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 March 31, 1998.
[ ] 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 May 1, 1998 was
7,948,959.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 1998 December 31, 1997
------------------------ -------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 534,562 $ 239,993
Receivables-net 3,682,349 1,963,410
Net investment in sales-type leases 236,630 272,125
Income tax refund receivable 155,642 119,499
Inventories 7,473,485 6,197,359
Prepaid expenses 422,309 316,878
----------------------- -----------------------
Total current assets 12,504,977 9,109,264
Property, plant and equipment - net 4,346,889 4,189,999
Net investment in sales-type leases 663,077 763,412
Deferred taxes 272,839 236,586
Other assets - net 1,021,400 1,001,812
----------------------- -----------------------
Total assets $ 18,809,182 $ 15,301,073
======================= =======================
LIABILITIES AND STOCK
HOLDERS'EQUITY
Current liabilities:
Notes payable $ 1,635,341 $ 1,498,146
Accounts payable 5,811,974 2,331,126
Accrued expenses 2,301,341 1,853,521
Deferred income taxes 96,241 6,884
Current portion of long
term obligations 3,510,983 3,576,085
----------------------- -----------------------
Total current liabilities 13,355,880 9,265,762
Long-term obligations 756,412 733,082
Other long-term liabilities 363,414 362,278
----------------------- -----------------------
Total liabilities 14,475,706 10,361,122
----------------------- -----------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 7,941 7,941
Additional paid-in capital 8,416,335 8,416,335
Foreign currency translation adjustment (439,658) (413,737)
Accumulated deficit (3,651,142) (3,070,588)
------------------------ ------------------------
Total stockholders' equity 4,333,476 4,939,951
----------------------- -----------------------
Total liabilities and stockholders' equity $ 18,809,182 $ 15,301,073
======================= =======================
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GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three months ended
March 31, 1998 March 31, 1997
----------------------------- ----------------------------
Sales $ 5,140,406 $ 6,031,774
Cost of good sold 2,547,344 2,383,993
----------------------------- ----------------------------
Gross Profit 2,593,062 3,647,781
----------------------------- ----------------------------
Expenses:
Selling, general and administrative 2,629,148 2,646,365
Research and development 389,383 401,309
----------------------------- ----------------------------
Total expenses 3,018,531 3,047,674
----------------------------- ----------------------------
Operating income (loss) (425,469) 600,107
------------------------------ -----------------------------
Other expense:
Interest expense (199,273) (145,137)
Other 49,045 (3,420)
----------------------------- ------------------------------
Total other expense (150,228) (148,557)
------------------------------ ------------------------------
Income (loss) before provision for
income taxes (575,697) 451,550
Income tax provision 4,857 393,630
----------------------------- ------------------------------
Net income (loss) $ (580,554) $ 57,920
============================== ==============================
Net income (loss) per common share:
Basic and diluted $ (.07) $ .01
============================== ============================
2
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GULL LABORATORIES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
Three Months Ended
March 31, 1998 March 31, 1997
----------------------- -------------------
Cash flows from operating activities:
Income from continuing operations $ (580,554) $ 57,920
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 294,194 345,909
Other 55,135 360
Changes in assets and liabilities:
Net receivables (1,791,184) (1,877,596)
Inventories (1,280,550) (172,559)
Prepaid expenses (110,454) (142,281)
Other assets/liabilities (48,351) 12,222
Income taxes (receivable) payable (36,143) 237,307
Accounts payable 3,545,686 497,633
Deferred income taxes 41,000 125,540
Accrued expenses 478,844 30,392
-------------------- ----------------------
Net cash provided by (used in) operating activities 567,623 (885,153)
-------------------- -----------------------
Cash flows from investing activities:
Receipts of sales type lease 93,229 81,227
Disposition of property, plant
and equipment 9,457
Purchase of property, plant and equipment (496,826) (160,904)
---------------------- -----------------------
Net cash used in investing activities (394,140) (79,677)
---------------------- -----------------------
Cash flows from financing activities:
Proceeds from long-term obligations 156,202 853,005
Principal payments on long-term obligations (184,897) (316,000)
Line of Credit 144,968 404,737
Proceeds from issuance of common stock 159,240
-------------------- ----------------------
Net cash provided from financing activities 116,273 1,100,982
-------------------- ----------------------
Foreign currency translation adjustment 4,813 (28,875)
-------------------- -----------------------
Net increase in cash 294,569 107,277
Cash at beginning of period 239,993 301,033
-------------------- ----------------------
Cash at end of period $ 534,562 $ 408,310
==================== ======================
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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 March 31, 1998 and for the three months
ended March 31, 1998 and 1997 were prepared by the Company without audit
pursuant to the rules and regulations of the Securities and Exchange Commission.
These financial statements and related notes should be read in conjunction with
the Company's audited financial statements for the year ended December 31, 1997
contained in its Annual Report on Form 10-K.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all necessary adjustments to the
financial statements have been made to present fairly the financial position and
results of operations and cash flows. The results of operations for the periods
presented are not necessarily indicative of the results for the respective
complete years.
2. Inventories
Inventories consisted of the following:
March 31, December 31,
1998 1997
Raw materials $1,587,587 $2,514,522
Work-in-process 1,109,003 889,947
Finished goods 2,806,890 1,576,303
Equipment held for
lease or sale 1,970,005 1,216,587
----------- -----------
Total $7,473,485 $6,197,359
=========== ===========
3. Earnings per share
SFAS 128, requires the presentation of basic and diluted income (loss)
per share. Basic earnings (loss) per common share is the amount of net income
(loss) for the period available to each share of common stock outstanding during
the reporting period. Diluted earnings (loss) per common share is the amount of
net income (loss) for the period available to each share of common stock
outstanding during the reporting period and to each share that would have been
outstanding during the period. A total of 305,075 potential common shares (stock
options) have not been included in the computation of loss per share for the
three months ended March 31, 1998, as they would have had an antidilutive
effect.
4
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In calculating income (loss) per common share, the net income (loss)
was the same for both the basic and diluted calculation. Below is a
reconciliation between the basic and diluted weighted average common and
common-equivalent shares for three months ended March 31, 1998 and 1997.
1998 1997
---- ----
Basic (weighted average common shares
outstanding during the period) 7,953,247 7,899,938
Weighted average common stock options
outstanding during the period - 159,924
--------------- -----------
Diluted 7,953,247 8,059,862
=============== ===========
4. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", effective January 1, 1998 which
establishes standards for reporting and display of comprehensive income and its
components in financial statements. The components of the Company's
comprehensive income are as follows:
Three Months Ended
March 31, 1998 March 31, 1997
Net income (loss) $ (580,554) $ 57,920
Foreign currency translation
adjustment net of
income taxes (16,071) (90,162)
----------------- ----------------
Comprehensive (loss) $ (596,625) $ (32,242)
================= ================
5
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly 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, production and
technology and other risks detailed in this filing. Although the Company
believes it has the necessary product offerings and resources, 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.
CHANGES IN FINANCIAL CONDITIONS
The Company's liquidity continued to decrease due to operating losses
incurred in the first three months of 1998.
As a result of the losses and decrease in liquidity, the Company was
not in compliance with certain earnings and leverage covenants associated with
its long-term debt and a line of credit with two banks at March 31, 1998. The
line of credit was due in May 1998 but the Company expects that the bank will
extend the line through August 1998. The banks have waived the non-compliance
with these covenants through April 1, 1998 and are currently discussing
alternative covenants, although neither bank has given any assurances in this
regard. Because the banks have not waived the covenants through April 1, 1999,
the long-term debt with the banks has been classified as a current liability.
In the first three months of 1998, working capital decreased by
$694,405 to a working capital deficit of $850,903, as compared to a working
capital deficit of $156,498 at December 31, 1997. The Company's current ratio of
current assets divided by current liabilities decreased from .98 at December 31,
1997 to .94 at March 31, 1998 and the Company's ratio of total liabilities to
equity increased from 2.1 to 1 at December 31, 1997 to 3.3 to 1 at March 31,
1998.
The Company experienced increased accounts receivable in the Company's
European Operations as customers extended their payments. Finished Goods
inventories increased as the Company reestablished safety stocks which had been
depleted due to the manufacturing and product quality problems that the Company
had experienced in the fourth quarter of 1997 and the first quarter of 1998. The
Company also increased its inventory of instruments in both the American and
European operations. These increases were financed by an increase in accounts
payable and accrued expenses payable to Fresenius AG as well as an increase in
the line of credit.
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
6
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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 March 31,1998, the Company had approximately $600,000 available
under lines of credit with its banks and had no commitments to purchase capital
assets. The Company believes that cash flow generated from operations and its
existing lines of credit and other sources will be sufficient to meet its
short-term working capital requirements. Changes have been made in the Company's
manufacturing operations and certain management personnel together with the
implementation of cost cutting programs, all of which are intended to return the
Company to profitability. If the Company is unable to renegotiate its loan
covenants and renew its line of credit with the banks or continues to incur
losses, it will need to obtain additional financing to fund its operations and
instrumentation program. Although the Company does not have any funding
commitments from outside lending institutions and there is no guarantee that it
will be able to obtain funding if working capital needs cannot be financed
through internally generated funds, the Company is currently exploring various
financing alternatives including additional debt, equity and lease financing to
meet the Company's long-term financing needs. Fresenius AG, the Company's
majority shareholder has committed to provide up to an additional $500,000 in
funding, on an as needed basis, through August 15, 1998
Results of Operations
Sales of the first quarter of 1998 of $5,140,406 were $891,368 or 15%
lower than sales in the first quarter of 1997 of $6,031,774. Approximately
$250,000 of the sales decrease was due to the strength of the dollar against
major European currencies. Sales of the Company's United States' operations
decreased approximately $611,000 or 19%, due to decreased sales to the College
of American Pathologists, more placements of instrumentation being treated as
monthly rental agreements rather than sales and decreased sales into the South
American, Australian and Asian markets. In Europe, the Company experienced
revenue growth, particularly in the French market, in its infectious disease
product sales. This increase was partially offset by a decrease in sales of its
autoimmune products. Sales in Germany decreased approximately 19% due to
increased competition and decreased pricing in blood grouping products and
shortages of infectious disease products. Changes in sales were due to both
changes in volume and prices.
Gross profits as a percentage of sales decreased to 50% in the first
quarter of 1998 compared to 60% in 1997. During the last quarter of 1997 and the
first quarter of 1998, the Company encountered certain product quality problems
as well as problems manufacturing certain key raw materials. As a result, it was
forced to expedite manufacturing processes, replace product in the field and
lose some manufacturing efficiencies. The Company believes that it has resolved
the quality and manufacturing problems which occurred in the last quarter of
1997 and the first quarter of 1998 and that these issues will not impact
operations in the future.
7
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There were no other material changes in the Company's operations during
the first quarter of 1998.
Termination Costs
The Company had employment agreements with its President and a Senior
Vice President which have been terminated. Both agreements provided for
severance payments ranging from nine months to one year from the date of
termination. The amounts to be paid under these agreements is currently under
negotiation with settlements expected to be reached in the second quarter of
1998. The Company will accrue the full cost to be paid under the agreements in
the quarter in which the agreements are reached.
Additionally, both individuals hold stock options to purchase an
aggregate of 187,400 shares of the Company's common stock at a weighted average
price per share of $4.63. These options expire 90 days from the date that their
employment terminated. Under the terms of the Company's stock option plan, stock
option holders are entitled to exercise their stock options by surrendering
shares of previously issued stock as payment for the exercise price of the stock
option. Both individuals have discussed the possibility of exercising some or
all of their options by surrendering shares that they hold or may acquire.
Under United States Generally Accepted Accounting Principles,
compensation expense equal to the excess of the fair value of the stock received
over the exercise price of the option must be recorded if stock that has been
held for less than six months is used to exercise stock options. At the time
that their employment terminated, the President and the Senior Vice President
did not own any stock in the Company. To the extent that these individuals use
stock held for less than six months to exercise their stock options, the Company
will be required to record compensation expense. While the recognition of
compensation expense will not have an impact on the liquidity of the Company
because a corresponding credit will be recorded in the Company's equity section,
it will have an impact on the earnings of the Company and the impact will be
material.
Clinical Trial Costs
The Company has recently introduced its new Herpes Type Specific IgG
ELISA tests in several foreign markets and is seeking clearance to market the
products in the United States from the FDA. Because there is no in vitro
diagnostic device that is able to differentiate between Type 1 and Type 2 Herpes
infections that has been cleared to market in the United States by the FDA, the
Company has been required by the FDA to perform more extensive clinical trials
on individuals at risk for a sexually transmitted infection or disease. These
clinical trials are currently in process and are expected to be completed early
in the third quarter of 1998. These clinical trials are significantly more
extensive than the trials the Company has been required to perform for other new
product submissions to the FDA and the Company expects to incur clinical trial
costs in excess of $200,000 in the second and third quarters of 1998.
8
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PART Ill. OTHER INFORMATION
ITEM 5: OTHER INFORMATION
On April 8, 1998, the Company announced that Dr. Silke Humberg has been
elected its President and Chief Executive Officer. Prior to joining the Company,
Dr. Humberg was the Senior Vice President of International Business Development
for the Intensive Care and Hemotechnology Division of Fresenius AG, the
Company's majority shareholder.
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 5-15-98 /s/ Michael B. Malan
----------------------------- --------------------
Michael B. Malan, CPA
Secretary/Treasurer and
V.P. of Finance (Duly authorized
officer and principal financial
officer)
9
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GULL
LABORATORIES, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE COMPANY HAS RESTATED
EARNINGS PER SHARE FOR THE QUARTER ENDED MARCH 31, 1997 FOR BASIC AND DILUTED
EARNINGS PER SHARE TO BE IN ACCORDANCE WITH STATEMENTS OF FINANCIAL ACCOUNTING
STANDARDS (SFAS) SFAS NO. 128; EARNINGS PER SHARE AND TO REFLECT THE MERGER
WITH FRESENIUS DIAGNOSTICS WHICH HAS BEEN ACCOUNTED FOR IN A MANNER SIMILAR
TO A POOLING OF INTERESTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 534,562 408,000
<SECURITIES> 0 0
<RECEIVABLES> 4,395,352 4,383,000
<ALLOWANCES> 320,731 122,000
<INVENTORY> 7,473,485 5,151,000
<CURRENT-ASSETS> 12,504,977 10,482,000
<PP&E> 10,381,397 10,020,000
<DEPRECIATION> 6,034,508 5,802,000
<TOTAL-ASSETS> 18,809,182 16,471,000
<CURRENT-LIABILITIES> 13,355,880 5,842,000
<BONDS> 756,412 3,476,000
0 0
0 0
<COMMON> 7,941 7,941
<OTHER-SE> 4,325,535 6,363,059
<TOTAL-LIABILITY-AND-EQUITY> 18,809,182 16,471,000
<SALES> 5,140,406 6,031,000
<TOTAL-REVENUES> 5,140,406 6,031,000
<CGS> 2,547,344 2,383,993
<TOTAL-COSTS> 3,018,531 3,047,674
<OTHER-EXPENSES> (49,045) 3,420
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 199,273 145,137
<INCOME-PRETAX> (575,697) 451,550
<INCOME-TAX> 4,857 393,630
<INCOME-CONTINUING> (580,554) 57,920
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (580,554) 57,920
<EPS-PRIMARY> (.07) .01
<EPS-DILUTED> (.07) .01
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