UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 1997.
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the transition period from _________
to _________ .
0-16864
------------------------
(Commission File number)
GULL LABORATORIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
UTAH 87-0404754
---------------------- ---------------------------
(State of Incorporation) (IRS Employer Identification
Number)
1011 East Murray Holladay Road
Salt Lake City, Utah 84117
- --------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
(801) 263-3524
-------------------------------
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ____
The number of shares of common stock outstanding as of August 1, 1997 was
7,940,359.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 272,000 $ 301,033
Receivables-net 3,829,876 3,121,073
Sales type leases 241,427 262,831
Income tax refund receivable 134,743
Inventories 6,735,006 4,957,230
Prepaid expenses 356,976 399,774
Deferred income taxes 124,000 108,000
Total current asset 11,559,285 9,284,684
---------------- ----------------
Property, plant and equipment - net 4,192,646 4,409,760
Sales type leases 710,738 810,419
Other assets - net 1,036,396 1,034,523
---------------- ----------------
Total assets $ 17,499,065 $ 15,539,386
================ ================
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,876,224 $ 1,675,322
Accounts payable 2,830,030 1,582,276
Accrued expenses 1,742,931 1,043,495
Income tax payable 215,716
Deferred income taxes 177,146
Current portion of long-
term obligations 678,926 545,341
---------------- ----------------
Total current liabilities 7,343,827 5,023,580
Long-term obligations 3,484,534 3,000,675
Deferred income taxes 314,000 298,000
Other long-term liabilities 777,597 414,458
---------------- ----------------
Total liabilities 11,919,958 8,736,713
---------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 7,941 7,884
Additional paid-in capital 8,028,348 8,149,332
Foreign currency translation
adjustment (624,933) (173,386)
Accumulated deficit (1,832,249) (1,181,157)
---------------- ----------------
Total stockholders' equity 5,579,107 6,802,673
---------------- ----------------
Total liabilities and stockholders'
equity $ 17,499,065 $ 15,539,386
================ ================
1
<PAGE>
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three months ended
-----------------------------------------
September 30, 1997 September 30, 1996
------------------ ------------------
Sales 5,071,732 6,063,527
Cost of goods sold 1,924,998 3,247,744
------------------ ------------------
Gross Profit 3,146,734 2,815,783
------------------ ------------------
Expenses:
Selling, general and administrative 2,696,391 2,733,998
Research and development 320,708 385,900
Merger costs 1,226,519
------------------ ------------------
Total expenses 4,243,618 3,119,898
------------------ ------------------
Operating income/(loss) (1,096,884) (304,115)
------------------ ------------------
Other income (expense):
Interest expense (171,904) (128,622)
Other 164,790 (119,973)
------------------ ------------------
Total other income (expense) (7,114) (248,595)
------------------ ------------------
Income/(loss) before provision for
income taxes (1,103,998) (552,710)
Income tax provision (136,563) (61,440)
------------------ ------------------
Net loss (967,435) (491,270)
================== ==================
Loss per common and common
equivalent share (0.12) (0.06)
================== ==================
2
<PAGE>
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Nine months ended
-----------------------------------------
September 30, 1997 September 30, 1996
------------------ ------------------
Sales 16,296,732 18,612,419
Cost of goods sold 6,377,998 8,691,272
------------------ ------------------
Gross Profit 9,918,734 9,921,147
------------------ ------------------
Expenses:
Selling, general and administrative 7,855,392 7,805,514
Research and development 1,089,708 1,148,279
Merger costs 1,226,519
------------------ ------------------
Total expenses 10,171,619 8,953,793
------------------ ------------------
Operating income/(loss) (252,885) 967,354
------------------ ------------------
Other income (expense):
Interest expense (484,904) (388,924)
Other 220,791 (50,872)
------------------ ------------------
Total other income (expense) (264,113) (439,796)
------------------ ------------------
Income/(loss) before provision for
income taxes (516,998) 527,558
Income tax provision 274,437 284,552
------------------ ------------------
Net income/(loss) (791,435) 243,006
================== ==================
Earnings per common and common
equivalent share (0.10) 0.03
================== ==================
3
<PAGE>
GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
Nine Months Ended
----------------------------------------
September 30, 1997 September 30, 1996
(Unaudited) (Unaudited)
------------------ ------------------
Cash flows from operating activities:
Income/(loss) from continuing
operations $ (791,435) $ 243,006
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 827,412 868,572
Loss on sale of fixed assets 42,627 26,003
Changes in assets and liabilities:
Net receivables (1,885,883) (386,097)
Inventories (2,050,701) (64,748)
Prepaid expenses 594,670 17,761
Other assets (38,618) (45,056)
Accounts payable 1,461,343 (102,785)
Notes payable 266,879 (42,635)
Income taxes payable 350,459 330,451
Accrued expenses 799,896 (326,632)
Deferred taxes (131,594) (65,688)
Other liabilities 29,887
Sales type leases 129,339
------------------ ------------------
Net cash provided by (used in)
operating activities (395,719) 452,152
------------------ ------------------
Cash flows from investing activities:
Disposition of property, plant
and equipment 16,642 4,434
Purchase of property, plant and
and equipment (669,443) (771,600)
------------------ ------------------
Net cash used in investing activities (652,801) (767,166)
------------------ ------------------
Cash flows from financing activities:
Proceeds from long-term obligations 2,081,188 2,675,710
Principal payments on
long-term obligations (833,834) (1,947,516)
Proceeds from issuance of
common stock 204,727 (362,720)
------------------ ------------------
Net cash provided from
financing activities 1,452,081 365,474
------------------ ------------------
Foreign currency translation adjustment (432,594) (10,045)
------------------ ------------------
Net decrease in cash (29,033) 40,415
Cash at beginning of period 301,033 219,415
------------------ ------------------
Cash at end of period $ 272,000 $ 259,830
================== ==================
4
<PAGE>
GULL LABORATORIES, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
1. Basis of presentation
The unaudited consolidated condensed financial statements of Gull
Laboratories, Inc. (the "Company") as of September 30, 1997 and for the
three months and nine months ended September 30, 1997 and 1996 were
prepared by the Company without audit pursuant to the rules and regulations
of the Securities and Exchange Commission. On August 11, 1997, the Company
acquired certain assets of the Fresenius Diagnostics Business Unit
(OFresenius DiagnosticsO), of the Intensive Care and Diagnostics Division
of Fresenius AG, the Company's majority shareholder. The acquisition of
the assets has been accounted for as a combination of entities under common
control in a manner similar to a pooling of interests. The Company's
results of operations have been restated to include the operations of
Fresenius Diagnostics from the beginning of the periods presented and the
effects of intercompany transactions have been eliminated. These financial
statements and related notes should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1996
contained in its Annual Report on Form 10-K, as amended, and the Company's
Proxy Statement dated July 9, 1997.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, all necessary adjustments
to the financial statements have been made to present fairly the financial
position and results of operations and cash flows. The results of
operations for the periods presented are not necessarily indicative of the
results for the respective complete years.
2. Inventories
Inventories consisted of the following:
September 30, December 31,
1997 1996
------------ -----------
Raw materials $3,339,036 $1,677,786
Work-in-process 1,029,702 822,576
Finished goods 2,366,268 2,456,868
------------ -----------
Total $6,735,006 $4,957,230
============ ===========
3. Earnings/(loss) per share
Earnings/(loss) per share amounts are computed by dividing net
income/(loss) by the weighted average number of common and common
equivalent shares outstanding during each period. The weighted average
number of shares used in computing earnings per share for the three months
ended September 30, 1997 and 1996 was 7,938,359 and 7,883,934 respectively.
5
<PAGE>
For the nine months ended September 30, 1997 and 1996, the weighted average
number of shares outstanding were 7,916,227 and 7,883,934, respectively.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128). SFAS 128 establishes a different method of computing earnings
per share than is currently required under the provisions of Accounting
Principles Board Opinion No. 15. Under SFAS 128, the Company will be
required to present both basic earnings per share and diluted earnings per
share. Basic earnings per share is expected to be higher than the
currently presented primary earnings per share as the effect of dilutive
stock options will not be considered in computing basic earnings per share.
Diluted earnings per share is expected to be comparable or slightly lower
than the currently presented primary earnings per share.
The Company plans to adopt SFAS 128 in its fiscal fourth quarter and
at that time all historical earnings per share data presented will be
restated to conform to the provisions of SFAS 128.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
During the nine months ended September 30, 1997, the ratio of current
assets to current liabilities decreased from 1.85 at December 31, 1996 to
1.57. Working capital decreased from $4,261,104 to $4,215,458. Net
receivables increased due to revenues recognized in September that were
collected in October and due to slower payments by some customers.
Inventories increased as the Company acquired more inventories for its
instrumentation program and increased safety stocks in its European
operations. The increased receivables and inventories were financed
primarily through increased accounts payable, increased borrowings on a
line of credit and a decrease in income tax refund receivable. Accrued
expenses increased due to the accrual of merger costs incurred in
consolidating the Company's European operations with Fresenius Diagnostics.
At September 30, 1997, the Company had approximately $400,000
available under lines of credit with its banks and had commitments
totalling approximately $200,000 for the purchase of capital assets for
which borrowing commitments have been secured. The Company has obtained a
1.7 million DM (approximately $950,000) credit facility from Fresenius AG,
its majority owner. To the extent that working capital needs cannot be
financed through internally generated funds and exceed the credit facility
with Fresenius AG, the Company believes that additional debt, equity and
lease financing can be obtained.
Results of Operations
Sales for the third quarter of 1997 of $5,071,732 were 16% lower than
sales in the third quarter of 1996 of $6,063,527. For the first nine
months of 1997, sales of $16,296,732 were $2,315,687 or 12% lower than 1996
sales of $18,612,419. Sales of the Company's United States' operations
were comparable to the prior year. Increased sales of the Company's
Bioresearch operations and the Company's ELISA product line, were offset by
lower sales of instrumentation and proficiency testing products to the
6
<PAGE>
College of American Pathologists. For the nine months ended September 30,
1997, sales of the Company's European operations, including the operations
acquired from Fresenius AG, decreased $2,063,533 or 23%. Approximately
$1,180,000 or 57% of the sales decrease was caused by the strength of the
United States dollar which appreciated 15% against the Belgian Franc and
German Mark in the first nine months of 1997. The remaining decrease is
due to decreased sales in 1997 of the Company's blood grouping products
acquired from Fresenius, the loss of a significant distributed product line
in 1996 and the loss of customers due to production problems encountered in
1996. Except for the impact of the changes in foreign currency exchange
rates discussed above, changes in sales are principally due to changes in
sales volume. There have been no significant changes in sales prices.
Gross profit as a percentage of sales increased to 62% in the third
quarter of 1997 compared to 46% in the third quarter of 1996. For the
first nine months of 1997, gross profit was 61% compared to 53% during the
first nine months of 1996. The increase in the gross profit percentage is
due to product sales mix and manufacturing efficiencies.
Selling, general and administrative costs and research and development
costs were comparable with the prior year.
During the quarter ended September 30, 1997, the Company expensed
$1,226,519 of costs incurred in the acquisition of Fresenius Diagnostics.
Of that amount, approximately $630,000 represented legal, accounting,
investment banking and other costs incurred in investigating, negotiating
and closing the merger. An additional $595,000 expense has been accrued
for the cost of moving administrative and logistics functions from Belgium
to Germany, including severance costs for eight terminated employees in
Belgium as well as the rental expense for the Belgium facility that is
being rented under a lease that canOt be cancelled.
Interest expense increased during the three months and the six months
ended June 30, 1997 due to increased usage of debt financing. Other income
increased due to greater interest earned on sales type lease receivables
and lower currency translation losses.
There were no other material changes in the Company's operations
during the third quarter or first nine months of 1997.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
On August 11, 1997, the Company held its annual shareholder's meeting to
elect the members of its Board of Directors, to ratify the Company's selection
of KPMG Peat Marwick as its auditor and to ratify the acquisition of certain
assets of the Fresenius Diagnostics Business Unit of the Intensive Care and
Diagnostics Division of Fresenius AG, the majority shareholder of the Company.
The results of the voting were as follows:
7
<PAGE>
Vote Vote Vote Withheld/
For Against Abstain
Election of Board Members:
Dr. Myron Wentz 4,640,203 140,349
Mr. Rainer Baule 4,773,219 7,333
Dr. Matthias Schmidt 4,777,719 2,833
Dr. Ulrich Wagner 4,747,953 32,599
Anne-Marie Ricart 4,637,203 143,349
Peter Gladkin 4,776,129 4,333
Dr. George R. Evanega 4,777,719 2,833
Ratification of KPMG Peat
Marwick as auditor 4,772,799 6,800 953
Ratification of acquistion of certain
assets from Fresenius AG 4,265,283 18,125 497,194
Under the terms of the agreement to purchase the assets from Fresenius AG,
approval of the non-Fresenius shareholders voting at the annual meeting was
required to be obtained. Without including the shares of Fresenius voted at the
Annual Meeting, there were 654,565 shares voted for the proposal, 18,125 shares
were voted against the proposal, 1,399 shares abstained from voting and there
were 495,795 OBroker No-VotesO.
No other material matter occurred during the quarter ended September 30,
1997 that requires disclosure as Part II of the Quarterly Report on Form 10Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Gull Laboratories, Inc.
Date 11-14-97 /s/ Michael B. Malan
----------------------- --------------------------
Michael B. Malan, CPA
Secretary/Treasurer and
V.P. of Finance (Duly authorized
officer and principal financial
officer)
8
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GULL
LABORATORIES, INC. SEPTEMBER 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 272,000
<SECURITIES> 0
<RECEIVABLES> 4,272,691
<ALLOWANCES> 442,815
<INVENTORY> 6,735,006
<CURRENT-ASSETS> 11,559,285
<PP&E> 9,494,102
<DEPRECIATION> 5,301,456
<TOTAL-ASSETS> 17,499,065
<CURRENT-LIABILITIES> 7,343,827
<BONDS> 3,484,534
0
0
<COMMON> 7,941
<OTHER-SE> 5,571,166
<TOTAL-LIABILITY-AND-EQUITY> 17,499,065
<SALES> 5,071,732
<TOTAL-REVENUES> 5,071,732
<CGS> 1,924,998
<TOTAL-COSTS> 4,243,618
<OTHER-EXPENSES> (7,113)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,103,998)
<INCOME-TAX> (136,563)
<INCOME-CONTINUING> (967,435)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (967,435)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
