant
or other agreement contained in this Agreement, which breach is not cured
after fifteen (15) days' written notice thereof is given to the Purchaser
by the Seller, or (d) by either the Seller or the Purchaser if the Closing
shall not have occurred on or before June 30th, 1997, for reasons other
than the failure of the terminating party to perform its obligations
hereunder.
(2) If this Agreement is terminated pursuant to this Section 19 by any
party hereto for any reason other than the breach of a warranty,
representation, covenant or agreement contained herein by the other, all
further obligations of the parties hereunder will terminate without further
liability of the parties.
Article 20
General
(1) In case of a failure of payments of any amounts due under the
Agreement, default interest at a rate of 5 % above the Bundesbank discount
rate shall be paid. This shall not affect the assertion of damage claims in
excess thereof.
<PAGE>
(2) If either party claims against the other for a breach of
representations or warranties given under this agreement, the successful
party shall be reimbursed by the other party for all legal expenses
including attorney's fees.
(3) Any modifications of and amendments to this Agreement shall be
valid only if in writing unless notarial or another form is required by
mandatory law. This shall apply also to the modification and/or cancelation
of this provision.
(4) If any provisions of the foregoing Agreement are or become invalid,
in whole or in part, or if there are unintended gaps, this shall not affect
the effectiveness or validity of the other provisions hereof. In such case,
the contract parties agree to replace the ineffective provisions by legally
effective provisions and close the gaps in such a way as they would have
done upon preparation of this Agreement, properly and subject to a
reasonable consideration of their interests, had they been aware of the
ineffectiveness of the provisions or of such gaps.
(5) Any breach of any obligation, convenant, agreement of condition
contained herein shall be deemed waived by the non-breaching party only by
a writing, setting forth with particularity the breach being waived and the
scope of the waiver, but such waiver shall not operate as a waiver of, or
estoppel with respect to, any subsequent breach. No waiver shall be implied
from any conduct or action of the non-breaching party. No failure or delay
by any party in exercising any right, power or privilege hereunder or under
any ancillary document, and no course of dealing by any party, shall
operate as a waiver of any right, power or privilege hereunder, nor shall
any single or partial exercise of any other right, power or privilege.
All notices, requests, demands and other communications which are
required to be or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when delivered in person, or
transmitted by telecopy, or upon receipt after dispatch by certified or
registered first class mail, postage prepaid, return receipt requested, to
the party to whom the same is so given or made, at the following address or
telecopy numbers (or such others as shall be provided in writing
hereinafter):
If Seller, to: Fresenius AG
Borkenberg 14
61440 Oberursel
Attention: Frank Simon
Telecopy No.: 06171 - 602218
If to Purchaser
or Gull, to: Gull Laboratories, Inc.
1011 East Murray Holladay Road
Salt Lake City, UT 84117
George Evanega
Telecopy No.: (801) 265-9268
(6) This Agreement (including the Schedules and Exhibits hereto)
constitutes the entire agreement and supersedes all prior agreements and
understandings, oral and written, between the parties hereto with respect
to the subject matter hereof, including without limitation, the Letter of
Intent, dated December 13, 1996, between the Purchaser and the Seller.
<PAGE>
Nothing in this Agreement is intended to, or shall be construed so as to
create any third party beneficiary to this Agreement or otherwise confer
any rights upon any person, firm or corporation that is not a party hereto.
Article 21
Applicable Law, Language, Jurisdiction
(1) This Agreement shall be governed exclusively by German law.
(2) The courts in Frankfurt am Main shall, as far as legally
permissible, have exclusive jurisdiction for any and all disputes arising
out of or in connection with this Agreement. Gull hereby expressly submits
to the jurisdiction of the courts in Frankfurt am Main and agrees to
service of process by mail. Gull further agrees to appoint an agent in
Germany for such service of process.
(3) This Agreement shall be concluded in the English language. The
English version shall be controlling also in the event that there exist
versions in another language.
Oberursel, 21. April 1997
Fresenius AG
/s/ Frank Simon
----------------------------
By: Frank Simon
Gull GmbH Gull Laboratories Inc.
/s/ Mike Malan /s/ George Evanega
---------------------------- ----------------------------
By: Mike Malan By: George Evanega
<PAGE>
Appendix D
[ Vector Securities International Letterhead ]
April 2, 1997
The Board of Directors
Gull Laboratories, Inc.
1011 E. Murray Holladay Road
Salt Lake City, UT 84117
Members of the Board:
We understand that Gull Laboratories, Inc., a Utah corporation
("Gull"), has agreed to acquire (the "Transaction") the assets of the
immunological assay-based diagnostic test kit business of Fresenius
Aktiengesellschaft ("Fresenius"), pursuant to the terms set forth in the April
1, 1997, draft Asset Purchase Agreement, by and among Gull and Fresenius (the
"Draft Agreement"). Terms used herein but not defined have the meanings
ascribed to them in the Draft Agreement.
Under the terms and conditions of the Draft Agreement, Gull will
acquire the Business for 1,320,000 shares, $0.001 par value, of Gull common
stock (the "Transaction Shares"). For the purposes of our opinion, you have
asked us to evaluate the Transaction using an aggregate value of the
Transaction Shares of $10,942,800 (the "Negotiated Aggregate Consideration
Value"). We understand that such Negotiated Aggregate Consideration Value was
determined by agreement of Gull and Fresenius, based on the average closing
price of the Gull common stock during the twenty day trading period preceding
and the twenty day trading period following the first public announcement of
the execution of a Letter of Intent relating to the Transaction on December
13, 1996. The actual aggregate value of the Transaction Shares to be issued
to Fresenius in the Transaction will be based on the market price at the time
of closing of the Transaction. The closing market price on April 1, 1997, the
last trading day prior to the date the Agreement was entered into, was $10.50
per share. The terms and conditions of the Transaction are more fully set
forth in the Draft Agreement. You have requested our opinion as investment
bankers, as of the date hereof, with respect to the fairness from a financial
point of view, to Gull of the Negotiated Aggregate Consideration Value.
In arriving at our opinion, we, among other things: (i) subject
to the assumptions described above, reviewed the financial terms of the
Transaction as set forth in the Draft Agreement; (ii) held discussions with
certain members of the management of Gull and the Business concerning their
respective businesses, operations and prospects, as well as other matters we
believe relevant to our inquiry; (iii) reviewed certain business and financial
information of Gull and the Business, including financial forecasts prepared
and provided by the respective managements of Gull and the Business; (iv)
compared certain financial data of Gull and the Business with similar
financial data of such other publicly traded companies as we deemed reasonably
comparable; (v) compared the Negotiated Aggregate Consideration Value with
<PAGE>
The Board of Directors
Gull Laboratories, Inc.
April 2, 1997
Page 2
those terms of other transactions which we deemed reasonably comparable;
(vi) reviewed the pro forma impact of the Transaction on Gull's financial
results and condition' (vii) reviewed certain documents filed by Gull with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended; and (viii) performed such other studies, analyses and
investigations as we deemed appropriate.
In connection with our opinion, we neither attempted independently
to verify nor assumed any responsibility for independent verification of any
information publicly available or supplied or otherwise made available to us
regarding Gull or the Business and we have assumed and relied on such
information being accurate and complete in all respects. We have not made or
obtained, or assumed any responsibility for making or obtaining, any
independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of Gull or the Business, nor have we been furnished any such
evaluations or appraisals. With respect to the financial projections of Gull
and the Business referred to above, we have assumed that they have been
reasonably prepared on bases reflecting the best available estimates and
educated judgments of the management of Gull and the Business as to the future
financial performance of Gull and the Business, respectively, and that Gull
and the Business will perform substantially in accordance with such
projections. We assume no responsibility for and express no view as to such
forecasts or the assumptions under which they were prepared. We have also
taken into account our assessment of general economic, market and financial
conditions and our knowledge of the diagnostic industry, as well as our
experience in connection with similar transactions and securities valuation
generally. Our conclusions are based solely on information available to us on
or before the date hereof and reflect economic, market, and other conditions
as of such date. In rendering our opinion, we have assumed that the
Transaction will qualify as a "pooling of interests" under the United States
generally accepted accounting principles. It should be understood that,
although subsequent developments may affect this opinion, we assume no
responsibility and do not have any obligation to update, revise, or reaffirm
this opinion. We also assumed that the Transaction will be consummated on the
terms described in the Draft Agreement, subject to the assumptions made
herein, without any material waiver of or modification by Gull or the
Business, and that obtaining any necessary regulatory approvals for the
Transaction will not have an adverse effect on Gull or the Business.
Vector Securities has in the past acted and is currently acting as
a financial advisor to Fresenius on unrelated matters. We have acted as a
financial advisor to Gull in connection with the Transaction for which we will
receive a fee, a significant portion of which is contingent upon the
consummation of the Transaction. Gull has agreed to indemnify us for certain
liabilities arising out of the rendering of this opinion. Vector Securities
International, Inc., is a full service securities firm, and in the course of
its normal trading activities may from time to time effect transactions and
hold positions in securities of Gull.
Our opinion set forth below is directed to the Board of Directors
of Gull and does not address Gull's underlying business decision to effect the
Transaction or constitute a recommendation to the Board of Directors or any
<PAGE>
The Board of Directors
Gull Laboratories, Inc.
April 2, 1997
Page 3
stockholder of Gull with respect to the approval of the Transaction. Our
opinion is not to be reproduced, quoted or published in any manner without our
prior written consent, except that this letter may be reproduced in full in
the proxy statement to be filed with the Securities and Exchange Commission in
connection with the Transaction.
On the basis of and subject to the foregoing, including the
various assumptions and limitations set forth herein, and based upon such
other matters as we consider relevant, it is our opinion that, as of the date
hereof, the Negotiated Aggregate Consideration Value is fair to Gull, from a
financial point of view.
Very truly yours,
VECTOR SECURITIES INTERNATIONAL,
INC.
By: /s/ Jeffrey A. Fink
---------------------------
Jeffrey A. Fink
Its: Managing Director
