-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, nG+Id4ZQ6+N4XIGkwQYG/t0xXd9GMHTg7uIqqba9KygAbeuNXsNeKH+qg6o1xiRI ObUbH+vKuqfA86NzUSHo1A== 0000950124-95-000487.txt : 19950301 0000950124-95-000487.hdr.sgml : 19950301 ACCESSION NUMBER: 0000950124-95-000487 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19950224 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: GELMAN SCIENCES INC CENTRAL INDEX KEY: 0000310252 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY APPARATUS & FURNITURE [3821] IRS NUMBER: 381614806 STATE OF INCORPORATION: MI FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-88808 FILM NUMBER: 95514978 BUSINESS ADDRESS: STREET 1: 600 SOUTH WAGNER RD CITY: ANN ARBOR STATE: MI ZIP: 48103-9019 BUSINESS PHONE: 3136650651 MAIL ADDRESS: STREET 1: 600 S WAGNER RD STREET 2: 600 S WAGNER RD CITY: ANN ARBOR STATE: MI ZIP: 48103-9019 FORMER COMPANY: FORMER CONFORMED NAME: GELMAN INSTRUMENT CO DATE OF NAME CHANGE: 19600201 S-2/A 1 S-2/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1995 Registration No. 33-88808 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ GELMAN SCIENCES INC. (Exact name of Registrant as specified in its charter) MICHIGAN (State or other jurisdiction of incorporation or organization) 38-1614806 (I.R.S. Employer Identification No.) 600 SOUTH WAGNER ROAD ANN ARBOR, MICHIGAN 48103-9019 (313) 665-0651 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------------ JAMES J. FAHRNER, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER GELMAN SCIENCES INC. 600 SOUTH WAGNER ROAD ANN ARBOR, MICHIGAN 48103-9019 (313) 665-0651 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: STANLEY E. EVERETT BROUSE & MCDOWELL 500 FIRST NATIONAL TOWER AKRON, OHIO 44308 (216) 535-5711 CHRISTOPHER B. NOYES GODFREY & KAHN, S.C. 780 NORTH WATER STREET MILWAUKEE, WISCONSIN 53202 (414) 273-3500 ------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If the Registrant elects to deliver its latest annual report to security holders, or a compete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 GELMAN SCIENCES INC. CROSS REFERENCE SHEET
FORM S-2 ITEM CAPTION OR LOCATION IN PROSPECTUS - --------------------------------------------- --------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................... Facing Page of Registration Statement; Cross- Reference Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front Cover Page of Prospectus; Available Information; Incorporation of Certain Documents by Reference; Table of Contents; Outside Back Cover Page of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges....... Summary; Investment Considerations 4. Use of Proceeds.......................... Use of Proceeds 5. Determination of Offering Price.......... Not Applicable 6. Dilution................................. Not Applicable 7. Selling Security Holders................. Not Applicable 8. Plan of Distribution..................... Underwriting 9. Description of Securities to be Registered............................... Description of Capital Stock 10. Interests of Named Experts and Counsel... Not Applicable 11. Information with Respect to the Registrant............................... Business; Index to Financial Statements; Price Range of Common Stock and Dividend Policy; Selected Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations 12. Incorporation of Certain Information by Reference................................ Incorporation of Certain Documents by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED FEBRUARY 23, 1995 PROSPECTUS 1,000,000 SHARES [GELMAN LOGO] COMMON STOCK All of the shares of Common Stock offered hereby are being sold by Gelman Sciences Inc. (the "Company"). The Common Stock of the Company is listed on the American Stock Exchange under the symbol "GSC." On February 23, 1995, the last reported sale price of the Common Stock was $13.625 per share. See "Price Range of Common Stock and Dividend Policy." ------------------------- SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) THE COMPANY(2) - ------------------------------------------------------------------------------------------------ Per Share....................................... $ $ $ - ------------------------------------------------------------------------------------------------ Total(3)........................................ $ $ $ - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $210,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to an additional 150,000 shares of Common Stock solely to cover over-allotments, if any, on the same terms and conditions as set forth above. If the option is exercised in full, the total Price to Public, total Underwriting Discount and total Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------- The shares of Common Stock are offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to various conditions, including their right to reject orders in whole or in part. It is expected that the shares of Common Stock will be ready for delivery on or about March , 1995. ------------------------- CLEARY GULL REILAND & MCDEVITT INC. MCDONALD & COMPANY Securities, Inc. RONEY & CO. The date of this Prospectus is March , 1995 4 LABORATORY PRODUCTS [Three photographs of the Company's The Company's laboratory products are products manufactured for the utilizedin the biotechnology biotechnology and pharmaceutical and pharmaceutical markets for new markets.] drug and product development, sample preparation and testing, fluid sterilization, environmental testing and academic research.
MEDICAL DEVICES [Two photographs of the Company's Medical devices are used products used in healthcare in healthcare applications applications.] such as the diagnosis and treatment of disease, delivery of intravenous solutions to patients and hemodialysis treatment.
------------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its Regional Offices located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511; and Suite 1300, 7 World Trade Center, New York, New York 10007, and copies of such materials can be obtained from the Public Reference Section of the Commission, at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy statements and other information can also be inspected at the offices of the American Stock Exchange, 86 Trinity Place, New York, New York 10006. This Prospectus constitutes a part of a registration statement filed by the Company with the Commission under the Securities Act of 1933, as amended. This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Company and the securities offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and in such instance reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. ------------------------------ INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are incorporated by reference in this Prospectus: (1) The Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1994; and (2) The Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended October 31, 1994 and January 31, 1995. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of any document incorporated by reference in this Prospectus (other than exhibits unless such exhibits are expressly incorporated by reference in such documents). Requests should be directed to Shareholder Relations, Gelman Sciences Inc., 600 South Wagner Road, Ann Arbor, Michigan 48103-9019; telephone (313) 665-0651. 3 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, information in this Prospectus relating to share data reflects two 3-for-2 stock splits effective December 28, 1993 and August 12, 1994 and assumes that the Underwriters' over-allotment option is not exercised. As reflected herein, the Company has adopted a convention of referring to a fiscal year by the year in which the fiscal year ends. For example, the fiscal year ended July 31, 1994 is referred to herein as "fiscal 1994." THE COMPANY The Company designs, manufactures and markets a comprehensive line of specialty microfiltration products for the separation, purification and sterilization of liquids and gases. The Company's core technologies are the manufacturing of microporous membranes which serve as a barrier, filter or separator of microscopic particles and the packaging and sealing of these membranes into microfiltration products. The Company's products include syringe, capsule and cartridge filters, microporous membranes and other microfiltration products. Microfiltration products with healthcare applications account for over 60% of the Company's sales. These products are sold to biotechnology, pharmaceutical and healthcare companies for use in the research, development and manufacturing of new drugs and vaccines and their administration to patients. The Company believes that it offers a greater variety of membranes and microfiltration products in its markets than any other manufacturer and that it has built significant brand recognition, particularly in scientific and industrial laboratories. Nearly all of the Company's microfiltration products are disposable, and many are used in high volume applications requiring regular replacement. The Company's products are marketed worldwide for scientific and industrial applications in the biotechnology/pharmaceutical, medical/healthcare, high technology manufacturing and environmental markets. The Company's product lines include: - Laboratory products are utilized in the biotechnology and pharmaceutical markets for new drug and product development, sample preparation and testing, fluid sterilization, environmental testing and academic research. - Process filtration products are used in high technology manufacturing applications such as sterilization of pharmaceutical products, ultrapurification of water for the manufacture of semiconductor chips and the production of ultrapure chemicals. - Medical devices are used in healthcare applications such as the diagnosis and treatment of disease, delivery of intravenous solutions to patients and hemodialysis treatment. - Membranes are sold primarily to medical products manufacturers who incorporate them into products such as medical devices and diagnostic kits for early detection of pregnancy and monitoring levels of cholesterol and glucose. Over the last several years, the Company resolved environmental lawsuits relating to groundwater contamination at its Ann Arbor, Michigan manufacturing facility, divested all non-core product lines and strengthened senior management. As a result of these actions, the Company has been able to focus on those microfiltration products which provide the Company a competitive advantage and brand name recognition. The Company has developed growth and operating strategies which focus its sales, marketing and manufacturing efforts on these products. These strategies have accelerated sales growth and improved profitability in the Company's operations. Year over year sales growth of the Company's core products increased from 5% in fiscal 1990 to 12% in fiscal 1994. The Company's operating earnings increased from $427,000 in fiscal 1990 to $9.2 million in fiscal 1994. 4 7 The Company believes that the worldwide demand for microfiltration products in its markets is approximately $1.4 billion and is growing as a result of a broadening base for filter applications, increasing concern for consumer safety, a trend toward finer and more economical filtration, more stringent governmental regulations and intensive research efforts to find cures for contagious, genetic and other diseases. Management's strategy is to focus on geographic areas and product applications in which microfiltration needs are expected to exceed overall market growth. This growth strategy is being implemented by (a) focusing on the Company's microfiltration products with competitive advantages and brand name recognition; (b) strengthening the Company's international management team and distributor network in order to build its presence in the growing international marketplace; (c) marketing to large multinational companies the benefits of purchasing their worldwide filtration requirements from a single supplier; (d) accelerating new product development and introduction; and (e) pursuing new market opportunities for the Company's microfiltration products. In addition to sales growth, management has been implementing a strategy to increase profitability by (i) reducing product scrap and waste; (ii) increasing automation to reduce labor content; (iii) consolidating suppliers to improve the quality and reduce the cost of purchased materials; (iv) targeting sales efforts on high margin microfiltration products and membranes; and (v) increasing capacity utilization. The Company is a Michigan corporation with its executive offices at 600 South Wagner Road, Ann Arbor, Michigan 48103-9019; telephone (313) 665-0651. THE OFFERING Common Stock Offered........................ 1,000,000 shares Common Stock to be Outstanding after the Offering.................................. 7,218,969 shares(1) Use of Proceeds............................. Repayment of certain indebtedness American Stock Exchange Symbol.............. GSC
- ------------------------- (1) Does not include 782,296 shares of Common Stock issuable upon the exercise of outstanding stock options and warrants at January 31, 1995. See Note F to the Consolidated Financial Statements. 5 8 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JANUARY 31, YEAR ENDED JULY 31, (UNAUDITED) ----------------------------------------------------- ------------------ 1990 1991 1992 1993 1994 1994 1995 ------- ------- ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA Net sales................ $73,294 $76,516 $81,460 $86,209 $94,963 $45,576 $48,185 Gross profit............. 33,848 35,726 38,499 42,545 47,710 22,546 24,602 Pollution-related expenses.............. 223 806 4,988(1) 543 -- -- -- Operating earnings....... 427 3,189 1,519 6,738 9,226 3,999 4,780 Interest expense......... 2,823 2,851 2,590 2,006 1,689 878 882 Net earnings (loss) before extraordinary items................. (1,955) 88 (859) 2,702 4,937 1,992 2,487 Net earnings (loss)...... (1,955) 88 (1,211)(2) 2,702 4,754(3) 1,992 2,487 PER SHARE DATA Net earnings (loss) before extraordinary items................. $ (.37) $ .02 $ (.15) $ .47 $ .78 $ .32 $ .38 Net earnings (loss)...... (.37) .02 (.21)(2) .47 .75(3) .32 .38 Weighted average shares outstanding(4)........ 5,254 5,575 5,662 5,751 6,308 6,183 6,597 OTHER DATA Capital expenditures..... $ 9,657 $ 4,491 $ 4,027 $ 5,860 $ 6,682 $ 3,446 $ 3,207 Depreciation and amortization.......... 4,067 4,186 4,219 4,452 4,396 2,251 2,092
JANUARY 31, 1995 (UNAUDITED) ------------------------- ACTUAL AS ADJUSTED(5) ------- -------------- BALANCE SHEET DATA Working capital..................................................... $23,862 $ 27,362 Total assets........................................................ 74,902 74,902 Total debt.......................................................... 26,527 13,930 Stockholders' equity................................................ 33,615 46,212
- ------------------------- (1) Includes a $4.0 million charge for settlement of environmental lawsuits and costs of a remediation plan initiated in fiscal 1992 as part of such settlement. See Note G to the Consolidated Financial Statements. (2) Includes an extraordinary charge of $352,000 or $.06 per share (net of tax benefit) for settlement of product liability litigation. See Note K to the Consolidated Financial Statements. (3) Includes an extraordinary charge of $183,000 or $.03 per share (net of tax benefit) for deferred finance charges, redemption premium and fees relating to the redemption of industrial development revenue bonds issued by the Company in 1989. See Notes B and K to the Consolidated Financial Statements. (4) The number of weighted average shares outstanding includes common stock equivalents (stock options and warrants) outstanding during the fiscal year. (5) Adjusted to reflect the sale by the Company of the 1,000,000 shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 6 9 INVESTMENT CONSIDERATIONS Prospective investors should carefully consider the investment considerations set forth below, as well as other information included elsewhere herein or incorporated herein by reference, prior to purchasing shares of the Common Stock offered hereby. LOSS OF KEY DISTRIBUTORS The Company's sales to three laboratory products distributors were approximately $22 million or 23% of total sales in fiscal 1994. These distributors resell the Company's products and other laboratory products to end-user customers. The loss of any one of these distributors could have an adverse effect on the Company's sales and results of operations. Management believes the loss of any one of these distributors is unlikely due to the Company's long-term relationship with these distributors and the investments made by these distributors in inventory, promotional programs and training of their sales forces. See "Business -- Sales and Marketing" and "-- Customers." ADEQUACY OF RESERVE FOR ENVIRONMENTAL LIABILITIES The Company is performing a remediation plan pursuant to a consent decree dated October 26, 1992 with the State of Michigan relating to groundwater contamination at its Ann Arbor manufacturing facility. The remediation plan requires the Company to treat the groundwater to the extent necessary to reduce the contaminants to a defined level. Total costs to the Company of pollution-related activities will be dependent upon the efficacy and duration of the remediation plan, obtaining a cost-free repository for treated groundwater and settlement of private environmental lawsuits. As of January 31, 1995, the Company had accrued $1.1 million to cover the future costs and expenses of the remediation plan and settlement of private environmental lawsuits. The Company believes that the reserve is adequate to cover all such future costs and expenses; however, there can be no assurance that future events will not have an effect on the required amount of the reserve. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Environmental Matters," and Note G to the Consolidated Financial Statements. COMMON STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS; AVAILABILITY OF PREFERRED STOCK Upon completion of the Offering, directors and executive officers of the Company will beneficially own approximately 21% of the Common Stock, including 17% owned by Charles Gelman, Chairman, Chief Executive Officer and a director of the Company. Accordingly, Mr. Gelman, if he acts alone or together with other directors and executive officers, would have the ability to significantly influence certain corporate transactions requiring shareholder approval. Among other provisions, the Company's Restated Articles of Incorporation authorize the Board of Directors to issue from time to time, in one or more designated series, shares of Preferred Stock with such voting, dividend, redemption, conversion and exchange provisions as the Board of Directors determines. Since the issuance of shares of Preferred Stock could be made convertible into shares of Common Stock, their issuance could dilute the voting power of holders of Common Stock and could discourage certain takeover attempts which might be viewed by some shareholders of the Company to be in their best interests. See "Description of Capital Stock." USE OF PROCEEDS Based on an assumed public offering price of $13.625 per share, the net proceeds to the Company from the Offering are estimated to be $12,597,500. The Company intends to apply the net proceeds to repay a term note payable to NBD Bank, N.A. and to reduce outstanding indebtedness under the Company's Credit Agreement with NBD Bank, N.A. and Comerica Bank (the "Credit Agreement"). The term note bears interest at the 90-day London Interbank Offered Rate plus 1.375% per annum (7.95% at February 23, 1995), and the outstanding indebtedness under the Credit Agreement bears interest at a variable rate (7.61% at February 23, 1995). The term note is due and payable in full on December 31, 1995 and the Credit Agreement expires on December 31, 1996. See "Capitalization" and Note B to the Consolidated Financial Statements. 7 10 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock is listed and traded on the American Stock Exchange under the symbol "GSC." The following table sets forth, for the periods indicated, the high and low sale prices of the Common Stock as reported on the American Stock Exchange:
FISCAL QUARTER ENDED HIGH LOW ----------------------------------------------------- ---- ---- FISCAL 1993: October 31......................................... $ 4 1/8 $ 3 3/8 January 31......................................... $ 5 7/8 $ 3 7/8 April 30........................................... $ 6 5/8 $ 5 3/8 July 31............................................ $ 7 3/4 $ 5 3/4 FISCAL 1994: October 31......................................... $ 8 3/8 $ 7 January 31......................................... $11 1/4 $ 7 3/8 April 30........................................... $12 1/2 $10 July 31............................................ $14 $10 1/8 FISCAL 1995: October 31......................................... $15 1/4 $12 1/2 January 31......................................... $15 7/8 $11 5/8 April 30 (through February 23, 1995)............... $13 5/8 $12
The last sale price of the Common Stock as reported on the American Stock Exchange on February 23, 1995 was $13 5/8. At February 23, 1995, there were approximately 1,200 beneficial holders of the Common Stock. The Company has never paid a cash dividend and intends to retain all earnings for investment in and growth of the Company's business. The payment of future dividends, if any, will be determined by the Board of Directors in light of existing conditions, including the Company's earnings, financial condition and requirements, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board of Directors. Financial covenants and other restrictions in the Credit Agreement limit the payment of cash dividends on the Common Stock. 8 11 CAPITALIZATION The following table sets forth the unaudited consolidated short-term debt and capitalization of the Company as of January 31, 1995 and as adjusted to give effect to the estimated net proceeds obtained upon the sale of the shares of Common Stock offered hereby and the application of the net proceeds to reduce indebtedness. This table should be read in conjunction with the Consolidated Financial Statements and the related notes thereto.
JANUARY 31, 1995 (UNAUDITED) ---------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Short-term debt, including current portion of long-term debt............ $ 5,788 $ 2,288 ======= ========= Long-term debt, less current portion.................................... $20,739 $11,642 ------- --------- Stockholders' equity: Preferred stock, par value $1.00 per share, 500,000 shares authorized, none outstanding................................................... -- -- Common stock, par value $.10 per share, 15,000,000 shares authorized, 6,218,969 shares issued and outstanding; 7,218,969 as adjusted(1)........................................................ 622 722 Additional capital.................................................... 14,670 27,167 Retained earnings..................................................... 19,579 19,579 Foreign currency translation adjustments.............................. (806) (806) Less loan to Employee Stock Ownership Plan............................ (450) (450) ------- --------- Total stockholders' equity......................................... 33,615 46,212 ------- --------- Total capitalization............................................. $54,354 $57,854 ======= =========
- ------------------------- (1) Does not include 782,296 shares of Common Stock issuable upon the exercise of outstanding stock options and warrants at January 31, 1995. See Note F to the Consolidated Financial Statements. 9 12 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data shown below for, and as of the end of, each of the five years in the five-year period ended July 31, 1994 has been derived from the Consolidated Financial Statements of the Company. The Consolidated Financial Statements of the Company as of July 31, 1993 and 1994 and for the years ended July 31, 1992, 1993 and 1994, together with the related Report of Independent Auditors by Coopers & Lybrand, L.L.P., are included elsewhere herein. The Consolidated Financial Statements of the Company for the years ended July 31, 1990 and 1991 were audited by Coopers & Lybrand, L.L.P., whose report thereon dated September 29, 1992 except for Notes B and H as to which the date was October 26, 1992, included an explanatory paragraph indicating that the ultimate costs of the environmental remediation program agreed to by the Company could exceed the amount estimated and accrued. The selected consolidated financial data shown below for the six months ended January 31, 1994 and 1995, are derived from unaudited consolidated financial statements of the Company which, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to fairly present such information in accordance with generally accepted accounting principles for the unaudited interim periods. The following data should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
SIX MONTHS ENDED JANUARY 31, YEAR ENDED JULY 31, (UNAUDITED) ----------------------------------------------- ----------------- 1990 1991 1992 1993 1994 1994 1995 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA Net sales............................................. $73,294 $76,516 $81,460 $86,209 $94,963 $45,576 $48,185 Cost of products sold............................... 39,446 40,790 42,961 43,664 47,253 23,030 23,583 ------- ------- ------- ------- ------- ------- ------- Gross profit.......................................... 33,848 35,726 38,499 42,545 47,710 22,546 24,602 Selling and administrative expenses................. 29,018 28,815 29,232 31,044 33,785 16,299 17,320 Research and development expenses .................. 4,606 3,733 3,242 4,139 4,877 2,326 2,624 Pollution-related expenses.......................... 223 806 4,988(1) 543 -- -- -- Other expense (income) -- net....................... (426) (817) (482) 81 (178) (78) (122) ------- ------- ------- ------- ------- ------- ------- Operating earnings.................................... 427 3,189 1,519 6,738 9,226 3,999 4,780 Interest expense...................................... 2,823 2,851 2,590 2,006 1,689 878 882 ------- ------- ------- ------- ------- ------- ------- Earnings (loss) before income taxes and extraordinary items............................................... (2,396) 338 (1,071) 4,732 7,537 3,121 3,898 Income taxes (credit)................................. (441) 250 (212) 2,030 2,600 1,129 1,411 ------- ------- ------- ------- ------- ------- ------- Net earnings (loss) before extraordinary items........ (1,955) 88 (859) 2,702 4,937 1,992 2,487 Extraordinary items(2)................................ -- -- (352) -- (183) -- -- ------- ------- ------- ------- ------- ------- ------- Net earnings (loss)................................... $(1,955) $ 88 $(1,211) $ 2,702 $ 4,754 $ 1,992 $ 2,487 ======= ======= ======= ======= ======= ======= ======= PER SHARE DATA Primary earnings (loss) before extraordinary items(3)............................................ $ (.37) $ .02 $ (.15) $ .47 $ .78 $ .32 $ .38 Extraordinary items(2)................................ -- -- (.06) -- (.03) -- -- ------- ------- ------- ------- ------- ------- ------- Primary earnings (loss)(3)............................ $ (.37) $ .02 $ (.21) $ .47 $ .75 $ .32 $ .38 ======= ======= ======= ======= ======= ======= ======= Primary weighted average common shares outstanding(4)...................................... 5,254 5,575 5,662 5,751 6,308 6,183 6,597
JANUARY 31, JULY 31, (UNAUDITED) ----------------------------------------------- ----------------- 1990 1991 1992 1993 1994 1994 1995 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA Cash.................................................. $ 205 $ 811 $ 867 $ 1,142 $ 1,525 $ 883 $ 1,906 Accounts receivable -- net............................ 15,774 16,348 16,529 17,088 20,859 18,845 21,680 Inventories........................................... 14,566 13,827 13,331 12,986 13,990 14,139 14,183 Working capital....................................... 21,418 21,943 8,211 19,133 23,450 21,073 23,862 Total assets.......................................... 62,968 62,903 61,530 63,495 71,687 67,941 74,902 Long-term debt including current portion.............. 30,946 30,415 25,624 23,854 23,649 25,437 24,809 Total liabilities..................................... 43,068 42,759 41,879 41,239 41,252 43,119 41,287 Stockholders' equity.................................. 19,900 20,144 19,651 22,256 30,435 24,822 33,615
- ------------------------- (1) Includes a $4.0 million charge for settlement of environmental lawsuits and costs of a remediation plan initiated in fiscal 1992 as part of such settlement. See Note G to the Consolidated Financial Statements. (2) The amount for fiscal 1994 is a charge (net of tax benefit) for deferred finance charges, redemption premium and fees relating to the redemption of industrial development revenue bonds issued by the Company in 1989, and the amount for fiscal 1992 is a charge (net of tax benefit) for settlement of product liability litigation. See Notes B and K to the Consolidated Financial Statements. (3) Fully diluted earnings per share for fiscal 1993 were $.45 based on the weighted average number of common and common equivalent shares outstanding of 5,952,710. The computation for fully diluted earnings per share was equal to primary earnings per share for fiscal 1990, 1991, 1992 and 1994 and the six months ended January 31, 1994 and 1995. (4) Includes common stock equivalents (stock options and warrants) outstanding during the fiscal year. 10 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Over the last several years, the Company resolved environmental lawsuits relating to groundwater contamination at its Ann Arbor manufacturing facility, divested all non-core product lines and strengthened its senior management team. As a result of these actions, the Company has been able to focus on those microfiltration products where the Company has a competitive advantage and brand name recognition. The Company, which strives to be the highest quality, lowest cost producer of microfiltration products, has developed growth and operating strategies which focus its sales, marketing and manufacturing efforts on these products. Year over year sales growth of the Company's core products increased from 5% in fiscal 1990 to 12% in fiscal 1994. The Company's operating earnings increased from $427,000 in fiscal 1990 to $9.2 million in fiscal 1994. The Company's growth and operating strategies include: - Concentrating the Company's global sales and marketing efforts on the biotechnology/ pharmaceutical and medical/healthcare markets where management believes that the Company has the greatest opportunity for profitability and growth. In fiscal 1994, over 60% of the Company's sales were to these markets, marking a shift from the Company's past industrial focus. The Company has strengthened its global sales and marketing management in the United States, Japan, France and Germany, the Company's four largest markets. - Utilizing continuous improvement programs and increased automation to reduce product scrap and waste and the labor content of products. In fiscal 1992, the Company completed the construction of its state-of-the-art membrane manufacturing facility in Pensacola, Florida. This facility produces membranes more efficiently and at lower cost than previously in its Ann Arbor facility. In fiscal 1994, the Company reengineered its plant lay-out in Ann Arbor thereby improving manufacturing efficiencies. During the period from fiscal 1990 to fiscal 1994, gross profit as a percentage of net sales improved from 46.2% to 50.2%. - Focusing on controlling operating expenses. From fiscal 1990 to fiscal 1994, selling and administrative expenses as a percentage of net sales decreased from 39.6% to 35.6% through a combination of cost controls and increased sales volume. RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of net sales for the periods indicated.
SIX MONTHS ENDED YEAR ENDED JULY 31, JANUARY 31, --------------------------- ---------------- 1992 1993 1994 1994 1995 ----- ----- ----- ----- ----- Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of products sold...................... 52.7 50.6 49.8 50.5 48.9 ----- ----- ----- ----- ----- Gross profit................................. 47.3 49.4 50.2 49.5 51.1 Selling and administrative expenses........ 35.9 36.0 35.6 35.8 35.9 Research and development expenses.......... 4.0 4.8 5.1 5.1 5.5 Pollution-related expenses................. 6.1 0.7 -- -- -- Other expense (income) -- net.............. (0.6) 0.1 (0.2) (0.2) (0.2) ----- ----- ----- ----- ----- Operating earnings........................... 1.9 7.8 9.7 8.8 9.9 Interest expense........................... 3.2 2.3 1.8 1.9 1.8 Income taxes (credit)...................... (0.3) 2.4 2.7 2.5 2.9 ----- ----- ----- ----- ----- Net earnings (loss) before extraordinary items...................................... (1.0) 3.1 5.2 4.4 5.2 Extraordinary items.......................... (0.4) -- (0.2) -- -- ----- ----- ----- ----- ----- Net earnings (loss).......................... (1.4)% 3.1% 5.0% 4.4% 5.2% ===== ===== ===== ===== =====
11 14 Comparison of Six Months ended January 31, 1995 and 1994 Net sales for the six months ended January 31, 1995 increased $2.6 million or 5.7% to $48.2 million as compared to net sales of $45.6 million for the six months ended January 31, 1994. Net sales for the six months ended January 31, 1994 included (a) non-recurring sales of $3.0 million related to the Company's Australian non-core product lines that have been divested and (b) a special shipment of $800,000 of roll stock membrane to a single customer. This customer has placed its annual order this year; however, the shipment dates are spread over the next twelve months. Sales in the first half of fiscal 1995 were favorably affected by the weakened U.S. dollar, which increased reported sales by $798,000. The Company's sales growth, adjusted for these items, was 13.4%. Sales to customers in North, Central and South America increased 10.8% over the same period of the prior fiscal year primarily due to a 31.6% increase in sales of medical devices. Sales to customers in Europe increased 17.0% mainly due to increases in sales of process filtration products in Italy and France. Sales to customers in the Asia/Pacific region declined 28.0% as a result of the divestiture of the Australian non-core product lines. Without the effect of these sales, Asia/Pacific sales would have increased 22.5%, primarily as a result of increases in sales of process filtration products in Japan and Korea. Worldwide sales of laboratory products, medical devices and process filtration products increased 11.1%, 23.6% and 19.7%, respectively. Worldwide sales of microporous membranes decreased 8.2% as a result of the special shipment to a single customer in the first half of fiscal 1994. Without the effect of this shipment, sales of microporous membranes would have increased 14.7%. Gross profit increased $2.1 million or 9.1% to $24.6 million in the six months ended January 31, 1995, compared to $22.5 million in the six months ended January 31, 1994. As a percentage of net sales, gross profit increased to 51.1% from 49.5%. The improvement in gross profit margin is primarily attributable to the divesture of the lower margin non-core product lines and improved operating efficiencies, which was partially offset by a less favorable product mix due to lower membrane sales as a percentage of total net sales. Selling and administrative expenses increased $1.0 million or 6.3% to $17.3 million in the six months ended January 31, 1995 compared to $16.3 million in the six months ended January 31, 1994. The increase in selling and administrative expenses was primarily due to efforts to implement the Company's growth strategy, particularly in the international markets. Research and development expenses increased to $2.6 million in the six months ended January 31, 1995 as compared to $2.3 million in the six months ended January 31, 1994, or 12.8%. As a percentage of net sales, these expenses were 5.5% compared to 5.1%. The higher research and development spending is a result of an increased effort to develop and modify products to meet customer requirements. The effective tax rate for each of the six months ended January 31, 1995 and 1994 was 36.2%. Net earnings increased $495,000 or 24.8% to $2.5 million or $.38 per share for the six months ended January 31, 1995 compared to $2.0 million or $.32 per share for the six months ended January 31, 1994. As a percentage of net sales, net earnings were 5.2% compared to 4.4%. Comparison of Fiscal Years ended July 31, 1994 and 1993 Net sales for fiscal 1994 increased $8.8 million or 10.2% to $95.0 million as compared to net sales of $86.2 million for fiscal 1993. Net sales to U.S. customers were $59.8 million, an increase of $5.9 million or 11.0% over fiscal 1993. Sales to customers in international markets were $35.2 million, an increase of $2.8 million or 8.7% as compared to fiscal 1993. The increase in sales to U.S. customers was primarily attributable to growth in sales of medical devices and microporous membranes. The international growth was partially offset by fluctuations in foreign currency rates. Without the effects of the fluctuations in foreign currency rates, the increase in international sales in fiscal 1994 would have been 12% over fiscal 1993. Worldwide sales of microporous membranes increased 35.6% compared to fiscal 1993. This growth was attributable to fulfilling significant orders from original equipment manufacturers that use bulk membrane in 12 15 filtration applications and diagnostic health care kits. Sales of products for the medical devices market increased 24.1% in fiscal 1994 over fiscal 1993 due primarily to increased sales of microfiltration products with hemodialysis treatment and intravenous therapy applications. Industrial process product sales increased 11.4% in fiscal 1994, with particularly strong sales in the international markets. Laboratory product sales increased 4.0% over fiscal 1993. Gross profit increased $5.2 million or 12.1% to $47.7 million in fiscal 1994 as compared to $42.5 million in fiscal 1993. As a percentage of net sales, gross profit was 50.2% compared to 49.4%. The improvement in the Company's gross profit margin was attributable to increased sales volume and a higher percentage of microporous membrane sales which have a higher gross margin than other products sold by the Company. Selling and administrative expenses increased $2.7 million or 8.8% to $33.8 million in fiscal 1994 compared to $31.0 million in fiscal 1993. As a percentage of net sales, these expenses declined to 35.6% compared to 36.0%. These expenses increased over the prior fiscal year due primarily to higher selling expenses resulting from increased sales. Research and development expenses increased $738,000 or 17.8% to $4.9 million in fiscal 1994 compared to $4.1 million in fiscal 1993 due to a greater new product development effort. As a percentage of net sales, research and development expenses increased to 5.1% from 4.8% in fiscal 1993. During fiscal 1994 all charges and cost recoveries related to pollution expenses were recorded in a reserve maintained by the Company for pollution-related charges. The Company had third party cost recoveries of $750,000 from the settlement of a lawsuit against certain chemical companies. The Company reached a settlement on a lawsuit for $561,000 with residents located near its Ann Arbor facilities for damages related to groundwater contamination. In addition, the Company incurred costs of $1.3 million related to the implementation of a remediation plan and legal costs of $312,000 in defense of these lawsuits. At July 31, 1994, the Company had accrued $1.5 million to complete the remediation plan and to pay for other costs associated with groundwater contamination. The ultimate costs incurred by the Company as a result of the groundwater contamination will depend on the efficacy and duration of the remediation plan, obtaining a cost-free repository for treated groundwater and settlement of private lawsuits. See "Business -- Environmental Matters." In a series of transactions in fiscal 1994, the Company's Australian subsidiary sold all of its non-core product lines for cash and a note receivable. Included in other expense (income) is a gain of $108,000 or $.02 per share on the sale of the assets relating to the non-core products. Sales from these product lines were $4.4 million and $5.0 million for fiscal 1994 and 1993, respectively. Interest expense decreased $317,000 or 15.8% to $1.7 million in fiscal 1994 compared to $2.0 million in fiscal 1993. This change was due to steps taken by management to secure more favorable interest rates. The Company's effective tax rate for fiscal 1994 was 34.5% as compared to 42.9% in fiscal 1993. The lower effective tax rate was attributable to use of net operating loss carryforwards from certain foreign subsidiaries in fiscal 1994 and use of research and development tax credits. Net earnings increased $2.1 million or 75.9% to $4.8 million or $.75 per share in fiscal 1994 compared to $2.7 million or $.47 per share in fiscal 1993. Net earnings included an extraordinary charge of $295,000 (net of $112,000 tax benefit) or $.03 per share to write-off deferred finance charges and the payment of a premium and fees incurred in connection with the redemption of industrial development revenue bonds. Excluding these charges, net earnings would have been $4.9 million or $.78 per share as compared with net earnings of $2.7 million or $.47 per share in fiscal 1993. Comparison of Fiscal Years ended July 31, 1993 and 1992 Net sales for fiscal 1993 increased $4.7 million or 5.8% to $86.2 million from $81.5 million for fiscal 1992. Net sales to U.S. customers were $53.8 million, an increase of $6.2 million or 12.9% over fiscal 1992. Sales to international customers were $32.3 million, a decrease of $1.4 million or 4.0% compared to fiscal 1992. This decrease was mainly attributable to continued down-sizing at the Company's Australian subsidiary and 13 16 fluctuations in foreign exchange rates. Without the effect of the exchange rates and the Australian down-sizing, growth in the international market would have been 2.8% in fiscal 1993 over fiscal 1992. The Company believes the strong performance in the U.S. market in fiscal 1993 was the result of new product introductions and strong distributor relations. Worldwide sales of laboratory products increased 12.5% over fiscal 1992 because of strong sales in the U.S. market. Sales of microporous membrane increased 23.7% and sales of medical device products increased 13.2% in fiscal 1993. Industrial process product sales were slightly higher, increasing 3.1%. This lower increase was primarily due to discontinuing the sale of certain process microfiltration products to two customers. Gross profit increased $4.0 million or 10.5% to $42.5 million in fiscal 1993 compared to $38.5 million in fiscal 1993. As a percentage of net sales, gross profit improved to 49.4% compared to 47.3%. The improvement in the Company's gross profit margin was the result of productivity improvements, increased sales and a greater percentage of laboratory products and microporous membrane sales which have higher margins over other products. Selling and administrative expenses increased $1.8 million or 6.2% to $31.0 million in fiscal 1993 compared to $29.2 million in fiscal 1992. As a percentage of net sales, these expenses were 36.0% compared to 35.9%. The higher expenditures were attributable to the sales increase and an increase in expenditures for marketing programs. Research and development expenses increased $897,000 or 27.7% to $4.1 million in fiscal 1993 compared to $3.2 million in fiscal 1992. As a percentage of net sales, research and development expenses were 4.8% compared to 4.0%. The increased expenditures reflect the Company's efforts to ensure timely development of new products. Pollution-related expenses decreased $4.4 million to $543,000 in fiscal 1993 compared to $5.0 million in fiscal 1992. As a percentage of net sales, these expenses were 0.6% compared to 6.1%. This change was primarily attributable to a $4.0 million charge for the settlement of the environmental lawsuits with the State of Michigan in fiscal 1992. Other expense (income)-net declined $563,000 due mainly to net losses on foreign currency transactions in fiscal 1993 compared with net gains in fiscal 1992. Interest expense decreased $584,000 or 22.6% to $2.0 million in fiscal 1993 compared to $2.6 million in fiscal 1992. These changes were due to lower debt levels and more favorable interest rates. The Company's effective tax rate for fiscal 1993 was 42.9% which compares with a tax benefit of 19.8% in fiscal 1992 due to the environmental charge. Net earnings for fiscal 1993 were $2.7 million or $.47 per share in fiscal 1993 compared to a loss of $1.2 million or $.21 per share in fiscal 1992. The loss for fiscal 1992 was attributable to the settlement of a product liability lawsuit and the environmental settlement with the State of Michigan Department of Natural Resources. Without these two significant items, the Company would have reported net earnings of $1.7 million or $.30 per share. LIQUIDITY AND CAPITAL RESOURCES Net cash flow provided by operating activities was $8.4 million, $8.2 million, $4.5 million and $2.2 million for the fiscal years ended July 31, 1992, 1993, 1994 and the six-month period ended January 31, 1995, respectively. The lower level of cash provided by operations in fiscal 1994 was attributable to higher inventories and accounts receivable as a result of the increased sales volume and increasing inventory levels for delivery performance. The Company's cash balances were $867,000, $1.1 million, $1.5 million and $1.9 million at July 31, 1992, 1993, 1994 and January 31, 1995, respectively. Net cash flow provided by financing activities in fiscal 1994 included the receipt of $992,000 related to a note receivable and $924,000 for stock options exercised. During the year, the Company recorded and received 14 17 a tax benefit of $608,000 from the exercise of non-qualified stock options. Net cash flow provided by investing activities in fiscal 1994 included the receipt of $820,000 plus a note receivable for $726,000 relating to the sale of the Company's non-core product lines. The cash proceeds from the sale of these product lines were used to reduce indebtedness of the Australian subsidiary. Capital expenditures for the fiscal years ended July 31, 1992, 1993, 1994 and the six months ended January 31, 1995, were $4.0 million, $5.9 million, $6.7 million and $3.2 million, respectively. These expenditures were made primarily to upgrade equipment and molds. In fiscal 1994, the Company spent $1.0 million to reengineer its plant layout in Ann Arbor which increased available manufacturing space, improved manufacturing efficiencies and reduced work-in-process inventories and scrap. Capital expenditures of $7 to $8 million are planned for fiscal 1995. The majority of the planned spending is for manufacturing automation, process improvement, and new molds, which should reduce the unit costs of the Company's products. The Company believes that funds generated from operations and amounts available under the Credit Agreement will be adequate to fund fiscal 1995 capital expenditures. During fiscal 1994, the Company increased its credit facility under the Credit Agreement to $22.5 million from $17.5 million. At January 31, 1995, the unused portion of the line of credit provided under the Credit Agreement was $7.5 million. The Company also refinanced its $5.1 million industrial development revenue bonds by issuing new bonds bearing interest at 120% of the 90-day Eurodollar rate (approximately 7.25% as of January 31, 1995) with principal and interest due quarterly through July 2004. As of January 31, 1995, the Company had an outstanding interest rate swap agreement to obtain long-term fixed interest rates for a notional amount of $5 million. Under the terms of the agreement, the Company secured a fixed rate of 7.41% on the notional amount through January 25, 1996. During fiscal 1994, the Company purchased a 7.5% interest rate cap on $5 million notional amount effective May 1, 1995 through May 1, 1998. The interest rate swap and cap agreements have been entered into with major financial institutions that are expected to perform fully under the terms of the agreements. Cash outflows during fiscal 1994 for the groundwater remediation plan at its Ann Arbor facility, the settlement of lawsuits and associated legal expenses were $2.4 million, approximately $1.3 million of which was to construct the infrastructure for the remediation system. The groundwater remediation is expected to take up to an additional eight years and costs will be dependent upon the efficacy and duration of remediation efforts and obtaining a cost-free repository for treated groundwater. As of January 31, 1995, the Company had accrued $1.1 million for expenses related to this remediation and the settlement of private lawsuits. The Company currently estimates that additional remediation expenses and the costs of the settlement of private lawsuits for the second half of fiscal 1995 will be approximately $200,000. The infrastructure for the remediation system is substantially complete. The Company estimates that the annual operating costs for the remediation system will be in the range of $75,000 to $100,000. 15 18 BUSINESS GENERAL The Company designs, manufactures and markets a comprehensive line of specialty microfiltration products for the separation, purification and sterilization of liquids and gases. The Company's core technologies are the manufacturing of microporous membranes which serve as a barrier, filter or separator of microscopic particles and the packaging and sealing of these membranes into microfiltration products. The Company's products include syringe, capsule and cartridge filters, microporous membranes and other microfiltration products. Microfiltration products with healthcare applications account for over 60% of the Company's sales. These products are sold to biotechnology, pharmaceutical and healthcare companies for use in the research, development and manufacturing of new drugs and vaccines and their administration to patients. The Company believes that it offers a greater variety of membranes and microfiltration products in its markets than any other manufacturer and that it has built significant brand recognition, particularly in scientific and industrial laboratories. Nearly all of the Company's microfiltration products are disposable, and many are used in high volume applications requiring regular replacement. The Company's products are marketed worldwide for scientific and industrial applications in the biotechnology/pharmaceutical, medical/healthcare, high technology manufacturing and environmental markets. The Company's product lines include: - Laboratory products are utilized in the biotechnology and pharmaceutical markets for new drug and product development, sample preparation and testing, fluid sterilization, environmental testing and academic research. - Process filtration products are used in high technology manufacturing applications such as sterilization of pharmaceutical products, ultrapurification of water for the manufacture of semiconductor chips and the production of ultrapure chemicals. - Medical devices are used in healthcare applications such as the diagnosis and treatment of disease, delivery of intravenous solutions to patients and hemodialysis treatment. - Membranes are sold primarily to medical products manufacturers who incorporate them into products such as medical devices and diagnostic kits for early detection of pregnancy and monitoring levels of cholesterol and glucose. Over the last several years, the Company resolved environmental lawsuits relating to groundwater contamination at its Ann Arbor manufacturing facility, divested all non-core product lines and strengthened senior management. As a result of these actions, the Company has been able to focus on those microfiltration products which provide the Company a competitive advantage and brand name recognition. The Company has developed growth and operating strategies which focus its sales, marketing and manufacturing efforts on these products. These strategies have accelerated sales growth and improved profitability in the Company's operations. Year over year sales growth of the Company's core products increased from 5% in fiscal 1990 to 12% in fiscal 1994. The Company's operating earnings increased from $427,000 in fiscal 1990 to $9.2 million in fiscal 1994. The Company believes that the worldwide demand for microfiltration products in its markets is approximately $1.4 billion and is growing as a result of a broadening base for filter applications, increasing concern for consumer safety, a trend toward finer and more economical filtration, more stringent governmental regulations and intensive research efforts to find cures for contagious, genetic and other diseases. Management's strategy is to focus on geographic areas and product applications in which microfiltration needs are expected to exceed overall market growth. This growth strategy is being implemented by (a) focusing on the Company's microfiltration products with competitive advantages and brand name recognition; (b) strengthening the Company's international management team and distributor network in order to build its presence in the growing international marketplace; (c) marketing to large multinational companies the benefits of purchasing their worldwide filtration requirements from a single supplier; (d) accelerating new product development and introduction; and (e) pursuing new market opportunities for the Company's 16 19 microfiltration products. In addition to sales growth, management has been implementing a strategy to increase profitability by (i) reducing product scrap and waste; (ii) increasing automation to reduce labor content; (iii) consolidating suppliers to improve the quality and reduce the cost of purchased materials; (iv) targeting sales efforts on high margin microfiltration products and membranes; and (v) increasing capacity utilization. PRODUCT AND MARKET OVERVIEW Filtration is the process of separating particles of various sizes from liquids or gases, including (a) macrofiltration, for the separation of large-size particles visible to the naked eye (a grain of sand); (b) microfiltration, for the separation and removal of microscopic-sized particles (bacteria); and (c) reverse osmosis, for separation at the molecular level (desalination of saltwater). A filtration device consists of a plastic or metal housing and a filtration medium. Filtration media, which can be manufactured out of a variety of substances, act as the separator or barrier in the filtration process. Of the filtration processes, microfiltration has the most diverse applications. Microfiltration utilizes several different types of filtration media, including microporous and nylon membranes, glass fibers and ceramics. Microporous membranes are thin, film-like materials with millions of microscopic holes per square inch. These membranes are the most popular microfiltration media because they offer the following benefits: (i) removal of specifically-sized particles, (ii) configuration into a variety of shapes and sizes of filtration devices, and (iii) incorporation into economical, disposable filtration devices. The Company believes that worldwide demand for microfiltration products in its markets is $1.4 billion, two-thirds of which is from outside the United States. It is expected that the growth rate for sales of microfiltration products internationally will exceed that of the United States over the next several years, particularly in the Asia/Pacific Rim and Latin America. Growth opportunities in the Asia/Pacific Rim and Latin America should result primarily from increasing industrialization, the effects of government regulations and environmental concerns. Sales in Western Europe are growing primarily due to microfiltration demands from biotechnology, pharmaceutical and healthcare companies. The demand for microfiltration products in the United States is growing due to (a) a broadening base for filter applications, (b) increasing concern for consumer safety, (c) a trend toward finer and more economical filtration, (d) more stringent governmental regulations and (e) intensive research efforts to find cures for contagious, genetic and other diseases. In addition, demand is increasing for biomedical and diagnostic membranes for routine sterilization, cell cultures, protein separation and diagnostic tests. GROWTH STRATEGY The Company's strategy is to expand its position as a manufacturer of microfiltration products to the biotechnology/pharmaceutical, medical/healthcare, high technology manufacturing and environmental markets by responding to customer needs with high quality products at competitive prices. Management expects to increase sales in excess of market growth by increasing international sales, expanding sales to existing customers, introducing new products and entering new markets with microfiltration products. The Company is implementing these sales and marketing strategies and making the infrastructure investments necessary to achieve the expected growth. The Company's growth strategy focuses on the following key factors: Key Products with Competitive Advantages and Brand Name Recognition. The Company is focusing its sales and marketing programs on those microfiltration products which have competitive advantages and brand name recognition. The Company has targeted these products because of their ease of use, novel and unique design and superior performance characteristics. International Sales Growth. Historically, the Company's worldwide sales have been divided approximately 65% U.S. and 35% international. The Company believes, however, that the worldwide market for microfiltration products is approximately 35% U.S. and 65% international. The Company's historical sales mix 17 20 reflects its prior focus on domestic markets. The Company has redirected its marketing focus to take advantage of the significant demand for microfiltration products outside the United States. The Company believes that the international markets are growing due to demand from the scientific, medical and industrial communities and the effect of increasing government regulation. The Company has made investments to enhance its international marketing and distribution efforts, including expanding the number of international distributors and strengthening sales and marketing management in Japan, France and Germany, the Company's largest markets outside the United States. International sales are expected to become the fastest growing component of the Company's business. Focused Account Penetration. The Company has dedicated sales teams and other resources to develop global supplier agreements with large multinational biotechnology and pharmaceutical companies. This sales strategy is designed to market to these companies the benefits of purchasing their worldwide filtration requirements from the Company. Many of these companies require consistent microfiltration in their manufacturing processes -- from laboratory research through finished production -- and would benefit from the Company's ability to supply a wide variety of microfiltration products and its willingness to partner with customers in developing new products. Acceleration of New Product Development and Introduction. In the last two years, the Company has organized product development teams which are focused on understanding customer procedures and potential applications for the Company's microfiltration products and working with customers to develop innovative and creative products to address their filtration needs. These teams also identify product modifications to enhance performance of, and new applications for, the Company's existing product lines. In addition, the Company has succeeded in shortening the period of product development, introduction and commercialization of new and modified products from approximately 24 months to as little as 12 months, thereby accelerating revenue growth. The Company's marketing plans are developed, distribution agreements formulated and sales force trained concurrently with product development efforts. New Markets. The increased awareness of and need for sterilization, purification and separation of liquids and gases, as well as the use of membranes in other specialized applications, have created new market opportunities for the Company's products. The Company intends to examine and exploit opportunities in those emerging markets which the Company believes have significant growth opportunities, including medical, home healthcare, biotechnology and diagnostic applications. OPERATING STRATEGY The Company continues its focus on increasing profitability by reducing product scrap and waste, reducing labor content, consolidating suppliers, improving product mix and increasing manufacturing efficiency and capacity utilization. Reduction of Product Scrap and Waste. The Company is reducing the amount of product scrap and waste by (a) increasing its quality standards for raw materials and plastic parts purchased from suppliers, (b) purchasing additional automated machinery and equipment and (c) implementing Company-wide continuous improvement programs. These programs are designed to identify sources of scrap, set goals for the reduction of scrap, eliminate waste and educate the work force to improve quality in the manufacturing process. Reduction of Labor Content. Management believes that it can increase profitability by investing in automated machinery and equipment. Automation reduces the labor content and improves the quality of the Company's microfiltration products. In fiscal 1994, the Company spent approximately $2 million to purchase machinery and equipment for its medical devices product line. To further increase automation, the Company plans to make expenditures of approximately $3 million in fiscal 1995 for its capsule and intravenous fluid filter manufacturing lines. Product Mix. In the last three years, the Company has increased its sales and marketing efforts to promote the sale of its higher margin laboratory and microporous membrane products. As a result of the improvement of its international distribution network and growth in the international markets, the Company 18 21 expects to increase international sales of its laboratory products. The Company actively promotes the sale of membranes, primarily to manufacturers of medical products, through a dedicated sales force. Consolidation of Suppliers. The Company has reduced the number of its suppliers of raw materials and plastic parts by concentrating its purchases with those suppliers which meet the Company's high quality standards. The Company has recently been successful in negotiating volume price discounts with many of these suppliers. An increase in the quality of purchased materials has enabled the Company to reduce its incoming and in-process quality inspection expenses. Manufacturing Efficiency and Capacity Utilization. The Company's state-of-the-art manufacturing facility in Pensacola, Florida, completed in fiscal 1992, produces membranes more efficiently and at a lower cost than previously in Ann Arbor. The construction of the Pensacola facility allowed the Company to reengineer its plant lay-out in Ann Arbor which increased available manufacturing space, improved manufacturing efficiencies and reduced work-in-process inventory and scrap. The Company's existing facilities have the capacity to support additional sales growth. PRODUCTS The Company's core technologies are the manufacturing of microporous membranes and the packaging and sealing of these membranes into microfiltration products. Microfiltration products manufactured by the Company using its proprietary membranes as the filtration media account for approximately 75% of sales. The remainder of the Company's products incorporate high quality filtration media such as nonwoven media and glass fiber purchased from third parties. These other filtration media allow the Company to complement its wide variety of microporous product offerings, particularly in the laboratory and process filtration product lines. The design, engineering and manufacturing of the filtration device is critical to the performance of a microfiltration product. The Company has the technical expertise to integrate various filtration media into custom-designed plastic housings. The Company uses state-of-the-art manufacturing processes to ensure the proper sealing of filtration media in these housings. The Company's revenues from the four major product lines for the last three fiscal years and for the six month periods ended January 31, 1994 and 1995 are as follows (in millions):
SIX MONTHS ENDED YEAR ENDED JULY 31, JANUARY 31, --------------------------- ---------------- 1992 1993 1994 1994 1995 ----- ----- ----- ----- ----- Laboratory Products............................. $35.1 $39.4 $41.0 $19.2 $21.4 Process Filtration Products..................... 17.8 18.3 20.4 9.8 11.7 Medical Devices................................. 13.1 14.8 18.4 8.3 10.3 Membranes....................................... 5.0 6.2 8.4 4.0 3.7
The above table does not include sales from non-core products lines which have been divested in the past three years or sales of other miscellaneous products that are distributed by the Company's foreign subsidiaries on behalf of other manufacturers. Sales from the divested product lines and of other products totaled $10.5 million in fiscal 1992, $7.5 million in fiscal 1993 and $6.8 million in fiscal 1994, and $4.3 million and $1.2 million for the six months ended January 31, 1994 and 1995, respectively. Laboratory Products. Laboratory products are small volume filters utilized in research, clinical and industrial laboratories for new drug and product development and for sample preparation and fluid sterilization. These products are also used in environmental testing and manufacturing quality control operations. Nearly all of these filters are inexpensive, disposable items. The Company believes that its 30% U.S. market share of microfiltration products sold to the laboratory market makes it one of the largest manufacturers in this market. However, the Company believes that it can improve its international market share in laboratory products, which is currently less than 5%. Process Filtration Products. Process filtration products utilize microporous membranes in cartridge and capsule form for use in various process industry applications, such as the biotechnology/pharmaceutical, 19 22 semiconductor and fine chemicals industries. In many manufacturing processes, these products are required to remove particles and contaminants, including bacteria, and for the clarification and purification of waters and chemicals. Process filtration products are disposable and require regular replacement. Medical Devices. The medical devices product line consists principally of three products: intravenous fluid filters, transducer protectors for hemodialysis equipment and insufflation filters for noninvasive laser and endoscopic surgery. In addition, the Company manufactures ophthalmic, cardiovascular, prebypass and respiratory filters. The Company's medical devices are sold primarily to major healthcare manufacturers for private label use. The Company sells a line of ready-to-market products and works with its healthcare manufacturer customers to develop custom products. Membranes. In addition to use in its own products, the Company sells microporous membranes to third parties who incorporate them into products such as diagnostic kits for early detection of pregnancy and monitoring levels of cholesterol and glucose. As the concern for controlling costs in the healthcare industry continues, new applications for membrane-based diagnostic kits are growing rapidly. Many of the Company's competitors do not manufacture their own membranes and have to purchase them at higher cost from suppliers. Membranes have higher gross profit margins than the Company's other products because they are produced on highly automated equipment with minimal handling costs. SALES AND MARKETING The Company serves the U.S. laboratory markets through the four largest distributors serving these markets: Baxter International Inc., Curtin Matheson Scientific, Inc., Fisher Scientific International Inc. and VWR Corporation. The Company believes that sales by these distributors account for over 50% of the microfiltration products consumed in the U.S. laboratory market. Distributors enable the Company to reach thousands of end-user customers who have similar microfiltration needs. In the United States, the Company's process filtration products are sold through a network of distributors who specialize in products sold for a broad range of process applications. These distributors are supported by the Company's field sales organization which provides training and assistance in sales calls. The Company sells its medical devices and membranes throughout the world through a direct sales force. By using a direct sales force the Company is able to provide customized service to its end-user customers and utilize market feedback to develop new microfiltration applications. Internationally, the Company serves the laboratory and process filtration markets through a combination of a direct sales force and independent distributors. The Company has foreign sales and distribution subsidiaries operating in Australia, Canada, France, Germany, Ireland, Italy, Japan and the United Kingdom. RESEARCH AND PRODUCT DEVELOPMENT The Company maintains a strong commitment to applied research and development. The Company's product development efforts are focused on the enhancement of existing product lines and development of new products based on the Company's existing technologies and production capabilities. The Company employs a staff of approximately 70 in its research and development department, including experienced polymer chemists, biochemists, engineers and laboratory technicians. Research and development expenditures were $3.2 million, $4.1 million and $4.9 million in fiscal 1992, 1993 and 1994, respectively. CUSTOMERS The Company believes that no end-user of any of its products accounts for more than 5% of sales. Sales by the Company to three U.S. distributors of its laboratory products accounted for 23% of total sales in fiscal 1994. The loss of any one of these distributors could have an adverse effect on the Company. Management believes the loss of any one of these distributors is unlikely due to the Company's long-term relationship with these distributors and the investments made by these distributors in inventory, promotional programs and training of their sales forces. Baxter International Inc., which distributes the Company's products through its 20 23 Baxter Scientific Products Division and purchases the Company's products through its Baxter Healthcare Division, a manufacturer of healthcare products, accounted for $10.5 million or 11.1% of sales in fiscal 1994. COMPETITION The filtration and separation industry is fragmented, with many firms developing expertise in specialized applications. The Company's primary competitors are Millipore Corporation, Pall Corporation and, to a lesser extent, Sartorious Membranfilter GmbH. The Company believes that it offers a greater variety of membranes and microfiltration products in its markets than any other manufacturer in the world. The Company competes with other manufacturers based on a variety of factors, including product innovation and performance, price and customer service. The Company has developed many of its microfiltration products in conjunction with its customers, which have worked closely with the Company during the design process. The Company believes that these close working relationships with its customers in the development of specialized products gives it a competitive advantage over other manufacturers. PROPERTIES Summary information on the Company's principal manufacturing and distribution facilities is as follows:
APPROXIMATE LOCATION SQUARE FOOTAGE OWNED/LEASED - ---------------------- -------------- ------------ Ann Arbor, Michigan 180,000 Owned Ann Arbor, Michigan 20,000 Leased Pensacola, Florida 58,000 Owned Pleasanton, California 18,000 Leased
All of the Company's membranes are manufactured at its Pensacola facility and are either sold directly to customers or shipped to its Ann Arbor facility and incorporated into the Company's microfiltration products. Stainless steel housings for process filtration devices are manufactured at the Company's Pleasanton facility. The Company purchases all of the plastic components for its filters. INTELLECTUAL PROPERTY The Company has 137 active patents and 125 registered and 58 unregistered trademarks throughout the world. The Company does not consider any one of these patents or trademarks to be materially important to its business. The Company relies to a great extent on its technological skills and product development achievements to compete effectively. RAW MATERIAL SUPPLIERS The primary raw materials used by the Company are polymers, solvents and plastic injection molded components. The Company has not experienced a shortage of any of its raw materials in the past three years. The Company believes that there is an adequate supply of all of its raw materials at competitive prices from a variety of suppliers. EMPLOYEES The Company has approximately 825 employees. The Company's hourly employees are not represented by a collective bargaining agreement. The Company believes that relations with employees are good. There have been no work stoppages due to labor difficulties. FINANCIAL SEGMENTS AND INFORMATION REGARDING GEOGRAPHIC AREAS The Company reports financial information for two industry segments: Filtration Products and Health Products. See Note I to the Consolidated Financial Statements. Filtration Products are primarily comprised of 21 24 laboratory products, certain membranes and process filtration products for the biotechnology, pharmaceutical, environmental and industrial markets. Health Products are primarily comprised of products for the medical and healthcare industries, including custom-manufactured disposable filters and certain membranes for original equipment manufacturers in the healthcare field. The Company has foreign subsidiaries operating in Australia, Canada, France, Germany, Ireland, Italy, Japan and the United Kingdom. These operations are sales and distribution facilities. All of the Company's products are manufactured in the United States. The Company sells directly to non-owned foreign distributors in many regions of the world. See Note I to the Consolidated Financial Statements. ENVIRONMENTAL MATTERS The Company's operations are subject to extensive federal, state and local regulation under environmental laws and regulations concerning, among other things, emissions into the air, discharges into the water and the generation, handling, storage, transportation, treatment and disposal of wastes and other materials. Inherent in the Company's manufacturing operations is the risk of environmental liabilities which cannot be predicted with certainty. The Company has incurred and will continue to incur environmental regulatory compliance costs on an ongoing basis associated with the operation of its business. Until May 1986, the Company used 1,4-dioxane, an organic chemical, in manufacturing processes at its manufacturing facility in Ann Arbor and stored and disposed of waste water using methods then permitted by the responsible governmental agencies for this chemical. In January 1986, 1,4-dioxane was determined to be present in groundwater wells near the Company's manufacturing plant. Under an October 1992 consent judgment resolving litigation with the State of Michigan, the Company is remediating this contamination without admitting wrongdoing. The Company has resolved eight of ten private lawsuits related to groundwater contamination. The Company has been successful in defense of the remaining two lawsuits in the trial courts; however, the verdicts are being appealed by the plaintiffs. The Company believes that the ultimate resolution of these lawsuits will not have a material adverse effect on the Company's financial position or results of operations. The remediation plan requires the Company to treat the groundwater to the extent necessary to reduce the contaminants to a defined level. Management estimates that remediation will take eight years. Total costs to the Company of pollution-related activities will be dependent upon the efficacy and duration of the remediation plan, obtaining a cost-free repository for treated groundwater and settlement of private environmental lawsuits. As of January 31, 1995, the Company had accrued $1.1 million to cover the future costs and expenses of the remediation plan and settlement of private environmental lawsuits. The Company believes that the reserve is adequate to cover all such future costs and expenses; however, there can be no assurance that future events will not have an effect on the amount of the required reserve. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note G to the Consolidated Financial Statements. LEGAL PROCEEDINGS The Company, in the normal course of business, is involved in incidental, routine litigation. In the opinion of management, currently pending legal proceedings and claims against the Company will not individually or in the aggregate have a material adverse effect on the Company's financial condition or results of operations. 22 25 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the executive officers and directors of the Company:
NAME AGE POSITION WITH THE COMPANY - ------------------------------ --- -------------------------------------------------------- Charles Gelman................ 63 Chairman of the Board, Chief Executive Officer and a Director Kim A. Davis.................. 43 President and Chief Operating Officer James C. Marshall............. 51 Senior Vice President Robert L. Buker............... 47 Vice President, Corporate Communications Alfred G. Craske.............. 51 Vice President, Marketing James J. Fahrner.............. 43 Vice President-Finance, Treasurer and Chief Financial Officer Mark A. Sutter................ 33 Vice President, Research & Development Edward J. Levitt.............. 50 Secretary and Corporate Counsel Robert M. Collins............. 63 Director John A. Geishecker, Jr. ...... 57 Director Saul H. Hymans................ 57 Director Hajime Kimura................. 44 Director Nina I. McClelland............ 65 Director Charles Newman................ 53 Director
Charles Gelman founded the Company in 1959. He was the Company's President from 1974 to April 1988 and from October 1990 to May 1993. He has been the Company's Chairman, Chief Executive Officer and a director since 1974. Kim A. Davis was appointed President and Chief Operating Officer of the Company in May 1993. Mr. Davis is responsible for worldwide operations including sales, marketing and manufacturing. From January 1991 to May 1993, Mr. Davis was Chief Operating Officer of Promega Corporation, a Wisconsin-based biotechnology company. Prior to joining Promega, Mr. Davis was president and chief executive officer of a privately-held engineering graphics software company from November 1989. James C. Marshall is Senior Vice President responsible for manufacturing operations in Pensacola, Florida. Prior to that, he was responsible for the Company's Ann Arbor Operations, and has worked in the manufacturing function for the Company for over 30 years. Robert L. Buker has been Vice President of Corporate Communications since December 1994. He was Vice President, Marketing, from January 1994 to December 1994. Previously, he was Vice President of Corporate Communications, and Director, Corporate Communications since June 1986. Alfred G. Craske was hired as Vice President, Marketing, in December 1994. Mr. Craske was the Vice President, Marketing and Sales for Difco Laboratories, a provider of media products for growth of microbiological organisms, from September 1993 to November 1994. From May 1991 to May 1993, he was Vice President, Marketing and Sales of Hitachi Instruments, Inc., a distributor of scientific products. Prior thereto, Mr. Craske was Vice President, Marketing and Sales for Extrel Corporation. James J. Fahrner was hired as Vice President-Finance, Treasurer and Chief Financial Officer in November 1990. Previously, Mr. Fahrner was a Vice President and Treasurer of J.P. Industries, Inc., a manufacturer of industrial and consumer durable goods, from November 1989 to September 1990. Mark A. Sutter was appointed as Vice President, Research & Development in May 1992, and is responsible for all research and development activities. Previously, Mr. Sutter served as Director of Membrane 23 26 Research & Development and Cartridge Capsule Product Development and in various marketing functions for the Company since January 1986. Edward J. Levitt was appointed as Secretary of the Company in March 1994. From December 1991 to March 1994, Mr. Levitt was Assistant Vice President-Legal. Since April 1989, Mr. Levitt has served as Corporate Counsel. Robert M. Collins has been a director of the Company since June 1994. Mr. Collins has been an independent consultant since April 1991. Prior to that, he was President of Cobe Laboratories, Inc., a medical supply company, from 1989 to April 1991. John A. Geishecker, Jr. has been a director of the Company since 1978. Mr. Geishecker has been Vice President-Planning and Finance, of Rule Industries, a diversified manufacturer, for more than five years. Saul H. Hymans has been a director of the Company since 1980. Dr. Hymans is a professor of Economics and Statistics and the Director of Research Seminars in Quantitative Economics and has been a faculty member of the University of Michigan since 1964. Hajime Kimura has been a director of the Company since September 1994. Dr. Kimura has been President and Chief Executive of JMS Co. Ltd., a large Japanese medical supply company, since August 1994 and was employed in various positions at JMS for the five years prior to his appointment as President. Nina I. McClelland has been a director of the Company since 1989. Dr. McClelland has been the Chairman of the Board and an executive officer of the National Sanitation Foundation since 1980. She is also an Adjunct Professor, School of Public Health, at the University of Michigan. Charles Newman has been a director of the Company since May 1992. Mr. Newman has been President of ReCellular Inc., manufacturer of cellular phones, since 1989. DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 15,000,000 shares of Common Stock, $.10 par value, and 500,000 shares of Preferred Stock, $1.00 par value. As of February 23, 1995, there were 6,235,625 shares of Common Stock outstanding, which were held beneficially by approximately 1,200 shareholders. There are currently no shares of Preferred Stock outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held. All outstanding shares of Common Stock are, and those offered hereby will be, validly issued, fully paid and nonassessable. Holders of Common Stock are entitled to such dividends as may be declared by the Board of Directors out of funds legally available therefor. Upon liquidation, dissolution or winding-up of the Company, the assets legally available for distribution to shareholders are distributable ratably among the holders of Common Stock at that time outstanding, subject to prior distribution rights of creditors of the Company and of holders of any Preferred Stock then outstanding. The Common Stock does not have preemptive or other subscription rights, any conversion rights or any redemption rights. Chapters 7A and 7B of the Michigan Business Corporation Act (the "MBCA") may affect attempts to acquire control of the Company. In general, under Chapter 7A of the MBCA, "business combinations" (defined to include, among other transactions, certain mergers, share exchanges, sales or other dispositions of assets or shares and recapitalizations) between covered Michigan business corporations or their subsidiaries and an "interested shareholder" (defined as the direct or indirect beneficial owner of at least 10% of the voting power of a covered corporation's outstanding shares) can only be consummated if approved by at least 90% of the votes of each class of the corporation's shares entitled to vote and by at least two-thirds of such voting shares not held by the interested shareholder or affiliates, unless five years have elapsed after the person involved became an "interested shareholder" and unless certain price and other conditions are satisfied. The Board of Directors has the power to elect to be subject to Chapter 7A as to specifically identified or 24 27 unidentified interested shareholders, but has not currently elected to be subject to Chapter 7A. Upon completion of the Offering, Charles Gelman will continue to beneficially own approximately 17% of the outstanding Common Stock and, if the Board of Directors elects to have the Company subject to Chapter 7A, Mr. Gelman would be able to prevent the attainment of the required approval by holders of 90% or more of the outstanding shares of the Common Stock. In general, under Chapter 7B of the MBCA, an entity that acquires "controlling shares" of the Company may vote the controlling shares on any matter only if a majority of all shares, and of all non-"interested shares," of each class of stock entitled to vote as a class, approve such voting rights. Interested shares are shares owned by officers of the Company, employee-directors of the Company and the entity making the acquisition of controlling shares. Controlling shares are shares that, when added to shares already owned by a person, would give the person voting power in the election of directors over any of three thresholds: one-fifth, one-third and a majority. The effect of the statute is to condition the acquisition of voting control of a corporation on the approval of a majority of the pre-existing disinterested shareholders. Chapter 7B currently applies to the Company. However, the Board of Directors could amend the Company's Restated By-laws (the "By-laws") before a "control share acquisition" occurs to provide that Chapter 7B does not apply to the Company. The Company's Restated Articles of Incorporation, as amended (the "Articles") and By-laws provide for staggered terms for the election of directors. As a result, at least two annual meetings will generally be required for shareholders to elect a majority of the Board of Directors. Directors are divided into three classes, with each class elected once every three years. The By-laws provide that directors may only be removed for cause. The By-laws establish procedures, including advance notification to the Company, that a shareholder must follow to place the name of any person in nomination for election to the Company's Board of Directors. In general, notice must be received not less than 60 nor more than 90 days prior to the date of the annual meeting and must contain certain specified information, including in part, the name of the proposed nominee, certain biographical and other information with respect to such nominee and certain information concerning the shareholder submitting the proposal. The Articles permit corporate action to be taken by written consent of the minimum percentage required by statute for the proposed corporate action without a formal meeting of shareholders. The Articles further provide that the Company is required to give notice of any such consent action to all non-consenting shareholders. The transfer agent and registrar for the Common Stock is Society National Bank. The Common Stock of the Company is listed on the American Stock Exchange under the symbol "GSC". PREFERRED STOCK The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to determine the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock and to fix the number of shares of any series of Preferred Stock and the designation of any such series. The issuance of Preferred Stock could be used, under certain circumstances, as a method of preventing a takeover of the Company and could permit the Board of Directors, without any action by the holders of Common Stock, to issue Preferred Stock which could have a detrimental effect on the rights of holders of Common Stock, including the loss of voting control. Anti-takeover provisions that could be included in the terms of any Preferred Stock issued may depress the market price of the Company's Common Stock and may limit the ability of shareholders to receive a premium on their shares by discouraging takeover and tender offer bids. The Company has no present plans to issue any shares of Preferred Stock. 25 28 UNDERWRITING The several Underwriters named below, for whom Cleary Gull Reiland & McDevitt Inc., McDonald & Company Securities, Inc. and Roney & Co. are acting as Representatives, have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company the aggregate number of shares of Common Stock (assuming the Underwriters' over-allotment option is not exercised) set forth below opposite their respective names.
NUMBER OF UNDERWRITERS SHARES ------------------------------------------------------------------- --------- Cleary Gull Reiland & McDevitt Inc. ............................... McDonald & Company Securities, Inc. ............................... Roney & Co. ....................................................... --------- Total......................................................... 1,000,000 ========
The Underwriting Agreement provides that all of the shares of Common Stock being offered, excluding shares covered by the over-allotment option granted to the Underwriters, must be purchased if any are purchased. The Company has been advised by the Representatives that the several Underwriters propose to offer the Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and may offer to selected dealers at such price less a concession of not more than $ per share; that the Underwriters may allow and such dealers may reallow a concession of $ per share on sales to certain other dealers; and that the public offering price and concessions and reallowances to dealers may be changed by the Representatives. The Company has granted the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an additional 150,000 shares of Common Stock to cover over-allotments, at the same price per share being paid by the Underwriters for the other shares offered hereby. If the Underwriters exercise this option in whole or in part, each of the Underwriters will be committed to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments, if any, made in connection with the Offering made hereby. The Company and its present executive officers and directors have agreed with the Underwriters that they will not offer or sell any shares of the Common Stock for 120 days from the effective date of the Registration Statement without the prior written consent of Cleary Gull Reiland & McDevitt Inc.; provided, however, that commencing 30 days after the effective date of the Registration Statement, non-employee directors of the Company collectively have the right to sell up to 11,000 shares of the Common Stock. The Underwriting Agreement provides that the Company will indemnify the several Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. LEGAL MATTERS Certain legal matters in connection with the Common Stock offered hereby will be passed upon for the Company by Brouse & McDowell, a Legal Professional Association, Akron, Ohio, and for the Underwriters by Godfrey & Kahn, S.C., Milwaukee, Wisconsin. 26 29 EXPERTS The Consolidated Financial Statements of the Company included in this Prospectus have been audited by Coopers & Lybrand, L.L.P., independent auditors, to the extent and for the periods indicated in their report with respect thereto which includes an explanatory paragraph indicating that the ultimate costs of the remediation program agreed to by the Company could exceed the amount estimated and accrued at July 31, 1994, and are included herein or incorporated by reference in reliance on the aforementioned report given on September 22, 1994 and upon the authority of said firm as experts in accounting and auditing. 27 30 GELMAN SCIENCES INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- AUDITED CONSOLIDATED FINANCIAL STATEMENTS Independent Auditor's Report....................................................... F-2 Consolidated Balance Sheets as of July 31, 1993 and 1994........................... F-3 Consolidated Statements of Operations for the Years Ended July 31, 1992, 1993 and 1994............................................................................ F-4 Consolidated Statements of Cash Flows for the Years Ended July 31, 1992, 1993 and 1994............................................................................ F-5 Consolidated Statements of Stockholders' Equity for the Years Ended July 31, 1992, 1993 and 1994........................................................................ F-6 Notes to Consolidated Financial Statements......................................... F-7 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of January 31, 1994 and 1995 (unaudited)..................................................................... F-16 Condensed Consolidated Statements of Operations for the Six Months Ended January 31, 1994 and 1995 (unaudited)........................................... F-17 Condensed Consolidated Statements of Cash Flows for the Six Months Ended January 31, 1994 and 1995 (unaudited)........................................... F-18 Notes to Condensed Consolidated Financial Statements (unaudited)................... F-19
F-1 31 INDEPENDENT AUDITOR'S REPORT Board of Directors and Stockholders Gelman Sciences Inc. Ann Arbor, Michigan We have audited the consolidated balance sheets of Gelman Sciences Inc. and Subsidiaries as of July 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 1994, included on pages F-3 through F-15, inclusive. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gelman Sciences Inc. and Subsidiaries as of July 31, 1994 and 1993, and the consolidated results of their operations and cash flows for each of the three years in the period ended July 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note G to the financial statements, the Company has agreed to perform a remediation program for groundwater contamination. The ultimate costs of this remediation program could exceed the amount estimated and accrued at July 31, 1994. COOPERS & LYBRAND L.L.P. Detroit, Michigan September 22, 1994 F-2 32 GELMAN SCIENCES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JULY 31, --------------------- 1993 1994 -------- -------- ASSETS Current Assets Cash................................................................. $ 1,142 $ 1,525 Accounts receivable less allowances (1993 - $927; 1994 - $790)....... 17,088 20,859 Inventories Finished products................................................. 5,841 5,790 Work in process................................................... 2,638 1,555 Raw materials and purchased parts................................. 4,507 6,645 -------- -------- 12,986 13,990 Other current assets................................................. 3,600 3,849 -------- -------- Total Current Assets......................................... $ 34,816 $ 40,223 Property, Plant and Equipment Land................................................................. 1,429 1,433 Buildings and improvements........................................... 16,937 18,851 Equipment............................................................ 43,816 43,270 -------- -------- 62,182 63,554 Less allowances for depreciation..................................... (34,972) (34,392) -------- -------- 27,210 29,162 Intangibles and Other Assets........................................... 1,469 2,302 -------- -------- Total Assets................................................. $ 63,495 $ 71,687 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks............................................... $ 1,415 $ 1,549 Accounts payable..................................................... 5,214 5,611 Compensation and amounts withheld.................................... 4,361 4,273 Other accrued expenses............................................... 3,329 3,511 Current maturities of long-term debt................................. 1,364 1,829 -------- -------- Total Current Liabilities.................................... 15,683 16,773 Long-Term Debt, exclusive of current maturities........................ 22,490 21,820 Other Long-Term Liabilities............................................ 3,066 2,659 Stockholders' Equity Preferred stock, par value $1.00 per share -- authorized shares 500,000, none outstanding......................................... -- -- Common stock, par value $.10 per share -- issued and outstanding 2,597,000 shares in 1993 and 6,131,000 shares in 1994............. 260 613 Additional capital................................................... 12,508 14,055 Retained earnings.................................................... 12,345 17,092 Foreign currency translation adjustments............................. (1,265) (875) Less loan to Employee Stock Ownership Plan........................... (600) (450) Note receivable -- common stock...................................... (992) -- -------- -------- Total Stockholders' Equity................................... 22,256 30,435 -------- -------- Total Liabilities and Stockholders' Equity................... $ 63,495 $ 71,687 ======== ========
See notes to consolidated financial statements. F-3 33 GELMAN SCIENCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JULY 31, ------------------------------- 1992 1993 1994 ------- ------- ------- Net sales..................................................... $81,460 $86,209 $94,963 Costs and expenses Cost of products sold....................................... 42,961 43,664 47,253 Selling and administrative.................................. 29,232 31,044 33,785 Research and development.................................... 3,242 4,139 4,877 Pollution -- related expenses............................... 4,988 543 -- Other expense (income) -- net............................... (482) 81 (178) ------- ------- ------- 79,941 79,471 85,737 ------- ------- ------- Operating earnings............................................ 1,519 6,738 9,226 Interest expense.............................................. 2,590 2,006 1,689 ------- ------- ------- Earnings (loss) before income taxes and extraordinary item.... (1,071) 4,732 7,537 Income taxes (credit)......................................... (212) 2,030 2,600 ------- ------- ------- Net earnings (loss) before extraordinary item................. (859) 2,702 4,937 ------- ------- ------- Extraordinary item............................................ 352 -- 183 ------- ------- ------- Net earnings (loss)........................................... $(1,211) $ 2,702 $ 4,754 ======= ======= ======= Primary earnings (loss) per share before extraordinary item... $(.15) $.47 $.78 ===== ==== ==== Primary earnings (loss) per share............................. $(.21) $.47 $.75 ===== ==== ==== Fully diluted earnings (loss) per share before extraordinary item........................................................ $(.15) $.45 $.78 ===== ==== ==== Fully diluted earnings (loss) per share....................... $(.21) $.45 $.75 ===== ==== ====
See notes to consolidated financial statements. F-4 34 GELMAN SCIENCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JULY 31, ---------------------------------- 1992 1993 1994 -------- -------- -------- Operating Activities Net earnings (loss)...................................... $ (1,211) $ 2,702 $ 4,754 Extraordinary loss related to early extinguishment of debt, before tax benefit.............................. -- -- 295 Depreciation and amortization............................ 4,219 4,452 4,396 Increase (decrease) in deferred income taxes............. (1,661) 275 627 Loss (gain) on sale of property, plant and equipment..... 90 31 (196) Stock issued for employee service........................ 62 300 360 Contribution to employee stock ownership plan............ 150 150 150 (Increase) decrease in inventories....................... 736 (47) (1,431) (Increase) decrease in accounts receivable............... 173 (1,051) (3,391) (Increase) decrease in other current assets.............. 1,919 (433) (276) Increase (decrease) in current liabilities............... (554) 2,285 382 Increase (decrease) in liabilities for environmental activities............................................ 4,523 (515) (1,154) Other.................................................... (4) 21 (25) -------- -------- -------- Net Cash Provided by Operating Activities............. 8,442 8,170 4,491 -------- -------- -------- Financing Activities Long-term debt borrowings................................ 24,125 25,700 33,011 Net increase (decrease) in short-term borrowings......... 40 (116) 114 Principal payments on long-term debt..................... (28,836) (28,327) (33,196) Fees paid on early retirement of debt.................... -- -- (52) Tax benefit from exercised stock options................. -- -- 608 Proceeds from exercised stock options.................... -- 389 924 Payment received -- note receivable common stock......... -- -- 992 -------- -------- -------- Net Cash Provided by (Used In) Financing Activities... (4,671) (2,354) 2,401 -------- -------- -------- Investing Activities Capital expenditures..................................... (4,027) (5,860) (6,682) Proceeds from sale of property, plant and equipment...... 83 50 537 (Increase) decrease in intangibles and other assets...... 263 66 (347) -------- -------- -------- Net Cash Used in Investing Activities................. (3,681) (5,744) (6,492) -------- -------- -------- Effects of Exchange Rate Changes on Cash................... (34) 203 (17) -------- -------- -------- Net Change in Cash......................................... 56 275 383 Cash at Beginning of Year.................................. 811 867 1,142 -------- -------- -------- Cash at End of Year........................................ $ 867 $ 1,142 $ 1,525 ======== ======== ========
See notes to consolidated financial statements. F-5 35 GELMAN SCIENCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
LOAN TO FOREIGN EMPLOYEE NOTE CURRENCY STOCK RECEIVABLE COMMON ADDITIONAL RETAINED TRANSLATION OWNERSHIP COMMON STOCK CAPITAL EARNINGS ADJUSTMENTS PLAN STOCK ------ ---------- -------- ----------- --------- ---------- Balances at July 31, 1991............. $252 $ 11,765 $ 10,854 $ (835) $(900) $ (992) ------ --------- -------- --------- ------- -------- Net loss for 1992................... -- -- (1,211) -- -- -- Stock issued -- 14,370 shares....... 1 61 -- -- -- -- Currency translation adjustments.... -- -- -- 506 -- -- ESOP loan payment................... -- -- -- -- 150 -- ------ --------- -------- --------- ------- -------- Balances at July 31, 1992............. 253 11,826 9,643 (329) (750) (992) ------ --------- -------- --------- ------- -------- Net earnings for 1993............... -- -- 2,702 -- -- -- Stock issued -- 68,050 shares....... 7 682 -- -- -- -- Currency translation adjustments.... -- -- -- (936) -- -- ESOP loan payment................... -- -- -- -- 150 -- ------ --------- -------- --------- ------- -------- Balances at July 31, 1993............. 260 12,508 12,345 (1,265) (600) (992) ------ --------- -------- --------- ------- -------- Net earnings for 1994............... -- -- 4,754 -- -- -- Stock issued -- 161,270 shares...... 16 1,276 -- -- -- -- ESOP loan payment................... -- -- -- -- 150 -- Three-for-two common stock splits... 337 (337) (7) -- -- -- Tax benefit from exercise of stock options.......................... -- 608 -- -- -- -- Currency translation adjustments.... -- -- -- 390 -- -- Officer loan repayment.............. -- -- -- -- -- 992 ------ --------- -------- --------- ------- -------- Balances at July 31, 1994............. $613 $ 14,055 $ 17,092 $ (875) $(450) -- ====== ========= ======== ========= ======= ========
See notes to consolidated financial statements. F-6 36 GELMAN SCIENCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of all subsidiaries after elimination of intercompany accounts and transactions. The financial data of foreign subsidiaries is translated using current exchange rates at the end of the year for balance sheet accounts and average exchange rates for operations. Translation gains and losses are reflected in stockholders' equity, while transaction gains and losses are reflected in the statements of operations. Foreign exchange transaction gains (losses) of $264,000, $(129,000) and $77,000 were recognized in fiscal 1992, 1993 and 1994, respectively. Inventories: Inventories are stated at the lower of cost or market. Cost was determined by the last-in, first-out (LIFO) method at the U.S. locations, representing approximately 69% and 78% of the July 31, 1993 and 1994 inventories, respectively, and by the first-in, first-out (FIFO) method for the foreign locations. The current cost of inventories exceeded their LIFO carrying amount by approximately $2,220,000 and $2,556,000 at July 31, 1993 and 1994, respectively. Properties and Depreciation: Properties are stated at cost. Depreciation is computed using the straight-line method based on the estimated useful life of the related asset. Included in property, plant and equipment are capitalized computer software costs. At July 31, 1993 and 1994 the unamortized amount of these costs was $246,000 and $92,700, respectively, and the amount amortized and charged to expense was $194,000, for each of the two fiscal years ended July 31, 1993 and 1992 and $153,300 for the fiscal year ended July 31, 1994. The Company capitalized interest costs of $91,000 in 1994, associated with the construction of certain capital assets. No interest was capitalized in fiscal 1993 and 1992. Intangibles: Intangibles consist principally of the excess of cost over net assets of acquired companies, amortized over 30 years. Income Taxes: Effective fiscal year 1992, the Company elected to adopt Statement of Financial Account Standard No. 109 -- Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or the tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The statement allows recognition of future tax benefits based on a realization test of "more likely than not." The cumulative effect of adopting SFAS No. 109 was not material. Earnings (Loss) Per Share: Primary earnings per share for fiscal 1992, 1993 and 1994 are based on the weighted average of common and common equivalent shares of 5,661,749, 5,750,543 and 6,307,388, respectively. Common share equivalents included in the computation represent shares issuable upon assumed exercise of stock options and warrants which would have dilutive effect in years where there are earnings. Fully diluted earnings per share for fiscal 1993 is based on the weighted average of common and common equivalent shares of 5,952,710. Full dilution had no material effect on earnings per share in fiscal 1992 and 1994. All per share amounts have been restated to retroactively reflect the two stock splits in fiscal 1994. Financial Instruments: The Company enters into certain financial instruments to reduce exposure to fluctuating foreign currency exchange rates and interest rates. Gains and losses on contracts which hedge specific foreign currency denominated transactions are deferred and recognized in the period in which the transaction is completed. Realized and unrealized gains and losses on other forward exchange contracts are recorded as other expense (income) currently. The Company enters into interest rate financial instruments to manage exposure to interest rate fluctuations. The difference to be paid or received on a interest rate swap agreement is included in interest expense currently. The fee paid on a interest rate cap agreement is amortized over the life of the agreement. F-7 37 GELMAN SCIENCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B -- FINANCING Financing consisted of the following obligations:
JULY 31, ------------------ 1993 1994 ------- ------- (in thousands) Borrowings under revolving credit agreement............................... $11,700 $13,000 Borrowings under term loan agreement due December 31, 1995................ 4,750 4,000 Industrial Development Revenue Bonds with maturities through July 1, 2004.................................................................... 5,336 5,045 Note payable, State of Michigan, bearing interest at 7.5%, through January 6, 2002................................................................. 975 850 Notes payable to banks.................................................... 1,415 1,549 Other..................................................................... 1,093 754 ------- ------- Total debt................................................................ 25,269 25,198 Less current maturities and short-term debt............................... 2,779 3,378 ------- ------- Long-term debt............................................................ $22,490 $21,820 ======= =======
Notes payable to banks of $1,549,000 are short-term borrowings under foreign subsidiaries' local currency credit lines, supported by a parent guarantee. The Company has a three-year unsecured revolving credit agreement that expires December 31, 1996. The amount of the commitment is $22,500,000. The agreement contains certain financial covenants of which the most restrictive requires that the interest coverage ratio be not less than 2.25 to 1.0 for the twelve month period preceding the date of determination. Various interest rate options are available under the agreement; at July 31, 1994, the option selected charged interest at 5.7%. The Company redeemed the 7.98% Industrial Development Revenue Bonds issued in 1989. The redemption was funded by the issuance of 1994 Industrial Development Revenue Bonds in the amount equal to the principal balance of the 1989 Bonds of $5.1 million. The 1994 bonds bear interest at 120% of the 90 day Eurodollar rate (approximately 6% as of July 31, 1994) with principal and interest due quarterly through July, 2004. The Company recorded a charge of $295,000 net of $112,000 tax benefit, or $.03 per share, to write-off deferred finance charges and record a redemption premium and fees related to the 1989 Bonds. During fiscal 1994, the Company also renegotiated the interest rate on the term loan from prime plus 1% to a Eurodollar rate plus an applicable margin (approximately 6.3% as of July 31, 1994). Maturities of long-term debt for the five fiscal years following July 31, 1994 are as follows: $1,829,000 in 1995; $16,612,000 in 1996; $565,000 in 1997; $598,000 in 1998; $634,000 in 1999 and $3,411,000 thereafter. Interest paid during the years ended July 31, 1992, 1993 and 1994 was $2,611,000, $2,020,000 and $1,433,000, respectively. F-8 38 GELMAN SCIENCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE C -- INCOME TAXES The components of earnings (loss) before income taxes and extraordinary items consisted of the following:
1992 1993 1994 ------- ------ ------ (in thousands) U.S................................................................ $(1,339) $5,336 $6,132 Foreign............................................................ 268 (604) 1,405 ------- ------ ------ $(1,071) $4,732 $7,537 ======= ====== ======
The provision (benefit) for income taxes is as follows:
1992 1993 1994 ------- ------ ------ (in thousands) Current payable: U.S.............................................................. $ 1,163 $1,481 $1,469 State............................................................ -- 149 88 Foreign.......................................................... 253 138 489 Deferred (credit): U.S.............................................................. (1,642) 277 556 Foreign.......................................................... 14 (15) (2) ------- ------ ------ $ (212) $2,030 $2,600 ======= ====== ======
Income tax benefit attributable to the extraordinary items in fiscal years 1992 and 1994 amounted to $206,000 and $112,000, respectively. A reconciliation between the provision (benefit) for income taxes and the amount compared through the application of the U.S. statutory tax rate (34%) to earnings (loss) before income taxes and extraordinary items is as follows:
1992 1993 1994 ----- ------ ------ (in thousands) Income taxes (benefit) at the statutory rate........................ $(364) $1,609 $2,563 Add (deduct): Effect of foreign losses that had no tax benefit.................. 202 342 47 Foreign rates in excess of U.S. statutory rate.................... (26) (30) 104 Non-deductible travel and entertainment........................... 19 13 34 Benefit of net operating loss carryforward........................ (59) (13) (161) State income taxes, net of federal income tax benefit............. -- 98 58 Foreign sales corporation benefit................................. -- (10) (26) Other items, net.................................................. 16 21 (19) ----- ------ ------ $(212) $2,030 $2,600 ===== ====== ======
Deferred income taxes for fiscal 1993 and 1994 reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. F-9 39 GELMAN SCIENCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities are as follows:
JULY 31, --------------------- 1993 1994 ------ ------ (in thousands) Deferred tax assets Allowance for doubtful accounts.................................... $ 161 $ 146 Litigation accruals................................................ 161 91 Inventory-related transactions..................................... 283 283 Administrative and general expenses not currently deductible....... 670 779 Environmental accrual.............................................. 1,184 720 Foreign operating loss carryforwards............................... 624 460 ------ ------ 3,083 2,479 Less excess tax over book depreciation and amortization.............. 1,537 1,676 ------ ------ Gross deferred tax asset............................................. 1,546 803 Valuation allowance.................................................. (624) (460) ------ ------ Net deferred tax asset............................................... $ 922 $ 343 ====== ====== Current deferred tax asset........................................... $1,494 $1,506 ====== ====== Non-current deferred tax liability................................... $ 572 $1,163 ====== ======
The Company has a 100% valuation allowance on all foreign subsidiary operating loss carryforwards. Net current deferred tax assets of $1,494,000 and $1,506,000 for fiscal 1993 and 1994, respectively are included in other current assets and net non-current liabilities of $572,000 and $1,163,000 for fiscal 1993 and 1994, respectively, are included in other long-term liabilities based on their relationship to assets and liabilities that generated the temporary difference. Income taxes paid during the years ended July 31, 1992, 1993, and 1994 were $1,229,000, $2,190,000 and $1,210,000, respectively. Taxes paid in 1994 reflect the benefit received from the exercise of stock options under the non-qualified stock option plan. No deferred income taxes have been provided on undistributed earnings of foreign subsidiaries since those earnings are expected to be reinvested indefinitely in the subsidiaries. NOTE D -- SAVINGS AND RETIREMENT PLANS The Company has a Savings Plan and an Employee Stock Ownership Plan (ESOP) covering substantially all U.S. employees. The Company contributes to the Savings Plan $.85 for every dollar contributed by employees up to 6% of their compensation, with one half of the Company's contribution in Company common stock. Company contributions charged to operations under these plans were $641,000, $714,000 and $780,000 for the years ended July 31, 1992, 1993 and 1994, respectively. NOTE E -- STOCKHOLDERS' EQUITY During the year, the Company's shareholders approved an increase in the number of authorized shares of common stock from 4 million to 8 million. The Company declared two, three-for-two stock splits for shareholders of record on December 8, 1993 and July 11, 1994. The distribution dates were December 28, 1993 and August 12, 1994, respectively. A total of 3,372,523 shares of common stock were issued in connection with the two splits. Cash was paid to settle fractional shares. The stated par value per share of common stock remains at $.10 and the value of the shares at par of $337,252 was transferred from additional capital to common stock. All per share amounts have been restated to retroactively reflect the stock splits. F-10 40 GELMAN SCIENCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In September 1990, the Company issued 128,000 shares (pre-split) of its common stock to an officer of the Company at market value in exchange for a $992,000 promissory note and cancellation of 128,000 stock options outstanding. During the year, this note was repaid in full plus accrued interest on the note. In October 1982, the Trust under the Company's Employee Stock Ownership Plan acquired 200,000 shares (pre-split) of the Company's common stock. The purchase price of $2,250,000 was financed by a loan from the Company to the Trust, repayable over a 15-year period at a 13.5% interest rate. The Company is making annual contributions to the Trust during the 15-year period of $150,000 per year to cover the principal payments plus additional contributions to cover interest. The Company has a non-qualified stock option plan. The Company is entitled to a tax deduction for income tax purposes of the amount that an employee reports as ordinary income. Since the Company recognizes no compensation expense from the exercise of the options, the tax benefit received is recorded as a reduction to income taxes payable and an increase to additional capital. NOTE F -- STOCK OPTIONS AND WARRANTS The Company has granted options under the Company's non-qualified stock option plans to certain key employees to purchase the Company's common stock at fair market value on the date of grant. The options generally become exercisable cumulatively, in equal installments over a period of four or five years commencing one year from date of grant and expiring ten years after date of grant. Changes in the number of shares available under outstanding options during fiscal years 1992, 1993 and 1994 were as follows:
NUMBER OF SHARES EXERCISE PRICE ---------------- ---------------- Outstanding at July 31, 1991................................ 339,925 $ 6.75 to $10.00 Granted................................................... 18,500 7.63 Exercised................................................. (300) 7.75 Cancelled................................................. (42,800) 7.75 to 10.00 ------------ ---------------- Outstanding at July 31, 1992................................ 315,325 $ 6.75 to $10.00 Granted................................................... 91,150 7.75 to 16.00 Exercised................................................. (47,225) 6.75 to 10.00 Cancelled................................................. (16,300) 7.75 to 10.00 ------------ ---------------- Outstanding at July 31, 1993................................ 342,950 $ 6.75 to $16.00 Granted................................................... 110,300 14.25 to 18.38 Exercised................................................. (144,149) 4.50 to 10.00 Cancelled................................................. (5,141) 5.08 to 10.25 Adjustment for Stock Splits............................... 369,398 3.00 to 12.25 ------------ ---------------- Outstanding at July 31, 1994................................ 673,358 $ 3.00 to $12.25 ============ ================
At July 31, 1992, 1993 and 1994, options for 137,550, 148,175 and 259,252 shares, respectively, were exercisable and options for 317,586, 242,736 and, subject to shareholder approval, 231,258 shares, respectively, were available for future grants. During the year, warrants to acquire 200 shares of Common Stock were exercised at $10.00 per share and warrants to acquire 18,000 shares of Common Stock were granted to purchase shares at $16.38 per share. The two 3-for-2 stock splits increased the number of shares subject to outstanding warrants by 74,500. These warrants are exercisable on the date of grant. At July 31, 1994, warrants were outstanding and exercisable to purchase 144,900 shares at exercise prices ranging from $3.33 to $10.92 per share as adjusted for stock splits. F-11 41 GELMAN SCIENCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE G -- POLLUTION-RELATED EXPENSES The Company has settled several lawsuits related to groundwater contamination and has begun remediation activities. The remediation plan requires the Company to treat the groundwater to the extent necessary to reduce the contaminants to a defined level. Management estimates that remediation will take ten years. The following table shows pollution-related balance sheet activity:
ACCRUED LONG-TERM LIABILITY DEBT ------- --------- (in thousands) Balance as of July 31, 1992............................................ $ 4,413 $ 625 Reclassification of State of Michigan note........................... (1,100) 1,100 Remediation costs charged to accrued liability....................... (390) -- Payments relating to settlements..................................... (42) (350) ------- --------- Balance as of July 31, 1993............................................ $ 2,881 $ 1,375 Remediation costs charged to accrued liability....................... (1,258) -- Settlement with chemical companies, cost recovery.................... 750 -- Payments relating to settlements..................................... (561) (250) Defense cost on settlement with local residents...................... (312) -- ------- --------- Balance as of July 31, 1994............................................ $ 1,500 $ 1,125 ======= ========
During the year, the Company settled its lawsuit against several chemical companies for a cost recovery of $750,000 for damages in connection with the groundwater contamination. Also during the year, the Company reached a settlement for $561,000 with nearby residents wherein the residents filed suit for damages associated with contamination of residential water supplies. The defense and other costs associated with this case of $312,000 was offset against the recovery from the chemical companies. Pollution-related expenses in fiscal 1992 and 1993, as shown on the Consolidated Statement of Operations, include legal costs, settlement provisions and other related costs. At July 31, 1994, $509,000 of the total accrued liability is classified as other accrued expenses with the remainder classified as other long-term liabilities. Of the total long-term debt, $191,000 is classified as current maturities. Total costs to the Company of pollution-related activities will be dependent upon the efficacy and duration of the remediation plan and obtaining a cost-free repository for treated groundwater. The ultimate costs to be incurred could exceed the amount provided for at July 31, 1994. However, it is the opinion of management that these additional costs, if any, will not have a material adverse effect on the Company's operations because the cash outflows would be spread over many future years. NOTE H -- OTHER EXPENSE (INCOME) For the year ended July 31, 1994, other expense (income) includes a gain of $108,000 on the sale of Australian assets relating to the Laminar Air Flow product line. Also included in other expense (income) are royalties, interest income, gains and losses on sales of other assets and foreign exchange gains and losses. F-12 42 GELMAN SCIENCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE I -- OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA The principal products of the Company are grouped into two segments: the Filtration Products Group and the Health Products Group. Filtration Products are primarily comprised of laboratory products, certain membranes and process filtration products for the biotechnology, pharmaceutical, environmental and industrial markets. Health Products are primarily comprised of products for the medical and health industries, including custom-manufactured disposable filters and certain membranes for original equipment manufacturers in the healthcare field. In both of these segments, sales and distribution of the Company's products both domestically and internationally are through Company salespeople and a network of distributors.
NET OPERATING IDENTIFIABLE DEPRECIATION CAPITAL SALES EARNINGS ASSETS EXPENSE EXPENDITURES ------- --------- ------------ ------------ ------------ (in thousands) INDUSTRY SEGMENTS Year Ended July 31, 1994 Filtration Products Group............... $62,916 $ 9,749 $ 49,431 $3,039 $4,223 Health Products Group................... 29,461 4,833 20,918 1,325 2,338 Other................................... 2,586 115 1,245 41 121 ------- -------- ---------- --------- --------- Totals................................ $94,963 $14,697 $ 71,594 $4,405 $6,682 ======= ======== ========== ========= ========= Year Ended July 31, 1993 Filtration Products Group............... $56,900 $ 7,407 $ 44,407 $3,069 $3,717 Health Products Group................... 26,394 4,375 17,356 1,114 2,114 Other................................... 2,915 (14) 1,542 58 29 ------- -------- ---------- --------- --------- Totals................................ $86,209 $11,768 $ 63,305 $4,241 $5,860 ======= ======== ========== ========= ========= Year Ended July 31, 1992 Filtration Products Group............... $53,612 $ 6,739 $ 42,942 $3,013 $3,082 Health Products Group................... 24,226 3,321 16,253 1,106 935 Other................................... 3,622 64 2,104 71 10 ------- -------- ---------- --------- --------- Totals................................ $81,460 $10,124 $ 61,299 $4,190 $4,027 ======= ======== ========== ========= =========
NET OPERATING IDENTIFIABLE SALES EARNINGS ASSETS LIABILITIES -------- --------- ------------ ----------- (in thousands) GEOGRAPHIC AREA DATA Year Ended July 31, 1994 U.S. Operations...................................... $ 80,147 $13,477 $ 56,685 $37,026 Europe............................................... 13,631 809 7,579 1,428 Asia/Pacific......................................... 9,300 328 6,264 2,649 Other................................................ 3,095 83 1,066 149 Elimination -- Inter-area sales...................... (11,210) -- -- -- -------- -------- ---------- --------- Totals............................................. $ 94,963 $14,697 $ 71,594 $41,252 ======== ======== ========== ========= Year Ended July 31, 1993 U.S. Operations...................................... $ 72,589 $11,932 $ 50,517 $37,049 Europe............................................... 10,564 163 5,938 1,057 Asia/Pacific......................................... 8,958 (35) 5,684 2,991 Other................................................ 3,142 (292) 1,166 142 Elimination -- Inter-area sales...................... (9,044) -- -- -- -------- -------- ---------- --------- Totals............................................. $ 86,209 $11,768 $ 63,305 $41,239 ======== ======== ========== ========= Year Ended July 31, 1992 U.S. Operations...................................... $ 65,737 $ 9,889 $ 47,002 $36,677 Europe............................................... 9,848 22 6,750 1,332 Asia/Pacific......................................... 10,528 56 6,610 3,701 Other................................................ 3,141 157 937 169 Elimination -- Inter-area sales...................... (7,794) -- -- -- -------- -------- ---------- --------- Totals............................................. $ 81,460 $10,124 $ 61,299 $41,879 ======== ======== ========== =========
F-13 43 GELMAN SCIENCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Operating earnings are total revenues less operating expenses, foreign exchange gains or losses, interest and finance charges, and corporate expenses (fiscal 1992 - $8,966,000; fiscal 1993 - $4,847,000; fiscal 1994 - $5,568,000). Corporate expenses include an allocated share of administrative costs and pollution-related expenses. Identifiable assets by industry segment include both assets directly identified with those operations and an allocated share of jointly used assets. Corporate assets consist of an allocated share of the buildings, furniture and fixtures, and equipment. Asia/Pacific operations are represented by subsidiaries located in Japan and Australia. European operations are represented by subsidiaries located in the United Kingdom, Ireland, France, Germany and Italy. The geographic data has been revised and restated retroactively in order to present more meaningful data. Inter-area sales are accounted for at prices comparable to unaffiliated customer sales. Export sales to unaffiliated customers were: fiscal 1992 - $9,970,000; fiscal 1993 - $10,018,000; fiscal 1994 - $9,239,000. Net sales to a major customer, who is a distributor of the Company's products and a manufacturer of medical products, approximated $8,487,000, $9,929,000 and $10,522,000 in fiscal 1992, 1993 and 1994, respectively. NOTE J -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Foreign Exchange Instruments: The Company enters into forward exchange contracts to hedge foreign currency transactions on a continuing basis. At July 31, 1994 the Company had contracts outstanding to exchange foreign currencies for U.S. dollars amounting to approximately $1.1 million denominated in British pounds, Japanese yen, French francs and German deutschemarks, maturing at various dates. Maximum market risk is limited to the difference between the spot rate on the date of delivery and the contract price. Interest rate instruments: At July 31, 1994, the Company had outstanding an interest rate swap agreement to obtain long-term fixed interest rates for a notional amount of $5 million. Under the terms of the agreement, the Company secured a fixed rate of 7.41% on the notional amount, through January 25, 1996. During the year, the Company purchased a 7.5% interest rate cap on $5 million notional amount effective May 1, 1995 through May 1, 1998. The interest rate swap and cap agreements have been entered into with major financial institutions that are expected to fully perform under the terms of the agreements. NOTE K -- EXTRAORDINARY ITEM As more fully discussed in Note B -- Financing, during the year ended July 31, 1994, the Company redeemed the 7.98% Industrial Development Revenue Bonds issued in 1989. The Company recorded a charge of $295,000 net of $112,000 tax benefit or $.03 per share to write-off deferred finance charges and record a redemption premium and fees related to the 1989 Bonds. During the year ended July 31, 1992, the Company agreed to settle an adverse $2.6 million verdict in a product liability case for $1.8 million. While the lawsuit was pending, the Company believed that it had full insurance coverage. In the interim, however, its primary insurance carrier was placed in reorganization and the Company's secondary carrier failed. The Company received $1.3 million from its primary insurance carrier as part of the reorganization in December 1990. The balance of the settlement, $558,000, has been expensed and recorded as an extraordinary loss net of a $206,000 tax benefit. F-14 44 GELMAN SCIENCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE L -- SUMMARY OF QUARTERLY RESULTS OF OPERATION (UNAUDITED) Summarized quarterly financial information for fiscal years ended July 31, 1993 and July 31, 1994 is shown below:
FISCAL 1993 FISCAL 1994 -------------------------------------- -------------------------------------- OCT. 31 JAN. 31 APR. 30 JULY 31 OCT. 31 JAN. 31 APR. 30 JULY 31 -------- -------- -------- -------- -------- -------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales....................... $ 20,932 $ 20,200 $ 22,269 $ 22,808 $ 22,294 $ 23,282 $24,377 $ 25,010 Gross profit.................... 10,118 9,693 11,155 11,579 10,918 11,628 12,042 13,122 Research and development expense....................... 941 979 1,035 1,184 1,220 1,106 1,188 1,363 Pollution-related expense....... 237 94 111 101 -- -- -- -- Earnings before income taxes and extraordinary item............ 1,118 707 1,508 1,399 1,388 1,733 2,266 2,150 Income taxes.................... 480 292 653 605 490 639 784 687 Extraordinary item.............. -- -- -- -- -- -- (183) -- Net earnings.................... 638 415 855 794 898 1,094 1,299 1,463 Net earnings per share.......... .10 .07 .15 .13 .15 .18 .20 .23
The third quarter ended April 30, 1994 includes an extraordinary charge resulting from redemption of Industrial Development Revenue Bonds issued in 1989. The Company recorded a charge of $295,000 net of $112,000 tax benefit or $.03 per share to write off deferred finance charges and record a redemption premium and fees related to the 1989 Bonds. F-15 45 GELMAN SCIENCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JANUARY 31, ------------------- 1994 1995 ------- ------- ASSETS Current Assets Cash................................................................... $ 883 $ 1,906 Accounts receivable less allowances.................................... 18,845 21,680 Inventories Finished products................................................... 6,794 5,785 Work in process..................................................... 2,328 1,689 Raw material and purchased parts.................................... 5,017 6,709 ------- ------- 14,139 14,183 Other current assets................................................... 3,948 4,485 ------- ------- Total Current Assets........................................... 37,815 42,254 Property, Plant and Equipment............................................ 65,550 65,552 Less allowances for depreciation....................................... (36,983) (35,252) ------- ------- 28,567 30,300 Intangibles and Other Assets............................................. 1,559 2,348 ------- ------- Total Assets................................................... $67,941 $74,902 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks................................................. $ 1,364 $ 1,718 Accounts payable....................................................... 5,562 4,396 Accrued expenses....................................................... 8,379 8,208 Current maturities of long-term debt................................... 1,437 4,070 ------- ------- Total Current Liabilities...................................... 16,742 18,392 Long-Term Debt, exclusive of current maturities.......................... 24,000 20,739 Other Long-Term Liabilities.............................................. 2,377 2,156 Stockholders' Equity: Preferred stock, par value $1.00 per share -- authorized shares 500,000, none outstanding........................................... -- -- Common stock, par value $.10 per share -- issued and outstanding 3,989,606 shares in 1994 and 6,218,969 shares in 1995............... 399 622 Additional capital..................................................... 12,868 14,670 Retained earnings...................................................... 14,337 19,579 Foreign currency translation adjustments............................... (1,190) (806) Less loan to Employee Stock Ownership Plan............................. (600) (450) Note receivable -- common stock........................................ (992) -- ------- ------- Total Stockholders' Equity..................................... 24,822 33,615 ------- ------- Total Liabilities and Stockholders' Equity..................... $67,941 $74,902 ======= =======
See notes to unaudited consolidated financial statements. F-16 46 GELMAN SCIENCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS ENDED JANUARY 31, ------------------- 1994 1995 ------- ------- Net sales................................................................ $45,576 $48,185 Costs and expenses Cost of products sold.................................................. 23,030 23,583 Selling and administrative............................................. 16,299 17,320 Research and development............................................... 2,326 2,624 Other income -- net.................................................... (78) (122) ------- ------- Operating earnings....................................................... 3,999 4,780 Interest expense......................................................... 878 882 ------- ------- Earnings before income taxes............................................. 3,121 3,898 Income taxes............................................................. 1,129 1,411 ------- ------- Net earnings............................................................. $ 1,992 $ 2,487 ======= ======= Primary earnings per share............................................... $ .32 $ .38 ======= ======= Weighted average common and common equivalent shares outstanding......... 6,183,000 6,597,000 ========= =========
See notes to unaudited consolidated financial statements. F-17 47 GELMAN SCIENCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JANUARY 31, --------------------- 1994 1995 -------- -------- Operating Activities Net earnings......................................................... $ 1,992 $ 2,487 Loss on disposal of assets........................................... -- 25 Depreciation and amortization........................................ 2,251 2,092 Increase in inventories.............................................. (1,153) (150) Increase in accounts receivable...................................... (1,737) (724) Increase in other current assets..................................... (345) (620) Increase (decrease) in current liabilities........................... 814 (675) Decrease in liabilities for environmental activities................. (746) (522) Tax benefit from exercised stock options............................. 191 220 Other................................................................ 56 38 -------- -------- Net Cash Provided by Operating Activities.................... 1,323 2,171 -------- -------- Financing Activities Long-term debt borrowings............................................ 15,683 14,420 Principal payments on long-term debt................................. (14,114) (13,267) Proceeds from exercised stock options................................ 499 386 -------- -------- Net Cash Provided by Financing Activities.................... 2,068 1,539 -------- -------- Investing Activities Capital expenditures................................................. (3,446) (3,207) Increase in intangibles and other assets............................. (222) (71) Proceeds from sale of assets......................................... 3 34 -------- -------- Net Cash Used in Investing Activities........................ (3,665) (3,244) -------- -------- Effects of Exchange Rate Changes on Cash............................... 15 (85) -------- -------- Net Change in Cash During the Period................................... (259) 381 Cash at Beginning of Period............................................ 1,142 1,525 -------- -------- Cash at End of Period.................................................. $ 883 $ 1,906 ======== ========
See notes to unaudited consolidated financial statements. F-18 48 GELMAN SCIENCES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) GENERAL In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position of the Company and subsidiaries as of January 31, 1995, and the results of their operations and cash flows for the six months ended January 31, 1995 and 1994. These financial statements should be read in conjunction with the audited financial statements and notes thereto set forth on pages F-2 through F-15. The results of operations for the six months ended January 31, 1995 and 1994 are not necessarily indicative of the results for the full year. PUBLIC OFFERING On January 27, 1995, the Company filed a Registration Statement with the Commission to sell 1,000,000 shares of Common Stock in an underwritten public offering. The Company has granted the Underwriters an option for 30 days to purchase up to an additional 150,000 shares of Common Stock solely to cover over-allotments, if any. The net proceeds from the sale of the Common Stock will be used to repay a term note payable to NBD Bank N.A. and to reduce outstanding indebtedness under the Credit Agreement. POLLUTION-RELATED MATTERS The Company has settled several lawsuits related to groundwater contamination and has begun remediation activities. The remediation plan requires the Company to treat the groundwater to the extent necessary to reduce the contaminants to a defined level. Management estimates that remediation will take eight years. Total costs to the Company of pollution-related activities will be dependent upon the efficacy and duration of the remediation plan and obtaining a cost-free repository for treated groundwater. The ultimate costs to be incurred could exceed the amount provided of $1.1 million at January 31, 1995. However, it is the opinion of management that these additional costs, if any, will not have a material adverse effect on the Company's operations because the cash outflows would be spread over many future years. F-19 49 MEMBRANES [Two photographs of the Company's The Company manufactures membranes products sold primarily to medical for its microfiltration products. products manufacturers.] These membranes are also sold primarily to medical products manufacturers who incorporate them into products such as diagnostic kits for early detection of pregnancy and monitoring levels of cholesterol and glucose.
PROCESS FILTRATION PRODUCTS [Three photographs of the Company's Process filtration products are used in high products used in high technology technology manufacturing applications such as manufacturing applications.] sterilization of pharmaceutical products, ultrapurification of water for the manufacture of semiconductor chips and the production of ultrapure chemicals. The filters are disposable, used in high volume applications and require regular replacement. Cartridge filters are housed in stainless steel vessels, many of which are manufactured by the Company.
50 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALES REPRESENTATIVE, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 4 Investment Considerations............. 7 Use of Proceeds....................... 7 Price Range of Common Stock and Dividend Policy..................... 8 Capitalization........................ 9 Selected Consolidated Financial Data................................ 10 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 11 Business.............................. 16 Management............................ 23 Description of Capital Stock.......... 24 Underwriting.......................... 26 Legal Matters......................... 26 Experts............................... 27 Index to Consolidated Financial Statements.......................... F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 1,000,000 SHARES [GELMAN LOGO] COMMON STOCK -------------------- PROSPECTUS -------------------- CLEARY GULL REILAND & MCDEVITT INC. MCDONALD & COMPANY Securities, Inc. RONEY & CO. MARCH , 1995 - ------------------------------------------------------ - ------------------------------------------------------ 51 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the fees and expenses payable by the Company in connection with the offering of the shares of Common Stock. Securities and Exchange Commission registration fee................ $ 5,403 NASD filing fee.................................................... 2,067 Legal fees and expenses............................................ 30,000 Blue Sky fees and expenses (including legal fees).................. 15,000 Accounting fees and expenses....................................... 45,000 Transfer Agent and Registrar fees.................................. 1,500 Printing and engraving fees........................................ 75,000 AMEX listing fees.................................................. 17,500 Miscellaneous...................................................... 18,530 -------- Total......................................................... $210,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Sections 561 through 571 of the Michigan Business Corporation Act ("MBCA") set forth the conditions and limitations governing the indemnification of officers, directors and other persons. The MBCA provides for indemnification of directors and officers acting in good faith and in a manner they reasonably believe to be in or not opposed to the best interest of the Company or its shareholders (and, with respect to a criminal proceeding, if they have no reasonable cause to believe their conduct to be unlawful) against (i) expenses (including attorney's fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending, or completed action, suit, or proceeding (other than an action by or in the right of the Company) arising out of a position with the Company (or with some other entity at the Company's request) and (ii) expenses (including attorney's fees) and amounts paid in settlement actually and reasonably incurred in connection with a threatened, pending, or completed action or suit by or in the right of the Company, unless the director or officer is found liable to the Company and an appropriate court does not determine that he or she is nevertheless fairly and reasonably entitled to indemnification. The MBCA requires indemnification for expenses to the extent that a director or officer is successful in defending against any such action, suit or proceeding, and otherwise requires in general that the indemnification provided for in (i) and (ii) above be made only on a determination by a majority vote of a quorum of the Board of Directors who were not parties to or threatened to be made parties to such action. In certain circumstances, the MBCA further permits advances to cover such expenses before a final determination that indemnification is permissible, upon receipt of (i) a written affirmation by the directors or officers of their good faith belief that they have met the applicable standard of conduct set forth in the MBCA, (ii) receipt of a written undertaking by or on behalf of the directors of officer to repay such amounts unless it shall ultimately be determined that they are entitled to indemnification and (iii) a determination that the facts then known to those making the advance would not preclude indemnification. Indemnification under the MBCA is not exclusive of other rights to indemnification to which a person may be entitled under a company's articles of incorporation, bylaws, or a contractual agreement. Reference is made to Article VII of the Company's Restated Bylaws which provides for indemnification of directors and officers of the Company and others to the full extent permitted by the aforesaid sections of the MBCA. The Articles (Article X) provide that a director of the Company shall not be personally liable to the Company or its shareholders for monetary damages for breach of the director's fiduciary duty, provided such limitation on liability does not involve (i) a breach of the director's duty of loyalty to the Company or its shareholders; (ii) acts or omissions not in good faith or that involve intentional misconduct or knowing II-1 52 violation of law; (iii) a violation of certain provisions of the MBCA; (iv) a transaction from which the director derived an improper personal benefit; and (v) an act or omission occurring before March 1, 1987. The Articles further provide that any amendment to these director liability provisions will have prospective effect only. The MBCA permits the Company to purchase insurance on behalf of its directors and officers against liabilities arising out of their positions with the Company whether or not such liabilities would be within the indemnification provisions of the MBCA. The Company carries a directors' and officers' liability insurance policy which insures officers and directors of the Company against certain liability by reason of certain acts and omissions in connection with their duties for the Company and indemnifies the Company against losses for which it may be required or permitted by law to indemnify such directors and officers, generally covering such losses up to $5,000,000 in the aggregate in each policy year. The insurance policy is in effect until August 31, 1995 and the total premium for such policy is $42,300. Reference is made to Section 7 of the Underwriting Agreement, a copy of which is filed as Exhibit 1 to the Registration Statement, for information concerning indemnification arrangements among the Company and the Underwriters. ITEM 16. EXHIBITS 1 Form of Underwriting Agreement. 5 Opinion of Brouse & McDowell regarding legality of securities being offered. 10(a) Employment Agreement between the Company and Charles Gelman, as amended, incorporated by reference from Exhibit 10(1) to the Company's Form 10-K for year ended July 31, 1988. 10(b) Deferred Compensation Agreement between the Company and James C. Marshall, incorporated by reference from Exhibit 10(3) to the Company's Form 10-K for year ended July 31, 1988. 10(c) Employment Agreement between the Company and James C. Marshall, incorporated by reference from Exhibit 10(4) to the Company's Form 10-K for year ended July 31, 1989. 10(d) 1978 Employee Stock Option Plan, as amended, incorporated by reference from Exhibit 10(2) to the Company's Form 10-K for year ended July 31, 1987. 10(e) 1988 Stock Plan, incorporated by reference from Exhibit 10(6) to the Company's Form 10-K for year ended July 31, 1988. 10(f) Warrant Agreements, dated December 16, 1987, with John A. Geishecker and Saul Hymans, incorporated by reference to Exhibits 28.4 and 28.5 to the Company's Form S-8 Registration Statement No. 33-37235 filed with the Securities and Exchange Commission on October 9, 1990. 10(g) Warrant and Stock Appreciation Rights Agreements, dated January 12, 1989, with John A. Geishecker and Saul Hymans, incorporated by reference to Exhibits 28.7 and 28.8 to the Company's Form S-8 Registration Statement No. 33-37235 filed with the Securities and Exchange Commission on October 9, 1990. 10(h) Warrant Agreement, dated January 12, 1989, with Nina I. McClelland, incorporated by reference to Exhibit 28.10 to the Company's Form S-8 Registration Statement No. 33-37235 filed with the Securities and Exchange Commission on October 9, 1990. 10(i) Confidentiality, Anti-Competition and Termination Benefits Agreement between James J. Fahrner and the Company, incorporated by reference from Exhibit 10(10) to the Company's Form 10-K for year ended July 31, 1993. 10(j) Confidentiality, Anti-Competition and Termination Benefits Agreement between Robert L. Buker and the Company, incorporated by reference from Exhibit 10(11) to the Company's Form 10-K for year ended July 31, 1993. 10(k) Confidentiality, Anti-Competition and Termination Benefits Agreement between Eric Gelman and the Company, incorporated by reference from Exhibit 10(12) to the Company's Form 10-K for year ended July 31, 1993.
II-2 53 10(l) Warrant Agreement, dated September 2, 1992, with Charles Newman, incorporated by reference from Exhibit 10(14) to the Company's Form 10-K for year ended July 31, 1993. 10(m) Consent Judgment in Kelley v. Gelman Sciences Inc. entered October 26, 1992, incorporated by reference from Exhibit 10(15) to the Company's Form 10-K for year ended July 31, 1993. 10(n) Consent Judgment in State of Michigan v. Gelman Sciences Inc. entered October 26, 1992, incorporated by reference from Exhibit 10(16) to the Company's Form 10-K for year ended July 31, 1993. 10(o) Employment Agreement dated May 4, 1993, between the Company and Kim A. Davis, incorporated by reference from Exhibit 10(17) to the Company's Form 10-K for year ended July 31, 1993. 10(p) Warrant Agreement, dated June 17, 1994, with Robert Collins, incorporated by reference from Exhibit 10(16) of the Company's Form 10-K for year ended July 31, 1994. 10(q) Warrant Agreement, dated June 17, 1994, with John A. Geishecker, incorporated by reference from Exhibit 10(17) of the Company's Form 10-K for year ended July 31, 1994. 10(r) Warrant Agreement, dated June 17, 1994, with Saul Hymans, incorporated by reference from Exhibit 10(18) of the Company's Form 10-K for year ended July 31, 1994. 10(s) Warrant Agreement, dated June 17, 1994, with Nina McClelland, incorporated by reference from Exhibit 10(19) of the Company's Form 10-K for year ended July 31, 1994. 10(t) Warrant Agreement, dated June 17, 1994, with Charles Newman, incorporated by reference from Exhibit 10(20) of the Company's Form 10-K for year ended July 31, 1994. 10(u) Confidentiality, Anti-Competition and Termination Benefits Agreement between Mark A. Sutter and the Company, incorporated by reference from Exhibit 10(21) of the Company's Form 10-K for year ended July 31, 1994. 10(v) Confidentiality, Anti-Competition and Termination Benefits Agreement between Edward J. Levitt and the Company, incorporated by reference from Exhibit 10(22) of the Company's Form 10-K for year ended July 31, 1994. 10(w) Credit Agreement (the "Credit Agreement") dated October 29, 1993 between the Company, NBD Bank, N.A. and Comerica Bank, incorporated by reference from Exhibit 4.1 of the Company's Form 10-K for year ended July 31, 1993. 10(x) First Amendment to Credit Agreement dated April 1, 1994.* 10(y) Warrant Agreement, dated September 2, 1994, with Dr. Hajime Kimura, incorporated by reference from Exhibit 10(1) to the Company's Form 10-Q for the quarter ended January 31, 1995. 11 Statement re Computation of Per Share Earnings. 13(a) Annual Report to Shareholders for the fiscal year ended July 31, 1994.* 13(b) Form 10-Q for the fiscal quarter ended October 31, 1994.* 13(c) Form 10-Q for the fiscal quarter ended January 31, 1995. 23(a) Consent of Independent Auditors. 23(b) Consent of Brouse and McDowell (Included in Exhibit 5 above). 24 Powers of Attorney.
- ------------------------- *Previously filed as an exhibit to this registration statement. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event II-3 54 that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 55 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Ann Arbor, State of Michigan, on February 23, 1995. GELMAN SCIENCES INC. By: /s/ James J. Fahrner ------------------------------------ James J. Fahrner Vice President-Finance and Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated: * Date: February 23, 1995 - ----------------------------------------------- Charles Gelman Chairman of the Board and a Director (Chief Executive Officer) /s/ James J. Fahrner Date: February 23, 1995 - ----------------------------------------------- James J. Fahrner Vice President-Finance and Treasurer (Chief Financial Officer and Principal Accounting Officer)
Directors: Robert M. Collins, John A. Geishecker, Jr., Saul H. Hymans, Hajime Kimura, Nina I. McClelland and Charles Newman* *By: /s/ James J. Fahrner Date: February 23, 1995 ------------------------------------------ James J. Fahrner Attorney-In-Fact**
- ------------------------- ** Pursuant to authority granted by powers of attorney, copies of which have previously been filed. II-5 56 EXHIBIT INDEX
NO. DESCRIPTION - --- ----------------------------------------------------------------------------------- 1 Form of Underwriting Agreement. 5 Opinion of Brouse & McDowell. 11 Statement re Computation of Per Share Earnings. 13 (c) Form 10-Q for the fiscal quarter ended January 31, 1995. 23 (a) Consent of Independent Auditors. 23 (b) Consent of Brouse & McDowell (included in Exhibit 5 above).
EX-1 2 UA 1 EXHIBIT 1 1,000,000* Shares Gelman Sciences Inc. Common Stock Par Value $.10 Per Share UNDERWRITING AGREEMENT March ___, 1995 Cleary Gull Reiland & McDevitt Inc. McDonald & Company Securities Incorporated Roney & Co. As Representatives of the Several Underwriters Identified in Schedule A Annexed Hereto c/o Cleary Gull Reiland & McDevitt Inc. 100 East Wisconsin Avenue, Suite 2700 Milwaukee, Wisconsin 53202 Gentlemen: Gelman Sciences Inc., a Michigan corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the several Underwriters named in Schedule A hereto (the "Underwriters"), for which you are acting as representatives (the "Representatives"), an aggregate of 1,000,000 shares (the "Firm Shares"), and, at the election of the Underwriters, up to 150,000 additional shares (the "Option Shares") of Common Stock, $.10 par value per share, of the Company (the "Common Stock"). The Firm Shares and the Option Shares are herein collectively called the "Shares." The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-2 (File No. 33-_______) and a related preliminary prospectus for the registration of the Shares under the Securities Act of 1933, as amended (the "Act"). The registration statement, as amended, including the information (if any) deemed to be part thereof pursuant to Rule 430A under the Act, is herein referred to as the "Registration Statement." The form of prospectus first filed by the Company with the Commission pursuant to Rules 424(b) and 430A under the Act is referred to herein as the "Prospectus." Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective or filed with the Commission pursuant to Rule 424(a) under the Act is referred to herein as a "Preliminary Prospectus." As used herein, the terms Prospectus, Preliminary Prospectus and Registration Statement include all documents __________________________________ *Plus an option to acquire up to 150,000 additional shares to cover over allotments. 2 incorporated by reference therein. Copies of the Registration Statement, including all exhibits and schedules thereto, any amendments thereto and all Preliminary Prospectuses have been delivered to you. The Company hereby confirms its agreements with respect to the purchase of the Shares by the Underwriters as follows: 1. Representations and Warranties of the Company. (a) The Company represents and warrants to, and agrees with, each of the Underwriters that: (i) The Registration Statement has been declared effective under the Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. No stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or threatened by the Commission. (ii) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission promulgated thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty as to information contained in or omitted in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives expressly for use in the preparation thereof. (iii) The Registration Statement conforms, and the Prospectus and any amendments or supplements thereto will conform, in all material respects to the requirements of the Act and the rules and regulations thereunder. Neither the Registration Statement nor any amendment thereto, and neither the Prospectus nor any supplement thereto, contains or will contain, as the case may be, any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, expressly for use in the preparation thereof. (iv) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of Michigan, has the corporate power and authority to own or lease its properties and conduct its business as described in the Prospectus, and is duly qualified to transact business in all jurisdictions in which the conduct of its business or its ownership or leasing of property requires such qualification. (v) Each subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its 2 3 incorporation, has the corporate power and authority to own or lease its properties and conduct its business as described in the Prospectus, and is duly qualified to transact business in all jurisdictions in which the conduct of its business or its ownership or leasing of property requires such qualification. All outstanding shares of capital stock of each of the subsidiaries of the Company have been duly authorized and validly issued, are fully paid and nonassessable, and are beneficially owned, directly or indirectly, by the Company free and clear of all liens, encumbrances and security interests. No options, warrants or other rights to purchase, agreements or other obligations to issue, or other rights to convert any obligations into, shares of capital stock or the other equity interests in any of the subsidiaries of the Company are outstanding. (vi) The outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Shares to be issued and sold by the Company to the Underwriters pursuant to this Agreement have been duly authorized and, when issued and paid for as contemplated herein, will be validly issued, fully paid and nonassessable and the Underwriters will acquire good and marketable title thereto. Except as otherwise stated in the Prospectus, there are no preemptive rights or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of capital stock of the Company pursuant to the Company's Restated Articles of Incorporation, as amended (the "Articles"), By-laws or any agreement or other instrument to which the Company is a party or by which the Company is bound. Neither the filing of the Registration Statement nor the offering or the sale of the Shares as contemplated by this Agreement gives rise to any rights for, or relating to, the registration of any shares of capital stock or other securities of the Company. Except as described in the Prospectus, there are no outstanding options, warrants, agreements, contracts or other rights to purchase or acquire from the Company any shares of its capital stock. The Company has the authorized and outstanding capital stock as set forth under the heading "Capitalization" in the Prospectus. The capital stock of the Company, including the Shares, conforms, and the Shares to be issued by the Company to the Underwriters will conform, to the description thereof contained in the Prospectus. (vii) The financial statements, together with the related notes and schedules as set forth in the Registration Statement and Prospectus, present fairly the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries on the basis stated in the Registration Statement at the indicated dates and for the indicated periods. Such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of results for such periods have been made, except as otherwise stated therein. The summary and selected financial and statistical data included in the Registration Statement present fairly the information shown therein on the basis stated in the Registration Statement and have been compiled on a basis consistent with the financial statements presented therein. (viii) There is no action or proceeding pending or, to the knowledge of the Company, threatened or contemplated against the Company or any of its subsidiaries before any court or administrative or regulatory agency which, if determined adversely to the Company or any of its subsidiaries, would, individually or in the aggregate, result in a material adverse change in the business or condition (financial or otherwise), results of 3 4 operations, stockholders' equity or prospects of the Company and its subsidiaries, taken as a whole, except as set forth in the Registration Statement. (ix) The Company has good and marketable title to all properties and assets reflected as owned in the financial statements hereinabove described (or as described as owned in the Prospectus), in each case free and clear of all liens, encumbrances and defects, except such as are described in the Prospectus or those that do not materially affect the value of such properties and assets and do not materially interfere with the use made and proposed to be made of such properties and assets by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of any such property and buildings by the Company and its subsidiaries. (x) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, (A) there has not been any material adverse change, or any development involving a prospective material adverse change, in or affecting the condition, financial or otherwise, of the Company and its subsidiaries, taken as a whole, or the business affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries, taken as a whole, whether or not occurring in the ordinary course of business, (B) there has not been any transaction not in the ordinary course of business entered into by the Company or any of its subsidiaries which is material to the Company and its subsidiaries, taken as a whole, other than transactions described or contemplated in the Registration Statement, as it may be amended or supplemented, (C) the Company and its subsidiaries have not incurred any material liabilities or obligations, which are not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company and its subsidiaries, (D) the Company and its subsidiaries have not sustained any material loss or interference with their respective businesses or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance, (E) there has not been any change in the capital stock of the Company (other than upon the exercise of options and warrants described in the Registration Statement), or any material increase in the short-term or long-term debt (including capitalized lease obligations) of the Company and its subsidiaries, taken as a whole, or (F) there has not been any issuance of warrants, options, convertible securities or other rights to purchase or acquire capital stock of the Company. (xi) Neither the Company nor any of its subsidiaries is in violation of, or in default under, the Articles or Bylaws, or any statute, or any rule, regulation, order, judgment, decree or authorization of any court or governmental or administrative agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties, or any indenture, mortgage, deed of trust, loan agreement, lease, franchise, license or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them are bound or to which any property or assets of the Company or any of its subsidiaries is subject, which violation or default would have a material adverse effect on the business, condition (financial or otherwise), results of operations, stockholders' equity or prospects of the Company and its subsidiaries, taken as a whole. Except as disclosed in the Prospectus, the Company and its subsidiaries have disposed of all wastes in compliance with all applicable laws and is not aware of any existing condition that may form the basis for any 4 5 present or future claim, demand or action seeking cleanup of any site, location, or body of water, surface or subsurface. (xii) The issuance and sale of the Shares by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions contemplated herein will not violate any provision of the Articles or Bylaws of the Company or any of its subsidiaries or any statute or any order, judgment, decree, rule, regulation or authorization of any court or governmental or administrative agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties, and will not conflict with, result in a breach or violation of, or constitute, either by itself or upon notice or passage of time or both, a default under any indenture, mortgage, deed of trust, loan agreement, lease, franchise, license or other agreement or instrument to which the Company or any of its subsidiaries is a party, or by which the Company or any of its subsidiaries is bound or to which any property or assets of the Company or any of its subsidiaries is subject. No approval, consent, order, authorization, designation, declaration or filing by or with any court or governmental agency or body is required for the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated, except as may be required under the Act or any state securities or blue sky laws. (xiii) The Company and each of its subsidiaries holds and is operating in compliance with all licenses, approvals, certificates and permits from governmental and regulatory authorities, foreign and domestic, which are necessary to the conduct of its business as described in the Prospectus. (xiv) The Company has the power and authority to enter into and perform this Agreement and to authorize, issue and sell the Shares it will sell hereunder as contemplated hereby. This Agreement has been duly and validly authorized, executed and delivered by the Company and is enforceable in accordance with its terms. (xv) Coopers & Lybrand L.L.P., which has certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the rules and regulations thereunder. (xvi) The Company has not taken and will not take, directly or indirectly, any action designed to, or which has constituted, or which might reasonably be expected to cause or result in, stabilization or manipulation of the price of the Common Stock, including without limitation any action prohibited under Rule 10b-6 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (xvii) The Shares have been approved for listing on the American Stock Exchange, Inc. ("AMEX"). (xviii) The Company has obtained and delivered to the Representatives written agreements, in form and substance satisfactory to the Representatives, of each of its directors, and executive officers that no offer, sale, contract to sell, or other disposition of any Common Stock of the Company (including, without limitation, shares of Common Stock which may be deemed beneficially owned by the undersigned in accordance with rules and regulation of the Securities and Exchange Commission and shares of Common Stock which may be acquired upon the exercise of stock options or other securities) or any securities convertible into or 5 6 exercisable or exchangeable for Common Stock for a period of 120 days after the date of the Prospectus, directly or indirectly, by such holder otherwise than hereunder or with the prior written consent of Cleary Gull Reiland & McDevitt Inc.; provided that testamentary transfers shall be permitted without such consent and, with respect to non-employee directors, after 30 days from the date of the Prospectus up to 11,000 shares (as allocated among the non-employee directors by the Company's Board of Directors) may be sold without such consent. (xix) The Company has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectus or the Prospectus or other materials permitted by the Act to be distributed by the Company. (xx) The Company and its subsidiaries have filed all federal, state, local and foreign tax returns or reports required to be filed, and have paid in full all taxes indicated by said returns or reports and all assessments received by it or any of them to the extent that such taxes have become due and payable, except where the Company and its subsidiaries are contesting in good faith such taxes and assessments. (xxi) The Company and each of its subsidiaries own or license all patents, patent applications, trademarks, service marks, tradenames, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and other similar rights necessary for the conduct of its business as described in the Prospectus. The Company has no knowledge of any infringement by it or its subsidiaries of any patents, patent applications, trademarks, service marks, tradenames, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets or other similar rights of others, and neither the Company nor any of its subsidiaries has received any notice or claim of conflict with the asserted rights of others with respect any of the foregoing. (xxii) All documents provided by the Company or its representatives, or made available, to the Representatives in connection with the offer and sale of the Shares were on the dates on which they were delivered, or made available, true, complete and correct in all material respects and there are no material documents not provided or made available to the Representatives which were requested by the Representatives or their counsel. (b) Any certificate signed by any officer of the Company and delivered to the Representatives or counsel to the Company or counsel to the Underwriters shall be deemed to be a representation and warranty of the Company to each Underwriter (and counsel to the Underwriters for purposes of the opinion specified in Section 6(c)) as to the matters covered thereby. 2. Purchase, Sale and Delivery of Shares. On the basis of the representations, warranties and covenants contained herein, and subject to the terms and conditions herein set forth the Company agrees to sell to each Underwriter and each Underwriter agrees, severally and not jointly, to purchase from the Company, at a price of $_____ per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule A hereto, subject to adjustments in accordance with Section 8 hereof. In addition, on the basis of the representations, warranties and covenants contained herein and subject to the terms and conditions set forth herein, the Company hereby grants to the several Underwriters an option to purchase at their election up to 150,000 Option Shares at the price per share as set forth in the paragraph above, for the sole purpose of covering over-allotments in the sale of the Firm Shares. The option 6 7 granted hereby may be exercised in whole or in part, but only once, and at any time upon written notice given within 30 days after the date of this Agreement, by the Representatives, to the Company setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. If any Option Shares are purchased, each Underwriter agrees, severally and not jointly to purchase that portion of the number of Option Shares as to which such election shall have been exercised (subject to adjustment to eliminate fractional shares) determined by multiplying such number of Option Shares by a fraction, the numerator of which is the maximum number of Option Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule A hereto and the denominator of which is the maximum number of Option Shares which all of the Underwriters are entitled to purchase hereunder. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives, but shall not be earlier than two or later than ten full business days after the exercise of such option, and shall not in any event be prior to the Closing Date. If the date of exercise of the option is three or more full business days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. Certificates in definitive form for the Shares to be purchased by each Underwriter hereunder, and in such denominations and registered in such names as the Representatives may request upon at least forty-eight hours' prior notice to the Company, shall be delivered by or on behalf of the Company to you for the account of such Underwriter, against payment by such Underwriter or on its behalf of the purchase price therefor by certified or official bank check or checks, payable to the order of the Company in next day funds at the offices of Cleary Gull Reiland & McDevitt Inc., 100 East Wisconsin Avenue, Suite 2700, Milwaukee, Wisconsin 53202 or, with respect to the delivery of certificates, through the facilities of the Depository Trust Company. The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:00 a.m. Milwaukee time, on March ___, 1995, or such other time and date as you and the Company may agree upon in writing, such time and date being herein referred to as the "Closing Date," and, with respect to the Option Shares, 9:00 a.m. Milwaukee time, on the date specified by you in the written notice given by you of the Underwriters' election to purchase the Option Shares, or such other time and date as you and the Company may agree upon in writing, such time and date being referred to herein as the "Option Closing Date." Such certificates will be made available for checking and packaging at least twenty-four hours prior to the Closing Date or the Option Closing Date, as the case may be. 3. Offering by Underwriters. It is understood that the several Underwriters propose to make a public offering of the Firm Shares as soon as the Representatives deems it advisable to do so. The Firm Shares are to be initially offered to the public at the public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer such Option Shares to the public on the foregoing terms. 4. Covenants of the Company. The Company covenants and agrees with the several Underwriters that: (a) The Company will prepare and timely file with the Commission pursuant to Rule 424(b) under the Act a Prospectus containing information omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A under the Act, and will not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy and as to which the Representatives shall have objected in writing promptly after reasonable notice thereof or which is not in compliance with the Act or the rules and regulations thereunder. 7 8 (b) The Company will advise the Representatives promptly of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the institution or threatening of any proceedings for that purpose, and the Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus or suspending such qualification and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will endeavor to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will, or will cause counsel to, make such applications, file such documents, and furnish such information as may be reasonably requested by the Representatives, provided that the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports and other documents as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (d) The Company will furnish the Underwriters with as many copies of any Preliminary Prospectus as the Representatives may reasonably request and, during the period when delivery of a prospectus is required under the Act, the Company will furnish the Underwriters with as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may, from time to time, reasonably request. The Company will deliver to the Representatives, at or before the Closing Date, four (4) signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement, without exhibits, and of all amendments thereto, as the Representatives may reasonably request. (e) If, during the period in which a prospectus is required by law to be delivered by an Underwriter, any event shall occur as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or if for any other reason it shall be necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein in light of the circumstances when it is so delivered, not misleading, or so that the Prospectus will comply with law. In case any Underwriter is required to deliver a prospectus in connection with sales of any Shares at any time nine months or more after the effective date of the Registration Statement, upon the request of the Representatives the Company will prepare and deliver to such Underwriter as many copies as the Representatives may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act. (f) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 18 months after the effective date of the Registration Statement, an earnings statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration 8 9 Statement, which earnings statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 thereunder and will advise you in writing when such statement has been so made available. (g) The Company will, for such period up to five years from the Closing Date, deliver to the Representatives copies of its annual report and copies of all other documents, reports and information furnished by the Company to its security holders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representatives similar reports with respect to significant subsidiaries, as that term is defined in the rules and regulations under the Act, which are not consolidated in the Company's financial statements. (h) No offering, sale or other disposition of any Common Stock or other capital stock of the Company, or warrants, options, convertible securities or other rights to acquire such Common Stock or other capital stock (other than pursuant to employee stock option plans, outstanding options or warrants or on the conversion of convertible securities outstanding on the date of this Agreement) will be made for a period of 120 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of the Cleary Gull Reiland & McDevitt, Inc. (i) The Company will apply the net proceeds from the sale of the Shares to be sold by it hereunder in accordance with the purposes set forth under "Use of Proceeds" in the Prospectus. (j) The Company will use its best efforts to maintain the listing of its Common Stock on the American Stock Exchange. 5. Costs and Expenses. The Company will pay (directly or by reimbursement) all costs, expenses and fees incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of preparing, printing and filing of the Registration Statement, Preliminary Prospectuses and the Prospectus and any amendments and supplements thereto and the printing, mailing and delivery to the Underwriters and dealers of copies thereof and of this Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters' Selling Memorandum, the Invitation Letter, the Power of Attorney, the Blue Sky Memorandum and any supplements or amendments thereto; the filing fees payable to the Commission; the filing fees and expenses (including legal fees and disbursements of counsel for the Underwriters) incident to securing any required review by the NASD of the terms of the sale of the Shares; listing fees, if any, transfer taxes and the expenses, including the fees and disbursements of counsel for the Underwriters incurred in connection with the qualification, or exception, of the Shares under state securities or Blue Sky laws; the fees and expenses incurred in connection with the listing of the Shares on AMEX; the costs of preparing stock certificates; the costs and fees of any registrar or transfer agent and all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section 5. In addition, the Company will pay all reasonable costs, expenses and fees incident to all informational "road show" meetings held in connection with the offering and all travel expenses incurred by management of the Company in connection with any such meetings. The Company shall not, however, be required to pay for any of the Underwriters' expenses (other than those related to qualification of the Shares under state securities or Blue Sky laws and those incident to securing any required review by the NASD of the terms of the sale of the shares) except that, if this Agreement shall not be consummated for any reason, then the Company agrees to reimburse the Representatives for out-of-pocket expenses incurred in connection with the offering of Shares (including fees and expenses of counsel) up to a maximum of $75,000, which shall be accompanied by detailed invoices. 9 10 6. Conditions of Obligations of the Underwriters. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the condition that all representations and warranties of the Company contained herein are true and correct, at and as of the Closing Date or the Option Closing Date, as the case may be, the condition that the Company shall have performed all of its covenants and obligations hereunder and to the following additional conditions: (a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 4(a) hereof; no stop order suspending the effectiveness of the Registration Statement, as amended from time to time, or any part thereof shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to the reasonable satisfaction of the Representatives. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Brouse & McDowell, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters, to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Michigan, with corporate power and authority to own or lease its properties and conduct its business as described in the Prospectus. (ii) Each subsidiary of the Company has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Prospectus. The outstanding shares of capital stock of each such subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and are owned, directly or indirectly, by the Company, free and clear of all liens, encumbrances and security interests, other than security interests specifically disclosed in the Prospectus. To the knowledge of such counsel, no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or ownership interests in each such subsidiary are outstanding. (iii) The Company has authorized and outstanding capital stock as described in the Prospectus. The outstanding shares of the Company's capital stock have been duly authorized and validly issued and are fully paid and nonassessable. The form of certificate for the Shares is in due and proper form and complies with all applicable statutory requirements. The Shares to be issued and sold by the Company pursuant to this Agreement have been duly authorized and, when issued and paid for as contemplated herein, will be validly issued, fully paid and nonassessable and the Underwriters will acquire good and marketable title thereto. No preemptive or other similar subscription rights of shareholders of the Company, or of holders of warrants, options, convertible securities or other rights to acquire shares of capital stock of the Company, exist with respect to any of the Shares or the issue and sale thereof. No rights to register outstanding shares of the Company's capital stock, or shares issuable upon the exercise of outstanding warrants, options, convertible securities or other rights to acquire 10 11 shares of such capital stock, exist. The capital stock of the Company, including the Shares, conforms in all material respects to the description thereof contained in the Prospectus. (iv) The Registration Statement has become effective under the Act and, to the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened by the Commission. (v) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules included therein). (vi) The statements in the Prospectus under the caption "Description of Capital Stock", the description of all environmental litigation included in the Prospectus or incorporated by reference therein, and in the Registration Statement in Item 15 are accurate summaries and fairly present the information called for with respect to such matters. (vii) Such counsel does not know of any contracts, agreements, documents or instruments required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required; and insofar as any statements in the Registration Statement or the Prospectus constitute summaries of any contract, agreement, document or instrument to which the Company is a party, such statements are accurate summaries and fairly present the information called for with respect to such matters. (viii) Such counsel knows of no legal or governmental proceeding, pending or threatened, before any court or administrative body or regulatory agency, to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or Prospectus and are not so described, or statutes or regulations that are required to be described in the Registration Statement or the Prospectus that are not so described. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a violation of or default under the Articles or Bylaws of the Company, or under any statute, rule or regulation applicable to the Company or permit, judgment, decree or order, or any lease, contract, indenture, mortgage, loan agreement or other material agreement or other instrument or obligation to which the Company is a party or by which it or its material properties is bound, except such agreements, instruments or obligations with respect to which valid consents or waivers have been obtained by the Company. (x) The Company has the corporate power and authority to enter into this Agreement and to authorize, issue and sell the Shares as contemplated hereby. This Agreement has been duly and validly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by state securities and blue 11 12 sky laws, as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) The Common Stock, including the Shares, is listed on AMEX and is registered under the Exchange Act. (xiii) Such counsel has no reason to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to the Closing Date or the Option Closing Date, as the case may be, (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date, the Prospectus or any further amendment or supplement thereto made by the Company prior to the Closing Date or the Option Closing Date, as the case may be (other than the financial statements and related schedules therein, as to which such counsel need express no opinion), contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading or that, as of the Closing Date or the Option Closing Date, as the case may be, either the Registration Statement or the Prospectus or any further amendment or supplement thereto made by the Company prior to the Closing Date or the Option Closing Date, as the case may be (other than the financial statements and related schedules therein, as to which such counsel need express no opinion), contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; and they do not know of any amendment to the Registration Statement required to be filed. (xiv) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act. (c) The Representatives shall have received from Godfrey & Kahn, S.C., counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, with respect to the incorporation of the Company, the validity of the Shares, the Registration Statement, the Prospectus, and other related matters as the Representatives may reasonably request, and such counsel shall have received such documents, information and certificates as they may reasonably request to enable them to pass upon such matters. (d) The Representatives shall have received on each of the date hereof, the Closing Date and the Option Closing Date, as the case may be, a signed letter, dated as of the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to the Representatives, from Coopers & Lybrand L.L.P. to the effect that they are independent auditors with respect to the Company and its subsidiaries within the meaning of the Act and the related rules and regulations and containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (e) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date or the Option Closing Date, as the case may be, there shall not have been any change or any development involving a prospective change, in or affecting the general affairs, management, financial 12 13 position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in your judgment, is material and adverse to the Company and makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at the Closing Date or the Option Closing Date, as the case may be, on the terms and in the manner contemplated in the Prospectus. (f) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the chief executive officer and the chief financial officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Prospectus was filed with the Commission pursuant to Rule 424(b) within the applicable period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 4 of this Agreement; no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been initiated or are, to his knowledge, threatened by the Commission. (ii) The representations and warranties of the Company set forth in Section 1 of this Agreement are true and correct at and as of the Closing Date or the Option Closing Date, as the case may be, and the Company has performed all of its obligations under this Agreement to be performed at or prior to the Closing Date or the Option Closing Date, as the case may be. (g) The Company shall have furnished to the Representatives such further certificates and documents as the Representatives may reasonably have requested. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects reasonably satisfactory to the Representatives and to Godfrey & Kahn, S.C., counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company of such termination in writing, by telegram or by facsimile transmission at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 7 hereof). 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter, each officer and director thereof, and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or such persons may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus or the Prospectus, including any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading in light of the circumstances under which they were made, and will reimburse each Underwriter and each such controlling person for any 13 14 legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission, made in the Registration Statement, any Preliminary Prospectus or the Prospectus, including any amendments or supplements thereto, in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein. (b) Each Underwriter agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or through the Representatives and described in Section 7(f) hereof. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity or contribution may be sought pursuant to this Section 7, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 7(a) or (b) or contribution provided for in Section 7(d) shall be available to any party who shall fail to give notice as provided in this Section 7(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party otherwise than on account of the provisions of Section 7(a), (b) or (d). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the reasonable fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. 14 15 It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by the Representatives and shall be reasonably satisfactory to the Company in the case of parties indemnified pursuant to Section 7(a) and shall be designated in writing by the Company and shall be reasonably satisfactory to the Representatives in the case of parties indemnified pursuant to Section 7(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under Section 7(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereto) referred to above in this Section 7(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7(d), no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter; and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 7(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section 7 shall be in addition to any liability which the Company may otherwise have, and the obligations of the Underwriters under this Section 7 shall be in addition to any liability which the Underwriters may otherwise have. 15 16 (f) For all purposes under this Section 7 and this Agreement (including, without limitation, Section 7(b) hereof), the Company understands and agrees with each of the Underwriters that the following constitutes the only written information furnished to the Company by or through the Representatives specifically for use in preparation of the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto: (i) the per share "Price to Public" and per share "Underwriting Discounts and Commissions" set forth on the cover page of the Prospectus, (ii) the information relating to stabilization set forth in the [last paragraph on page two] of the Preliminary Prospectus and the Prospectus, and (iii) the information set forth in the [second] and [fourth] paragraphs under the caption "Underwriting" in the Preliminary Prospectus and the Prospectus. 8. Default by Underwriters. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company), you, as Representatives of the Underwriters, shall use your best efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon, and upon the terms set forth herein, of the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of Shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company except for expenses to be borne by the Company and the Underwriters as provided in Section 5 hereof and the indemnity and contribution agreements in Section 7 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 8, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 8 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 9. Notices. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telegraphed or telecopied and confirmed as follows: if to the Underwriters, to: Cleary Gull Reiland & McDevitt Inc. 100 East Wisconsin Avenue, Suite 2700 Milwaukee, Wisconsin 53202 Attention: Chris Barnes or Joseph F. Hickey, Jr. Telecopy: (414) 291-4558 16 17 With copies to: McDonald & Company Securities Incorporated 260 East Brown Street, Suite 150 Birmingham, Michigan 48009 Attention: Charles E. Chandler Telecopy: (810) 540-8886 Roney & Co. Roney Building One Griswald Street Detroit, Michigan 48226 Attention: Daniel B. French Telecopy: (313) 963-2303 Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, Wisconsin 53202 Attention: Christopher B. Noyes Telecopy: (414) 273-5198 if to the Company, to: Gelman Sciences Inc. 600 South Wagner Road Ann Arbor, Michigan 48103 Attention: James J. Fahrner Telecopy: (313) 913-6114 With copies to: Brouse & McDowell 500 First National Tower Akron, Ohio 44308 Attention: Stanley E. Everett Telecopy: (216) 253-8601 10. Termination. This Agreement may be terminated by you by notice to the Company as follows: 17 18 (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters or (ii) 4:00 p.m., Milwaukee time, on the first business day following the date on which the Registration Statement becomes effective; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change in or affecting the condition, financial or otherwise, of the Company and its subsidiaries taken as a whole or the business affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency after the date hereof or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your judgment, make the offering or delivery of the Shares impracticable or inadvisable, (iii) suspension of trading in securities on the New York Stock Exchange or the AMEX or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, or a halt or suspension of trading in securities generally which are quoted on NASDAQ-NMS, or (iv) declaration of a banking moratorium by either federal or New York State authorities; or (c) as provided in Sections 6 and 8 of this Agreement. This Agreement also may be terminated by you, by notice to the Company, as to any obligation of the Underwriters to purchase the Option Shares, upon the occurrence at any time prior to the Option Closing Date of any of the events described in subparagraph (b) above or as provided in Sections 6 and 8 of this Agreement. Any termination pursuant to this Section shall be without liability on the part of any Underwriter to the Company. 11. Successors. This Agreement has been and is made solely for the benefit of and shall be binding upon the Underwriters and the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares merely because of such purchase. 12. Miscellaneous. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. Each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable under any applicable law or rule in any jurisdiction, such provision will be ineffective only to the extent of such invalidity, illegality or unenforceability in such jurisdiction or any provision hereof in any other jurisdiction. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Wisconsin. 18 19 If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, GELMAN SCIENCES INC. By: _______________________________ Charles Gelman Chairman The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CLEARY GULL REILAND & MCDEVITT INC. MCDONALD & CO. SECURITIES INCORPORATED RONEY & CO. As Representatives of the several Underwriters By: Cleary Gull Reiland & McDevitt Inc. By: _________________________________ [Name] [Title] 19 20 SCHEDULE A Schedule of Underwriters
Number of Firm Maximum Number Underwriter Shares to be Purchased of Option Shares - ----------- ---------------------- ---------------- Cleary Gull Reiland & McDevitt Inc. . . . . . . . . . . . McDonald & Company Securities Incorporated . . . . . . . . Roney & Co . . . . . . . . . . . . . . . . . . . . . . . . --------- ------- Total . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 150,000 ========= =======
20 EX-5 3 OPINION 1 [Brouse & McDowell Letterhead] EXHIBIT 5 February 24, 1995 Gelman Sciences Inc. 600 South Wagner Road Ann Arbor, Michigan 48103-9019 Re: Registration on Form S-2 of 1,150,000 Shares of the Common Stock of Gelman Sciences Inc. Gentlemen: We are acting as counsel to Gelman Sciences Inc. (the "Company") in connection with the issuance and sale by the Company of up to 1,150,000 shares of its common stock, par value $.10 per share (including up to 150,000 such shares to cover over-allotments) (the "Shares"), in accordance with the underwriting agreement (the "Underwriting Agreement") among the Company and the representatives of the underwriters named in Schedule A thereto (the "Underwriters"). We have examined such documents, records and matters of law as we have deemed necessary for purposes of this opinion, and based thereon we are of the opinion that the Shares are duly authorized and, when issued and delivered to the Underwriters pursuant to the Underwriting Agreement against payment of the consideration therefor as provided therein, will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as Exhibit 5 to the Registration Statement on Form S-2 No. 33-88808 filed by the Company to effect registration of the Shares under the Securities Act of 1933 (the "Registration Statement") and to the reference to this firm under the caption "Legal Matters" in the prospectus comprising a part of the Registration Statement. Very truly yours, Brouse & McDowell EX-11 4 COMPUTATION OF EARNINGS 1 EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE PRIMARY AND FULLY DILUTED
Three Months Ended Six Months Ended January 31 January 31 --------------------- --------------------- 1995 1994 1995 1994 ---------- ---------- ---------- ---------- Net income for computing primary and fully diluted earnings per common share $1,256,000 $1,094,000 $2,487,000 $1,992,000 Primary shares Weighted average number of common shares outstanding 6,205,245 5,673,656 6,173,976 5,654,729 Additions from assumed exercise of stock options and warrants 399,655 546,435 422,797 528,114 ---------- ---------- ---------- ---------- Weighted average of common and common equivalent shares 6,604,900 6,220,091 6,596,773 6,182,843 ========== ========== ========== ========== Fully diluted shares Weighted average number of common shares outstanding 6,205,245 5,673,656 6,173,976 5,654,729 Additions from assumed exercise of stock options and warrants 399,655 621,744 422,797 565,704 ---------- ---------- ---------- ---------- Weighted average of common and common equivalent shares 6,604,900 6,295,400 6,596,773 6,220,433 ========== ========== ========== ========== Net income per common share Primary $ 0.19 $ 0.18 $ 0.38 $ 0.32 ========== ========== ========== ========== Fully diluted $ 0.19 $ 0.18 $ 0.38 $ 0.32 ========== ========== ========== ==========
Primary additions from assumed exercise of stock options and warrants is net of assumed purchase of common shares at the average market price during the period. Fully diluted earnings per share was determined in the same manner except that the greater of the period end or period average stock price was used. EX-13.C 5 FORM 10-Q 1 EXHIBIT 13(c) FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 1995 -------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to --------- --------- Commission file number I7828 ---------------- GELMAN SCIENCES INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) MICHIGAN 38-1614806 - ------------------------------- -------------------------- (State or other jurisdiction of (I.R.S.Employer incorporation or organization) (Identification Number) 600 South Wagner Road, Ann Arbor, Michigan 48103-9019 -------------------------------------------------------- (Address of principal executive offices) (Zip Code) (313) 665-0651 ----------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At February 22, 1995 6,235,625 shares were outstanding of the Company's $.10 par value common stock. -1- 2 GELMAN SCIENCES INC. INDEX
Page PART I. Financial Information Number - ------------------------------- ------- ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets of January 31, 1995 (Unaudited) and July 31, 1994 . . . . . . . . . . . . . . . . . . . . 3 Condensed Unaudited Consolidated Statements of Operations for the three and six months ended January 31, 1995 and 1994 . . . . . . . . . . . . . . 4 Condensed Unaudited Consolidated Statements of Cash Flows for the six months ended January 31, 1995 and 1994 . . . . . . . . . . . . . . 5 Condensed Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 7 PART II. OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 10 Item 4 Submission of Matters to a Vote of Security Holders . . 11 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 12 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
-2- 3 GELMAN SCIENCES INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
January 31 July 31 1995 1994 ----------- ----------- ASSETS (Unaudited) Current Assets: Cash $ 1,906 $ 1,525 Accounts receivable, less allowances 21,680 20,859 Inventories: Finished products 5,785 5,790 Work in process 1,689 1,555 Raw material and purchased parts 6,709 6,645 --------- --------- 14,183 13,990 Other current assets 4,485 3,849 --------- --------- Total Current Assets 42,254 40,223 Property, Plant and Equipment 65,552 63,554 Less Allowances for Depreciation (35,252) (34,392) --------- --------- 30,300 29,162 Intangibles and Other Assets 2,348 2,302 --------- --------- Total Assets $ 74,902 $ 71,687 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable $ 1,718 $ 1,549 Accounts payable 4,396 5,611 Accrued expenses 8,208 7,784 Current maturities of long-term debt 4,070 1,829 --------- --------- Total Current Liabilities 18,392 16,773 Long-Term Debt, Exclusive of Current Maturities 20,739 21,820 Other Long-Term Liabilities 2,156 2,659 Stockholders' Equity: Preferred stock, par value $1.00 per share Common stock, par value $.10 per share 622 613 Additional capital 14,670 14,055 Retained earnings 19,579 17,092 Translation adjustments (806) (875) Less loan to Employee Stock Ownership Plan (450) (450) --------- --------- Total Stockholders' Equity 33,615 30,435 --------- --------- Total Liabilities and Stockholders' Equity $ 74,902 $ 71,687 ========= =========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. -3- 4 GELMAN SCIENCES INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (In Thousands, except per share data)
Three Months Ended Six Months Ended January 31 January 31 ---------------------- ---------------------- 1995 1994 1995 1994 ---------- ---------- ----------- ---------- Net Sales $ 24,018 $ 23,282 $ 48,185 $ 45,576 Cost and Expenses: Cost of products sold 11,573 11,654 23,583 23,030 Selling and administrative 8,808 8,410 17,320 16,299 Research and development 1,316 1,106 2,624 2,326 Other income - net (117) (21) (122) (78) --------- --------- --------- --------- Operating Earnings 2,438 2,133 4,780 3,999 Interest Expense 449 400 882 878 --------- --------- --------- --------- Earnings Before Income Taxes 1,989 1,733 3,898 3,121 Provision For Income Taxes 733 639 1,411 1,129 --------- --------- --------- --------- Net Earnings $ 1,256 $ 1,094 $ 2,487 $ 1,992 ========= ========= ========= ========= Primary Earnings Per Share $ 0.19 $ 0.18 $ 0.38 $ 0.32 ========= ========= ========= ========= Weighted Average Common and Common Equivalent Shares Outstanding 6,605 6,220 6,597 6,183 ========= ========= ========= =========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. -4- 5 GELMAN SCIENCES INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands)
Six Months Ended January 31 --------------------- 1995 1994 ---------- ---------- Operating Activities Net earnings $ 2,487 $ 1,992 Loss on disposal of assets 25 - Depreciation and amortization 2,092 2,251 Increase in inventories (150) (1,153) Increase in accounts receivable (724) (1,737) Increase in other current assets (620) (345) Increase (decrease) in current liabilities (675) 814 Decrease in liabilities for environmental activities (522) (746) Tax benefit from exercised stock options 220 191 Other 38 56 -------- -------- Net Cash Provided by Operating Activities 2,171 1,323 Financing Activities Long-term debt borrowings 14,420 15,683 Principal payments on long-term debt (13,267) (14,114) Proceeds from exercised stock options 386 499 -------- -------- Net Cash Provided by Financing Activities 1,539 2,068 Investing Activities Capital expenditures (3,207) (3,446) Proceeds from sale of assets 34 3 (Increase) decrease in intangibles and other assets (71) (222) -------- -------- Net Cash Used in Investment Activities (3,244) (3,665) Effects of Exchange Rate Changes on Cash (85) 15 -------- -------- Net change in cash during the period 381 (259) Cash at beginning of period 1,525 1,142 -------- -------- Cash at end of period $ 1,906 $ 883 ======== ========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. -5- 6 GELMAN SCIENCES INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS GENERAL In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position of Gelman Sciences Inc. and subsidiaries as of January 31, 1995, and the results of their operations and cash flows for the three months and six months ended January 31, 1995 and 1994. These financial statements should be read in conjunction with the financial statements and notes set forth in the Company's Annual Report and Form 10-K for the year ended July 31, 1994. The results of operations for the three months and six months ended January 31, 1995 and 1994 are not necessarily indicative of the results of the full year. PUBLIC OFFERING On January 27, 1995 the Company filed a registration statement with the Securities and Exchange Commission to sell 1,000,000 shares of common stock in an underwritten public offering. The Company has granted the underwriters an option for 30 days to purchase up to an additional 150,000 shares of common stock solely to cover overallotment. The net proceeds from the sale of common stock will be used to repay a term note payable to NBD Bank N.A. and to reduce outstanding indebtedness under the Company's Credit Agreement. POLLUTION RELATED MATTERS The Company has settled several lawsuits related to groundwater contamination and has begun remediation activities. The remediation plan requires the Company to treat the groundwater to the extent necessary to reduce the contaminants to a defined level. Management estimates that remediation will take eight years. Total costs to the Company of pollution-related activities will be dependent upon the efficacy and duration of the remediation plan and obtaining a cost-free repository for treated groundwater. The ultimate costs to be incurred could exceed the amount provided of $1.1 million at January 31, 1995. However, it is the opinion of management that these additional costs, if any, will not have a material adverse effect on the Company's operations because the cash outflows would be spread over many future years. -6- 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Comparison of Six Months ended January 31, 1995 and 1994 Net sales for the six months ended January 31, 1995 increased $2.6 million or 5.7% to $48.2 million as compared to net sales of $45.6 million for the six months ended January 31, 1994. Net sales for the six months ended January 31, 1994 included (a) non-recurring sales of $3.0 million related to the Company's Australian non-core product lines that have been divested and (b) a special shipment of $800,000 of roll stock membrane to a single customer. This customer has placed its annual order this year; however, the shipment dates are spread over the next twelve months. Sales in the first half of fiscal 1995 were favorably affected by the weakened U.S. dollar, which increased reported sales by $798,000. The Company's sales growth, adjusted for these items, was 13.4%. Sales to customers in North, Central and South America increased 10.8% over the same period of the prior fiscal year primarily due to a 31.6% increase in sales of medical devices. Sales to customers in Europe increased 17.0% mainly due to increases in sales of process filtration products in Italy and France. Sales to customers in the Asia/Pacific region declined 28.0% as a result of the divestiture of the Australian non-core product lines. Without the effect of these sales, Asia/Pacific sales would have increased 22.5%, primarily attributable to increases in sales of process filtration products in Japan and Korea. Worldwide sales of laboratory products, medical devices and process filtration products increased 11.1%, 23.6% and 19.7%, respectively. Worldwide sales of microporous membranes decreased 8.2% as a result of the special shipment to a single customer in the first half of fiscal 1994. Without the effect of this shipment, sales of microporous membranes would have increased 14.7%. Gross profit increased $2.1 million or 9.1% to $24.6 million in the six months ended January 31, 1995, as compared to $22.5 million in the six months ended January 31, 1994. As a percentage of net sales, gross profit increased to 51.1% from 49.5%. The improvement in gross profit is primarily attributable to the divestiture of the lower margin non-core product lines and improved operating efficiencies, which was partially offset by a less favorable product mix due to lower membrane sales as a percentage of sales. Selling and administrative expenses increased $1.0 million or 6.3% to $17.3 million in the six months ended January 31, 1995, compared to $16.3 million in the six months ended January 31, 1994. The increase in selling and administrative expenses was primarily due to efforts to implement the Company's growth strategy, particularly in the international markets. -7- 8 Research and development expenses increased to $2.6 million in the six months ended January 31, 1995 as compared to $2.3 million in the six months ended January 31, 1994, or 12.8%. As a percentage of net sales, these expenses were 5.4% compared to 5.1%. The higher research and development spending is a result of an increased effort to develop and modify products to meet customer requirements. The effective tax rate for each of the six months ended January 31,1995 and 1994 was 36.2%. Net earnings increased $495,000 or 24.8% to $2.5 million or $.38 per share for the six months ended January 31, 1995, compared to $2.0 million or $.32 per share for the six months ended January 31, 1994. As a percentage of sales, net earnings were 5.2% compared to 4.4% . Comparison of Three Months ended January 31, 1995 and 1994 Net sales for the second quarter ended January 31, 1995 increased by 3.2% to $24.0 million as compared to $23.3 million for the second quarter of fiscal 1994. The second quarter sales for fiscal 1994 were affected by the two items discussed under the six month sales comparison in the amount of $2.3 million. The second quarter fiscal 1995 sales were favorably affected by the weakened U.S. dollar, which increased reported sales by $474,000. The Company's sales growth for the second quarter of fiscal 1995 versus the same period last fiscal year, adjusted for the two items mentioned and the fluctuation in foreign currency, was 12.3%. Worldwide sales of laboratory products, medical devices and process filtration products increased 12.9%, 17.6% and 22.2%, respectively, as compared to the second quarter of fiscal 1994. The sales growth in these markets is primarily attributable to a more intensive selling and marketing program, especially its focus on sales outside the United States. Membrane sales decreased 21.8% because of the large shipment mentioned under the six month comparison. Without this shipment, microporous membrane sales increased 12.1% as compared to the second quarter of fiscal 1994. Net earnings for the second quarter ended January 31, 1995 were $1.3 million as compared to $1.1 million for the second quarter ended January 31, 1994. The second quarter of fiscal 1994 was favorably affected by the large shipment of roll stock membrane which increased earnings by $260,000. Without this transaction, net earnings in the second quarter of fiscal 1995 would have increased 50.5%. This transaction favorably impacted the gross profit in the second quarter of fiscal year 1994 by 0.5%. Therefore, on a comparable basis, gross profit as a percentage of sales increased from 49.5% to 51.9% for the second quarter of fiscal 1995. -8- 9 LIQUIDITY AND CAPITAL RESOURCES The Company generated cash from operations in the amount of $2.2 million and increased borrowings by $1.2 million for the six months ended January 31, 1995. The funds were used for capital expenditures of $3.2 million and to finance trade receivables attributable to higher sales in the last month of the second quarter, which is a seasonal pattern. Working capital was $23.9 million and $23.4 million at January 31, 1995 and July 31, 1994, respectively. The working capital at January 31, 1995 includes the classification of a $3.5 million term note due December 31, 1995 as a current liability. At January 31, 1995, the Company's unused portion of its Credit Agreement was $7.5 million. On January 27, 1995, the Company filed a Registration Statement with the Securities and Exchange Commission to sell 1,000,000 shares of common stock in an underwritten public offering. The Company granted the underwriters an option for 30 days to purchase up to an additional 150,000 shares of common stock solely to cover overallotment. The net proceeds from the sale will be used to repay the term note and to reduce outstanding indebtedness under the Company's Credit Agreement. The proceeds should be received at the end of March. -9- 10 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in various legal actions in the normal course of business. In addition, the Company is currently a party to various legal actions arising under statutes regulating the discharge of materials into or otherwise protecting the environment. These have been described in the Company's 1994 Annual Report, in Item 1. "Environmental Regulations" and Item 3. "Legal Proceedings" of the Company's Form 10-K for the year ended July 31, 1994, and in Item 1. "Legal Proceedings in Part II of the Company's Form 10-Q for the quarter ended October 31, 1994. The following sets forth these environmental matters to the extent any material developments have occurred since the filing of the Company's Form 10-Q for the quarter ended October 31, 1994. Campbell, et al. v. Gelman Sciences Inc. (Circuit Court for Washtenaw County, Michigan, Case No. 91-41524-CE). On July 30, 1991, a complaint was filed against the Company by five individuals residing in the Westover residential subdivision located near the main facility of the Company for damages for anticipated expenses for future medical monitoring asserted to be necessary as a result of exposure to air and groundwater allegedly contaminated by the Company. On August 26, 1991, the Company filed its answer, denying liability and asking the Court to dismiss this lawsuit. On October 23, 1992, the Court entered an Order granting summary judgment to the Company, and, on December 11, 1992, the case was dismissed. The plaintiffs appealed the dismissal. On February 8, 1995, the Michigan Court of Appeals affirmed the dismissal. Laird, et ano v. Gelman Sciences Inc., et ano (Circuit Court for Washtenaw County, Michigan, Case No. 93-623 CZ). On May 12, 1993, two owners of a business located near the main facility of the Company brought this action against the Company and its Chairman for damages associated with alleged contamination of the groundwater supply of that business. On December 1, 1994, the parties agreed to settle this case. The Company paid the plaintiffs $30,000 and the case was dismissed on stipulation of the parties on January 3, 1995. "Thermo Chem" Superfund Site, Muskegon, Michigan. By correspondence dated January 2, 1992, the United States Environmental Protection Agency ("USEPA") identified the Company as a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") for past and future response costs in connection with the Thermo Chem Superfund site, a waste chemical reclamation and disposal site. The USEPA issued an Administrative Order mandating remediation of the site to a number of generator PRPs. On July 22, 1994, the Company and the USEPA entered into a settlement agreement under which the Company agreed to pay $124,100. A consent order based on that agreement became effective February 8, 1995. Payment is due by March 10, 1995. -10- 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders, held on December 15, 1994, the Shareholders approved an amendment to the Restated Articles of Incorporation to increase the authorized shares of Common Stock of Gelman Sciences Inc. from 8,000,000 to 15,000,000. The Shareholder votes were 5,178,994 or 93.21% "For" 365,039 or 6.57% "Against", and 12,313 or 0.22% "Abstain". At the same meeting, the Shareholders approved an amendment to the Gelman Sciences Inc. 1988 Stock Option Plan to permit the Company to grant employee stock options with respect to up to 400,000 additional shares of Common Stock of the Company. The Shareholder votes were 3,353,352 or 60.35% "For", 1,006,627 or 18.12% "Against", and 21,895 or 0.39% "Abstain", and 1,174,472 or 21.14% "Broker's Non Vote". Further, the Shareholders elected four directors as follows: Dr. Hajime Kimura, M.D., Ph.D., was re-elected as a director for a two-year term expiring with the 1996 Annual Meeting. The Shareholder votes were 5,544,008 or 99.78% "For", and 12,338 or 0.22% "Withheld". Mr. Charles Gelman was re-elected as a director for a three- year term expiring with the 1997 Annual Meeting. The Shareholder votes were 5,541,466 or 99.73% "For", and 14,880 or 0.27% "Withheld". Mr. Charles Newman was re-elected as a director for a three- year term expiring with the 1997 Annual Meeting. The Shareholder votes were 5,545,155 or 99.80% "For", and 11,191 or 0.20% "Withheld". Mr. Robert Collins was re-elected as a director for a three- year term expiring with the 1997 Annual Meeting. The Shareholder votes were 5,545,357 or 99.80% "For", and 10,989 or 0.20% "Withheld". -11- 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS (3) Articles of Incorporation and Bylaws (1) Restated Articles of Incorporation for Amendment of Article III to increase the authorized shares of Common Stock to 15,000,000. (4) Instruments Defining the Rights of Security Holders (1) Pursuant to 17 CFR 229.601(b)(4)(iii), instruments with respect to long-term debt issues have been omitted where the amount of securities authorized under each instrument does not exceed 10% of the total consolidated assets of the Company. The Company hereby agrees to furnish a copy of each such instrument to the Commission upon its request. (10) Material Contracts (1) Warrant Agreement, Dated September 2, 1994, with Dr. Hajime Kimura. (11) Statement re computation of per share earnings for the three and six months ended January 31, 1995 and 1994. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fiscal quarter ended January 31, 1995. -12- 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GELMAN SCIENCES INC. --------------------------------- (Registrant) Date: February 24, 1995 Charles Gelman -------------------------------- Chairman of the Board and Chief Executive Officer Date: February 24, 1995 James J. Fahrner -------------------------------- Vice President, Finance and Chief Financial Officer -13- EX-23.A 6 CONSENT 1 EXHIBIT 23(a) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion and incorporation by reference in this registration statement on Form S-2 of our reports dated September 22, 1994, on our audits of the consolidated financial statements and financial statement schedules of Gelman Sciences, Inc. and Subsidiaries. We also consent to the reference to our firm under the caption "Experts." Detroit, Michigan February 23, 1995 -----END PRIVACY-ENHANCED MESSAGE-----