SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (Fee Required)For the Fiscal Year Ended December
31, 1996.
or
[ ] Transition Report Pursuant to Section 13 or 15( d) of the Securities
Exchange Act of 1934 for the transition period from to .
Commission File number 0-16864
GULL LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0404754
(State of incorporation) (I.R.S. Employer Identification No.)
1011 East Murray Holladay Road Salt Lake City, Utah 84117
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code (801) 263-3524
Securities registered under Section 12(b) of the Exchange Act:
Common Stock $.001 par value
Name of each exchange on which registered: American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
proceeding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation 5K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant as of March 17, 1997 was $21,784,940 based
upon the closing price on such date.
The number of shares of common stock outstanding as of March 17, 1997 was
6,588,696.
Documents Incorporated by reference:
The information required by Items 11, 12 and 13 is incorporated by reference
to the Company's definitive proxy statement to be filed with the Commission on
or prior to April 30, 1997.
<PAGE>
PART I
ITEM 1: DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Diagnostic Products- Gull Laboratories, Inc. ("Gull or the Company")
develops, manufactures and markets diagnostic test kits designed to detect
past or present infections caused by certain microbial agents such as viruses,
bacteria, and protozoa and to diagnose 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, Gull 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 laboratory or hospital clinical laboratory can gain
operating efficiencies by automating its operations and the Company is able to
secure a long-term commitment for the sale of its reagent products. The
Company has an exclusive worldwide distribution agreement to market an
automated clinical laboratory sample processor called DUET(TM)which addresses
the needs of the moderate to high-volume laboratory testing market. The
Company's other instrumentation offerings focus on the low volume and the
high-volume laboratory testing market.
In March 1996, the Company announced that it is developing a new
diagnostic test system, called GeneSTAR(TM), which uses DNA-based technology.
The GeneSTAR technology is expected to be able to detect up to five separate
genetic targets simultaneously without favoring any individual target and also
confirm test performance with an internal control. Current commercially
available products can only detect up to two targets. The GeneSTAR technology
will be easily adaptable to instrumentation already in use in many private
laboratories 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 GeneSTAR technology will focus on the
detection and identification of up to five different gastrointestinal
pathogens in fecal samples which are extremely difficult to assay due to
interfering substances. Additional applications are planned for respiratory
infections, systemic blood infections, cardiovascular disease and autoimmune
disorders. GeneSTAR is designed to detect infectious agents in a wide range of
specimens including serum, whole blood, sputum, bronchial ravage, tissue
culture, fecal samples and cerebral spinal fluid.
In July 1996, the Company released XTRAX(TM), a patented component of its
GeneSTAR technology that extracts of genomic DNA from patient samples. In
January 1997, the Company announced that it had entered into an exclusive
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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 plate formats, ABS's proprietary Thrombus Precursor Protein
("TpP")(TM)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, surgical and other patients. A subsidiary
of Fresenius AG, the Company's majority shareholder, is one of the world's
largest fully integrated dialysis products and services company.
None of these strategic alliances are deemed to be material contracts as
defined by the Securities Exchange Commission.
Bioreagents- Through its wholly owned subsidiary, Biodesign, Inc.
("Biodesign"), 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- Gull 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. CAP sales in 1996, 1995 and 1994 were $2,776,045, $2,718,761 and
$1,922,373 or 16%, 15% and 12% of Gull's sales, respectively. The benefits of
the CAP contracts go beyond increased direct sales. Gull's management believes
that the Company's reputation for high-quality products is enhanced in
clinical laboratories which participate in CAP proficiency testing programs.
Accordingly, Gull will devote significant resources to securing additional
commitments to supply materials for future CAP surveys as well as other
contract manufacturing business.
Fresenius AG- 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 holds a majority of the voting
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shares of Fresenius Medical Care AG, one of the world's largest fully
integrated dialysis products and service company. Fresenius AG markets the
Company's products in Germany through its Intensive Care and Diagnostic division
and is Gull's single largest customer of non-CAP related products. In 1996, 1995
and 1994, Gull's sales to Fresenius totaled $1,535,943, $2,370,977 and
$1,106,582 or 9%,13% and 7% of the Company's consolidated sales, respectively.
In December 1996, the Company entered into a letter of intent to acquire
the diagnostics business of Fresenius AG's Intensive Care and Diagnostics
division, subject to obtaining a fairness opinion by an independent investment
banker and to the approval of the Fresenius AG Managing and Supervisory
Boards, Gull's Board of Directors and its shareholders. The proposed
acquisition will give the Company a direct sales force in Germany, the single
largest market in Europe. The Company should also realize synergy through
eliminating certain duplicate administrative, distribution and personnel
costs. No definitive purchase price for the acquisition had been determined as
of March 17, 1997. The acquisition is anticipated to close during the second
quarter of 1997. See the Company's Proxy Statement for additional information
regarding Gull's relationship with Fresenius AG.
No other customer or distributor accounted for more than 10% of the
Company's consolidated sales during any period from 1994 through 1996.
The geographic distribution of the Company's sales is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
Area 1996 1995 1994
- ------------- ---- ---- ----
<S> <C> <C> <C>
United States 57% 48% 42%
Europe 36 42 49
Pacific Rim 6 6 5
Other 1 4 4
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
See Note 13 of the Company's consolidated financial statements for
additional information regarding foreign and domestic operations and export
sales.
COMPETITION
Gull competes in a diversified market characterized by a few strong
companies and numerous smaller companies which 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 and labor saving
potential to the customer 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 is leading to a few large companies supplying
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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 world wide 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 have offered
instrumentation to customers for many years while the Company only recently
entered that area of the diagnostics market in 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, DNA probes,
which use genetic markers to detect pathogenic organisms, and radioimmunoassay
("RIA"), which uses radioactive isotopes for detection, may be used instead of
the Company's current products. The Company's products are competitive with
these and other alternative test methods.
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.
TRADEMARKS & PATENTS
The Company 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 Company has filed for several patents and trademarks and has
received one patent relating to its new GeneSTAR technology which is currently
under development.
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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 World 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
where it markets its products.
Good Manufacturing Practices- In the United States, the Company must
operate its manufacturing operations in conformity with Good Manufacturing
Practices ("GMP") as prescribed in the 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 companies 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 more stringent than the FDA's GMP.
Healthcare Cost Containment - Governments and other third-party payers 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 is believed to be prudent and effective programs to ensure a
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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 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 infectious diseases,
cardiovascular diseases and autoimmune disorders. The Company's new GeneSTAR
technology also uses DNA-based methods to directly detect specific infectious
agents and genetic markers 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 5% of sales in 1995
and 8% of sales in 1996 and 1994. The 1995 decrease in research and
development expenditures was directly attributable to cutbacks in the
Company's European operation. Research and development expenditures in the
United States have increased. Management anticipates R&D expenditures will
remain constant or increase slightly as a percentage of sales in 1997.
EMPLOYEES
At December 31, 1996, the Company had 144 employees worldwide of which 10
were part-time. None of the Company's employees are unionized.
ITEM 2: 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 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.
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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 rent agreement expires in July 2005. The Company also rents a
small sales office in France.
ITEM 3: 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.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
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.
<TABLE>
<CAPTION>
Quarter Ended Low High
------------- ------ ------
<S> <C> <C>
March 31, 1995 $ 4.000 $ 6.375
June 30, 1995 5.000 5.875
September 30, 1995 5.000 6.500
December 31, 1995 4.250 5.875
March 31, 1996 3.625 5.500
June 30, 1996 4.250 5.500
September 30, 1996 4.125 7.125
December 31,1996 $ 5.875 $12.500
</TABLE>
Security Holders - On March 17,1997 there were approximately 1,000
beneficial owners of the Company's common stock.
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.
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ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
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.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Sales $ 17,908,752 $18,827,853 $15,841,606 $15,405,641 $14,646,102
Net income (loss) 240,712 352 893 (311,102) (401,484) (506,636)
Net income (loss) per
common and common
equivalent share $ 0.04 $ 0.05 $ (0.05) $ (0.06) $ (0.08)
</TABLE>
There were no cash dividends declared in the periods presented above.
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Working capital $ 2,739,891 $ 124,863 $ 1,910,317 $ 2,063,930 $ 932,527
Total assets 12,352,702 12,317,630 11,502,141 10,446,111 11,335,558
Long-term obligations 2,785,893 131 826 2,477,545 2,347,098 3,548,745
Stockholders' equity $ 4,975,136 $ 4,741,479 $ 4,080,032 $ 4,493,448 $ 3,176,686
</TABLE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report 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 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.
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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 no material commitments for the
purchase of capital assets. As the Company continues to grow, and if losses in
the Company's European operations continue at a significant level, there will
be a need to obtain additional financing to fund the Company's operations and
instrumentation program and to increase building and equipment capacity.
Although the Company does not have any funding commitments, to the extent that
working capital needs cannot be financed through internally generated funds,
the Company believes that additional debt, equity and lease financing can be
obtained.
See the Company's Proxy Statement for a discussion of the financing needs
associated with the acquisition of the Diagnostics business of Fresenius AG.
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 products to the less profitable
ELISA 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 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.
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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.
RESULTS OF OPERATIONS
1996 Compared to 1995
In 1996, the Company had net income of $240,712 compared to net income of
$352,393 in 1995. In 1995, the Company had nonrecurring income of approximately
$660,000 resulting from the sale of its German operations to Fresenius AG and
the sale of its European Operations' headquarters. These gains were recorded as
"Other Income". Without these one time gains, 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 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.
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 in
1995 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
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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 $352,893 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 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.
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 $140,000 of gain realized on
the sale of its German operations to Fresenius AG, the Company's majority
shareholder (See Note 11 to the Company's consolidated financial statements)
and approximately $515,000 of gain realized on the sale of its European
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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.
ITEM 8: FINANCIAL STATEMENTS
The Financial Statements and Schedules of the Company are submitted as a
separate section of this report and are listed in the index thereto.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no Form 8-K filings reporting a change of accountants or
reporting disagreement on any matter of accounting principle or financial
statement disclosure during the two most recent fiscal years or in any period
subsequent thereto.
PART III
The information called for by:
ITEM 10. DIRECTORS EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
and
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
is incorporated by reference to the Company's definitive Proxy Statement which
involves the election of Directors to be filed pursuant to Regulation 14A and
which the Company intends to file with the Securities and Exchange Commission
not later than 120 days after December 31, 1996, the end of the year covered
by this Form 10-K. If such definitive Proxy Statement is not filed with the
Securities and Exchange Commission within the 120-day period, the information
called for by these Items will be filed as an amendment to this Form 10-K
under cover of Form 10-K/A not later than the end of the 120-day period.
12
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report on Form
10-K.
1. CONSOLIDATED FINANCIAL STATEMENTS. (See Index to Consolidated
Financial Statements and Consolidated Financial Statement Schedules on page 16.)
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE - Schedule II -
Valuation and Qualifying Accounts
(See Index to Consolidated Financial Statements and
Consolidated Financial Statement Schedules on page 16.)
Schedules other than the above are omitted because of the absence of
conditions under which they are required or because the required information
is presented in the Financial Statements or notes thereto.
3. EXHIBITS. The following documents are filed or incorporated by
reference as exhibits to this Report as required by Item 601 of Regulation
S-K:
<TABLE>
<CAPTION>
Exhibit Number Title of Document
-------------- ------------------
<S> <C>
3 Articles of Incorporation and Bylaws of Gull
Laboratories, Inc., as amended, incorporated by
reference to a Registration Statement on Form S-4
(No. 33-53720) filed with the Securities and
Exchange Commission and effective December 31,
1992.
4 Description of the Company's common stock as
contained in the Registration Statement filed
under Section 12(b) of the Securities Exchange
Act on Form 8A, effective May 18, 1993 (No.
1-11952).
10 Material Contracts:
(a) Agreement for Acquisition of Shares of
Biodesign, Inc. incorporated by reference to
Exhibits 2 and 10 of a Registration
Statement on Form S-4 (No. 33-53720) filed
with the Securities and Exchange Commission
and effective December 31, 1992.
(b) Agreement of Merger with Biolab SA
incorporated by reference to Exhibit 2 of a
Registration Statement on Form S-3 (No. 33
-67508 filed with the Securities and
13
<PAGE>
Exchange Commission and effective September
24, 1993.
(c) Employment Agreement with Dr. George R.
Evanega which is a management contract
or compensatory plan or arrangement filed
with the Company's Annual Report on Form
10-K for the fiscal year ended December 31,
1995.
(d) Private label agreement with Fresenius AG
filed with the Company's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1995.
21 Subsidiaries of Registrant, incorporated by
reference to Exhibit 2 of Annual Report on
Form 10-KSB for the fiscal year ended
December 31, 1994.
23 Consent of KPMG Peat Marwick LLP for incorporation
of its report with respect to the financial
statements included herein as a part of this report,
which report is incorporated by reference into a
Registration Statement on Form S-3 (No. 33-67508)
filed with the Securities and Exchange Commission
and effective September 24,1993, a Registration
Statement on Form S-8 (No. 33-48810) filed with
Securities and Exchange Commission and effective
June 24, 1992 and a Registration Statement on Form
S-8 (No. 33-50546) filed with the Securities and
Exchange Commission and effective August 6, 1992.
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K. During the last quarter of the fiscal year ended
December 31, 1996, the Company filed no reports on Form 8-K.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GULL LABORATORIES, INC.
By /s/ George R. Evanega
------------------------
George R. Evanega, President and CEO
Date 3-26-97
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ George R. Evanega Date 3-26-97
- ------------------------------- -----------
George R. Evanega President and
Chief Executive Officer
(Principal Executive Officer)
Director
/s/ Michael B. Malan Date 3-26-97
- ------------------------------- -----------
Michael B. Malan Secretary/Treasurer
(Principal Financial & Accounting Officer)
/s/ Myron W. Wentz Date 3-26-97
- ------------------------------- -----------
Myron W. Wentz
Chairman of the Board of Directors
- ------------------------------- Date
Matthias Schmidt, Director, Vice -----------
Chairman
- ------------------------------- Date
Gerd Krick, Director -----------
/s/ Ulrich Wagner Date 3-26-97
- ------------------------------- -----------
Ulrich Wagner, Director
/s/Anne-Marie Ricart Date 3-26-97
- ------------------------------- -----------
Anne-Marie Ricart, Director
/s/ Peter Gladkin Date 3-26-97
- ------------------------------- -----------
Peter Gladkin, Director
15
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Item Page
- ------------------------- ----
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors F-1
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1996
and 1995 F-2
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-7
Report of KPMG Peat Marwick LLP, Independent Auditors S-1
Consolidated Financial Statement Schedule II -
Valuation and Qualifying Accounts S-2
</TABLE>
16
<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 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.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Salt Lake City, Utah
January 28, 1997
<PAGE>
GULL LABORATORIES, INC.
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
Assets
------
Current assets:
Cash $ 301,033 219,415
Accounts receivable, less allowance for doubtful accounts of
$314,194 in 1996 and $253,747 in 1995 (note 5) 2,406,222 2,778,952
Net investment in sales-type leases (notes 6, 7, and 8) 262,831 145,200
Income tax refund receivable (note 9) 134,743 264,506
Inventories (notes 3 and 5) 3,324,408 3,393,924
Prepaid expenses 399,774 242,088
Deferred income taxes (note 9) 108,000 124,000
------------- --------------
Total current assets 6,937,011 7,168,085
------------- --------------
Property, plant, and equipment, net (notes 4, 6, and 7) 3,616,171 3,572,899
Net investment in sales-type leases (notes 6, 7, and 8) 810,419 507,018
Other assets, net (note 2) 989,101 1,069,628
------------- --------------
$ 12,352,702 12,317,630
============= ==============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable (note 5) $ 1,675,322 2,286,123
Accounts payable 1,648,036 1,693,480
Accrued expenses 471,825 1,221,990
Current installments of long-term debt and capital lease
obligations (notes 6 and 7) 401,937 1,841,629
------------- --------------
Total current liabilities 4,197,120 7,043,222
Long-term debt and capital lease obligations, excluding current
installments (notes 6 and 7) 2,785,893 131,826
Deferred income taxes (note 9) 298,000 304,600
Other long-term liabilities 96,503 96,503
------------- --------------
Total liabilities 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;
6,563,934 shares issued and outstanding in 1995 and 1996 6,564 6,564
Additional paid-in capital 6,910,908 6,910,908
Foreign currency translation adjustment (192,833) (185,828)
Accumulated deficit (1,749,453) (1,990,165)
------------- --------------
Total stockholders' equity 4,975,186 4,741,479
------------- --------------
$ 12,352,702 12,317,630
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Sales $ 17,908,752 18,827,853 15,841,606
Cost of sales 8,395,238 9,020,172 7,159,067
-------------- -------------- --------------
9,513,514 9,807,681 8,682,539
-------------- -------------- --------------
Expenses:
Selling, general and administrative 6,856,018 7,415,244 6,101,852
Research and development 1,422,926 901,633 1,219,582
Restructuring charge (note 14) - 505,260 775,000
-------------- -------------- --------------
Total expenses 8,278,944 8,822,137 8,096,434
-------------- -------------- --------------
Operating income 1,234,570 985,544 586,105
-------------- -------------- --------------
Other income (expense):
Interest expense (535,786) (647,656) (588,626)
Other (note 11) 32,697 872,305 258,044
-------------- -------------- --------------
Total other (income) expense (503,089) 224,649 (330,582)
-------------- -------------- --------------
Income before provision for income taxes 731,481 1,210,193 255,523
Income tax expense (note 9) 490,769 857,300 566,625
-------------- -------------- --------------
Net income (loss) $ 240,712 352,893 (311,102)
============== ============== ==============
Income (loss) per common and common equivalent share $ 0.04 0.05 (0.05)
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Addi- Foreign Total
Common Stock tional currency stock-
-------------------------- paid-in translation Accumulated holders'
Shares Amount capital adjustment deficit equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 - - 173,063 - - 173,063
Tax benefit from exercise of stock options - - 197,117 - - 197,117
Net income - - - - 352,893 352,893
Foreign currency translation adjustment - - - (76,813) - (76,813)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1995 6,563,934 6,564 6,910,908 (185,828) (1,990,165) 4,741,479
Net income - - - - 240,712 240,712
Foreign currency translation adjustment - - - (7,005) - (7,005)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1996 6,563,934 $ 6,564 6,910,908 (192,833) (1,749,453) 4,975,186
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 240,712 352,893 (311,102)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 660,097 667,196 778,832
Loss (gain) on disposal of property, plant, and equipment 11,214 (371,176) 24,118
Provision for losses on accounts receivable 63,754 93,649 127,616
Provision for loss on leases 65,470 86,765 -
Provision for inventory reserve 163,613 302,123 -
Provision for warranty reserve 84,515 84,609 -
Tax benefit from exercise of stock options - 197,117 59,000
Gain on sale of Gull GmbH - (140,437) -
Gain on sales-type leases (246,484) (275,662) -
Amortization of unearned income on sales-type leases (100,892) (53,448) -
Changes in assets and liabilities:
Accounts receivable 233,625 (154,109) (332,355)
Income tax refund receivable 129,765 (110,681) 116,673
Inventories (492,999) (805,879) (871,498)
Prepaid expenses (166,370) (6,834) 135,533
Other assets 5,541 (206,905) (125,323)
Accounts payable and accrued expenses (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 (82,758) (94,494) (482,338)
------------- ------------- --------------
Cash flows from investing activities:
Increase in sales-type leases (233,960) (344,854) -
Payments received on sales-type leases 421,966 226,384 -
Proceeds from sale of property, plant, and equipment 24,889 989,127 70,814
Purchase of property, plant, and equipment (681,924) (663,766) (668,858)
Proceeds from the sale of Gull GmbH - 313,500 -
------------- ------------ --------------
Net cash provided by (used in) investing activities (469,029) 520,391 (598,044)
------------- ------------ --------------
Cash flows from financing activities:
Principal payments on long-term debt & capital lease obligations (2,057,957) (1,394,241) (1,371,652)
Net increase (reduction) in line-of-credit (634,583) 469,346 1,014,693
Proceeds from issuance of long-term debt & capital lease obligations 3,167,095 180,866 1,302,466
Proceeds from issuance of common stock - 15,187 58,125
------------- ------------ --------------
Net cash provided by (used in) financing activities 474,555 (728,842) 1,003,632
------------- ------------ --------------
Effect of foreign exchange rate changes on cash 158,850 154,206 38,989
------------- ------------ --------------
Net increase (decrease) in cash 81,618 (148,739) (37,761)
Cash at beginning of year 219,415 368,154 405,915
------------- ------------ --------------
Cash at end of year $ 301,033 219,415 368,154
============= ============ ==============
</TABLE>
F-5
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the year for:
Interest $ 533,554 644,009 611,194
Income tax 321,624 1,050,800 372,000
Supplemental Disclosures of Noncash Investing and Financing Activities
- ---------------------------------------------------------------------
Note payable incurred for equipment $ 127,808 60,491 -
Transfer of inventory to net investment in sales-type leases 327,133 236,605 -
</TABLE>
See accompanying to consolidated financial statements.
F-6
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
(1) Summary of Significant Accounting Policies
(a) Business Presentation
Gull Laboratories, Inc. (the Company or Gull) is in the business of develop
ing, 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.
(b) Accounts Receivable
As a general policy, collateral is not required for receivables, but custom
ers' financial condition and credit worthiness are regularly evaluated and
historical losses have not been material. The Company maintains an allow
ance 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.
(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. Good
will 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.
F-7
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(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 1996, 1995, and 1994, were 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 trans
lation 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.
(j) Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make esti
mates and assumptions that affect the reported amounts of assets and liabil
ities 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.
F-8
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(k) Disclosure About Fair Value of Financial Instruments (continued)
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, there
fore, 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.
(2) Other Assets
Other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
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
============= ============
</TABLE>
F-9
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(3) Inventories
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Raw materials $ 945,795 1,141,163
Work-in-process 822,576 176,624
Finished goods 858,540 1,625,523
Equipment held for lease or sale 697,497 450,614
-------------- --------------
$ 3,324,408 3,393,924
============== ==============
</TABLE>
(4) Property, Plant, and Equipment
Property, plant, and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
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
=============== =============
</TABLE>
(5) Notes Payable
Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
--------------- -------------
<S> <C> <C>
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
=============== =============
</TABLE>
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
December 31, 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.
F-10
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(6) Long-term Debt
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
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 -
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
============= ==============
</TABLE>
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
=============
F-11
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(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.
Required future minimum lease payments and the present value of the future
minimum capital lease payments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------------- --------------
<S> <C> <C>
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
==============
</TABLE>
F-12
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(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:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Gross minimum sales-type lease receivables $ 1,605,283 921,038
Less allowance for uncollectible receivables (128,622) (86,765)
------------- -------------
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
============= =============
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
F-13
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(9) Income Taxes (continued)
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:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 249,000 411,500 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 41,800 35,625
------------ ------------ ------------
Provision for income taxes $ 490,769 857,300 566,625
============ ============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
--------------------------------- --------------------------------
Domestic Foreign Domestic Foreign
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
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
-------------- -------------- ------------- --------------
</TABLE>
F-14
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(9) Income Taxes (continued)
<TABLE>
<CAPTION>
1996 1995
--------------------------------- --------------------------------
Domestic Foreign Domestic Foreign
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
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 liabilities (349,000) (29,000) (316,900) (40,000)
-------------- -------------- ------------- --------------
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) -
============== ============== ============= ==============
</TABLE>
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.
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.
F-15
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(10) Employee Benefit Plans (continued)
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,:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Gain on sale of Biolab Germany $ - 140,437 -
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)
-------------- -------------- -------------- ------------
$ 32,697 872,305 258,044
============== ============== ==============
</TABLE>
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.
In January 1995, the Company sold all of the assets of its German
operations to Fresenius AG. The Company received proceeds on the sale of
$313,500 of which $140,437 was recognized as a gain, as noted in the table
above, and $173,063 was recognized as a contribution to capital.
(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 option's 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.
F-16
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(12) Stock Compensation Plans (continued)
A summary of the activity under the plans is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares price Shares price Shares price
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------------------------- ----------------------------------
Weighted
Number average Weighted- Number Weighted-
Range of outstanding at remaining average exercisable at average
exercise December 31, contractual exercise December 31, exercise
prices 1996 life price 1996 price
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 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
============== ==============
</TABLE>
F-17
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(12) Stock Compensation Plans (continued)
Had compensation cost for the Company' stock-based compensation plans been
determined consistent with SFAS No. 123, the Company' net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Net income:
As reported $ 40,712 352,893
Pro forma (49,909) 318,268
Primary and fully diluted earnings per share:
As reported $ 0.04 0.05
Pro forma (0.01) 0.03
</TABLE>
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.
(13) Foreign Operations, Export Sales, and Major Customer
Operations by geographic area:
<TABLE>
<CAPTION>
Sales
----------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
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
============== ============== ==============
</TABLE>
F-18
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(13) Foreign Operations, Export Sales, and Major Customer (continued)
<TABLE>
<CAPTION>
Income before income taxes
----------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
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
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Identifiable assets
----------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
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
============== ============== ==============
</TABLE>
United States export sales to unaffiliated customers by destination of
sale:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
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
============== ============== ==============
</TABLE>
Sales to one customer amounted to 16 percent, 14 percent, and 12 percent
of total sales in 1996, 1995, and 1994, respectively.
(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. No restructuring costs were incurred in 1996.
(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.
F-19
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(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
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Gull Laboratories, Inc.:
Under the date of January 28, 1997, we reported on the 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 for each of the years in the three-year period ended
December 31, 1996. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this consolidated financial statement schedule based on our
audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Salt Lake City, Utah
January 28, 1997
S-1
<PAGE>
Schedule II
GULL LABORATORIES, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Charged
Balance at to cost Balance
beginning and Amounts at end of
of period expenses charged off period
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $ 253,747 63,754 (3,307) 314,194
Allowance for loss on leases 86,765 65,470 (23,614) 128,621
Inventory reserve 129,668 163,613 (238,083) 55,198
Warranty reserve 73,609 84,515 (40,500) 117,624
Year ended December 31, 1995:
Allowance for doubtful accounts $ 160,343 93,649 (245) 253,747
Allowance for loss on leases - 86,765 - 86,765
Inventory reserve 27,545 302,123 (200,000) 129,668
Warranty reserve - 84,609 (11,000) 73,609
Year ended December 31, 1994:
Allowance for doubtful accounts $ 33,000 127,616 (273) 160,343
Inventory reserve 32,563 - (5,018) 27,545
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000832404
<NAME> GULL LABORATORIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 301
<SECURITIES> 0
<RECEIVABLES> 2,669
<ALLOWANCES> 314
<INVENTORY> 3,324
<CURRENT-ASSETS> 6,937
<PP&E> 7,025
<DEPRECIATION> 3,409
<TOTAL-ASSETS> 12,353
<CURRENT-LIABILITIES> 4,197
<BONDS> 2,786
0
0
<COMMON> 7
<OTHER-SE> 4,968
<TOTAL-LIABILITY-AND-EQUITY> 12,353
<SALES> 17,909
<TOTAL-REVENUES> 17,909
<CGS> 8,395
<TOTAL-COSTS> 8,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 129
<INTEREST-EXPENSE> 536
<INCOME-PRETAX> 732
<INCOME-TAX> 491
<INCOME-CONTINUING> 241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 241
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
