UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[x] Amendment No. 2 to 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.
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(Exact Name of Registrant as Specified in its Charter)
UTAH 87-0404754
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(State of Incorporation) (IRS Employer Identification Number)
1011 E. Murray Holladay Road
Salt Lake City, UT 84117
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (801) 263 - 3524
Securities registered under Section 12(b) of the Exchange Act:
Common Stock $.001 par value registered on the 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 ninety days. [x] Yes [ ] 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: None
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The Registrant's Form 10-K for the Fiscal Year ended December 31,
1996 is hereby amended and restated so as to read in its entirety as follows:
PART I
ITEM 1: DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
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(tm), 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(tm), 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(tm) 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(tm) 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(tm) is designed
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to detect infectious agents in a wide range of specimens, including serum,
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
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CAP contracts go beyond increased direct sales. The Company's management
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, through the diagnostics
business unit of its I+D Division, has marketed the Company's products in
Germany 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. See "Item 13 - - Certain Relationships and Related
Transactions" for a discussion of the Company's acquisition of certain assets
of the diagnostics business unit of the I + D Division of Fresenius AG.
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:
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Year Ended December 31
Area 1996 1995 1994
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United States 57% 48% 42%
Europe 36% 42% 49%
Pacific Rim 6% 6% 5%
Other 1% 4% 4%
Total 100% 100% 100%
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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."
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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,
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 infectious 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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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(tm) 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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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(tm) 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 to be acquired from Fresenius AG.
EMPLOYEES
At December 31, 1996, the Company had 144 employees of which 10
were part time. None of the Company's employees at December 31, 1996 were
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unionized. Upon consummation of the acquisition of the Fresenius AG
diagnostics business unit, the Company will have 182 employees.
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 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.
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."
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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.
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Prices of Common Stock
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Quarter Ended Low High
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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
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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
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Security Holders
On June 15, 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.
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.
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Statement of Operations
(000's Omitted)
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Year Ended December 31,
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1996 1995 1994 1993 1992
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Sales $17,909 $18,828 $15,842 $15,406 $14,646
Net Income (loss) 241* 353* (311) (401) (507)
Net income (loss) per common
and common equivalent share 0.04 0.05 (0.05) (0.06) (0.08)
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*See "1996 Compared to 1995" in "Results of Operations" below.
There were no cash dividends declared in the periods presented above.
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Balance Sheet Data
(000's Omitted)
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Year Ended December 31,
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1996 1995 1994 1993 1992
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Working capital $ 2,740 $ 125 $ 1,910 $ 2,064 $ 933
Total assets 12,353 12,318 11,502 10,446 11,336
Total long-term obligations 2,786 132 2,478 2,347 3,549
Stockholder's equity 4,975 4,741 4,080 4,493 3,177
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual 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 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.
As part of the acquisition of the Fresenius AG diagnostics business unit, the
Company has committed to implement a data processing system which the Company
believes can be implemented at a cost of less than $100,000.00. The cost of
implementing the data processing system was contemplated as part of certain
financing that Fresenius AG has agreed to make available to the Company in
connection with the Company's acquisition of the Fresenius AG diagnostics
business unit. 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 as of
December 31, 1996, 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 to meet the Company's long-term financing needs.
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
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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.
RESULTS OF OPERATIONS
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
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.
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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(tm) 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 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 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(tm) 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(tm)
instrumentation. Additionally, the Company incurred significant travel costs
associated with monitoring its European operations while it was hiring new
European management.
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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 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.
ITEM 8: FINANCIAL STATEMENTS
The Financial Statements and Schedules of the Company are submitted
as a separate section of this report and 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.
-14-
<PAGE>
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT
Certain information concerning the members of the Board of Directors is set
forth below:
- -------------------------------------------------------------------------
Has Served
as Director
Name of Director Age Company Position Since
- -------------------------------------------------------------------------
Myron W. Wentz 56 Director 1974
Chairman of the Board
Matthias Schmidt 38 Director 1997
Anne-Marie Ricart 55 Director 1993
Gerd Krick 58 Director 1994
Ulrich Wagner 53 Director 1994
Peter Gladkin 49 Director 1995
George R. Evanega 61 Director 1995
Chief Executive Officer
President
- -------------------------------------------------------------------------
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.
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;
-15-
<PAGE>
(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 members of the
Board of Directors or among such members and the current management of the
Company.
Directors
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 Intensive Care + Diagnostics Division
(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 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.
-16-
<PAGE>
Gerd Krick Dr. Gerd Krick has been Chairman of the Managing Board and
Chief Executive Officer of Fresenius AG since August 1993
and Chairman of the Managing Board and Chief Executive
Officer of Fresenius Medical Care since September 1996.
Prior to August 1993, he held various positions with
Fresenius AG, including Deputy Chairman of the Managing
Board and Director of the Medical Systems Division. Dr.
Krick holds a Ph.D. degree in mechanical engineering from
T.H. University, Munich, Germany. He is also Chairman of
the Board of Directors of Fresenius National Medical Care
Holdings, Inc. ("FNMC"), a publicly held subsidiary of
Fresenius Medical Care and Chairman of the Board of
Directors of Fresenius USA, Inc. ("FUSA"), a manufacturer
and distributor of dialysis equipment and related
disposable products (including products manufactured by
Fresenius Medical Care). FUSA was publicly held until
September 1996, when it became a wholly owned subsidiary
of FNMC.
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 FUSA from October 1989 through
October 1989 and from March 1992 until September 1996.
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 the 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 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.
-17-
<PAGE>
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.
Executive Officers
The executive officers of the Company are as follows:
--------------------------------------------------------------------
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
Regulatory Affairs/Quality
Assurance
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 "Directors."
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.
-18-
<PAGE>
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.
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 Marketing and Sales 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.
-------------------------------------------------------------------
-19-
<PAGE>
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
(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.
ITEM 11: 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").
-20-
<PAGE>
<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 Awards 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 $44,734 was paid in 1996.
No options were granted to any of the Named Executive Officers in
1996. The following table presents information concerning stock options
exercised during1996 and the value of unexercised stock options held by the
Named Executive Officers at December 31, 1996.
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Option Exercises in Last Fiscal Year and
Value of Stock Options at December 31, 1996
- ------------------------------------------------------------------------------------------------------
Name of Securities Value of Unexercised
Underlying In-the-Money
Unexercised options Options at
at December 31, 1996 December 31, 1996 ($)
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.
-21-
<PAGE>
All stock options held by Dr. Evanega and Mr. Taylor at December
31, 1996 were "in-the-money."
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.
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.
-22-
<PAGE>
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
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."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
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, 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 current 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:
-23-
<PAGE>
- ------------------------------------------------------------------------------
Security Ownership of Certain Beneficial
Owners and Management
- ------------------------------------------------------------------------------
Amount and Nature of Percentage of
Name/Address Beneficial Ownership (1)(2) of Class (2)
- ------------------------------------------------------------------------------
Principal Shareholders:
Fresenius AG
Borkenberg 14
61440 Oberursel, Germany 3,610,693 (3)(4) 55%
Anne-Marie Ricart
La Grande Buissiere 25
1380 Ohain
Belgium 852,155 13%
- ------------------------------------------------------------------------------
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 (5) *
Matthias Schmidt
Director
Fresenius AG
Borkenberg 14
61440 Oberursel, Germany -0- *
Gerd Krick
Director
Fresenius AG
Borkenberg 14
61440 Oberursel, Germany -0- *
Anne-Marie Ricart
Director See Above
Ulrich Wagner
Director
O'Melveny & Myers LLP
153 East 53rd Street
New York, NY 10022 -0- *
Peter Gladkin
Director
Health Data Sciences
268 West Hospitality Lane
3rd Floor
San Bernadino, CA 92408 -0- *
George R. Evanega
President/CEO/Director
Gull Laboratories, Inc.
1011 East Murray Holladay Road
Salt Lake City, UT 84117 200,000 (6) 3%
Andrew Taylor
Vice President-Sales/Marketing
Gull Laboratories, Inc.
1011 East Murray Holladay Road
Salt Lake City, UT 84117 -0- *
- ------------------------------------------------------------------------------
All officers and directors as a
group (13 persons) (7) 1,193,605 17%
- ------------------------------------------------------------------------------
-24-
<PAGE>
* 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 May
9, 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.
(4) Does not include 1,320,000 shares issuable to Fresenius AG in connection
with the Company's agreement to acquire certain assets of the diagnostics
business unit of the I+D Division of Fresenius AG. See Item 13, "Certain
Relationships and Related Transactions."
(5) Represents 10,000 shares issuable upon exercise of options as described in
note (2) above.
(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.
-25-
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Fresenius AG, currently the 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 $1,106,582, or approximately 9%, 13% and
7%, respectively, of total sales. Dr. Gerd Krick and Dr. Matthias Schmidt,
each of whom is a director of the Company, are the Chairman and a member,
respectively, of the Management Board of Fresenius AG. In January 1995, the
Company sold all of the intangible assets relating to its German operations to
Fresenius AG for approximately $313,500. The intangible assets had no recorded
cost on the Company's financial records. The transaction was negotiated on an
arm's length basis between the Company's management and representatives from
the I+D Division.
On April 21, 1997 Fresenius AG, Gull GmbH, a wholly owned subsidiary
of the Company (the "Purchaser") and the Company entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement"), setting forth their agreement for
the Purchaser's acquisition of certain assets of the diagnostics business unit
(the "Business") of the I+D Division of Fresenius AG. The Purchaser has
assigned all of its rights under the Asset Purchase Agreement to the Company.
After the Closing Date, the Company intends to transfer the assets of the
Business to the Purchaser in exchange for non-voting stock of the Purchaser.
Under the Asset Purchase Agreement, the Company, through the Purchaser, agreed
to purchase, and Fresenius AG agreed to sell, all fixed assets, all inventory
stocks, and all rights belonging to the Business as of the date of the Asset
Purchase Agreement ("Assets") as well as certain industrial property rights,
intangible objects and rights of usage related thereto. "Assets" does not
include receivables, checks, cash or credit balances existing or accrued as of
December 31, 1996. The closing date (the "Closing Date") is presently
anticipated to occur after all of the conditions to closing have been satisfied
and, if appropriate, at the end of a fiscal quarter. Under the Asset Purchase
Agreement, the purchase price for the Business will be 1,320,000 shares of the
Company's Common Stock, subject to adjustment, as described below. The
purchase price will be payable in shares of the Company Common Stock, with each
share having an agreed value of $8.29, which was the average of closing sale
prices of a share of the Company Common Stock on the American Stock Exchange
for the twenty trading days preceding and the twenty trading days following the
first public announcement of the execution of the letter of intent on December
13, 1996. The Purchaser has agreed to assume all liabilities pertaining to the
operations of the Business after December 31, 1996 (the "Effective Date").
Fresenius AG has agreed to operate the Business from the Effective Date to the
Closing Date on behalf and for the account of the Purchaser. 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 has agreed
to enter into certain service contracts with the Purchaser, and to lease to the
Purchaser certain real property currently occupied by the Business.
The consummation of the sale of the Business is subject to receipt
of the following approvals: (a) Fresenius AG Supervisory Board approval,
which approval has been obtained; (b) the Company Board of Directors approval,
including the unanimous approval of the members of the Special Committee of
Independent Directors, which approval has been obtained, (c) approval of a
majority of the non-Fresenius AG shareholders actually voting at the Company
annual meeting, and (d) approval for listing by the American Stock Exchange of
-26-
<PAGE>
the shares of Common Stock to be issued to Fresenius AG. Conditions precedent
include: (a) delivery to the Company Board of Directors of a satisfactory
opinion of Vector Securities, in form and substance satisfactory to Fresenius
AG, the Company and the Purchaser, to the effect that the purchase price for
the Business and the other terms and conditions of the Asset Purchase
Agreement are fair, from a financial point of view, to the shareholders of the
Company (other than Fresenius AG), which opinion has been delivered; (b) non-
denial of the asset sale by the German Federal Cartel Office; and
(c) execution of a Registration Rights Agreement, as described below. There
can be no assurance that acquisition of the Business by the Company will be
consummated.
Assuming a closing under this Asset Purchase Agreement, Fresenius
AG's beneficial ownership of the Company's Common Stock will increase from
approximately 55% to approximately 62%. Pursuant to a Retransfer of Shares
Agreement by and among Fresenius AG, the Purchaser and the Company, dated
April 21, 1997, the purchase price described above is subject to adjustment
under certain circumstances and could change the number of shares to be issued
to Fresenius AG. The parties agreed that the purchase price would be reduced
by the amount of 33,000 shares of the Company Common Stock if the present
commercial relationship between Fresenius AG and a certain supplier to the
Business (the "Supplier") is entirely terminated ("Entire Termination") on or
before December 31, 1997. If the commercial relationship between Fresenius AG
and the Supplier relating to certain products of the Supplier is terminated
("Partial Termination") on or before such date, the purchase price would only
be reduced by an amount of 18,721 shares of the Company Common Stock. If
either an Entire Termination or a Partial Termination takes place after
payment of the purchase price, Fresenius AG will be obliged to retransfer the
33,000 or 18,721 shares of Common Stock, as applicable, to the Company.
Likewise, if within two years after Entire Termination or Partial Termination,
the Purchaser, the Company or an affiliate of either enters into a commercial
relationship with the Supplier or a successor to the Supplier, which is in
quality and volume comparable with the terminated commercial relationship
between Fresenius AG and the Supplier, then the Company and the Purchaser
shall transfer the 33,000 or 18,721 shares of Common Stock, as applicable,
back to Fresenius AG.
In connection with the execution of the Asset Purchase Agreement,
Fresenius AG and the Company agreed that at the closing under the Asset
Purchase Agreement, they would enter into a Registration Rights Agreement
pursuant to which Fresenius AG would have the right on two separate occasions
to require that the Company file a registration statement under the securities
Act of 1933, as amended (the "1933 Act") for the registration of shares of
Common Stock issued to Fresenius AG as the consideration for the Business.
The Registration Rights Agreement provides that the Company will bear the
costs of registering such shares, up to a maximum of $20,000. Fresenius AG
would also have the right to include such shares in certain registration
statements filed by the Company under the 1933 Act for its own account or for
the registration of shares of Common Stock held by other persons.
The description of the Asset Purchase Agreement and the Retransfer
of Shares Agreement set forth above are qualified in their entirety by
reference to such agreements, copies of which are on file with the Securities
and Exchange Commission and the American Stock Exchange.
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,
-27-
<PAGE>
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.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GULL LABORATORIES, INC.
Date: July 1, 1997 By: /s/ George R. Evanega
----------------------------
George R. Evanega, Ph.D.
President and CEO
-28-
<PAGE>
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: July 1, 1997
- ----------------------------------------- ------------------
George R. Evanega President and Chief
Executive Officer
(Principal Executive
Officer)
Director
/s/ Michael B. Malan Date: July 1, 1997
- ----------------------------------------- ------------------
Michael B. Malan Secretary/Treasurer
(Principal Financial &
Accounting Officer)
/s/ Myron W. Wentz Date: July 1, 1997
----------------------------------------- ------------------
Myron W. Wentz Chairman of the Board
of Directors
/s/ Matthias Schmidt Date: July 1, 1997
----------------------------------------- ------------------
Matthias Schmidt Director, Vice
Chairman
___________________________________________ Date:____________________
Gerd Krick Director
/s/ Ulrich Wagner Date: July 1, 1997
----------------------------------------- ------------------
Ulrich Wagner Director
___________________________________________ Date:____________________
Anne-Marie Ricart Director
___________________________________________ Date:____________________
Peter Gladkin Director
-29-
<PAGE>
EXHIBITS
-30-
<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
December 31, 1996 and 1995
<TABLE>
<S> <C> <C>
1995
Assets 1996 (note 11)
-------- ------------- -----------
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 2,785,893 131,826
installments (notes 6 and 7)
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 6,564 6,564
and 1996
Additional paid-in capital 7,051,345 7,051,345
Foreign currency translation adjustment (192,833) (185,828)
Accumulated deficit (1,889,890) (2,130,602)
------------- -----------
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>
<S> <C> <C> <C>
1995
1996 (note 11) 1994
------------- ------------ ------------
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) 32,697 731,868 258,044
------------- ------------ ------------
Total other income (expense) (503,089) 84,212 (330,582)
------------- ------------ ------------
Income before provision for income taxes 731,481 1,069,756 255,523
Income tax expense (note 9) 490,769 857,300 566,625
------------- ------------ ------------
Net income (loss) $ 240,712 212,456 (311,102)
============= ============ ============
Income (loss) per common and common
equivalent share $ 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
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Addi- Foreign Total
tional 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
=========== ========= =========== ============ ============= ============
</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>
<S> <C> <C> <C>
1995
1996 (note 11) 1994
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 240,712 212,456 (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 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 and
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 and
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>
<S> <C> <C> <C>
1995
1996 (note 11) 1994
----------- ----------- -----------
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the year for:
Interest $ 533,554 644,009 611,194
Income taxes 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 notes 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 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 55Epercent 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 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.
(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.
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 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.
(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.
F-8
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(k) Disclosure About Fair Value of Financial Instruments
At December 31, 1996, the book value of all of the CompanyOs
financial instruments approximates fair value except for long-term
debt. The fair value of the CompanyOs 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.
(k) Disclosure About Fair Value of Financial Instruments (continued)
The fair value of the CompanyOs 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.
(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 288,135 77,671
marketing rights
Other 153,949 262,900
Less accumulated amortization (376,521) (279,138)
---------- ----------
$ 989,101 1,069,628
========== ==========
F-9
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(3)Inventories
Inventories consist of the following at December 31:
1996 1995
----------- ----------
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
=========== ==========
(4)Property, Plant, and Equipment
Property, plant, and equipment consist of the following at DecemberE31:
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
========== ==========
(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.
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:
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 -
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
==========
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:
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
==========
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:
1996 1995
---------- ----------
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
========== ==========
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
========== ========== ===========
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:
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
========== ========== ==========
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
========= ========= ========= =========
F-14
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(9)Income Taxes (continued)
1996 1995
Domestic Foreign Domestic Foreign
--------- --------- --------- ---------
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) -
========= ========= ========= =========
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,:
1996 1995 1994
---------- ---------- -----------
Gain on sale of building $ - 516,533 -
Currency transaction gains (38,496) 155,116 257,431
(losses)
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 55Epercent 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 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 $0.02.
(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 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>
<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 269,750 70,000 55,500
year-end
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:
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
-------------- -----------
1.12 - 5.50 506,000 7.6 4.633 269,750 4.676
============== ===========
F-17
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(12) Stock Compensation Plans (continued)
Had compensation cost for the CompanyOs stock-based compensation plans
been determined consistent with SFAS No. 123, the CompanyOs 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 CompanyOs 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 CompanyOs 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:
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
============= ============ =============
F-18
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(13) Foreign Operations, Export Sales, and Major Customer (continued)
Income 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 accounted for more than ten percent of
sales.
(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.
F-19
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(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 CompanyOs majority stockholder subject to
the execution of a definitive acquisition agreement, receipt of a
fairness opinion from an investment banker, and approval of the
CompanyOs stockholders and the Fresenius AGOs 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
<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,
stockholdersO equity, and cash flows for each of the years in the three-year
period ended DecemberE31, 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 CompanyOs 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.
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
Charged
Balance at to cost Balance
beginning and Amounts at end
of period expenses charged off of period
---------- -------- ----------- ---------
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
S-2
<PAGE>
