UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required) for the Fiscal Year Ended December 31, 1997. or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________ to ___________.
Commission File Number 0-16864
GULL LABORATORIES, INC.
(Exact Name of Registrant as Specified in its Charter)
UTAH 87-0404754
(State of Incorporation) (IRS Employer Identification Number)
1011 E. Murray Holladay Road
Salt Lake City, UT 84117
(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. |X|
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the registrant as of March 26, 1998 was $22,456,086 based
upon the closing price on such date.
The number of shares of common stock outstanding as of March 26, 1998
was 7,940,359.
Documents Incorporated by reference: None
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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 also
sells Bloodgrouping and HLA tissue typing reagents in the European market. The
Company's products are used by private laboratories and hospital clinical
laboratories worldwide.
In August 1997, the Company acquired certain of the net assets
of the Diagnostics Business Unit ("Fresenius Diagnostics"), part of the
Intensive Care and Diagnostics Division of Fresenius AG the majority
shareholder of the Company, in exchange for 1,320,000 shares of the Company's
common stock. Prior to the acquisition, Fresenius Diagnostics was the Company's
largest distributor. The acquisition has enabled the Company to better
coordinate and centralize its marketing efforts in Europe and to realize cost
savings through the elimination of overlapping functions that existed between
Fresenius Diagnostics and the Company's European operations, previously
located in Belgium. The cost savings realized in 1997 were offset by merger and
integration costs. See "Management's Discussion and Analysis."
The Company has direct sales forces in the United States,
Germany, 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
laboratory 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's instrumentation offerings address the needs of the small to high
volume laboratory testing market.
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
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 has obtained six patents on its GeneSTAR technology
and expects to receive additional patent protection in the future.
The Company expects to launch the first GeneSTAR product in
Europe and to begin clinical trials in the United States in 1998.
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GeneSTAR is designed 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. The initial
application of the technology will focus on the detection of E. coli 0157;H7,
enterohemmoragic bacteria and other 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.
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. Biodesign also provides certain key raw materials for use in the
Company's products.
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 1997, 1996 and 1995 were $2,377,054, $2,776,045 and $2,718,761or 11%,
11%, and 10% of the Company's sales, respectively. The benefits of the 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 recapturing CAP sales lost in 1997
and 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.
In October 1997, Fresenius AG announced that it has engaged an
investment banker to evaluate various partnering alternatives for the
Company. These alternatives could involve the sale of Fresenius AG's ownership
interest in Gull. The Company has made several presentations to interested
parties but no transactions have been completed to date.
As a result of the large loss incurred in 1997 with the
related decrease in liquidity discussed in Item 7, the Gull Board of Directors
has expanded the role of its Executive Committee to assist Gull management in
reorganizing the Company's operations to focus on major problems. The Board has
also appointed Silke Humberg, Ph.D. as Interim President and Chief Executive
Officer to replace George Evanega Ph.D. who has resigned effective April 6,
1998. Dr. Humberg has been a Senior Vice President of International Business
Development for the I+H Division of Fresenius AG.
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The geographic distribution of the Company's sales is as
follows:
Year Ended December 31,
- --------------------- ----------------------
Area
1997 1996 1995
- --------------------- ----------------------
United States 45% 37% 32%
Europe 44% 52% 57%
Pacific Rim 5% 5% 5%
Other 6% 6% 6%
Total 100% 100% 100%
- --------------------- ----------------------
No customer or distributor other than CAP accounted for more
than 10% of the Company's consolidated sales during any period.
The Company's common stock is listed on the American Stock
Exchange where it is traded under the symbol "GUL."
COMPETITION
The Company competes in a diversified market characterized by
a few strong companies and numerous smaller companies that manufacture and sell
diagnostic tests similar to those sold by the Company. Many of these competitors
have greater financial, technological and personnel resources than the Company.
The primary bases of competition include price, product quality, 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. Hospitals are also forming buying
groups to take advantage of volume purchase discounts. These trends could lead
to a few large companies supplying the majority of the diagnostics market to a
small number of large private laboratories, buying groups 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 high 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.
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The Company's competitors are also responding to healthcare
cost containment pressures by moving their product lines rapidly toward
automation which is less labor intensive. Many of these companies were already
offering instrumentation to customers when 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 OEM 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.
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 been granted six patents on its GeneSTAR technology
and has filed for several additional patents and trademarks.
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.
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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.
Good Manufacturing Practices
In the United States, the Company must operate its manufacturing operations
in conformity with Good Manufacturing Practices ("GMP")/Quality System
Regulation ("QSR") as prescribed in the U.S. Code of Federal Regulations ("CFR")
governing the manufacture of medical devices. The Company's facilities and its
operations are subject to inspection by the FDA. The Company believes that it is
in conformity with all such regulations.
Comparable to the GMP/QSR requirements are customer mandated standards
referred to as ISO9001/EN29001 under which the Company is seeking certification.
Additionally, the member nations of the European Community are in the process of
implementing an In Vitro Diagnostic ("IVD") Directive which is anticipated to be
in effect by the year 2000 and will complement existing EN29001/EN46001
Standards. The Company will also be required to conform to these standards and
the IVD Directive in order to market products sold in the European Community.
These regulatory requirements are not expected to be any more stringent than the
requirements of the FDA GMP/QSR.
Healthcare Cost Containment
Governments and other third party payers of healthcare costs
worldwide are examining methods to control the rising costs of providing
healthcare. Decreasing or eliminating reimbursements for costs that are
determined to be discretionary or non-essential is one method that is being
discussed or has already been implemented. Regulations and market trends such as
the above could affect the Company's ability to sell its products and, to the
extent that the Company is unable to effect commensurate cost reductions, could
decrease the Company's profitability.
Environmental Regulations
There have been no significant incremental costs incurred by
the Company to comply with environmental regulations. As part of its compliance
with GMP requirements, the Company has already implemented what 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 and autoimmune disorders. The Company's new GeneSTAR technology
also uses DNA based methods to directly detect specific infectious agents of
numerous other diseases.
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During 1997, 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, 1997, 1996, and 1995, the
Company expended approximately $ 1,553,119, $ 1,512,915 and $1,078,387,
respectively, for research and development. This represented approximately 7% of
sales in 1997, 6% of sales in 1996, and 4% in 1995. In 1995, the Company had
discontinued research and development in Europe and was increasing its
investment in research and development in the United States. Management
anticipates research and development expenditures will remain constant or
increase slightly as a percentage of sales in 1998.
EMPLOYEES
At December 31, 1997, the Company had 179 employees of which
14 were part time. As part of the acquisition of Fresenius Diagnostics, the
Company agreed to participate in the Chemical Industry Employers Association in
Germany and is bound by an industry wide employment agreement negotiated with
union representatives in that industry. The Company is also a party to
additional labor agreements negotiated with the works council in its German
manufacturing facility. None of the Company's other employees are unionized.
ITEM 2: DESCRIPTION OF PROPERTY
The Company's executive offices and principal United States
manufacturing facilities are located in two buildings totaling 33,000 square
feet in Salt Lake City, Utah. The facilities house modern offices, production
and product development facilities. The headquarters facilities are financed by
a long-term mortgage with an unrelated third party that is secured by the land
and the buildings.
Biodesign rents a 4,500 square foot facility that houses
administration, distribution and manufacturing facilities in Kennebunk, Maine
under a lease that expires in 1998. It is expected that Biodesign will renew its
lease for an additional one year period and then move to a larger facility in
1999 to facilitate additional growth.
The Company rents its European headquarters facility in Bad
Homburg, Germany from Fresenius AG under a three year agreement expiring October
2000. The facility includes approximately 14,000 square feet of administrative,
manufacturing and distribution capabilities. It is expected that the facility
should be adequate to meet the needs of the European operations for the
foreseeable future.
The Company also rents approximately 5,800 square feet of a
facility in Belgium that houses administration, distribution, and limited
manufacturing facilities. With the acquisition of Fresenius Diagnostics,
substantially all of the space has been vacated and the Company is looking for a
new tenant to assume the lease. The Company also rents a small sales office in
France.
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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 1997.
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PART II
ITEM 5: MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock is listed on the American Stock
Exchange where it is traded under the symbol "GUL."
The following table sets forth, for the periods indicated, the
prices of the Company's common stock, based on the closing sale quotation
without markup, markdown, commissions or adjustments.
------------------------------------------------------------
Prices of Common Stock
------------------------------------------------------------
Quarter Ended Low High
---------------------------------- ------------ ------------
1996
March 31, $ 3.625 $ 5.500
June 30, 4.375 5.500
September 30, 4.125 7.125
December 31, 5.750 12.500
---------------------------------- ------------ ------------
1997
March 31, 8.625 11.125
June 30, 9.438 12.000
September 30, 9.375 14.625
December 31, 10.000 12.000
---------------------------------- ------------ ------------
Security Holders
On March 26, 1998 there were approximately 1,050 beneficial
owners of the Company's common stock.
Dividends
No cash dividends have been paid by the Company since its
inception. The Company intends to use future earnings to finance additional
growth and, therefore, does not anticipate paying dividends in the foreseeable
future.
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ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial
information with respect to the Company for the periods indicated. Information
for years prior to 1997 has been restated to include Fresenius Diagnostics
because, as a transaction between entities under common control, the acquisition
has been accounted for in a manner similar to a pooling-of-interests. 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.
<TABLE>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Statement of Operations
(000's Omitted)
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------- --------------- --------------- -------------- ------------- ---------------
Sales $21,706 $24,444 $26,261 $23,652 $15,406
Net income (loss) (1,815)* (109)* 459* 266 (401)
Net income (loss) per common share:
Basic (0.23) (0.01) 0.06 0.03 (0.06)
Diluted (0.23) (0.01) 0.06 0.03 (0.06)
- --------------------------------------- --------------- --------------- -------------- ------------- ---------------
</TABLE>
*See "1997 Compared to 1996" and "1996 Compared to 1995" in "Results of
Operations" below. There were no cash dividends declared in the periods
presented above.
<TABLE>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
(000's Omitted)
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------- --------------- --------------- -------------- ------------- ---------------
Working capital $ (156) $ 4,186 $ 2,168 $ 3,612 $ 2,064
Total assets 15,301 15,290 16,220 13,732 10,446
Long-term portion of debt 733 3,001 210 2,478 2,347
Stockholders' equity 4,940 6,728 7,294 6,540 4,493
- --------------------------------------- --------------- --------------- -------------- ------------- ---------------
</TABLE>
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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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity decreased in 1997 due to operating losses and the
merger and integration costs incurred in connection with the acquisition of
Fresenius Diagnostics. These merger and acquisition costs include, in addition
to legal and other professional fees, accrued rent on excess office space and
accruals for severance costs payable to employees that were terminated in
Belgium as part of the integration process.
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 December 31, 1997. The
line of credit is due in May 1998. The banks have waived the non-compliance
with these covenants through December 31, 1997 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 January 1, 1999,
the long-term debt with the banks has been classified as a current liability.
For the reasons discussed above, in 1997, working capital decreased by
$4,342,221 to a working capital deficit of $156,498, as compared to $4,185,723
in 1996. The Company's current ratio of current assets divided by current
liabilities decreased from 1.9 in 1996 to .98 in 1997 and the Company's ratio of
total liabilities to equity increased from 1.3 to 1 in 1996 to 2.1 to 1 in 1997.
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 31,1997, the Company had approximately $900,000 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 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.
YEAR 2000 ISSUE
The Company is aware of the issues associated with programming codes in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the
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year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
The Company is utilizing both internal and external resources
to identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be complete by
December 31, 1998, allowing adequate time for testing. To date, confirmations
have been received from the Company's primary processing vendors that plans are
being developed to address processing of transactions in the year 2000.
Management has not yet fully assessed the year 2000 compliance expense and
related potential effect on the Company's earnings.
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 (Immunofluorescence Assay) products to the less
profitable ELISA (Enzyme Linked Immuno-Sorbent Assay) products, which are less
expensive for private laboratories and hospital clinical laboratories to perform
on a cost per test basis to the customer and can be automated. IFA tests are
more profitable because there is less competition in the marketplace and because
the manufacturing cost per test is lower for IFA products than for ELISA
products. The trend toward consolidation into larger volume laboratories has
also increased the level of automation and related volume discounts. This trend,
which is likely to continue, is expected to put pressure on the Company to
maintain or decrease the prices of many of its existing products. The Company
continues 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
1997 Compared to 1996
In 1997, the Company had a net loss of $1,814,675 compared to
a net loss of $109,223 in 1996 including $1,455,298 of nonrecurring costs the
Company incurred with the acquisition of Fresenius Diagnostics. Without the
acquisition costs, the 1997 loss would have been approximately $616,000.
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Consolidated sales in 1997 decreased 11% to $21,705,552
compared to $24,443,935 in 1996. Currency translation adjustments caused by the
strength of the US dollar versus the major European currencies in 1997 accounted
for $1.9 million of the shortfall in revenue compared to 1996. The balance of
the sales decrease was due to changes in both volume and average selling prices.
Sales of the Company's United States' operations in 1997 were comparable to the
sales level in 1996. A 17% increase in Biodesign's sales was offset by decreases
in sales to the College of American Pathologists as well as decreases in both
reagent and instrumentation sales. In addition to the currency translation
adjustments caused by the strength of the US dollar against the major European
currencies, sales to unaffiliated customers of the Company's European operations
decreased, principally due to the loss of distributed product lines, product
shortages and increased competition. European sales were also negatively
impacted by decreases in sales of Bloodgrouping and HLA reagent sales.
The Company's gross profit margin increased from 52% in 1996 to 57% in
1997. The increase in the gross profit margin was a result of automating certain
manufacturing processes in the United States, a decrease in the number of
manufacturing personnel in Europe and other manufacturing efficiencies. The
lower manufacturing costs were partially offset by the continued shift from the
Company's IFA products to less profitable ELISA products, penalties for not
meeting certain purchase commitments and product quality problems. The product
quality problems are expected to also negatively affect the Company's results of
operations in the first quarter of 1998.
Selling, General and Administrative expenses increased from
$10,378,679 or 42% of sales to $10,904,133 or 50% of sales. Biodesign expanded
its sales and marketing and regulatory compliance efforts. Greater effort was
placed on working with the Company's distributors in 1997 to increase export
sales in Europe and the Middle East and the Company incurred significant costs
preparing for new product launches anticipated in 1998. Also, the Company
incurred higher audit, personnel and recruiting costs in 1997 than in 1996.
Research and development costs of $1,553,119 or 7% of sales
in1997 were comparable to 1996 expense levels of $1,512,915 or 6% of sales.
1996 Compared to 1995
In 1996, the Company had a net loss of $109,223 compared to
net income of $458,687 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 $61,000 in 1995. There were no
such items in 1996.
Consolidated sales in 1996 decreased 7% to $24,443,935
compared to $26,261,130 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 Biodesign's sales
and a 12% increase in instrumentation and domestic ELISA reagent sales were
offset by decreases in worldwide IFA reagent sales and export ELISA sales. Sales
to unaffiliated customers of the Company's European Operations decreased,
principally due to the loss of significant distributed product lines, product
shortages, and increased competition. The loss of distributed product lines
resulted in a sales decrease of approximately $190,000 in 1996
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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. Sales in Germany were also affected as customers
switched from the Company's IFA products to other Companies' ELISA products.
The Company's gross profit margin decreased from 55% in 1995 to 52% in
1996. The decrease in the gross profit margin, caused by the continued shift
from the Company's IFA products to less profitable ELISA products was partially
offset by manufacturing efficiencies and lower inventory write offs. In 1995,
the Company wrote off approximately $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 $10,378,679 or
42% of sales in 1996 were comparable on a percentage basis with the 1995 cost
level of $11,339,139 or 43% of sales.
Research and development costs increased from $1,078,387 or 4%
of sales in1995 to $1,512,915 or 6% 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,
HSV Type Specific and autoimmune products that will give it a sustainable
competitive advantage in the future.
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:
<TABLE>
<S> <C> <C> <C>
----------------------------- ---------- ------------------------------ ----------------
Has Served
as Director
Name of Director Age Company Position Held Since
----------------------------- ---------- ------------------------------ ----------------
Myron W. Wentz 57 Director 1974
Chairman of the Board
Rainer Baule 49 Director 1997
Anne-Marie Ricart 56 Director 1993
Silke Humberg (1) 37 Director 1998
Ulrich Wagner 54 Director 1994
Peter Gladkin 50 Director 1995
George R. Evanega (1) 62 Director 1995
Chief Executive Officer
President
----------------------------- ---------- ------------------------------ ----------------
(1) See "Directors" below
</TABLE>
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 ss. 13(d)(3) of the Securities Exchange Act with respect to the
voting securities of the Company;
(c) induce or attempt to induce or give encouragement to any
other person to initiate any proposal or tender or exchange offer for equity
securities or change of control of the Company; or
-15-
<PAGE>
(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 and
personal care products.
Rainer Baule
Rainer Baule became a director of the Company in 1997. He has been
a member of the Management Board and President of the I+H Division of
Fresenius AG since June 1, 1997. Mr. Baule was Managing Director and
Chairman of the Board of Directors of Professor Dr. Berthold GmbH & Co. KG
from 1996 until 1997. From 1979 to 1996, Mr. Baule gained a broad range of
senior management experience in several functions with Carl Zeiss,
Oberkochen, Germany. Mr. Baule received a degree in business administration
and mechanical engineering from the Technische Hochschule Darmstadt,
Germany.
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 Laboratories SA, with Dr. J. A. Engels in 1971, and still serves as
a Director of Gull Laboratories 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.
Silke Humberg
Dr. Silke Humberg was elected to the Board in March 1998. Dr.
Humberg is currently a Senior Vice President of International Business
Development for the I+H Division of Fresenius AG. Prior to that, she worked
for Fresenius Diagnostics doing technical support, project management and
international marketing. Her most recent assignment was as the Executive
Vice President of Fresenius Diagnostics where she served from 1995 until
1997. Dr. Humberg earned a degree in nutritional chemistry and a Ph.D. in
biochemistry from the University of Hamburg in Germany. Effective April 6,
1998, Dr. Humberg has been appointed Interim President and Chief Executive
Officer of the Company.
-16-
<PAGE>
Ulrich Wagner
Dr. Ulrich Wagner has been a director of the Company since 1994.
He has been a partner of O'Melveny & Myers LLP, a law firm which represents
Fresenius AG, since 1982. He served as a director of Fresenius USA, Inc.,
formerly a subsidiary of Fresenius AG and currently a subsidiary of
Fresenius Medical Care AG from October 1987 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. Effective April 6, 1998, Dr. Evanega has
resigned his position with the Company.
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 1997 was $40,000.
-17-
<PAGE>
Executive Officers
The executive officers of the Company are as follows:
------------------------- ---------- ---------------------------
Name Age Position with the Company
------------------------- ---------- ---------------------------
Myron W. Wentz 57 Chairman of the
Board of Directors
George R. 62 Chief Executive Officer
Evanega and President
Fred Rachford 56 Senior Vice President
Regulatory Affairs/Quality
Assurance
Linxian Wu, Ph.D. 43 Executive Vice President
Chief Technology Officer
Michael B. Malan 41 Secretary/Treasurer
Chief Financial Officer
John Turner 51 European General
Manager and Vice
President
Andrew Taylor 55 Vice President
Sales and Marketing
Holly Scribner 41 President Biodesign, Inc.
Vice President
------------------------- ---------- ---------------------------
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.
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. In
March 1998, he was promoted to Executive Vice President and Chief Technology
Officer, overseeing production as well as research and development for the
Company.
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 an M.B.A. and B.A. degrees
in accounting and finance from the University of Utah.
-18
<PAGE>
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-six
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.
Holly Scribner
Ms. Scribner founded Biodesign and has been President and a Director of
Biodesign since its inception in 1987. In 1997, she was also made a Vice
President of Gull. The Company acquired Biodesign in February 1993. Ms. Scribner
is responsible for the management and daily operations of that 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.
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth the compensation of the
Company's chief executive officer for the periods indicated and other "Named
Executive Officers" of the Company who received total annual salary and bonus in
excess of $100,000 during the fiscal year ended December 31, 1997.
-19-
<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 Award(s) Options (#) Payouts sation
- --------------------- -------- ------------ ---------- ----------- ------------ ------------- --------- ------------
George Evanega (7) 1997 $180,000 $ -0- -0- $ 9,000(2)
CEO/President
1996 $180,000 $ -0- -0- $ 9,000(2)
1995 $ 29,187 $50,000 200,000 $ 50,000(3)
Ernest Sumsion (6) 1997 $121,000 $ -0- -0- $ 6,000(2)
Senior Vice
President 1996 $ 92,035 $ 8,250 30,000 $ 6,000(2)
---------
1995 $ 85,604 $ -0- -0-
Linxian Wu 1997 $116,971 $ -0- 30,000 $ 6,000(2)
Executive Vice
President/ Chief 1996 $ 85,243 $11,100 30,000 $ 6,000(2)
Technology Vice
President 1995 $ 72,566 $ -0- -0- _________
John Turner(1) 1997 $121,000(4) $ -0- 50,000 $42,000(5)
European General
Manager/Vice 1996 __________ ________ __________ _________
President
1995 __________ ________ __________ _________
Andrew Taylor
Vice President 1997 $106,288 $ -0- -0- $ 7,000(2)
Sales/Marketing
1996 $107,977 $ 4,750 -0- $ 7,000(2)
1995 $104,446 $ 5,000 -0- $ 7,000(2)
- --------------------- -------- ------------ ---------- ----------- ------------ ------------- --------- ------------
</TABLE>
(1) Mr. Turner joined the Company in January 1997.
(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.
(4) Based on 6 French Francs equals $1 (average exchange rate for the year).
(5) Represents contribution to a pension plan, temporary housing allowance and
dependent education costs. Mr. Turner is also provided with the use of a
Company car.
(6) Mr. Sumsion's employment was terminated in March 1998.
(7) Dr. Evanega's employment has been terminated effective April 6, 1998.
The following options were granted to then Named Executive Officers in the
fiscal year ended December 31, 1997:
-20-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Option Grants in the Last Fiscal Year
- ---------------------------------------------------------------------------------------------------------------------
Potential Realizeable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Term
- ----------------- ---------------- --------------- ---------------- ---------------- --------------- ----------------
Number of
Securities % of Total
Underlying Options
Options Granted to
Granted Employees in Exercise Price Expiration Date 5% 10%
Name (#) Fiscal Year ($/Sh) ($) ($)
- ----------------- ---------------- --------------- ---------------- ---------------- --------------- ----------------
Linxian Wu 30,000 31.5% $10.00 8/12/2007 $188,668 $478,123
John Turner 50,000 18.9% $10.00 8/12/2007 $314,447 $796,872
- ----------------- ---------------- --------------- ---------------- ---------------- --------------- ----------------
</TABLE>
The following table presents information concerning stock
options exercised during1997 and the value of unexercised stock options held by
the Named Executive Officers at December 31, 1997.
- --------------------------------------------------------------------------------
Option Exercises in Last Fiscal Year and
Value of Stock Options at December 31, 1997
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying in-the-Money
Unexercised Options Options at
at December 31, 1997 December 31, 1997 ($)
Shares
Acquired on ExerciseValue Exercisable/
(#) Realized ($) Unexercisable Exercisable/
Name Unexercisable
- ------------------------------- -------------- --------------- ------------------------- ---------------------------
George R. Evanega -0- $-0- 150,000/50,000 $918,750/$306,250
Ernie Sumsion 7,600 $29,251 29,900/22,500 $159,800/$135,000
Linxian Wu 2,075 $11,782 12,925/57,925 $74,319/$105,000
John Turner -0- $-0- -0- /50,000 $-0-/$31,250
Andrew Taylor 18,750 $105,046 7,500/-0- $121,875/$-0-
- ------------------------------- -------------- --------------- ------------------------- ---------------------------
</TABLE>
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.
All stock options held by the Named Executive Officers at December 31, 1997 were
"in-the-money."
The Company had an employment agreement with Dr. George Evanega, its
President and Chief Executive Officer and a member of its Board of Directors.
Gull's Board of Directors has accepted Dr. Evanega's resignation effective April
6, 1998. Under the terms of the
-21-
<PAGE>
agreement, Dr. Evanega was paid an annual salary of $180,000, with potential
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 was contingent upon the achievement of a level of "Net
Earnings Before Income Taxes" that was 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 or 1997 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.
Gull's Board of Directors has make a proposal for a severance arrangement
to Dr. Evanega pursuant to his employment agreement. The proposal includes
payment of one year's salary plus continued participation in the Company's
insurance benefit plans in accordance with his employment agreement. The Company
is awaiting Dr. Evanega's response to its proposal.
The Company also had an employment agreement with Ernest Sumsion, Senior
Vice President until March 8, 1998, when Mr. Sumsion's employment was
terminated. Under the terms of his agreement, Mr. Sumsion was paid an annual
salary of $120,000 per year, was eligible to receive a $40,000 bonus for
"targeted" performance, and received 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.
Mr. Sumsion's agreement also provided that, under certain circumstances,
upon termination of his employment, the Company would pay Mr. Sumsion nine
months severance pay, extendable at the option of the Company's Chief Executive
Officer for an additional three months if Mr. Sumsion had not obtained
employment during the nine-month period. In connection with the termination of
Mr. Sumsion's employment, and without acknowledging an obligation to make any
severance payments to him, the Company proposed severance arrangements to Mr.
Sumsion that include nine minths salary from March 9, 1998 and continued payment
of monthly premiums for Mr. Sumsion and his family under the Company's group
medical plan. Such salary payments would be reduced by compensation received
from another employer during the nine-month period, and terminated if Mr.
Sumsion obtains employment with substantially comparable responsibilities and
compensation during such period. Any unvested stock options held by Mr. Sumsion
at March 9 would terminate. The Company is awaiting Mr. Sumsion's response to
its proposal.
The Company has also agreed to terms of a severance arrangement
with Michael B. Malan, its Secretary/Treasurer. If Mr. Malan's employment is
terminated, he will be entitled to receive severance payments for nine months.
The Company's Chief Executive Officer has the discretion to extend the severance
payments for an additional three months if Mr. Malan has not found employment
during the nine month period.
The Company also has an employment agreement with John Turner, its European
General Manager. Under the terms of the agreement, Mr. Turner is paid an annual
salary of 725,000 French Francs (approximately $121,000 at 6 French francs to
the US Dollar which is the average exchange rate for the year) plus a housing
allowance, a pension plan contribution and a dependent educational allowance.
Mr. Turner also received a stock option grant in 1997 to purchase 50,000 shares
of the Company's common stock at $10.00 per share.
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.
-22-
<PAGE>
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. Baule, who was a member
of the Compensation Committee during 1997, is a member of the Managing Board of
Fresenius AG. Dr. Schmidt, who was a member of the Compensation Committee
through August 1997, is currently a member of the Fresenius AG Managing Board.
Dr. Schmidt resigned from the Board in March 1998. See "Certain Relationships
and Related Transactions."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
As of the close of business on March 26 , 1998, the Company
has issued and outstanding 7,940,359 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 March 26, 1998, 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
each current director of the Company and each Named Executive Officer, and all
officers and directors of the Company as a group:
- --------------------------------------------------------------------------------
Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
Amount and Nature of Percentage
Name/Address Beneficial Ownership (1,2) of Class (2)
- ---------------------------------- ---------------------------- ----------------
Principal Shareholders:
Fresenius AG
Borkenberg 14
61440 Oberursel, Germany 4,930,693(4) 62%
Anne-Marie Ricart
La Grande Buissiere 25
1380 Ohain
Belgium 847,755 11%
- ---------------------------------- ---------------------------- ----------------
Officers and Directors:
Myron W. Wentz
Director/Chairman
c/o Gull Laboratories, Inc.
1011 East Murray Holladay Road
Salt Lake City, UT 84117 10,000(4) *
Rainer Baule
Director
Fresenius AG
Borkenberg 14
61440 Oberursel, Germany -0- *
Silke Humberg
Director
Fresenius AG
Borkenberg 14
61440 Oberursel, Germany -0- *
- ---------------------------------- ---------------------------- ----------------
-23-
<PAGE>
- --------------------------------------------------------------------------------
Amount and Nature of Percentage
Name/Address Beneficial Ownership (1,2) of Class (2)
- ---------------------------------- ---------------------------- ----------------
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 150,000(5) 2%
Linxian Wu
Chief Technical Officer
Gull Laboratories, Inc.
1011 East Murray Holladay Road
Salt Lake City, UT 84117 13,210(6) *
John Turner
European General Manager/VP
Gull laboratories GmbH
Daimlerstr. 22
D-61352 Bad Homburg v.d.H
Germany -0- *
Andrew Taylor
Vice President-Sales/Marketing
Gull Laboratories, Inc.
1011 East Murray Holladay Road
Salt Lake City, UT 84117 6,250(7) *
- ---------------------------------- ---------------------------- ----------------
All officers and directors as a group
(14 persons) (8) 1,240,854 15%
- ---------------------------------- ---------------------------- ----------------
* 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 March
26, 1998 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.
-24-
<PAGE>
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) Represents 10,000 shares issuable upon exercise of options as described in
note (2) above.
(5) Represents 150,000 shares issuable upon exercise of options as described in
note (2) above.
(6) Includes 12,915 shares issuable upon exercise of options as described in
note (2) above.
(7) Includes 6,250 shares issuable upon exercise of options as described in
note (2) above.
(8) Includes all shares subject to exercisable options referred to in note (2)
above, and 116,072 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 other than described in Item 1.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Fresenius AG, is the beneficial owner of approximately 62% of
Gull's outstanding Common Stock. Mr. Rainer Baule and Dr. Matthias Schmidt, each
of whom is or was a director of the Company are members of the Management Board
of Fresenius AG. In addition, Dr. Silke Humberg, a director of the Company, is
an employee 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 between the
Company's management and representatives from the I+H Division.
-25-
<PAGE>
In August 1997, Gull GmbH, a wholly owned subsidiary of the Company (the
"Purchaser") purchased certain assets of the diagnostics business unit (the
"Business") of the I+D Division of Fresenius AG, including 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" did not
include receivables, checks, cash or credit balances existing or accrued as of
December 31, 1996. The purchase price for the Business was 1,320,000 shares of
the Company's Common Stock, subject to adjustment, as described below. The
purchase price was paid 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 Company agreed to assume all liabilities pertaining to the operations
of the Business after December 31, 1996 (the "Effective Date"). Fresenius AG has
entered into certain service contracts with the Purchaser, and leases to the
Purchaser certain real property currently occupied by the Business. The Company
incurred rent and other costs totaling approximately $965,000 under these
service contracts and leases in 1997.
As a result of the purchase of the Business, Fresenius AG's
beneficial ownership of the Company's Common Stock increased from approximately
55% to approximately 62%. Additionally, the Company has entered into a
Registration Rights Agreement pursuant to which Fresenius AG has 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 set forth
above is qualified in their entirety by reference to such agreement, a copy of
which is 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, 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.
-26-
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM
(a) The following documents are filed as a part of this Annual Report
on Form 10-K.
1. CONSOLIDATED FINANCIAL STATEMENTS (See Index to
Consolidated Financial Statements and Consolidated
Financial Statement Schedules on page 30.)
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE - Schedule
II-Valuation and Qualifying Accounts (See Index to
Consolidated Financial Statements and Consolidated
Financial Statement Schedules on page 30.)
Schedules other than the above are omitted because of
the absence of conditions under which they are required or
because the required information is presented in the Financial
Statements or notes thereto.
3. EXHIBITS
The following documents are filed or incorporated by
reference as exhibits to this Report as required by Item 601 of
Regulation S-K.
Exhibit
Number Title of Document
3 Articles of Incorporation and Bylaws of Gull
Laboratories, Inc., as amended, incorporated by reference to a Registration
Statement on Form S-4 (No. 33-53720) filed with the Securities and Exchange
Commission and effective December 31, 1992.
4 Description of the Company's common stock
as contained in the Registration Statement filed under Section 12(b) of the
Securities Exchange Act on Form 8-A, effective May 18, 1993 (No. 1-11952).
10 Material Contracts:
(a) Agreement for Acquisition of
Shares of Biodesign, Inc. incorporated by reference to Exhibits w and 10 of
a Registration Statement on Form S-4 (No. 33-53720) filed with the
Securities and Exchange Commission and effective December 31, 1992.
-27-
<PAGE>
(b) Agreement of Merger with Biolab
SA incorporated by reference to Exhibit 2 of a Registration Statement on
Form S-3 (No. 33- 67508) filed with the Securities and Exchange Commission
and effective September 24, 1993.
(c) Employment Agreement with
Dr. George R. Evanega which is a management contract or compensatory plan
or arrangement filed with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
(d) Asset Purchase Agreement between
the Company, Gull GmbH, and Fresenius AG (incorporated by reference to
Schedule 13 D/A (Amendment No. 4) filed by Fresenius AG). (e) Retransfer of
Shares Agreement between the Company, Gull GmbH, and Fresenius AG
(incorporated by reference to Schedule 13 D/A (Amendment No. 4) filed by
Fresenius AG).
21 Subsidiaries of Registrant,
incorporated by reference to Exhibit 2 of Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994.
23 Consent of KPMG Peat Marwick LLP
for incorporation of its report with respect to the financial statements
included herein as a part of this report, which report is incorporated by
reference into a Registration Statement on Form S-3 (No. 33-67508) filed
with the Securities and Exchange Commission and effective September 24,
1993, a Registration Statement on Form S-8 (No. 33-48810) filed with
Securities and Exchange Commission and effective June 24, 1992 and a
Registration Statement on Form S-8 (No. 33-50546) filed with the Securities
and Exchange Commission and effective August 6, 1992.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1997, the
Company filed no reports on Form 8-K.
-28-
<PAGE>
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: March 30, 1998 By: /s/ George R. Evanega
------------------------
George R. Evanega, Ph.D.
President and CEO
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ George R. Evanega Date: 3-30-98
- -------------------------------------------- ------------------
George R. Evanega President and Chief
Executive Officer
(Principal Executive Officer)
Director
/s/ Michael B. Malan Date: 3-30-98
- -------------------------------------------- ------------------
Michael B. Malan Secretary/Treasurer
(Principal Financial
& Accounting Officer)
/s/ Myron W. Wentz Date: 3-30-98
- -------------------------------------------- ------------------
Myron W. Wentz Chairman of
the Board
of Directors
/s/ Rainer Baule Date: 3-30-98
- -------------------------------------------- ------------------
Rainer Baule Director
/s/ Silke Humberg Date: 3-30-98
- -------------------------------------------- ------------------
Silke Humberg Director
-29-
/s/ Ulrich Wagner Date: 3-30-98
- -------------------------------------------- ------------------
Ulrich Wagner Director
Date:
- -------------------------------------------- ------------------
Anne-Marie Ricart Director
/s/ Peter Gladkin Date: 3-30-98
- -------------------------------------------- ------------------
Peter Gladkin Director
-30-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
ITEM 1
Report of KPMG Peat Marwick LLP, Independent Auditors F-1
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1997
and 1996 F-2
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-7
Report of KPMG Peat Marwick LLP, Independent Auditors S-1
Consolidated Financial Statement Schedule II -
Valuation and Qualifying Accounts S-2
-31-
<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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah
March 3, 1998, except as to note 18
which is as of April 6, 1998
F-1
<PAGE>
GULL LABORATORIES, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<S> <C> <C>
1997 1996
----------- -----------
Assets
Current assets:
Cash $ 239,993 301,033
Accounts receivable, less allowance for doubtful accounts of
$282,973 in 1997 and $320,815 in 1996 (note 5) 1,963,410 3,100,612
Net investment in sales-type leases (notes 6 and 8) 272,125 262,831
Income tax refund receivable (note 9) 119,499 134,743
Inventories (notes 3 and 5) 6,197,359 4,881,426
Prepaid expenses 316,878 399,775
----------- -----------
Total current assets 9,109,264 9,080,420
Property, plant, and equipment, net (notes 4, 6, and 7) 4,189,999 4,409,569
Net investment in sales-type leases (notes 6, 7, and 8) 763,412 810,419
Deferred income taxes (note 9) 236,586 -
Other assets, net (note 2) 1,001,812 989,101
----------- -----------
$15,301,073 15,289,509
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable (note 5) $ 1,498,146 1,675,322
Accounts payable 2,331,126 1,561,132
Accrued expenses 1,853,521 1,043,452
Deferred income taxes (note 9) 6,884 69,371
Current installments of long-term debt and capital lease
obligations (notes 6 and 7) 3,576,085 545,420
----------- -----------
Total current liabilities 9,265,762 4,894,697
Long-term debt and capital lease obligations, excluding current
installments (notes 6 and 7) 733,082 3,000,803
Deferred income taxes (note 9) - 252,260
Other long-term liabilities 362,278 413,801
----------- -----------
Total liabilities 10,361,122 8,561,561
----------- -----------
Commitments and contingencies (notes 7, 15, 17, and 18)
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; issued and
outstanding 7,940,409 and 7,883,934 shares in 1997 and 1996, respectively 7,941 7,884
Additional paid-in capital 8,416,335 8,113,555
Foreign currency translation adjustment (413,737) (137,578)
Accumulated deficit (3,070,588) (1,255,913)
----------- -----------
Total stockholders' equity 4,939,951 6,727,948
----------- -----------
$15,301,073 15,289,509
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
</TABLE>
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
----------- ----------- -----------
Sales $ 21,705,552 24,443,935 26,261,130
Cost of sales 9,236,929 11,631,952 11,890,053
----------- ----------- -----------
Gross profit 12,468,623 12,811,983 14,371,077
----------- ----------- -----------
Expenses:
Selling, general, and administrative 10,904,133 10,378,679 11,339,139
Research and development 1,553,119 1,512,915 1,078,387
Merger and integration costs (note 14) 1,455,298 - -
Restructuring charge (note 14) - 326,442 535,277
----------- ----------- -----------
Total expenses 13,912,550 12,218,036 12,952,803
----------- ----------- -----------
Operating income (loss) (1,443,927) 593,947 1,418,274
----------- ----------- -----------
Other income (expense):
Interest expense (593,361) (535,786) (647,656)
Other (note 11) 29,325 58,457 818,220
----------- ----------- -----------
Total other income (expense) (564,036) (477,329) 170,564
----------- ----------- -----------
Income (loss) before provision for income taxes (2,007,963) 116,618 1,588,838
Income tax expense (benefit) (note 9) (193,288) 225,841 1,130,151
----------- ----------- -----------
Net income (loss) (1,814,675) (109,223) 458,687
=========== =========== ===========
Net income (loss) per common share:
Basic $ (.23) (.01) .06
=========== =========== ===========
Diluted $ (.23) (.01) .06
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Addi- Foreign Total
Common stock tional currency Accum- stock-
-------------------- paid-in translation ulated holders'
Shares Amount capital adjustment deficit equity
--------- -------- --------- ----------- ----------- ----------
Balances, December 31, 1994 (note 1) 7,874,934 $ 7,875 7,901,260 (59,667) (1,605,377) 6,244,091
Stock options exercised 9,000 9 15,178 - - 15,187
Tax benefit from exercise of stock options - - 197,117 - - 197,117
Net income - - - - 458,687 458,687
Foreign currency translation adjustment - - - (76,510) - (76,510)
--------- -------- --------- ----------- ----------- ----------
Balances, December 31, 1995 7,883,934 7,884 8,113,555 (136,177) (1,146,690) 6,838,572
Net loss - - - - (109,223) (109,223)
Foreign currency translation adjustment - - - (1,401) - (1,401)
--------- -------- --------- ----------- ----------- ----------
Balances, December 31, 1996 7,883,934 7,884 8,113,555 (137,578) (1,255,913) 6,727,948
Stock options exercised 56,425 56 204,140 - - 204,196
Tax benefit from exercise of stock options - - 94,346 - - 94,346
Sale of common stock to ESOP 50 1 530 - - 531
Net assets not acquired from Fresenius AG - - (248,832) - - (248,832)
Tax benefit from goodwill amortization - - 252,596 - - 252,596
Net loss - - - - (1,814,675) (1,814,675)
Foreign currency translation adjustment - - - (276,159) - (276,159)
--------- -------- --------- ----------- ----------- ----------
Balances, December 31, 1997 7,940,409 $ 7,941 8,416,335 (413,737) (3,070,588) 4,939,951
========= ======== ========= =========== =========== ==========
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
----------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ (1,814,675) (109,223) 458,687
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,186,864 1,243,109 1,194,849
Loss (gain) on disposal of property, plant, and equipment 58,871 13,810 (370,478)
Provision for losses on accounts receivable 50,257 63,754 93,649
Provision for loss on leases 51,756 65,470 86,765
Provision for inventory reserve 115,329 223,434 393,713
Provision for warranty reserve 64,063 84,515 84,609
Tax benefit from exercise of stock options 94,346 - 197,117
Gain on sales-type leases (130,401) (246,484) (275,662)
Amortization of unearned income on sales-type leases (141,768) (100,892) (53,448)
Changes in assets and liabilities:
Accounts receivable 100,249 102,398 98,620
Income tax refund receivable 15,244 129,765 (110,681)
Inventories (1,329,031) (145,949) (902,795)
Prepaid expenses 50,939 (166,370) (6,834)
Other assets (145,350) 5,541 (206,905)
Accounts payable and accrued expenses 2,293,359 (623,071) 152,625
Other liabilities (51,523) 39,724 (30,895)
Deferred income taxes (256,758) (171,516) (179,978)
Due to parent company - (265,390) 60,103
----------- ---------- ----------
Net cash provided by operating activities 211,771 142,625 683,061
----------- ---------- ----------
Cash flows from investing activities:
Increase in sales-type leases (527,951) (233,960) (344,854)
Payments received on sales-type leases 386,735 421,966 226,384
Proceeds from sale of property, plant, and equipment 115,319 24,889 989,127
Purchase of property, plant, and equipment - (1,361,048) (1,305,186)
Proceeds from the sale of Gull GmbH - - 313,500
----------- ---------- ----------
Net cash provided by used in investing activities (25,897) (1,148,153) (121,029)
----------- ---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (505,829) (2,129,727) (1,397,033)
Net increase (decrease) in line-of-credit 293,780 (634,583) 469,346
Proceeds from issuance of long-term debt - 3,498,027 299,539
Proceeds from issuance of common stock 204,727 - 15,187
----------- ---------- ----------
Net cash provided by (used in) financing activities (7,322) 733,717 (612,961)
----------- ---------- ----------
Effect of foreign exchange rates on cash (239,592) 353,429 (97,810)
----------- ---------- ----------
Net increase (decrease) in cash (61,040) 81,618 (148,739)
Cash at beginning of year 301,033 219,415 368,154
----------- ---------- ----------
Cash at end of year $ 239,993 301,033 219,415
=========== ========== ==========
F-5
</TABLE>
<PAGE>
GULL LABORATORIES, INC.
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
Supplemental Disclosure of Cash Flow Information
Cash paid (received) during the year for:
Interest $ 599,344 546,754 644,609
Income taxes (25,081) 56,409 1,323,757
Supplemental Disclosures of Noncash Investing and
Financing Activities
Note payable and capital lease obligations incurred for equipment $1,155,050 127,808 60,491
Transfer of inventory to net investment in sales-type leases 339,342 327,133 236,605
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(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, Germany, Belgium,
France, and the Netherlands, and sells through distributors and OEM
relationships in 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 62 percent of the outstanding
common stock of the Company. In 1997, the Company acquired certain
assets and liabilities of the Fresenius Diagnostics Business Unit of
the Intensive Care and Diagnostics Division of Fresenius AG
(Fresenius Diagnostics) in exchange for 1,320,000 shares of the
Company's common stock. The transaction was between entities under
common control, and accounted for as if a pooling-of-interests.
Accordingly, the consolidated financial statements for periods prior
to 1997 have been restated to include the accounts and results of
operations of Fresenius Diagnostics. Net assets not acquired as part
of the acquisition of Fresenius Diagnostics have been shown as a
reduction of stockholders' equity.
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 been within the range of
management's expectations. 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.
F-7
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(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, Development, and Advertising
Research, development, and advertising costs are expensed as
incurred.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and deferred tax liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and deferred tax
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and deferred tax liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(h) Net Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share (SFAS 128). SFAS 128 became effective for financial statements
with interim and annual periods ending after December 15, 1997.
Accordingly, the Company has adopted SFAS 128.
SFAS 128 establishes a different method of computing net income
(loss) per common and common-equivalent share than was previously
required under the provisions of Accounting Principles Board Opinion
No. 15. 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 assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period.
Potential common shares (stock options and warrants) have not been
included in the computation of loss per share in 1997 and 1996, as
they would have had a dilutive effect. Prior periods have been
restated for presentation in accordance with SFAS 128, as
applicable.
F-8
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(h) Net Income (Loss) Per Common Share (continued)
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 1997, 1996, and 1995:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
Basic (weighted average common shares
outstanding during the year) $ 7,926,775 7,883,934 7,879,245
Weighted average common stock options
outstanding during the year - - 19,954
========== ========== ==========
Diluted $ 7,926,775 7,883,934 7,899,199
========== ========== ==========
</TABLE>
(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.
(k) Disclosure About Fair Value of Financial Instruments
At December 31, 1997 and 1996, the book value of all of the
Company's financial instruments approximates their fair value.
F-9
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(l) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 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 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 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 1996 and 1995 have been reclassified to conform
with the 1997 presentation.
(2) Other Assets
Other assets consist of the following at December 31:
1997 1996
----------- ----------
Goodwill $ 897,166 897,166
Deposits 93,722 26,372
Patents, organizational costs,
and marketing rights 367,727 288,135
Other 165,591 174,453
Less accumulated amortization (522,394) (397,025)
----------- ----------
$ 1,001,812 989,101
=========== ==========
(3) Inventories
Inventories consist of the following at December 31:
1997 1996
----------- -----------
Raw materials $2,514,522 1,677,800
Work-in-process 889,947 822,576
Finished goods 1,576,303 1,571,557
Equipment held for lease or sale 1,216,587 809,493
----------- -----------
$6,197,359 4,881,426
=========== ===========
F-10
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(4) Property, Plant, and Equipment
Property, plant, and equipment consist of the following at December 31:
1997 1996
------------ -----------
Land and improvements $ 649,835 649,835
Building and improvements 2,981,079 2,841,102
Machinery and equipment 3,380,315 3,061,230
Office furniture and equipment 2,803,259 3,062,233
Transportation equipment 297,694 371,247
Construction-in-progress 11,479 3,610
------------ -----------
Less accumulated depreciation 10,123,661 9,989,257
and amortization 5,933,662 5,579,688
------------ -----------
$ 4,189,999 4,409,569
============ ===========
(5) Notes Payable and Related Party Transactions
Notes payable consist of the following at December 31:
1997 1996
------------ -----------
Lines of credit $1,498,146 1,601,116
Bank overdraft facility -- 74,206
========== ==========
Total notes payable $1,498,146 1,675,322
========== ==========
The Company maintains lines of credit with banks totaling approximately
$2,400,000 which are either due on demand or expire in May 1998.
Borrowings under the lines of credit are limited to certain levels of
accounts receivable and inventories. The rates of interest charged range
from the foreign bank's reference rate plus .25 percent to the U.S. banks
reference rate plus .4 percent (effective rates from 7.50 to 8.90 percent
at December 31, 1997). 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.
The Company and Fresenius AG have entered into service contracts in which
Fresenius AG leases certain property and provides services to the
Company. Amounts paid to Fresenius AG totaled $965,000, $1,103,000 and
$1,021,000 in 1997, 1996 and 1995, respectively for these services.
Accounts payable at December 31, 1997, include approximately $860,000 due
to Fresenius AG for payments Fresenius AG made to creditors on behalf of
the Company.
F-11
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(6) Long-term Debt
Long-term debt consists of the following at December 31:
1997 1996
--------------- ---------------
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
due in June 2006. The note is secured by
land and a building $ 1,719,620 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 68,301 100,769
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 due in
February 2001. The note is secured by a building 60,773 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 324,958 452,746
Note payable to Fresenius AG 204,498 -
Capitalized lease obligations (note 7) 1,931,017 1,153,417
---------- -----------
Total long-term debt and
capital lease obligations 4,309,167 3,546,223
Less current portion 3,576,085 545,420
---------- -----------
Long-term debt and capital
lease obligations excluding
current installments $ 733,082 3,000,803
=========== ==========
Principal maturities of long-term debt and capital lease obligations for
the years subsequent to December 31, 1997 are as follows:
1998 $ 3,576,085
1999 498,814
2000 182,438
2001 51,830
==========
$ 4,309,167
==========
In connection with the acquisition of Fresenius Diagnostics (note 1),
Fresenius AG made available a working capital loan to the Company of
approximately $1,000,000 bearing interest at an annual rate of eight
percent payable quarterly. The amount available under the loan decreased
to $800,000 on December 31, 1997 and will continue to decrease by
$200,000 every six months thereafter with any remaining balance
outstanding due on June 30, 1999. The loan is secured by a pledge of the
Company's ownership interest in its German subsidiaries' common stock.
F-12
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
As a result of the loss and decrease in liquidity in 1997, the Company
was not in compliance with certain earnings and liquidity covenants
associated with its long-term debt, lease obligations, and line of credit
with two banks at December 31, 1997. The banks have waived the
noncompliance with the covenants through December 31, 1997, and are
currently discussing alternative covenants to be put into place in
connection with the extension of the line of credit which is due in May
1998. However, because the bank has not waived the covenants through
January 1, 1999, certain long-term obligations have been classified as
current liabilities.
(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. 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 $530,000 and $829,000 at
December 31, 1997 and 1996, respectively.
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 $92,000, $81,000, and $44,000 in 1997, 1996, and
1995, respectively.
Required future minimum lease payments and the present value of the
future minimum capital lease payments at December 31, 1997 are as
follows:
Capital Operating
leases leases
------------ ------------
Year ending:
1998 $ 1,909,767 84,804
1999 208,832 70,404
2000 134,531 70,404
2001 31,528 70,404
2002 -- 70,404
Thereafter -- 187,744
------------ ------------
Total future minimum lease payments 2,284,658 $ 554,164
============
Less amount representing interest 353,641
------------
Present value of future minimum lease
payments (see note 6) $ 1,931,017
============
(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, 1997 and 1996, the
net investment reflected in the accompanying consolidated balance sheets
for these sale-type leases consisted of the following:
1997 1996
----------- -----------
Gross minimum sales-type lease receivables $ 1,380,121 1,605,283
Less allowance for uncollectible
receivables (44,744) (128,622)
----------- -----------
Net minimum sales-type lease receivables 1,335,377 1,476,661
Unearned interest income (299,840) (403,411)
----------- -----------
Net investment in sales-type leases 1,035,537 1,073,250
Less current portion (272,125) (262,831)
----------- -----------
Net investment in sales-type leases,
excluding current portion $ 763,412 810,419
=========== ===========
F-13
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(8) Net Investment in Sales-Type Leases (continued)
Minimum gross receipts from sales-type lease receivables for the next
five years are as follows:
Year ending December 31:
1998 $ 390,511
1999 385,062
2000 328,626
2001 203,720
2002 72,202
-----------
Total $ 1,380,121
===========
(9) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1997, 1996,
and 1995 is as follows:
1997 1996 1995
----------- ------------ ------------
Current:
Federal $ 72,670 404,369 695,600
State 13,839 77,000 132,000
Foreign - (53,118) 261,686
----------- ------------ ------------
86,509 428,251 1,089,286
----------- ------------ ------------
Deferred:
Federal 12,600 7,900 24,700
State 2,400 1,500 5,000
Foreign (294,797) (211,810) 11,165
----------- ------------ ------------
(279,797) (202,410) 40,865
----------- ------------ ------------
Total tax espense
(benefit) $ (193,288) 225,841 1,130,151
=========== ============ ============
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:
1997 1996 1995
--------- --------- ---------
Computed "expected" tax expense (benefit) $(682,707) 39,650 540,205
Increase (decrease) in income taxes
resulting from:
Goodwill amortization 31,000 31,000 31,000
Exclusion of loss from foreign
subsidiary 207,619 86,422 411,646
Foreign sales corporation exclusion - (2,900) (32,000)
State taxes, net of federal benefits 10,000 41,000 90,000
Acquisition costs 148,000 - -
Other 92,800 30,669 89,300
--------- --------- ---------
Provision for income taxes $(193,288) 255,841 1,130,151
========= ========= ==========
F-14
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(9) Income Taxes (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996, are presented below:
<TABLE>
<S> <C> <C> <C> <C>
1997 1996
----------------------- ------------------------
Domestic Foreign Domestic Foreign
---------- ---------- ---------- ----------
Deferred tax assets:
Tax losses $ -- 3,370,000 -- 2,477,000
Research and development expenses -- -- -- --
Warranty reserve 60,000 -- 45,000 --
Vacation reserve 50,000 -- 38,000 --
Bad debt reserve 29,000 -- 35,000 --
Inventory reserve 67,000 -- 21,000 --
Technology amortization 21,000 -- 14,000 --
Property, plant and equipment -- 6,929 -- 45,740
Net investment in sales-type leases -- 108,246 -- 80,623
Other items 11,000 18,000 6,000 18,850
---------- ---------- ---------- ----------
Total gross deferred tax assets 238,000 3,503,175 159,000 2,622,213
Less valuation allowance -- (2,749,000) -- (2,448,000)
---------- ---------- ---------- ----------
Deferred tax assets 238,000 754,175 159,000 174,213
---------- ---------- ---------- ----------
Deferred tax liabilities:
Patents (73,000) -- (35,000) --
Sales leases (137,000) -- (92,000) --
Other payables -- (25,000) -- (29,000)
Property, plant and equipment (178,000) -- (167,000) --
Deferred revenue (55,000) -- (55,000) --
Other -- (294,473) -- (276,844)
---------- ---------- ---------- ----------
Total gross deferred tax liabilities (443,000) (319,473) (349,000) (305,844)
---------- ---------- ---------- ----------
Net deferred tax asset (liability) $ (205,000) 434,702 (190,000) (131,631)
========== ========== ========== ==========
Net current deferred tax asset (liability) $ 161,000 (167,884) 108,000 (177,371)
Net noncurrent deferred tax asset (liability) (366,000) 602,586 (298,000) 45,740
---------- ---------- ---------- ----------
$ (205,000) 434,702 (190,000) 131,631
========== ========== ========== ==========
</TABLE>
The domestic valuation allowance for deferred tax assets as of January 1,
1996 was zero. There was no change in the total domestic valuation
allowance for the years ended December 31, 1997 and 1996. The valuation
allowance of $2,749,000 and $2,448,000 at December 31, 1997 and 1996,
respectively, is solely attributable to the foreign jurisdiction.
F-15
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(9) Income Taxes (continued)
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that all or a portion of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of these deductible
differences.
(10) Employee Benefit Plans
The Company has an Employee Stock Ownership Plan (ESOP) and 401(k) plan
that covers all United States employees who have been employed for one
month. The ESOP contributions are used to purchase Company securities.
The Board of Directors approved discretionary contributions to the ESOP
totaling $11,587 for 1995. No discretionary contribution was made to the
ESOP during the years ended December 31, 1997 and 1996.
The Company matches 25 percent of employee contributions to the 401(k)
plan up to a maximum individual employee contribution of four percent of
the employee's cash compensation. These matching contributions vest over
a seven-year period. Employer matching contributions totaled $62,860,
$45,273, and $38,413 for 1997, 1996, and 1995, 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 $15,400, $14,500, and $17,000
during 1997, 1996, and 1995, respectively.
(11) Other Income
Other income consisted of the following approximate amounts for the years
ended December 31,:
1997 1996 1995
--------- --------- ---------
Gain on sale of building $ -- -- 516,533
Currency transaction gains (losses) 52,530 (38,496) 155,116
Interest income 144,706 132,981 92,083
Other nonoperating income (expenses) (167,911) (36,028) 54,488
========= ========= =========
$ 29,325 58,457 818,220
========= ========= =========
F-16
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(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
generally vest 25 percent per year. A summary of the activity under
the plans is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Years ended December 31,
--------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
Weighted-average Weighted-average
Weighted-average exercise exercise
exercise price price
Shares price Shares Shares
--------- ----------- -------- ------------ -------- ------------
Outstanding at beginning
of year 506,000 $4.63 386,000 $ 4.64 270,000 $ 4.88
Granted 158,500 9.99 130,000 4.68 200,000 4.50
Exercised (56,425) 3.93 - - (9,000) 1.69
Forfeited (25,500) 5.26 (10,000) 5.50 (75,000) 5.50
========= ======== ========
Outstanding at end
of year 582,575 $6.13 506,000 $ 4.63 386,000 $ 4.64
========= ======== ========
Options exercisable at
year-end 302,075 $4.83 269,750 $ 4.68 70,000 $ 4.40
Weighted-average fair
value of options
granted during the
year $ 5.84 3.34 2.77
</TABLE>
F-17
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(12) Stock Compensation Plans (continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Options outstanding Options exercisable
-------------------------------------------- -----------------------------
Number Number
outstanding Weighted-average Weighted-average exercisable Weighted-average
at remaining exercise at exercise
Range of exercise December 31, contractual price December 31, price
prices 1997 life 1997
-------------------- ------------- ------------ ----------- ------------- -----------
$1.125 9,500 1 yrs. $1.13 9,500 1.13
3.00 - 4.00 6,250 6 3.88 6,250 3.88
4.00 - 5.00 297,925 8 4.56 172,925 4.53
5.00 - 6.00 113,400 4.5 5.50 113,400 5.50
9.00 - 10.00 155,500 9.5 9.99 - -
============= =============
582,575 7.6 6.13 302,075 4.83
============= =============
</TABLE>
Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income (loss)
and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
----------- ------------- ------------
Net income:
As reported $ (1,814,675) (109,223) 458,687
Pro forma (2,158,146) (399,844) 424,062
Basic earnings per common share:
As reported $ (.23) (.01) .06
Pro forma (.27) (.05) .05
Diluted earnings per common share:
As reported $ (.23) (.01) .06
Pro forma (.27) (.05) .05
</TABLE>
The effect that calculating compensation cost for stock-based
compensation under SFAS 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 1997, 1996, and 1995
respectively: expected volatility of 60.3, 66.2, and 49.5 percent; risk
free interest rates of 6.0, 6.1, and 6.3 percent; no dividend yield for
any year; and expected lives of 5.2, 7.5, and 7.5 years.
On May 9, 1996, the Company granted an option to purchase 15,000 shares
of the Company's common stock to a nonemployee. The option is exercisable
5,000 shares at $6 per share, 5,000 shares at $8.50 per share, and 5,000
shares at $11 per share and becomes exercisable when the Company's stock
closes for twenty consecutive trading days at an average price of $6,
$8.50, and $11, respectively. Compensation expense related to these
options was not material.
F-18
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(13) Foreign Operations, Export Sales, and Major Customer
Operations by geographic area:
Sales
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
United States $ 15,457,761 15,217,860 15,272,576
Europe 12,682,781 12,189,526 14,497,234
Eliminations (6,434,990) (2,963,451) (3,508,680)
============ ============ ============
$ 21,705,552 24,443,935 26,261,130
============ ============ ============
Income (loss) before income taxes
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
United States $ 141,265 1,429,577 2,281,061
Europe (1,393,075) (714,340) 123,708
Eliminations (162,792) (62,833) (168,275)
------------ ------------ ------------
(1,414,602) 652,404 2,236,494
Interest expense (593,361) (535,786) (647,656)
------------ ------------ ------------
$ (2,007,963) 116,618 1,588,838
============ ============ ============
Identifiable assets
------------ ------------ ------------
1997 1996 1995
------------ ------------ ------------
United States $ 35,933,845 21,892,565 20,842,949
Europe 6,185,235 5,213,220 6,652,928
Eliminations (26,818,007) (11,816,276) (11,276,216)
------------ ------------ ------------
$ 15,301,073 15,289,509 16,219,661
============ ============ ============
United States export sales to unaffiliated customers by destination of
sale:
1997 1996 1995
---------- ---------- ----------
Europe $1,124,033 1,653,612 1,525,900
Pacific Rim (Australia, New Zealand,
and the Far East) 1,147,596 1,154,586 1,293,038
Other 325,002 149,310 131,243
---------- ---------- ----------
$2,596,631 2,957,508 2,950,181
========== ========== ==========
Sales to one customer amounted to 11 percent, 11 percent, and 10 percent
of total sales in 1997, 1996, and 1995, respectively. No single country
in Europe or the Pacific Rim accounted for more than ten percent of sales
to unaffiliated customers.
F-19
<PAGE>
GULL LABORATORIES, INC.
Notes to Consolidated Financial Statements
(14) Merger, Integration, and Restructuring Charges
In an effort to bring its European operations to profitability, the
Company incurred restructuring charges of $326,442 and $535,277 in 1996
and 1995, respectively, substantially all of which relate to personnel
termination costs. In connection with the acquisition of Fresenius
Diagnostics, (note 1) the Company incurred $1,455,298 of merger and
integration costs. Of these costs, approximately $625,000 relate to
investment banking, professional, and other costs incurred in
investigating and negotiating the acquisition, $630,000 relate to the
cost of severance payments and rental costs to be incurred under
long-term leases for property that will not be used in the future and
$200,000 relate to costs incurred integrating management information
systems and office space.
(15) 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.
In October 1997, Fresenius AG announced that it has engaged an investment
banker to evaluate various partnering alternatives for the Company. These
alternatives could involve the sale of Fresenius AG's ownership interest
in the Company. The Company has made several presentations to interested
parties but no transactions have been completed to date.
(16) Accounting Standards Issued Not Yet Adopted
In June of 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income." and Statement No. 131 "Disclosures about Segments
of an Enterprise and Related Information." These statements, which are
effective for periods beginning after December 15, 1997 expand or modify
disclosures and, accordingly, will have no impact on the Company's
reported financial position, results of operation, or cash flows.
(17) Liquidity
As a result of the operating loss in 1997, including
non-recurring merger and integration costs associated with the
acquisition of Fresenius Diagnostics, the Company violated certain debt
covenants with two banks causing the reclassification of certain
long-term obligations as short-term liabilities as discussed in note 6.
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. Management believes that as a result of these changes
together with amounts available from existing lines of credit and other
sources, the Company will be able to generate sufficient cash flow to
meet its short-term working capital requirements. If the Company is
unable to negotiate new loan covenants or continues to incur losses, it
will need to seek additional debt, equity and/or lease financing. There
is no guarantee that it will be able to obtain funding if working capital
needs cannot be financed through internally generated funds.
(18) Subsequent Events
Subsequent to year end, the President and Executive Vice President of the
Company resigned. Both have employment agreements with the Company
providing for severance payments. The amount to be paid under these
agreements is currently in negotiation.
F-20
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Gull Laboratories, Inc.:
Under the date of March 3, 1998, except as to note 18 which is as of April 6,
1998, we reported on the consolidated balance sheets of Gull Laboratories, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this consolidated financial statement schedule based
on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Salt Lake City, Utah
March 3, 1998
S-1
<PAGE>
Schedule II
GULL LABORATORIES, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<S> <C> <C> <C> <C>
Balance Charged Balance
at to cost Amounts at
beginning and charged end of
of period expenses off period
---------- ---------- ---------- ----------
Year ended December 31, 1997:
Allowance for doubtful accounts $ 320,815 50,257 (88,099) 282,973
Allowance for loss on leases 128,622 51,756 (135,634) 44,744
Inventory reserve 339,680 115,329 (170,512) 284,497
Warranty reserve 117,624 64,063 (54,679) 127,008
Year ended December 31, 1996:
Allowance for doubtful accounts $ 260,877 63,754 (3,816) 320,815
Allowance for loss on leases 86,765 65,470 (23,613) 128,622
Inventory reserve 373,098 223,434 (256,852) 339,680
Warranty reserve 73,609 84,515 (40,500) 117,624
Year ended December 31, 1995:
Allowance for doubtful accounts $ 167,473 93,649 (245) 260,877
Allowance for loss on leases - 86,765 - 86,765
Inventory reserve 170,302 393,713 (190,917) 373,098
Warranty reserve - 84,609 (11,000) 73,609
</TABLE>
S-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GULL
LABORATORIES, INC. DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 239,993
<SECURITIES> 0
<RECEIVABLES> 2,638,007
<ALLOWANCES> 282,973
<INVENTORY> 6,197,359
<CURRENT-ASSETS> 9,109,264
<PP&E> 10,123,661
<DEPRECIATION> 5,993,662
<TOTAL-ASSETS> 15,301,073
<CURRENT-LIABILITIES> 9,265,762
<BONDS> 733,082
0
0
<COMMON> 7,941
<OTHER-SE> 4,932,010
<TOTAL-LIABILITY-AND-EQUITY> 15,301,753
<SALES> 21,705,552
<TOTAL-REVENUES> 21,705,552
<CGS> 9,236,929
<TOTAL-COSTS> 13,912,550
<OTHER-EXPENSES> (29,325)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 593,361
<INCOME-PRETAX> (2,007,963)
<INCOME-TAX> (193,288)
<INCOME-CONTINUING> (1,814,675)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,814,675)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
