ITEM 1: BUSINESS - - -----------------
The Registrant, Realmark Property Investors Limited Partnership (the "Partnership"), is a Delaware Limited Partnership organized in 1979 pursuant to an Agreement and Certificate of Limited Partnership (the "Partnership Agreement"), under the Delaware Uniform Limited Partnership Act. The Partnership's Corporate General Partner is Realmark Properties, Inc. (the "Corporate General Partner"), a Delaware corporation, and it's Individual General Partner is Joseph M. Jayson (the "Individual General Partner").
The Registrant commenced the public offering of its limited partnership units, registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended, on March 26, 1981, and concluded the offering on December 31, 1981, having raised a total of $3.1 million before sales commissions and expenses of the offering.
The Partnership's investment objectives are to (1) provide a return of capital plus capital gains from the sale of appreciated properties; (2) provide partners with cash distributions until properties are sold; (3) preserve and protect partners capital; and (4) achieve a build-up of equity through the reduction of mortgage loans.
The Partnership's one remaining apartment complex, acquired in 1981, is located in Englewood, Ohio. The surrounding community continues to be marked by relatively stable occupancy rates and minimal construction. Physical occupancy at Carriage House of Englewood (formerly Gold Key Village Apartments) for 1996 was 83%, for 1995 was 92% and for 1994 occupancy was at 95%. As the only property in the Partnership, Carriage House of Englewood accounts for all of the revenue generated by the Partnership.
The business of the Partnership is not seasonal. As of December 31, 1996, the Partnership did not directly employ any persons in a full-time position. All persons who regularly rendered services on behalf of the Partnership through December 31, 1996 were employees of the Corporate General Partner or its affiliates.
Carriage House of Englewood is currently managed by Realmark Corporation, an affiliate of the Corporate General Partner.
ITEM 2:

ITEM 2: PROPERTIES - - -------------------
As of December 31, 1996, the Partnership continued to own and operate Carriage House of Englewood (formerly the Gold Key Village Apartments). Purchased in November 1981, Carriage House of Englewood, located in Englewood, Ohio, is a 144 unit rental complex consisting of 24 buildings and recreational facilities on 9.6 acres of land. Realmark Corporation, an affiliate of the General Partners, has managed the complex since March 1, 1984.
On May 5, 1992, the Partnership refinanced its two mortgages with a 9% U.S. Department of Housing and Urban Development (HUD) guaranteed mortgage in the amount of $2,997,800 due June 1, 2027. The outstanding mortgage balance at December 31, 1996 was $2,930,266.
On the same date, the Partnership entered into a joint venture agreement with Realmark Property Investors Limited Partnership VI A (RPILP VI A) for the purpose of operating Carriage House of Englewood. Under the terms of the joint venture agreement, the Partnership contributed the property net of the mortgage and RPILP VI A contributed $497,911. The agreement provided for the income, loss, cash flow, and sale or refinancing proceeds to be allocated 68% to the Partnership and 32% to RPILP VI A. On March 1, 1993, RPILP VI A contributed an additional $125,239, changing the allocation percentages to 60% to the Partnership and 40% to RPILP VI A.
ITEM 3:

ITEM 3: LEGAL PROCEEDINGS - - --------------------------
The Partnership is not a party to, nor is any of the Partnership's property the subject of, any material pending legal proceedings.
ITEM 4:

ITEM 5: MARKET FOR REGISTRANT'S UNITS OF LIMITED PARTNERSHIP INTEREST.
There is currently no established trading market for the units of Limited Partnership Interest of the Partnership and it is not anticipated that any will develop in the future.
The Partnership did not make any distributions during 1996, 1995 or 1994 and management does not anticipate making any distributions until Carriage House of Englewood is sold and all Partnership obligations are satisfied. Unless there is significant improvement in the overall property performance, it remains unlikely that the investors will receive any of the proceeds from sale.
As of December 31, 1996, there were 421 record holders of units of Limited Partnership Interest.
ITEM 6:

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND - - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - - ---------------------
Liquidity and Capital Resources: - - --------------------------------
The Partnership continues to incur cash flow deficits and large losses from operations as it has in prior years. During 1996, the Corporate General Partner and its affiliates continued to advance funds to the Partnership whenever it was necessary to cover its shortfalls. The General Partner is under no obligation to advance funds to the Partnership, and there is no assurance that such advances will continue. As of December 31, 1996, the Corporate General Partner advances totaled $784,461, all of which is payable on demand and accruing interest at 11% per annum. Due to the operating shortfalls, the Partnership did not make any distributions in the years ended December 31, 1996 and 1995. Until such time as the Partnership can satisfy its obligations and repay the Corporate General Partner advances, no distributions are anticipated.
The Partnership's one remaining property, Carriage House of Englewood (formerly Gold Key Apartments) came under contract for sale during July 1996. The sale is subject to a number of contingencies and is cancelable at any time by the buyer. Until such time as all of the buyers due diligence is performed, no closing date can be established. The Partnership has received as of December 31, 1996 non-refundable deposits on the sale of this property totaling $220,000, which includes a note for $47,200. The Corporate General Partner feels the pending sale is in the best interest of the Limited Partners, although at this date, it appears highly unlikely that the Limited Partners will receive any proceeds from the sale due to the amount of the Partnership's liabilities.
During 1996, management was successful in securing the release of funds from the property's replacement escrow reserve from the United States Department of Housing and Urban Development (HUD) and the mortgagor on the property. The additional cash was used to fund operations and to do needed capital improvements to the property, such as roofing repairs and interior and exterior painting. Although HUD and the mortgagor have assisted the Partnership through the release of the escrowed funds, unless the property shows significant improvement in occupancy and collections, as well as a decrease in expenses, the property could be in a position to default on its mortgage, thus throwing it into a foreclosure. With this in mind, the Corporate General Partner is aggressively attempting to close on the pending sale, as well as continuing to market the property to other buyers.
Management has once again implemented corrective action plans in response to the going concern consideration discussed in Note 9 to the financial statements, as well as to deal with the HUD noncompliance detailed in the notes to the financial statements. These plans include tighter cash management through the closer monitoring of expenses such as payroll, advertising and maintenance, which have typically been the expenses that have increased from year to year. Additionally, tighter credit policies have been put into place as a means of avoiding the collection problems which the property incurred during the past several years. The HUD noncompliance detailed in the notes technically puts the Partnership in default of the mortgage which could result in fines or interest charges being levied, or the take over of the property by HUD. A concerted effort at correcting the noncompliance will hopefully lead to the ultimate cure of such default.
Results of Operations: - - ----------------------
For the year ended December 31, 1996, the Partnership incurred a net loss of $263,347 or $84.10 per limited partnership unit. This is a slight increase from the year ended December 31, 1995 which resulted in a loss of $227,396 or $72.62 per limited partnership unit, and a considerable increase over the loss incurred in the year ended December 31, 1994 which was $178,828 or $57.11 per limited partnership unit.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND - - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS (Con't.) - - ------------------------------
Results of Operations (Con't.): - - -------------------------------
Partnership revenues for the year ended December 31, 1996 totaled $685,142; this consisted of rental income of $640,124 and other income, which includes interest, laundry income, and other miscellaneous sources of income of $45,018. Although other income remained fairly constant as compared to the year ended December 31, 1995 and increased approximately 18% in comparison to the year ended December 31, 1994, there was a drastic decrease in rental revenues which totaled $717,713 in 1995 and $705,970 in 1994. The decrease in rental income is related to the drop in occupancy at Carriage House of Englewood which was considerable during 1996. Physical occupancy averaged 83% during the year ended December 31, 1996, although it saw lows of 70% at points during the year, as compared to occupancy averages of 92% and 95% for the years ended December 31, 1995 and 1994, respectively. At the end of 1996, the property began to see improved occupancy; management continues to focus additional and continual effort on increasing occupancy, as well as decreasing delinquencies.
Partnership expenses for the year ended December 31, 1996 totaled $1,068,126, a decrease of slightly over $16,000 from those of 1995, but not yet returned to the level of 1994 which were $993,203. Decreases in payroll, repairs and maintenance and contracted services throughout the partnership continue to result in decreases in operating expenses, while substantially higher advertising, legal fees and portfolio management and accounting charges resulted in higher administrative expenses. The increase in administrative expenses was primarily due to activities, such as more aggressive advertising campaigns, undertaken to increase occupancies. Interest expense remained almost exactly the same as the previous year, and increased slightly as compared to 1994 due to the higher carrying value of the loan from affiliates between the two years.
The Partnership expects to incur higher than "normal" property operations expenses in the near future due to the costs associated with preparing units for new tenants (i.e. cleaning, painting, appliance and carpeting costs), as well as due to costs to be incurred to physically improve the exterior of the complex. Although this work is necessary in order to lease up the apartment complex, management is trying to control expenditures so as not to worsen the cash flow situation of the Partnership. For example, management has been able to obtain large price discounts on paint, carpeting and appliances through negotiations with large national companies, such as Whirlpool. It is hoped that by improving the property's appearance and through continual maintenance of the interior and exterior of the buildings that new tenants will be attracted, thus increasing revenues. Tenant retention also is seen as a means of controlling both operating and administrative expenses.
For the year ended December 31, 1996, the tax basis loss was $183,920 or $58.74 per limited partnership unit compared to a tax loss of $194,584 or $62.14 per unit for the year ended December 31, 1995 and a tax loss of $196,138 or $62.64 per limited partnership unit for the year ended December 31, 1994. The Partnership agreement provides for the taxable income or losses to be allocated 99% to the Limited Partners and 1% to the General Partners. Through the year ended December 31, 1986 and for the years ended December 31, 1991 and 1996, taxable income or losses were allocated in accordance with this provision. For the years 1987 through 1990, and 1992 through 1995, the Partnership was required to reallocate taxable losses in accordance with the provisions of Section 704(b) of the Internal Revenue Code. In general, Section 704(b) may be applicable when Partnership capital is negative and Limited Partners are not required to restore negative capital accounts. In such circumstances, the IRS code requires that the General Partner(s) bear a greater portion of the economic loss than that which would be allocated pursuant to the Partnership agreement and, therefore, the loss must be reallocated.
ITEM 8:

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - - ----------------------------------------------------
Listed under Item 14 of this report.
ITEM 9:

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - - -------- --------------------------------------------------
The Partnership, as an entity, does not have any directors or officers. The Individual General Partner of the Partnership is Joseph M. Jayson. The directors and executive officers of Realmark Properties, Inc., the Partnership's Corporate General Partner, as of March 1, 1996, are listed below. Each director is subject to election on an annual basis.
Year First Name Title of All Positions Held with Company Elected Director - - ---- ---------------------------------------- ----------------
Joseph M. Jayson President and Director 1979
Judith P. Jayson Vice-President and Director 1979
Michael J. Colmerauer Secretary
Joseph M. Jayson, President and Director of Realmark Properties, Inc. and Judith P. Jayson, Vice-President and Director of Realmark Properties, Inc., are married to each other.
The Directors and Executive Officers of the Corporate General Partner and their principal occupations and affiliations during the last five years or more are as follows:
Joseph M. Jayson, age 58, is Chairman and Director and sole stockholder of J.M. Jayson & Company, Inc. and certain of its affiliated companies: Westmoreland Capital Corporation, Oilmark Corporation and U.S. Energy Development Corporation. In addition, Mr. Jayson is Chairman of Realmark Corporation, and President and Director of Realmark Properties, Inc., wholly owned subsidiaries of J.M. Jayson & Company, Inc. and co-general partner of Realmark Properties Investors Limited Partnership, Realmark Properties Investors Limited Partnership-II, Realmark Properties Investors Limited Partnership-III, Realmark Properties Investors Limited Partnership-IV, Realmark Properties Investors Limited Partnership-V, Realmark Properties Investors Limited Partnership-VI A and Realmark Properties Investors Limited Partnership-VI B. Mr. Jayson is a member of the Investment Advisory Board of the Corporate General Partner. Mr. Jayson has been in real estate for the last 34 years and is a Certified Property manager as designated by the Institute of Real Estate Management ("I.R.E.M."). Mr. Jayson received a B.S. Degree in Education in 1961 from Indiana University, a Masters Degree from the University of Buffalo in 1963, and has served on the Educational Faculty of the Institute of Real Estate Management. Mr. Jayson has for the last 34 years been engaged in various aspects of real estate brokerage and investment. He brokered residential properties from 1962 to 1964, commercial and investment properties from 1964 to 1967, and in 1967, left commercial real estate to form his own investment firm. Since that time, Mr. Jayson and J.M. Jayson & Company, Inc. have formed, or participated in various ways in forming over 30 real estate related limited partnerships. For the past sixteen years, Mr. Jayson and J.M. Jayson & Company, Inc. and an affiliate have also engaged in developmental drilling for gas and oil.
Judith P. Jayson, age 57, is currently Vice-President and a Director of Realmark Properties, Inc. She is also a Director of the property management affiliate, Realmark Corporation. Mrs. Jayson has been involved in property management for the last 35 years and has extensive experience in the hiring and training of property management personnel and in directing, developing and implementing property management systems and programs. Mrs. Jayson, prior to joining the firm in 1973, taught business in the Buffalo, New York high school system. Mrs. Jayson graduated from St. Mary of the Woods College in Terre Haute, Indiana, with a degree in Business Administration. Mrs. Jayson is the wife of Joseph M. Jayson, the Individual General Partner.
Michael J. Colmerauer, age 39, is Secretary and in-house legal counsel for J.M. Jayson and Company, Inc., Realmark Corporation, Realmark Properties, Inc. and other companies affiliated with the General Partners. He received a Bachelor's Degree (BA) from Canisius College in 1980 and a Juris Doctors (J.D.) from the University of Tulsa in 1983. Mr. Colmerauer is a member of the American and Erie County Bar Association and has been employed by the Jayson group of companies for the last 13 years.
ITEM 11:

ITEM 11: EXECUTIVE COMPENSATION - - --------------------------------
No direct remuneration was paid or payable by the Partnerships to directors and officers (since it has no directors or officers) for its fiscal years ended December 31, 1996, 1995 or 1994, nor was any direct remuneration paid or payable by the Partnership to directors or officers of Realmark Properties, Inc., the Corporate General Partner and sponsor, for the fiscal years ended December 31, 1996, 1995 or 1994.
The following table sets forth for the years ended December 31, 1996, 1995 and 1994, the compensation paid or accrued as payable by the Partnership, directly or indirectly, to affiliates of the General Partners:
The Corporate General Partner is entitled to a continuing Partnership Management Fee equal to 9% of adjusted cash flow (as defined in the Partnership Agreement). This fee is subordinated to the receipt by the limited partners of a non-cumulative annual cash return equal to 7% on the average of their adjusted capital contributions (as defined in the Partnership Agreement). Since the limited partners have not received a 7% return on their average capital balances, this fee has not been paid to the General Partner or accrued by the Partnership. The General Partners are entitled to 1% of Distributable Cash (as defined in the Partnership Agreement) and to certain expense reimbursements with respect to Partnership operations.
Additionally, the Partnership's share of net proceeds arising from a sale or refinancing shall be distributed first to the Limited Partners in amounts equivalent to a 7% return on their average adjusted capital balances, plus an amount equal to their capital contributions, then to all partners in amounts equal to their respective positive capital account balances. The partnership's share of additional proceeds, after property disposition fees, shall then be allocated to the Limited Partners in an amount equivalent to 5% of their average adjusted capital balances and the remainder, if any, in the ratio of 90% to the Limited Partners and 10% to the General Partners. The Partnership's share of income arising from the sale or refinancing shall be allocated in the same manner as the proceeds are to be distributed, except that the General Partners are to be allocated at least 1% of the income.
The Corporate General Partner is also allowed to collect property disposition fees upon the sale of acquired properties. This fee is not to exceed the lesser of 9% of the gross proceeds of the offering applicable to the property or 50% of normal rates, subordinated to: (i) the payment to the Limited Partners of a cumulative annual return (not compounded) equal to 7% on their average adjusted capital balances; (ii) the repayment to the Limited Partners of a cumulative amount equal to their capital contributions; and (iii) the payment to all partners of an amount equal to their respective positive capital account balances to the extent such balances exceed the amounts provided for in the preceding clauses (i) and (ii). Inasmuch as these conditions have not been met, no amounts have been recorded with regard to the sale of Clarewood and Gallery. See also Notes 1 and 4 to the financial statements.
ITEM 12:

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - - -------------------------------------------------------------------------
No person is known to the Partnership to own of record or beneficially more than five percent (5%) of the units of Limited Partnership Interest of the Partnership. Excluding the General Partner's Interest in the Partnership ($1,000 initial capital contribution), the General Partners, as of December 31, 1996, owned no units of Limited Partnership interest.
ITEM 13:

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - - ---------------------------------------------------------
(a) Transactions with Management and Others ---------------------------------------
All transactions between the Partnership and Realmark Properties, Inc. (the Corporate General Partner) and any other affiliated organization are described in Item 11 of this report and in Notes 4 and 7 to the financial statements.
ITEM 14:

ITEM 14: EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. - - ----------------------------------------------------------------------------
(a) Financial Statements and Schedules ----------------------------------
Financial Statements Page
(i) Independent Auditors' Report 13
(ii) Balance Sheets as of December 31, 1996 and 1995 14
(iii) Statements of Operations for years ended December 31, 1996, 1995 and 1994 15
(iv) Statements of Partners' Deficit for years ended December 31, 1996, 1995 and 1994 16
(v) Statements of Cash Flows for years ended December 31, 1996, 1995 and 1994 17
(vi) Notes to Financial Statements 18 - 24
Financial Statement Schedule ----------------------------
(i) Schedule III - Real Estate and Accumulated Depreciation 25 - 26
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
(b) Reports on Form 8-K -------------------
None
c) Exhibits
4. Instruments defining the rights of security holder, including indentures.
(a) Certificate of Limited Partners filed with the Registration Statement of the Registrant Form S-11, filed March 26, 1981 and subsequently amended incorporated herein by reference.
ITEM 14: EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K - - -------------------------------------------------------------------------------- (Con't.) - - --------
10. Material contracts.
(a) Property Management Agreement with Realmark Corporation included with the Registration Statement of the Registrant as filed and amended to date incorporated herein by reference.
(b) Property sales agreement with unrelated third-party included with the third quarter Form 10Q incorporated herein by reference.
INDEPENDENT AUDITORS' REPORT
The Partners Realmark Property Investors Limited Partnership
We have audited the accompanying balance sheets of Realmark Property Investors Limited Partnership as of December 31, 1996 and 1995, and the related statements of operations, partners' deficit, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the index at Item 14. These financial statements and financial statement schedule are the responsibility of the General Partners. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards and Government Auditing Standards. Those standards require that we plan and perform the audits 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 the General Partners, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Realmark Property Investors Limited Partnership at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
The accompanying financial statements and financial statement schedule have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 9 to the financial statements, the Partnership's failure to meet its Department of Housing and Urban Development regulatory agreement requirements, its recurring losses from operations and its partners' deficit raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE, LLP Buffalo, New York March 25, 1997
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP BALANCE SHEETS DECEMBER 31, 1996 AND 1995
See notes to financial statements
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
See notes to financial statements
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
General Limited Partners Partners ----------------- Amount Units Amount
Balance, January 1, 1994 $ 786,274) $ 3,100 $(1,591,731)
Net loss (1,788) -- (177,040) ----------- ----------- -----------
Balance, December 31, 1994 (788,062) 3,100 (1,768,771)
Net loss (2,274) -- (225,122) ----------- ----------- -----------
Balance, December 31, 1995 (790,336) 3,100 (1,993,893)
Net loss (2,633) -- (260,714) ----------- ----------- -----------
Balance, December 31, 1996 (792,969) 3,100 (2,254,607) =========== =========== ===========
See notes to financial statements
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
See notes to financial statements
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. FORMATION AND OPERATION OF PARTNERSHIP: ---------------------------------------
Realmark Property Investors Limited Partnership (the "Partnership"), a Delaware Limited Partnership, was formed on August 28, 1979, to invest in a diversified portfolio of income producing real estate.
In March 1981, the Partnership commenced the Public Offering of Units of Limited Partnership Interest. On December 31, 1981 the offering was concluded, at which time 3,100 units of Limited Partnership Interest were outstanding. The General Partners are Realmark Properties, Inc., a wholly-owned subsidiary of J.M. Jayson & Company, Inc. (JMJ) and Mr. Joseph M. Jayson, the sole shareholder of JMJ. Under the Partnership Agreement, the General Partners and affiliates can receive compensation for services rendered, and reimbursement for expenses incurred on behalf of the Partnership (See Note 4).
The Partnership agreement provides for the Partnership's share of taxable income or losses of the Partnership to be allocated 99% to the Limited Partners and 1% to the General Partners. Through December 31, 1986 and for 1991 and 1996, taxable income or losses were allocated in accordance with this provision. For the years 1987 through 1990, and 1992 through 1995, the Partnership was required to reallocate losses in accordance with Internal Revenue Section 704(b). In general, section 704(b) may be applicable when Partnership capital is negative and Limited Partners are not required to restore negative capital accounts. In such instances the IRS code requires that the General Partner bears a greater portion of the economic loss than that which would be allocated pursuant to the Partnership Agreement and, therefore, the loss must be reallocated.
The Partnership's share of gains or losses arising from the sale or refinancing of properties shall be allocated 99% to the Limited Partners and 1% to the General Partners. The Partnership's share of net proceeds arising from a sale or refinancing shall be distributed first to the Limited Partners in amounts equivalent to a 7% return on their average adjusted capital balances, plus an amount equal to their capital contributions, then to all partners in amounts equal to their respective positive capital account balances. The partnership's share of additional proceeds, after property disposition fees, shall then be allocated to the Limited Partners in an amount equivalent to 5% of their average adjusted capital balances and the remainder, if any, in the ratio of 90% to the Limited Partners and 10% to the General Partners. The Partnership's share of income arising from the sale or refinancing shall be allocated in the same manner as the proceeds are to be distributed, except that the General Partners are to be allocated at least 1% of the income.
On May 5, 1992, the Partnership entered into an agreement to form a joint venture with Realmark Property Investors Limited Partnership VI A (RPILP VI A). The joint venture was formed for the purpose of operating Carriage House of Englewood, formerly Gold Key Village Apartments, owned by the Partnership. The joint venture is further described in Footnote 7.
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -------------------------------------------
a) Use of Estimates -----------------
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
b) Cash ----
For purposes of reporting cash flows, cash includes the following items: cash on hand and cash in checking and money market savings.
c) Cash-Security Deposits ----------------------
Cash-security deposits represents cash on deposit in accordance with the HUD regulatory agreement for the property which has a HUD mortgage.
d) Escrow Deposits ---------------
Escrow deposits represent cash which is restricted for the payment of property taxes or for repairs and replacements in accordance with the mortgage agreement.
e) Mortgage Costs --------------
Mortgage costs incurred in obtaining property mortgage financing have been deferred and are being amortized over the term of the mortgage using the straight-line method.
f) Property and Depreciation -------------------------
Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, and totaled $70,290, $118,072 and $117,489 for the years ended December 31, 1996, 1995 and 1994, respectively. The estimated useful lives of the Partnership's assets range from 5 to 25 years. Expenditures for maintenance and repairs are expensed as incurred; major renewals and betterments are capitalized. The Accelerated Cost Recovery System is used to calculate depreciation expense for tax purposes. See further discussion at Footnote 3.
g) Minority Interest in Consolidated Joint Venture -----------------------------------------------
The minority interest in a consolidated joint venture is stated at the amount of capital contributed by the minority investor adjusted for its share of joint venture losses.
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Con't.): ----------------------------------------------------
h) Rental Income -------------
All rental income is derived from one residential rental property. The outstanding leases with respect to this property are for terms of one year or less. The rental income is recognized as earned according to the terms of the leases.
i) Loss Per Limited Partnership Unit ---------------------------------
The loss per limited partnership unit is based on the weighted average number of limited partnership units outstanding for the year.
j.) Accrued Rent Receivable -----------------------
Due to the nature of accrued rent receivable, all such receivables are fully reserved for at December 31,1996 and 1995.
3. ACQUISITION AND DISPOSITION OF RENTAL PROPERTY: -----------------------------------------------
In November 1981, the Partnership acquired a 144 unit apartment complex (Carriage House of Englewood, formerly Gold Key Village Apartments) located in Englewood, Ohio, for a purchase price of $2,860,754, which included $191,872 in acquisition fees.
In July, 1982, the Partnership acquired a 99 unit apartment complex (Clarewood) located in Lafayette, Louisiana, for a purchase price of $2,428,834, which included $134,992 in acquisition fees.
In July, 1982, the partnership acquired a 155 unit apartment complex (Gallery) located in Lafayette, Louisiana, for a purchase price of $3,546,653, which included $197,987 in acquisition fees.
In October, 1989, the partnership sold Clarewood and Gallery for a combined price of $4,647,516, which generated a total net gain for financial statement purposes of $1,209,194.
In July 1996, the Partnership entered into a plan to dispose of the property, plant and equipment of Carriage House of Englewood with a carrying amount of $1,191,451. Carriage House of Englewood incurred a loss of $299,092 for the year ended December 31, 1996. Management has determined that a sale of the property is in the best interest of the investors. As of December 31, 1996, an agreement, cancelable by the buyer, has been signed with an anticipated sales price of $3,700,000.
In connection with the pending sale, the Partnership has received $220,000 in non-refundable deposits, of which $47,200 is represented by a note receivable from the buyer.
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
3. ACQUISITION AND DISPOSITION OF RENTAL PROPERTY (Con't.): --------------------------------------------------------
Financial Accounting Standards Statement No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of (the "Statement") requires that assets to be disposed of be recorded at the lower of carrying value or fair value, less costs to sell. The Statement also requires that such assets not be depreciated during the disposal period, as the assets will be recovered through sale rather than through operations. In accordance with this Statement, the long-lived assets of the Partnership, classified as held for sale on the balance sheet, are recorded at the carrying amount which is the lower of carrying value or fair value less costs to sell, and have not been depreciated during the disposal period. Depreciation expense, not recorded during the disposal period, for the year ended December 31, 1996 totaled approximately $44,000.
4. RELATED PARTY TRANSACTIONS: ---------------------------
Management fees for the properties are paid or accrued to an affiliate of the General Partners. The management agreement provides for 5% of gross monthly rental receipts of the complex to be paid as fees for administering the operations of the property. These fees totaled $33,678, $37,930 and $36,939 for the years ended December 31, 1996, 1995 and 1994, respectively.
Accounts payable to affiliates, which are payable on demand, amounted to $784,461 and $874,484 at December 31, 1996 and 1995, respectively. The payables represent fees due and advances from the General Partner or an affiliate of the General Partners. Interest is charged on accounts payable-affiliates at an annual rate of 11%. Such amounts totaled $84,692, $83,159 and $72,083 for the years ended December 31, 1996, 1995 and 1994, respectively.
Pursuant to the Partnership Agreement, the Corporate General Partner charges the Partnership for reimbursement of certain costs and expenses incurred by the Corporate General Partner and its affiliates in connection with the administration of the Partnership. These charges were for the Partnership's allocated share of such costs and expenses as payroll, printing, mailing, travel and communication costs related to Partnership accounting, partner communications and property marketing and are included in property operations. Additionally, Partnership accounting and portfolio management fees, investor services fees and brokerage fees are allocated based on total assets, number of partners and number of units, respectively. Such charges totaled $19,312, $13,174 and $19,514 in 1996, 1995 and 1994, respectively.
Computer service charges for the Partnership are paid or accrued to an affiliate of the General Partner. The fee is based upon the number of apartment units and totaled $3,030, $3,030 and $3,024 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Corporate General Partner is allowed to collect property disposition fees upon the sale of acquired properties. This fee is not to exceed the lesser of 9% of the gross proceeds of the offering applicable to the property or 50% of normal rates, subordinated to: (i) the payment to the Limited Partners of a cumulative annual return (not compounded) equal to 7% on their average adjusted capital balances; (ii) the repayment to the Limited Partners of a cumulative amount equal to their capital contributions; and (iii) the payment to all partners of an amount equal to their respective positive capital account balances to the extent such balances exceed the amounts provided for in the preceding clauses (i) and (ii). Inasmuch as these conditions have not been met no amounts have been recorded with regard to the sale of Clarewood and Gallery.
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
5. MORTGAGE PAYABLE: -----------------
Carriage House of Englewood ---------------------------
On May 5, 1992, the partnership's first and second mortgages on Carriage House of Englewood were refinanced with a 9% U.S. Department of Housing and Urban Development (HUD) guaranteed mortgage in the amount of $2,997,800, due June 1, 2027. The mortgage provides for monthly principal and interest payments of $23,503, plus monthly escrow deposits for real estate taxes, insurance and repairs and maintenance totaling $11,346. The balance of the mortgage at December 31, 1996 and 1995 was $2,930,266 and $2,947,711, respectively.
The mortgage is secured by all of the assets of Carriage House of Englewood.
The mortgage is subject to a HUD regulatory agreement which places restrictions on the operations of the Partnership.
As discussed in Note 9 to the Financial Statements, the Partnership currently is not in compliance with certain requirements of the HUD regulatory agreement.
Maturities of the mortgage for each of the next five years and thereafter are as follows:
1997 $ 19,080 1998 20,871 1999 22,829 2000 24,970 2001 27,312 Thereafter 2,815,204 ------------ TOTAL $ 2,930,266 =============
6. FAIR VALUE OF FINANCIAL INSTRUMENTS -----------------------------------
Statement of Financial Accounting Standards No. 107 requires disclosure about fair value of certain financial instruments. The fair values of cash, accounts payable, accrued expenses and deposit liabilities approximate the carrying value due to the short-term nature of these instruments.
The fair value of the mortgage payable, which has a carrying value of $2,930,266 at December 31, 1996, cannot be determined because it is uncertain if a comparable mortgage could be obtained in the current market. See Note 5 for a description of the terms of the mortgage payable.
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
7. MINORITY INTEREST OF RELATED PARTY IN CARRIAGE HOUSE OF ENGLEWOOD JOINT VENTURE:
On May 5, 1992, the Partnership entered into an agreement to form a joint venture with Realmark Property Investors Limited Partnership VI A (RPILP VI A). The joint venture was formed for the purpose of operating Carriage House of Englewood, formerly Gold Key Village Apartments, owned by the Partnership. Under the original terms of the agreement, RPILP VI A contributed $497,911, with the Partnership contributing the property net of the first mortgage. On March 1, 1993, RPILP VI A contributed an additional $125,239 to the joint venture. The amended joint venture agreement provides that any income, loss, gain, cash flow or sale proceeds be allocated 60% to the Partnership and 40% to RPILP VI A. The net loss from the date of inception has been allocated to the minority interest as described above and has been recorded as a reduction of the capital contribution.
A reconciliation of the minority interest share in Carriage House of Englewood Joint Venture is as follows:
1996 1995 --------- ---------
Balance, beginning of year $ 393,817 $ 485,650 Allocated loss (119,637) (91,833) --------- ---------
Balance, end of year $ 274,180 $ 393,817 ========= =========
8. INCOME TAXES: -------------
No provision has been made for income taxes since the income or loss of the Partnership is to be included in the tax returns of the individual partners.
The tax returns of the Partnership are subject to examination by federal and state taxing authorities. Under federal and state income tax laws, regulations and rulings, certain types of transactions, may be accorded varying interpretations and, accordingly, reported Partnership amounts could be changed as a result of any such examination.
The reconciliation of Partners' Deficit for the years ended December 31, 1996, 1995 and 1994, as reported in the balance sheet and as reported for tax return purposes, is as follows:
The reconciliation of net loss for the years ended December 31, 1996, 1995 and 1994, as reported in the statement of operations, and as would be reported for tax return purposes is as follows:
9. GOING CONCERN CONSIDERATIONS:
On May 5, 1992, the Partnership obtained a mortgage guaranteed by the Department of Housing and Urban Development (HUD). The mortgage is subject to a HUD regulatory agreement which places restrictions on the operations of the Partnership. As of December 31, 1996 the partnership was not in compliance with several of these regulations including those restricting commingling of funds.
The consequences of the noncompliance with these restrictions could include HUD-imposed sanctions such as fines or interest charges. Additionally, the violation of the regulatory agreement could be deemed an event of default by the mortgagor, and HUD could possibly take over as holder of the mortgage.
Given the uncertainty surrounding the outcome of the noncompliance, the Partnership's recurring losses from operations, and partners' deficit, substantial doubt exists about the Partnership's ability to continue as a going concern. Management is currently negotiating a sale of the Partnership's assets as described in Footnote 3, and has responded to HUD regarding the aforementioned noncompliance including its intentions to remedy the situation.
* * * * *
SCHEDULE III
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
(1) The aggregate cost for Federal income tax purposes is $2,781,305.
(2) A reconciliation of the carrying amount of land and buildings as of December 31, 1996, 1995 and 1994 follows:
1996 1995 1994 ------------------------------------ Balance at beginning of period $2,772,285 $2,766,285 $2,766,285 Additions 9,020 6,000 -- ---------- ---------- ---------- Balance at end of period $2,781,305 $2,772,285 $2,766,285 ========== ========== ==========
(3) A reconciliation of accumulated depreciation for the years ended December 31, 1996, 1995 and 1994 follows:
1996 1995 1994 ------------------------------------ Balance at beginning of period $1,527,236 $1,409,627 $1,292,137 Additions charged to cost and expenses during the year 69,341 117,609 117,490 ---------- ---------- ---------- Balance at end of year (4) $1,596,577 $1,527,236 $1,409,627 ========== ========== ==========
(4) Balance applies entirely to buildings and improvements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP By: /s/ Joseph M. Jayson 3/28/97 ------------------------------------------- --------------- JOSEPH M. JAYSON, Date Individual General Partner
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.
By: /s/ Joseph M. Jayson 3/28/97 -------------------------------------------- --------------- JOSEPH M. JAYSON, President Date Principal Executive Officer and Director
/s/ Michael J. Colmerauer 3/28/97 -------------------------------------------- --------------- MICHAEL J. COLMERAUER, Date Secretary
Supplemental Information to be Furnished with Reports Filed Pursuant -------------------------------------------------------------------- to Section 15(d) of the Act by Registrants Which Have Not Registered -------------------------------------------------------------------------- Securities Pursuant to Section 12 of the Act. ---------------------------------------------
The Form 10-K is sent to security holders. No other annual report is distributed. No proxy statement, form of proxy or other proxy soliciting material was sent to any of the registrant's security holders with respect to any annual or other meeting or security holders.


ITEM 1. BUSINESS.
Gamma Biologicals, Inc. (which, together with its subsidiaries is herein referred to as the "company" or "Gamma") manufactures reagents and systems used for in-vitro diagnostic testing. The reagents are sold to hospitals, blood centers and medical laboratories where they are used to detect the presence of diagnostically significant substances in biological fluids, primarily human blood. The company also develops test systems, which use certain of the company's reagents and serve to standardize test procedures. See "New Technology" and "Products Under Development - Gamma ReACT/TM/ System".
The company's current products are used in a number of applications, including:
. grouping donor and patient bloods and performing compatibility tests prior to transfusion
. detecting hemolytic disease of the newborn
. identifying antibodies and certain inherited blood group antigens
. screening for certain human diseases
Gamma markets its products to over 3,500 hospitals, blood centers and laboratories in the United States and Canada, and to dealers in approximately 50 countries. Domestic sales are made through the company's direct sales force, as well as through distributors. Internationally, the company sells its products and products manufactured by others through independent dealers.
CURRENT PRODUCTS
Most of the company's sales are derived from products used in tests performed to determine the ABO and Rh groups of hospital patients and blood donors, to detect and identify antibodies, to confirm compatibility between blood donors and patients, and in routine prenatal care. Antibodies are serum components produced in reaction to the introduction of foreign substances into the body through transfusion, pregnancy or other mechanisms. The company's reagent red cell products are used to test patients' blood specimens for antibodies and, if antibodies are present, to determine their identity, thereby enabling suitable donor blood to be selected. The selection of proper donor blood is also aided by testing with the company's line of other blood grouping reagents. Blood grouping reagents are products prepared from serum (the liquid portion) of blood drawn from immunized human donors, from antibodies secreted by monoclonal cell lines (hybridomas), and certain seed extracts (lectins). After an appropriate donor blood has been selected for transfusion to a patient, a direct test of compatibility is commonly performed using patient and donor bloods. The company's antiglobulin reagents (commonly known as "Coombs reagents") are used in all stages of these procedures beyond initial blood grouping. The company's line of serological products is used in screening for certain diseases.
BLOOD BANK PRODUCTS. This group includes blood grouping reagents, Coombs reagents, antibody potentiators, test cell products, quality control systems and certain specialty products.
Blood grouping reagents are used to determine the four major blood groups (A, B, AB and O) and six factors in the Rh blood group system, and include other products utilized to detect blood group factors in the eight other blood group systems.
Coombs reagents are used in blood grouping, antibody detection and identification procedures and in the diagnosis of hemolytic disease of the newborn, as well as autoimmune hemolytic anemia. The company presently markets nine Coombs products in three different specificities.
Antibody potentiators are solutions added to blood testing systems to enhance their sensitivity. Improved sensitivity is also achieved by the use of certain proteolytic enzymes. The company presently markets six antibody potentiators and two enzyme reagents.
Reagent red cell products are used in conjunction with Coombs reagents to detect and identify antibodies during pregnancy and in patient and donor blood serums. The company presently manufactures and sells 20 test cell products processed from human blood.
Reagent Quality Control (RQC(R)) Kit is a product comprising three selected reagents, designed to enable hospital laboratories and blood banks to test the effectiveness of reagents and to provide an organized permanent record of the test results, as required by various regulatory agencies.
Specialty reagents include a screening test for the detection of significant fetal-maternal hemorrhage, a self-evaluation system that is designed both to determine technical proficiency and to provide educational content, a simpler system for competency testing, and six products for the resolution of unusual blood groups or antibody detection problems.
DIAGNOSTIC PRODUCTS. The company currently sells several diagnostic products manufactured by others, which are used to test for typhoid, brucellosis and other human diseases.
GAMMA PRODUCT GROUP TABLE
NEW TECHNOLOGY
In 1989, Gamma began in-house research into a new in-vitro diagnostic testing system utilizing electro-biosensor technology. The immunoelectrode technique detects change in electrical charge as a positive test result in less than five minutes. The advantages of this testing system are speed and accuracy, while obtaining objectivity, as the results are determined by electrical impulse.
Gamma is currently funding biosensor research at the University of Wollongong, Australia, and progress reports appear encouraging towards the development of a reliable test system. Although commercialization is not expected before fiscal 1999, the company is not aware of any competitive efforts to utilize this new technology in the field of immunohematology. The company provided the University with $155,000 for biosensor research in fiscal 1996 and has committed to provide an additional $165,000 in fiscal 1997.
PRODUCTS UNDER DEVELOPMENT
Gamma ReACT/TM/ System. Gamma has developed and applied for a patent on a microcolumn technology to be used for red cell affinity testing. Products based on this technology should help Gamma compete with other microcolumn tests marketed very successfully in Europe since 1988 and recently introduced in the United States. The acronym ReACT has been chosen as a commercial trade name for the product line.
The principle of ReACT is based on the affinity adherence of red cells to an immunologically active matrix. The matrix consists of specially treated agarose beads. Custom designed disposables and dedicated centrifuge equipment have been developed to provide customers with an easy-to-use and inexpensive testing system.
The company's first ReACT products will be used for blood grouping, crossmatching, antibody screening and identification. Gamma plans to apply for FDA approval to market ReACT products in the United States later this year after completion of field testing. Manufacture and sales of test systems are currently expected to commence outside the United States before the end of fiscal 1997.
Gamma-clone(R) (Monoclonal) Reagents. The development of hybridoma technology has led to a ready availability of monoclonal antibodies, which have had a major impact on the design and manufacture of immunodiagnostic reagents. The company has recognized the potential for the application of this new technology to several of its blood bank product lines, and has pursued a program of introducing monoclonal-based products wherever the technology proves to be advantageous.
The company currently markets fourteen FDA-licensed blood grouping reagents manufactured by hybridoma technology. Its five monoclonal Coombs reagents include the first FDA-licensed Anti-IgG. The company owns or has exclusive use of the raw material sources (clones) for nine of the blood grouping reagents and all of the Coombs products; these clones are grown in-house to produce source material for manufacturing the relevant products. A license supplement has recently been approved for an Anti-B reagent made from the secretions of a hybridoma developed in Gamma's facility. Consequently another existing product purchased from an outside source has been replaced by one for which the company is its own source of raw material. Raw materials for the remaining products are currently purchased from a single supplier. Should the supply of these materials from this source be interrupted, the company anticipates that it could locate alternative sources of supply. The company is committed to a program aimed at developing clones for all blood grouping reagents.
Gamma is currently pursuing license applications for additional monoclonal blood grouping reagents. Applications for two Anti-D reagents and an Anti-E reagent based on cell lines of which the company has exclusive use, as well as an Anti-e reagent manufactured from purchased monoclonal antibodies, are still awaiting review and approval by the FDA, having been filed in 1995. Upon approval, the two new Anti-D reagents will replace the existing monoclonal/polyclonal product.
PRODUCTION AND QUALITY CONTROL
The company believes that its reputation in the industry as a source of quality products and services is largely attributable to the expertise of its technical employees and its maintenance of rigid quality control procedures at every step of the manufacturing process.
Raw materials for the FDA-licensed products manufactured and sold by the company are obtained from several sources. The principal sources for the company's blood grouping reagent products are human plasma obtained from FDA- licensed establishments and monoclonal antibodies. Test cell products are manufactured from whole blood drawn from local donors or purchased from licensed blood banks. The company believes that the available sources of supply for all raw materials are adequate for its present and anticipated needs. The company is not dependent on any single source
for any of its raw materials, other than six of its current Gamma-clone(R) products (see above), and for PT-Trays/TM, which are manufactured by another company and marketed exclusively by Gamma.
Once received, raw materials are subjected to a series of manufacturing and quality control steps, which vary according to the product. FDA regulations require samples of each finished lot of all blood grouping and Coombs reagents to be submitted to the Center for Biologics Evaluation and Research for approval of release prior to shipment. The FDA has granted the company exemption from the lot release requirements for Coombs reagents, for one of its Rh reagents, for three of its other monoclonal blood grouping reagents, and also for two of its monoclonal ABO reagents. The remaining blood grouping reagents remain subject to this provision of the regulations. Test cell products, though also licensed, do not require prior FDA approval on a lot-by-lot basis.
The products sold by the company that are not required to be licensed by the FDA (including antibody potentiators, diagnostic and specialty reagents) fall into two categories: those manufactured by the company from raw materials acquired from various sources, and those purchased from outside manufacturers for distribution by the company. All such products are manufactured in accordance with current Good Manufacturing Practices (cGMPs) as promulgated by the FDA. See "Regulation".
The company maintains product liability insurance against bodily injury and property damage in the amount of $10,000,000.
MARKETING AND SERVICES
The company's marketing strategy is to build a broad base of customer loyalty by providing a wide variety of quality products, marketed by a highly qualified sales force and supported by in-house technical assistance. The company believes that responsiveness to customer needs, both in the provision of services and the introduction of new products, is the key to success.
The company sells its products to hospitals, blood banks, the United States armed forces, and university and private research institutions throughout the world. In the United States and Canada, the company is directly represented by 20 full-time salespersons. Most members of the sales force have degrees in medical technology or blood banking experience. Each salesperson makes direct calls on pathologists, chief blood bank technologists and purchasing agents at institutions in defined geographic areas. The company also markets its products domestically through selected distributors, who sell to small hospitals, laboratories and doctors' offices. Internationally, the company is represented by independent dealers.
Management believes that timely delivery of its products to customers is an important element of its marketing and sales strategy. The company maintains an inventory sufficient to allow prompt response to customer needs. The company sells test cell products and its RQC(R) and Tech-Chek Kits on standing orders for shipment every two, three or four weeks. The RiSE/TM/ educational product is shipped quarterly. All contracts for company products may be terminated at any time without penalty by either the customer or the company.
To support its sales force and dealers, the company participates in a number of educational programs, with management and employees serving as speakers or faculty members in numerous domestic and international workshops and conventions. This participation provides visibility for the company and enhances its reputation in the scientific community. The company also conducts in-house training programs for blood bank personnel. In addition, the company maintains a reference laboratory, recognized by the American Association of Blood Banks, which employs five persons (including three persons registered as blood bank specialists by the American Society of Clinical Pathologists) and provides consulting services for hospitals and blood banks with rare or difficult blood testing problems. The reference laboratory often serves as a means of introducing the company and its products to potential customers, generating new products in response to customer needs and providing ongoing quality control of the company's blood bank products. New discoveries made in the course of
investigating problems referred for consultation are regularly reported in scientific literature or at scientific meetings.
Sales to the company's six largest domestic customers (two of which are regional laboratory supply dealers) represented 5.8% of the company's net sales for fiscal 1996 and 8.6% for fiscal 1995.
Approximately 27.6% of the company's net sales in fiscal 1996 were made to foreign customers. In fiscal 1996 the company's export sales were to customers in Japan ($715,000), Italy ($442,000), Spain ($430,000), Australia ($327,000), Saudi Arabia ($292,000), and over 50 other countries worldwide.
REGULATION
The company operates under U.S. Government Establishment License No. 435, granted by the National Institutes of Health in 1971. The terms of the license subject the company to stringent manufacturing and quality control standards, and the license may be suspended or revoked by the FDA for cause at any time. Such revocation would cause the company to cease business. The company's blood grouping and Coombs reagents, as well as its test cell products, must be licensed by the FDA pursuant to the Public Health Service Act and are manufactured in accordance with defined standards.
In addition, the Federal Food, Drug and Cosmetic Act and the Safe Medical Devices Act, together with regulations issued or authorized thereunder, provide for regulation by the FDA of the marketing, manufacture, labeling, packaging and distribution of medical devices, including most of the company's non-licensed products. Among the applicable regulations are requirements that medical device manufacturers register with the FDA, list devices manufactured by them, and file various reports. Regulations covering Good Manufacturing Practices for Medical Devices set forth requirements for, among other things, the company's manufacturing processes and associated record-keeping and maintenance. Certain requirements must be met before initial marketing of medical devices, ranging from a minimum obligation to notify the FDA before commencing marketing of a product substantially equivalent to devices already in commerce, to a maximum obligation to comply with the potentially expensive and time-consuming process of testing necessary to support an application for premarket approval. The FDA also has the authority, which it has so far exercised only to a limited degree, to issue performance standards to be met by most of the types of non-licensed products manufactured by the company. The company anticipates no difficulty in meeting the performance standards for the products as promulgated by the FDA.
None of the company's current or proposed products, except those labeled for forensic use only, can be marketed in the United States without the licenses or registrations required by the FDA. Unscheduled FDA inspections of the company's facilities occur from time to time to determine compliance with applicable FDA regulations. To date, the company believes that it has satisfactorily complied with requirements imposed by the FDA, OSHA, EEOC and other government agencies. The company also believes that the manufacturing and quality control procedures it employs conform to requirements of Good Manufacturing Practices for Medical Devices regulations, and does not anticipate having to make any material additional expenditures as a result of these requirements.
MARKETS AND COMPETITION
Management believes that the world market for blood bank reagent products is approximately $160 million per year, with about 40% of the market being in the United States. There are three other companies that actively compete with the company, two of which are divisions of large, diversified corporations with substantially greater financial resources than those of Gamma. The largest share of the domestic market is held by Ortho Diagnostic Systems, a division of Johnson and Johnson, Inc., which the company believes accounts for about 50% of all domestic sales. Other competitors include Immucor and Organon-Teknika, a division of AKZO.
Competition is based on quality of product, price, the size and talent of sales forces, ability to furnish a range of existing and new products, customer services and continuity of product supply. During the past several years, the industry has experienced aggressive price competition, particularly among manufacturers that target large hospitals and institutions as key customers. In spite of this competitive environment, the company has maintained its worldwide sales and increased its domestic reagent market share. Management believes that this is due to the company's emphasis on product quality, the introduction of new products, specialty products, customer service and training.
RESEARCH AND DEVELOPMENT
The company's strategy for growth includes internal research and development, technology acquisition and worldwide marketing. The research and development program is based upon the allocation of available resources among new product development, process development, product and process improvement, and technical services to manufacturing and marketing.
Any new product developed by the company will require, prior to its domestic sale, licensing or approval to market by the FDA. There can be no assurance that any such product will be so licensed or approved, or that it will gain acceptance in the marketplace.
In fiscal 1996, 1995 and 1994, the company expended $1,349,000, $1,013,000 and $902,000, respectively, for research and development on monoclonal, microcolumn and electro-biosensor technologies. The company engaged in no customer-sponsored research during these periods.
PATENTS AND TRADEMARKS
In May 1994, the company applied for a United States patent covering a new antigen/antibody detection procedure using an affinity adherence technology. See "Products Under Development - Gamma ReACT System/TM/".
The company is funding two international patent applications, submitted by the University of Wollongong, covering certain procedures developed in the course of their electro-biosensor research. In return for this financial support, the company would receive a four-year, royalty-free exclusive worldwide license to manufacture and sell any product based on claims made in these applications.
The company's trademark rights to the mark "Gamma" have been federally registered. The company holds nine different trademark registrations for various uses of "Gamma" and claims trademark rights in respect of other brand names utilized to identify the company's products. The company presently owns a number of federal and state registrations and has an aggressive policy of registering its trademark rights, where such is deemed available. There can be no assurance that any of the company's registrations will be enforceable.
EMPLOYEES
The company has 126 full-time employees, of whom 36 hold advanced technical degrees or certifications in medical technology. Of the total, 42 are sales, marketing and customer-support personnel, 50 are engaged in manufacturing and quality control, and the remainder serve in other capacities. The company has experienced a low turnover rate among its employees and considers its employee relations to be excellent. None of the company's employees are represented by a union.
EXECUTIVE OFFICERS
The executive officers of the company and their respective ages, offices and periods of service as executive officers are set forth below. The officers are elected for one-year terms.
All of the executive officers of the company have held the office indicated or other offices, or have been employed by the company for more than five years. There are no family relationships among any of the directors or executive officers of the company.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The company operates in one business sector and one geographic area.
ITEM 2.

ITEM 2. PROPERTIES.
The principal manufacturing, research, shipping, sales and administrative functions of the company are conducted in a 41,000 square foot building located in northwest Houston on a three-acre tract of land owned by the company. The land and building are subject to a first lien mortgage. Management believes that the facility is both suitable and adequate for current production needs and has no plans for expanding its domestic facilities in fiscal 1997. The company is currently evaluating potential manufacturing sites outside the United States for the production of ReACT test systems, currently scheduled to begin in late fiscal 1997.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
The company is involved in various legal actions that are in various stages of litigation and investigation by the company and its legal counsel. After reviewing all actions pending or threatened involving the company, management believes that while the resolution of any matter may have an impact on the financial results of the period in which the matter is settled, their ultimate resolution will not have any material adverse affect upon the business or consolidated financial position of the company. Since these matters are in various stages of proceedings, future developments could cause management to revise its assessment of these matters.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 1996, no matter was submitted to a vote of security holders of the company.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information contained under "Market for Registrant's Common Equity and Related Shareholder Matters" on page 32 of the company's annual report to shareholders for the year ended March 31, 1996, is incorporated herein by reference. See also Notes 7 and 8 of Notes to Consolidated Financial Statements on page 27 of the company's annual report to shareholders for the year ended March 31, 1996, which is incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
The information contained under "Selected Financial Data" on the inside front cover and page 1 of the company's annual report to shareholders for the year ended March 31, 1996, is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information contained under "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 13 through 18 of the company's annual report to shareholders for the year ended March 31, 1996, is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements of the company and its subsidiaries, included on pages 19 through 29 of the company's annual report to shareholders for the year ended March 31, 1996, are incorporated herein by reference:
Statements of Consolidated Income -- Years ended March 31, 1996, 1995 and
Consolidated Balance Sheets -- March 31, 1996 and 1995
Statements of Changes in Shareholders' Equity -- Years ended March 31, 1996, 1995 and 1994
Statements of Consolidated Cash Flows -- Years ended March 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
The information contained under "Quarterly Financial Data" on page 32 of the company's annual report to shareholders for the year ended March 31, 1996, is incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under "Election of Directors" on pages 3 and 4 of the company's proxy statement dated June 28, 1996, which has been filed with the Securities and Exchange Commission, is incorporated herein by reference. Reference is made to the information set forth under the caption "Executive Officers" on page 9 in Item 1 of this report, which is incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
The information contained under "Executive Officers", "Severance Agreements", and "Split-Dollar Agreements" on pages 4 through 10 (except for the Compensation/Stock Option Committee
Report therein) of the company's proxy statement dated June 28, 1996, which has been filed with the Securities and Exchange Commission, is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under "Common Stock Outstanding and Principal Holders Thereof" on pages 2 and 3 of the company's proxy statement dated June 28, 1996, which has been filed with the Securities and Exchange Commission, is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under "Certain Relationships and Related Transactions" on page 10 of the company's proxy statement dated June 28, 1996, which has been filed with the Securities and Exchange Commission, is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) AND (2) FINANCIAL STATEMENTS AND RELATED SCHEDULES The response to this portion of Item 14 is submitted as a separate section of this report.
(3) EXHIBITS The response to this portion of Item 14 is submitted as a separate section of this report. (b) REPORTS ON FORM 8-K No Report on Form 8-K was filed by the company during the quarter ended March 31, 1996. (c) EXHIBITS See Item 14(a)(3), above. (d) FINANCIAL STATEMENT SCHEDULES Such schedules are not required or are disclosed in the financial statements.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
GAMMA BIOLOGICALS, INC.
By: /s/ DAVID E. HATCHER ---------------------------------------- (DAVID E. HATCHER, CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER)
Dated: June 24, 1996
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.
INDEPENDENT AUDITORS' CONSENT
Gamma Biologicals, Inc.:
We consent to the incorporation by reference in Registration Statement No. 33-44950 on Form S-8 and in Registration Statement No. 333-01147 on Form S-8 of our report dated May 28, 1996, incorporated by reference in the 1996 Annual Report on Form 10-K of Gamma Biologicals, Inc. for the year ended March 31, 1996.
/s/ Deloitte & Touche LLP
Houston, Texas June 24, 1996
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(3)
EXHIBIT INDEX
EXHIBITS
Year Ended March 31, 1996
GAMMA BIOLOGICALS, INC.
HOUSTON, TEXAS
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(3)
GAMMA BIOLOGICALS, INC. AND SUBSIDIARIES
MARCH 31, 1996
EXHIBIT NUMBER - -------
3(a) -- Restated Articles of Incorporation of the Company dated June 20, 1996.
(b) -- Amended and Restated Bylaws of the Company dated April 13, 1990. Incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended March 31, 1990 (the "1990 Form 10-K").
4(a) -- Specimen Common Stock certificate of the Company. Incorporated by reference to Exhibit 4(a) to the 1990 Form 10-K.
(b) -- Shareholder Rights Plan dated as of September 5, 1989. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated September 5, 1989.
10(a) -- Restated and Amended Split-Dollar Agreement dated May 29, 1990 between the Company and David E. Hatcher. Incorporated by reference to Exhibit 10(a) to the 1990 Form 10-K.
(b) -- Restated and Amended Split-Dollar Agreement dated May 29, 1990 between the Company and Betty F. Hatcher. Incorporated by reference to Exhibit 10(b) to the 1990 Form 10-K.
(c) -- Restated and Amended Split-Dollar Agreement dated May 29, 1990 between the Company and Bryan J. Brieden. Incorporated by reference to Exhibit 10(c) to the 1990 Form 10-K.
(d) -- Restated and Amended Split-Dollar Agreement dated May 29, 1990 between the Company and Larry E. Letwin. Incorporated by reference to Exhibit 10(d) to the 1990 Form 10-K.
(e) -- Amendment to Restated and Amended Split-Dollar Agreement dated May 8, 1991 between the Company and David E. Hatcher. Incorporated by reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended March 31, 1991 (the "1991 Form 10-K").
(f) -- Amendment to Restated and Amended Split-Dollar Agreement dated May 8, 1991 between the Company and David E. Hatcher. Incorporated by reference to Exhibit 10(f) to the 1991 Form 10-K.
(g) -- Amendment to Restated and Amended Split-Dollar Agreement dated May 8, 1991 between the Company and Betty F. Hatcher. Incorporated by reference to Exhibit 10(g) to the 1991 Form 10-K.
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(h) -- Amendment to Restated and Amended Split-Dollar Agreement dated May 8, 1991 between the Company and Betty F. Hatcher. Incorporated by reference to Exhibit 10(h) to the 1991 Form 10-K.
(i) -- Amendment to Restated and Amended Split-Dollar Agreement dated May 8, 1991 between the Company and Bryan J. Brieden. Incorporated by reference to Exhibit 10(i) to the 1991 Form 10-K.
(j) -- Amendment to Restated and Amended Split-Dollar Agreement dated May 8, 1991 between the Company and Larry E. Letwin. Incorporated by reference to Exhibit 10(j) to the 1991 Form 10-K.
(k) -- Split-Dollar Agreement dated March 25, 1993 between the Company and John J. Moulds. Incorporated by reference to Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended March 31, 1993 (the "1993 Form 10-K").
(l) -- Split-Dollar Agreement dated March 25, 1993 between the Company and Margaret J. O'Bannion. Incorporated by reference to Exhibit 10(l) to the 1993 Form 10-K.
(m) -- Split-Dollar Agreement dated March 25, 1993 between the Company and Jimmie L. Turner. Incorporated by reference to Exhibit 10(m) to the 1993 Form 10-K.
(n) -- Split-Dollar Agreement dated March 25, 1993 between the Company and Jimmie L. Turner. Incorporated by reference to Exhibit 10(n) to the 1993 Form 10-K.
(o) -- Split-Dollar Agreement dated May 5, 1995 between the Company and Gary L. Parrish.
(p) -- Incentive Stock Option Plan of the Company. Incorporated by reference to the Company's Proxy Statement dated June 25, 1987, Exhibit A.
(q) -- 1991 Employee Stock Option Plan of the Company. Incorporated by reference to Exhibit 28.2 to the Company's Registration Statement on Form S-8 (File No. 33-44950) dated January 6, 1992.
(r) -- 1991 Outside Director Stock Option Plan of the Company. Incorporated by reference to Exhibit 28.3 to the Company's Registration Statement on Form S-8 (File No. 33-44950) dated January 6, 1992.
(s) -- 1995 Employee Stock Option Plan of the Company. Incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 333-01147) dated February 21, 1996.
(t) -- 401(k) Retirement Savings Plan of the Company adopted July 1, 1992. Incorporated by reference to Exhibit 10(r) to the 1993 Form 10-K.
EXHIBIT NUMBER - -------
(u) -- Patent License Agreement effective November 30, 1990 between the Company and the Board of Regents of the University of Texas System. Incorporated by reference to Exhibit 10(s) to the 1991 Form 10-K.
(v) -- Term and Revolving Line of Credit Loan Agreement dated August 17, 1990 between Sterling Bank and the Company. Incorporated by reference to Exhibit 10(v) to the 1991 Form 10-K.
(w) -- Promissory Note dated November 2, 1990 payable to the order of Sterling Bank by the Company. Incorporated by reference to Exhibit 10(w) to the 1991 Form 10-K.
(x) -- Employment Contract dated January 29, 1976 between the Company and John Case. Incorporated by reference to Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the year ended March 31, 1986.
(y) -- Amended and Restated Severance Agreement dated February 19, 1996 between Betty F. Hatcher and the Company.
(z) -- Amended and Restated Severance Agreement dated February 19, 1996 between John J. Moulds and the Company.
(aa) -- Amended and Restated Severance Agreement dated February 19, 1996 between David E. Hatcher and the Company.
(bb) -- Amended and Restated Severance Agreement dated February 19, 1996 between Margaret J. O'Bannion and the Company.
(cc) -- Amended and Restated Severance Agreement dated February 19, 1996 between Jimmie L. Turner and the Company.
(dd) -- Severance Agreement dated December 19, 1995 between Gary L. Parrish and the Company.
(ee) -- Listing Agreement dated May 14, 1990 between the Company and the American Stock Exchange. Incorporated by reference to Exhibit 10(mm) to the 1990 Form 10-K.
(ff) -- Agreement Concerning Issuance of Rights. Incorporated by reference to Exhibit 10(nn) to the 1990 Form 10-K.
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11 -- Incorporated by reference to the Company's Statements of Consolidated Income for the years ended March 31, 1996, 1995 and 1994 on page 19 of the Company's Annual Report to Shareholders for the year ended March 31, 1996 and to Note 1 of Notes to Consolidated Financial Statements on pages 23 and 24 of the Company's Annual Report to Shareholders for the year ended March 31, 1996.
13 -- The Company's Annual Report to Shareholders for the year ended March 31, 1996.
21 -- Subsidiaries of the Company.
27 -- Financial Data Schedule.