10-Q 1 d10q.txt FORM 10-Q FOR 12/31/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001 Or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ____________ to _____________ COMMISSION FILE NUMBER: 1-11091 APOGENT TECHNOLOGIES INC. ------------------------- (Exact name of registrant as specified in its charter) Wisconsin 22-2849508 (State or other jurisdiction of (IRS Employer Identification incorporation or organization) Number) 48 Congress Street, Portsmouth, New Hampshire 03801 (Address of principal executive offices) (Zip Code) (603) 433-6131 -------------- (Registrant's telephone number, including area code) (Former name, former address, former fiscal year, if changed since last report) Indicate by checkmark, whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period 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 . --- --- At February 8, 2002, there were 106,459,508 shares of the Registrant's Common Stock, par value $0.01 per share, outstanding. 1 APOGENT TECHNOLOGIES INC. AND SUBSIDIARIES Index Page Part I - FINANCIAL INFORMATION ...............................................3 Item 1. Financial Statements .................................................3 Consolidated Balance Sheets as of Decemeber 31, 2001 and September 30, 2001 .....................................................................3 Consolidated Statements of Income for the three months ended December 31, 2001 and 2000 ............................................................4 Consolidated Statement of Shareholders' Equity for the three months ended December 31, 2001 ......................................................5 Consolidated Statements of Cash Flows for the three months ended December 31, 2001 and 2000 ...................................................6 Notes to unaudited consolidated financial statements .........................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation ....................................................16 Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........24 Part II - OTHER INFORMATION .................................................24 Item 2. Changes in Securities and Use of Proceeds ...........................24 Item 4. Submission of Matters to a Vote of Security Holders .................24 Item 6. Exhibits and Reports on Form 8-K ....................................25 Signatures ..................................................................26 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements -------------------- APOGENT TECHNOLOGIES INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share and per share data)
December 31, September 30, 2001 2001 ------------ ------------- Assets Current assets: Cash and cash equivalents $ 71,059 $ 9,192 Accounts receivable (less allowance for doubtful accounts of $4,451 and $3,975, respectively) 171,644 183,278 Inventories 180,289 167,436 Deferred income taxes 13,075 13,046 Prepaid expenses and other current assets 24,077 20,985 ----------- ----------- Total current assets 460,144 393,937 Available for sale security 54,607 55,072 Property, plant and equipment, net 227,369 223,687 Intangible assets 1,175,627 1,140,334 Deferred income taxes 7,114 6,147 Other assets 18,470 15,961 ----------- ----------- Total assets $ 1,943,331 $ 1,835,138 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 43,480 $ 53,822 Current portion of long-term debt 75,068 73,642 Income taxes payable 41,423 38,747 Accrued payroll and employee benefits 26,547 33,236 Accrued interest expense 8,411 15,292 Restructuring reserve 892 1,552 Deferred income taxes 930 911 Other current liabilities 26,045 26,364 ----------- ----------- Total current liabilities 222,796 243,566 Long-term debt 675,385 583,788 Securities lending agreement 54,607 55,072 Deferred income taxes 118,733 107,220 Other liabilities 6,642 7,002 Commitments and contingent liabilities -- -- Shareholders' equity: Preferred stock, $0.01 par value; authorized 20,000,000 shares Common stock, $0.01 par value; authorized 250,000,000 shares issued 106,144,242 and 105,875,768 shares respectively; outstanding 106,144,022 and 105,875,548 shares respectively 1,061 1,059 Equity rights, 50 rights at $1.09 per right -- -- Additional paid-in capital 258,273 254,637 Retained earnings 657,609 627,642 Accumulated other comprehensive income (51,775) (44,848) Treasury common stock, 220 shares at cost -- -- ----------- ----------- Total shareholders' equity 865,168 838,490 ----------- ----------- Total liabilities and shareholders' equity $ 1,943,331 $ 1,835,138 =========== ===========
See accompanying notes to the unaudited consolidated financial statements 3 APOGENT TECHNOLOGIES INC. AND SUBSIDIARIES Consolidated Statements of Income (In thousands, except per share data) (Unaudited)
Three Months Ended December 31, ------------------------ 2001 2000 --------- --------- Net sales $ 241,196 $ 220,758 Cost of sales; Cost of products sold 126,560 114,681 Depreciation of purchase accounting adjustments 176 124 --------- --------- Total cost of sales 126,736 114,805 --------- --------- Gross profit 114,460 105,953 Selling, general and administrative expenses 53,331 45,586 Depreciation and amortization of purchase accounting adjustments 4,277 10,530 --------- --------- Total selling, general and administrative expenses 57,608 56,116 --------- --------- Operating income 56,852 49,837 Other income (expense): Interest expense (10,232) (12,528) Amortization of deferred financing fees (827) (109) Other, net 1,473 (222) --------- --------- Income from continuing operations before income taxes and extraordinary item 47,266 36,978 Income taxes 17,299 14,791 --------- --------- Income from continuing operations before extraordinary item 29,967 22,187 Discontinued operations (net of income tax expense of $435) -- (10,986) --------- --------- Income before extraordinary item 29,967 11,201 Extraordinary item (net of income tax of $496) -- (745) --------- --------- Net income $ 29,967 $ 10,456 ========= ========= Basic earnings per common share from continuing operations $ 0.28 $ 0.21 Discontinued operations -- (0.10) Extraordinary item -- (0.01) --------- --------- Basic earnings per common share $ 0.28 $ 0.10 ========= ========= Diluted earning per common share from continuing operations $ 0.28 $ 0.21 Discontinued operations -- (0.10) Extraordinary item -- (0.01) --------- --------- Diluted earnings per common share $ 0.28 $ 0.10 ========= ========= Weighted average basic shares outstanding 106,128 105,246 Weighted average diluted shares outstanding 108,949 107,628
See accompanying notes to the unaudited consolidated financial statements. 4 APOGENT TECHNOLOGIES INC. AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity For the three months ended December 31, 2001 (In thousands) (Unaudited)
Accumulated Additional Other Treasury Total Common Equity Paid - In Retained Comprehensive Common Shareholders' Stock Rights Capital Earnings Income Stock Equity --------- ------ ---------- ---------- ------------ -------- ------------ Balance at September 30, 2001 $ 1,059 $-- $ 254,637 $ 627,642 $ (44,848) $-- $ 838,490 Comprehensive income: Net income -- -- -- 29,967 -- -- 29,967 Translation adjustment -- -- -- -- (6,417) -- (6,417) Amortization of gain on sale of interest rate swaps, net of tax benefit of $154 -- -- -- -- (231) -- (231) Unrealized loss on security available for sale, net of tax benefit of $186 -- -- -- -- (279) -- (279) --------- --- --------- --------- --------- --- --------- Total comprehensive income -- -- -- 29,967 (6,927) -- 23,040 Shares issued in connection with stock options 2 -- 1,744 -- -- -- 1,746 Tax benefit related to stock options -- -- 1,892 -- -- -- 1,892 --------- --- --------- --------- --------- --- --------- Balance at December 31, 2001 $ 1,061 $-- $ 258,273 $ 657,609 $ (51,775) $-- $ 865,168 ========= === ========= ========= ========= === =========
See accompanying notes to the unaudited consolidated financial statements. 5 APOGENT TECHNOLOGIES INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Three Months Ended December 31, ------------------------ 2001 2000 --------- --------- Cash flows from operating activities: Net income $ 29,967 $ 10,456 Adjustments to reconcile net income to net cash provided by operating activities Discontinued operations -- 10,986 Depreciation 8,869 8,512 Amortization 5,104 10,009 Gain on sale of property, plant and equipment 43 27 Provision for losses on doubtful accounts 289 (453) Inventory provisions 696 1,848 Deferred income taxes -- 632 Extraordinary item -- 745 Changes in assets and liabilities, net of effects of businesses acquired: Decrease (increase) in accounts receivable 15,646 (698) Increase in inventories (10,395) (8,499) Increase in prepaid expenses and other current assets (2,728) (7,595) Decrease in accounts payable (12,123) (11,370) Increase in income taxes payable 5,797 18,338 (Decrease) increase in accrued payroll and employee benefits (7,019) 6,141 Decrease in accrued interest expense (6,881) (2,281) Decrease in restructuring reserve (763) (3,894) Decrease in other current liabilities (1,398) (8,962) Net change in other assets and liabilities (433) (1,522) --------- --------- Net cash provided by operating activities 24,671 22,420 --------- --------- Cash flows from investing activities: Capital expenditures (6,345) (7,379) Proceeds from sales of property, plant and equipment 50 258 Net cash flow from SDS -- 46,394 Net payment for businesses acquired (38,328) (18,856) --------- --------- Net cash used in invensting activities (44,623) 20,417 --------- --------- Cash flows from financing activities: Proceeds from long-term debt 300,000 300,000 Principal payments on long-term debt -- (380,920) Proceeds from the exercise of stock options 1,746 1,491 Financing fees paid (8,290) (3,900) Proceeds from revolving credit facility 151,900 326,640 Principal payments on revolving credit facility (360,474) (307,840) Other financing activities 920 14,583 --------- --------- Net cash provided by financing activities 85,802 (49,946) --------- --------- Effect of exchange rate changes on cash and cash equivalents (3,983) (529) --------- --------- Net increase (decrease) in cash and cash equivalents 61,867 (7,638) Cash and cash equivalents at beginning of year 9,192 12,411 --------- --------- Cash and cash equivalents at end of period $ 71,059 $ 4,773 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 17,036 $ 13,642 ========= ========= Income taxes $ 14,200 $ -- ========= ========= Capital lease obligations incurred $ 30 $ -- ========= =========
See accompanying notes to unaudited consolidated financial statements. 6 APOGENT TECHNOLOGIES INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (dollars in thousands except per share data) 1. Basis of Presentation In the opinion of management, all adjustments that are necessary for a fair statement of the results for the interim periods presented have been included. The results for the three month period ended December 31, 2001 are not necessarily indicative of the results to be expected for the full year. The financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the United States. These statements should only be read in conjunction with the Company's annual report on Form 10-K for the fiscal year ended September 30, 2001. The Company adopted Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) on October 1, 2001. SFAS 142 requires that all goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead tested for impairment at least annually. As a result the Company is no longer amortizing approximately $947 million of goodwill as of December 31, 2001. The remaining net intangible assets subject to amortization, and related accumulated amortization, at December 31, 2001 were $229 million and $57 million, respectively. The Company added approximately $27 million to intangibles and goodwill since September 30, 2001. The Company is currently performing initial impairment tests and it is not practical to estimate the impact of such tests. However, any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in our statement of earnings. In addition, the Company is currently allocating existing goodwill to the three business segments. The following table details the impact of SFAS 142 on the three months ended December 31, 2000, had the Company adopted the statement on October 1, 2000:
Three Months Ended December 31, 2000 --------------------------------------- As FAS 142 Reported Impact Adjusted -------- --------- --------- Net sales $ 220,758 $ -- $ 220,758 Gross profit 105,953 -- 105,953 Selling, general & administrative 56,116 (7,052) 49,064 Operating income 49,837 7,052 56,889 Income before income taxes, discontinued operations and extraordinary items 36,978 7,052 44,030 Income taxes 14,791 2,169 16,960 Income from continuing operations before extraordinary items 22,187 4,883 27,070 Discontinued operations (10,986) -- (10,986) Income before extraordinary item 11,201 4,883 16,084 Extraordinary item (745) -- (745) Net income 10,456 4,883 15,339 Basic earnings per common share from continuing operations $ 0.21 $ 0.05 $ 0.26 Discontinued operations (0.10) -- (0.10) Extraordinary items (0.01) -- (0.01) Basic earnings per common share 0.10 0.04 0.14 Diluted earnings per common share from continuing operations 0.21 0.04 0.25 Discontinued operations (0.10) -- (0.10) Extraordinary items (0.01) -- (0.01) Diluted earnings per common share 0.10 0.04 0.14
7 2. Inventories Inventories at December 31, 2001 and September 30, 2001 consist of the following: December 31, September 30, 2001 2001 ------------ ------------- Raw materials and supplies 65,898 84,802 Work in process 25,184 25,974 Finished goods 89,207 56,660 -------- -------- $180,289 $167,436 ======== ======== 3. Acquisitions During the three months ended December 31, 2001, the Company completed four acquisitions for cash. The aggregate purchase price, net of cash acquired, was approximately $38 million. None of the acquisitions were considered individually significant. The total goodwill and intangibles for the acquired companies were approximately $27 million. The intangible assets will be amortized over their expected lives ranging from 3 to 20 years. The following table outlines the sales, operating income and total assets for the most recent available twelve-month period prior to each cash acquisition.
Business Segment: Acquisition Operating Total Type of Company Acquired Date Sales Income Assets Acquisition ---------------- ---- ----- --------- ------ ----------- Clinical Diagnostics: Chromacol Limited, Epsom Glass Industries October 2001 $ 9,900 $ 350 $5,079 Stock Limited, and Amchro Inc. Forefront Diagnostics, Inc. November 2001 6,300 1,700 9,900 Stock Labware and Life Sciences: Cosmotec Co. Ltd. October 2001 10,500 2,500 2,600 Stock Barden Engineering October 2001 570 130 540 Asset
4. Long -Term Debt On October 10, 2001, the Company issued $300 million of senior convertible contingent debt securities (CODES). The CODES have a fixed interest rate of 2.25% per annum. Interest is payable on April 15 and October 15 of each year, beginning April 15, 2002. The Company will also pay contingent interest during any six-month period if the average trading price of the CODES during a specified period of five trading days preceding the relevant six-month period is above specified levels. The CODES will mature on October 15, 2021. The CODES are convertible, subject to certain conditions (including but not limited to the sale price of the Company's common stock, trading prices of the CODES, maintenance of the Company's credit ratings, and the occurrence of specified corporate transactions), into Apogent Common Stock at a price of approximately $30.49 per share. The Company may redeem some or all of the CODES on or after October 20, 2004. The holders may require the Company to purchase all or a portion of their CODES on October 20, 2004 and on October 15, 2006, 2011 and 2016, or subject to specified exceptions, upon a change of control event. Certain of the Company's U.S. subsidiaries guarantee the Company's obligations under the CODES. The proceeds from the issuance were used to pay down the outstanding balance on our Revolving Credit Facility, and for general corporate purposes. 8 5. Segment Information The Company's operating subsidiaries are engaged in the manufacture and sale of laboratory products in the United States and other countries. The Company's products are categorized in the business segments of: clinical diagnostics; labware and life sciences; and laboratory equipment. A description of each business segment follows. Products in the clinical diagnostic business segment include microscope slides, cover glass, glass tubes and vials, stains and reagents and histology and immunochemistry instrumentation for clinical testing, thin glass for watch crystals, cosmetic mirrors, precision and coated glass used in various optic applications, and precision thin film optical coating equipment. Certain products in this segment are used in drug testing, therapeutic drug monitoring, infectious disease detection, pregnancy testing, and glucose tolerance testing. Products include diagnostic test kits, culture media, diagnostic reagents, and other products used in detecting causes of various infections or diseases. Products in the labware and life sciences business segment include approximately 4,900 items, including reusable plastic products (bottles, carboys, graduated ware, beakers and flasks) and disposable plastic products (microfiltration and cryogenic storage products). Other labware products include products for critical packaging applications (bottles for packaging diagnostic and other reagents, media, pharmaceuticals and specialty chemicals), safety products (hazard labeled containers and biohazard disposal products), environmental containers, autosampler vials and seals used in chromatography analysis and glass products for research and industrial applications, manufactured and sold through our joint venture with Kimble Glass. Life sciences products include applications of cell culture, filtration, molecular biology, cryopreservation, immunology, electrophoresis, liquid handling and high throughput screening for pharmaceutical drug discovery. Products in the laboratory equipment business segment include heating, stirring and temperature control apparatus such as hot plates, stirrers, shakers, heating tapes, muffle furnaces, incubators, dri-baths, bench top sterilizers and cryogenic storage apparatus, which are fundamental to basic procedures performed in the laboratory; systems for producing ultra pure water; bottle top dispensers, positive displacement micropipettors, and small mixers used in biomolecular research; constant temperature equipment including refrigerators/freezers, ovens, water baths, environmental chambers; and furnaces and fluorometers, spectrophotometers, and strip chart recorders. 9 The cost of some corporate functions are allocated to the business segments at predetermined rates which approximate cost. Information on these business segments is summarized as follows:
Labware Clinical and Laboratory Diagnostics Life Sciences Equipment Eliminations (a) Other (a) Total ----------- ------------- ---------- ---------------- --------- ---------- Three Months Ended December 31, 2001 Revenues: External customer $116,940 $ 99,524 $ 24,732 $ -- $ -- $ 241,196 Intersegment 1,341 244 165 (1,750) -- -- Total revenues 118,281 99,768 24,897 (1,750) -- 241,196 Gross profit 54,565 49,612 10,283 -- -- 114,460 Selling general and administrative 24,507 28,044 4,854 -- 203 57,608 Operating income 30,058 21,568 5,429 -- (203) 56,852 Segment assets 904,330 120,664 752,203 -- 166,134 1,943,331 Three Months Ended December 31, 2000 Revenues: External customer 109,865 84,863 26,030 -- -- 220,758 Intersegment 1,573 318 107 (1,998) -- -- Total revenues 111,438 85,181 26,137 (1,998) -- 220,758 Gross profit 51,654 43,257 11,042 -- -- 105,953 Selling general and administrative 26,196 25,004 5,616 -- (700) 56,116 Operating income 25,453 18,253 5,431 -- 700 49,837
(a) Includes the elimination of intercompany and unallocated corporate office activity 6. Condensed Consolidating Financial Statements The Company's material U.S. subsidiaries are guarantors to its Revolving Credit Facility, Senior Notes, and CODES. Each of the subsidiary guarantors is 100% owned by the Company. The guarantees are full and unconditional as well as joint and several. Below are the condensed consolidating balance sheets as of December 31, 2001 and September 30, 2001, and statements of operations and statements of cash flows for the three months ended December 31, 2001 and 2000, of Apogent Technologies Inc. and its subsidiaries. Certain general corporate expenses have not been allocated to the subsidiaries, and are included under the Apogent Technologies Inc. heading. As a matter of course, the Company retains certain assets and liabilities at the corporate level that are not allocated to the subsidiaries including, but not limited to, certain employee benefit, insurance and tax liabilities. Income tax provisions for the subsidiaries are typically recorded using an estimate and finalized in total with an adjustment recorded at the corporate level. Certain debt under which Apogent Technologies Inc. is listed as the debtor has been allocated to the Guarantor subsidiaries. Intercompany balances include receivables/payables incurred in the normal course of business in addition to investments and loans transacted between subsidiaries of the Company or with Apogent Technologies Inc. 10 Condensed Consolidating Balance Sheets
As of December 31, 2001 -------------------------------------------------------------------------- Non Apogent Guarantor Guarantor (In thousands) Technologies Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Assets ------ Current assets: Cash and cash equivalents $ 59,871 $ -- $ 13,587 $ (2,399) $ 71,059 Accounts receivable, net -- 135,283 36,361 -- 171,644 Inventories, net 1,263 146,906 36,853 (4,733) 180,289 Other current assets 15,710 14,897 6,545 -- 37,152 ---------- ---------- -------- ----------- ---------- Total current assets 76,844 297,086 93,346 (7,132) 460,144 Property, plant and equipment, net 9,836 171,538 45,995 -- 227,369 Intangible assets 14,363 935,304 225,960 -- 1,175,627 Deferred income taxes 5,762 151 1,201 -- 7,114 Investment in subsidiaries 1,629,049 49,939 -- (1,678,988) -- Other assets 58,988 13,069 1,020 -- 73,077 ---------- ---------- -------- ----------- ---------- Total assets $1,794,842 $1,467,087 $367,522 $(1,686,120) $1,943,331 ========== ========== ======== =========== ========== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 336 $ 35,490 $ 10,053 $ (2,399) $ 43,480 Current portion of long-term debt -- 75,038 30 -- 75,068 Income taxes payable 17,113 19,142 6,417 (1,249) 41,423 Accrued expenses and other current liabilities 9,662 26,800 26,363 -- 62,825 ---------- ---------- -------- ----------- ---------- Total current liabilities 27,111 156,470 42,863 (3,648) 222,796 ---------- ---------- -------- ----------- ---------- Long-term debt -- 675,362 23 -- 675,385 Securities lending agreement 54,607 -- -- -- 54,607 Deferred income taxes 85,838 20,524 12,371 -- 118,733 Other liabilities 2,973 2,261 1,408 -- 6,642 Net intercompany payable/(receivable) 509,957 (740,191) 230,198 36 -- Commitments and contingent liabilities -- Shareholders' equity Preferred stock -- -- -- -- -- Common stock 1,061 -- -- -- 1,061 Equity rights -- -- -- -- -- Additional paid-in-capital 237,801 1,597,103 83,744 (1,660,375) 258,273 Retained earnings (deficit) 872,802 (244,442) 51,382 (22,133) 657,609 Other comprehensive income 2,692 -- (54,467) -- (51,775) Treasury stock (at cost) -- -- -- -- -- ---------- ---------- -------- ----------- ---------- Total shareholders' equity 1,114,356 1,352,661 80,659 (1,682,508) 865,168 ---------- ---------- -------- ----------- ---------- Total liabilities and shareholders' equity $1,794,842 $1,467,087 $367,522 $(1,686,120) $1,943,331 ========== ========== ======== =========== ==========
11 Condensed Consolidating Balance Sheets
As of September 30, 2001 -------------------------------------------------------------------------- Non Apogent Guarantor Guarantor (In thousands) Technologies Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Assets ------ Current assets: Cash and cash equivalents $ 4,145 $ -- $ 10,699 $ (5,652) $ 9,192 Accounts receivable, net -- 146,981 36,297 -- 183,278 Inventories, net 1,263 136,906 33,335 (4,068) 167,436 Other current assets 15,010 13,458 5,969 (406) 34,031 ---------- ---------- -------- ----------- ---------- Total current assets 20,418 297,345 86,300 (10,126) 393,937 Property, plant and equipment, net 9,553 169,032 45,102 -- 223,687 Intangible assets 7,003 913,651 219,680 -- 1,140,334 Deferred income taxes 6,147 -- -- -- 6,147 Investment in subsidiaries 1,593,800 46,461 -- (1,640,261) -- Other assets 58,605 11,543 885 -- 71,033 ---------- ---------- -------- ----------- ---------- Total assets $1,695,526 $1,438,032 $351,967 $(1,650,387) $1,835,138 ========== ========== ======== =========== ========== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 787 $ 46,802 $ 11,885 $ (5,652) $ 53,822 Current portion of long-term debt 378 33,450 36 -- 33,864 Income taxes payable 33,432 -- 6,638 (1,323) 38,747 Accrued expenses and other current liabilities 33,784 28,603 14,968 -- 77,355 ---------- ---------- -------- ----------- ---------- Total current liabilities 68,381 108,855 33,527 (6,975) 203,788 ---------- ---------- -------- ----------- ---------- Long-term debt -- 623,543 23 -- 623,566 Securities lending agreement 55,072 -- -- -- 55,072 Deferred income taxes 74,411 20,778 12,031 -- 107,220 Other liabilities 3,231 2,453 1,318 -- 7,002 Net intercompany payable/(receivable) 375,705 (599,911) 224,169 37 -- Commitments and contingent liabilities -- Shareholders' equity Preferred stock -- -- -- -- -- Common stock 1,059 -- -- -- 1,059 Equity rights -- -- -- -- -- Additional paid-in-capital 234,166 1,561,854 80,265 (1,621,648) 254,637 Retained earnings (deficit) 880,299 (279,540) 48,684 (21,801) 627,642 Other comprehensive income 3,202 -- (48,050) -- (44,848) Treasury stock (at cost) -- -- -- -- -- ---------- ---------- -------- ----------- ---------- Total shareholders' equity 1,118,726 1,282,314 80,899 (1,643,449) 838,490 ---------- ---------- -------- ----------- ---------- Total liabilities and shareholders' equity $1,695,526 $1,438,032 $351,967 $(1,650,387) $1,835,138 ========== ========== ======== =========== ==========
12 Condensed Consolidating Statements of Operations
For the Three Months Ended December 31, 2001 ------------------------------------------------------------------------- Non Apogent Guarantor Guarantor (In thousands) Technologies Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Net sales $ -- $ 205,698 $ 52,375 $ (16,877) $ 241,196 Cost of sales -- 111,311 31,636 (16,211) 126,736 --------- --------- --------- --------- --------- Gross profit -- 94,387 20,739 (666) 114,460 Selling, general and administrative expenses 5,784 38,663 13,161 -- 57,608 --------- --------- --------- --------- --------- Operating income (5,784) 55,724 7,578 (666) 56,852 Other income (expense): Interest expense -- (10,204) (28) -- (10,232) Other, net (858) 1,497 7 -- 646 --------- --------- --------- --------- --------- Income before income taxes (6,642) 47,017 7,557 (666) 47,266 Income taxes (2,647) 17,396 2,796 (246) 17,299 --------- --------- --------- --------- --------- Net income $ (3,995) $ 29,621 $ 4,761 $ (420) $ 29,967 ========= ========= ========= ========= =========
For the Three Months Ended December 31, 2000 ------------------------------------------------------------------------- Non Apogent Guarantor Guarantor (In thousands) Technologies Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Net sales $ 196,681 $ 34,923 $ (10,846) $ 220,758 Cost of sales -- 104,555 20,400 (10,150) 114,805 --------- --------- --------- --------- --------- Gross profit -- 92,126 14,523 (696) 105,953 Selling, general and administrative expenses 5,235 42,224 8,657 -- 56,116 --------- --------- --------- --------- --------- Operating income (5,235) 49,902 5,866 (696) 49,837 Other income (expense): Interest expense -- (12,512) (16) -- (12,528) Other, net (585) 143 111 -- (331) --------- --------- --------- --------- --------- Income before income taxes, discontinued operations and extraordinary items (5,820) 37,533 5,961 (696) 36,978 Income taxes (2,328) 15,013 2,384 (278) 14,791 --------- --------- --------- --------- --------- Income from continuing operations before extraordinary items (3,492) 22,520 3,577 (418) 22,187 Loss from discontinued operations (10,986) -- -- -- (10,986) --------- --------- --------- --------- --------- Income before extraordinary items (14,478) 22,520 3,577 (418) 11,201 Extraordinary item -- (745) -- -- (745) --------- --------- --------- --------- --------- Net income $ (14,478) $ 21,775 $ 3,577 $ (418) $ 10,456 ========= ========= ========= ========= =========
13 Condensed Consolidating Statements of Cash Flows
For the Three Months Ended December 31, 2001 --------------------------------------------------------------------- Non Apogent Guarantor Guarantor (In thousands) Technologies Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Cash flows (used by) provided by operating activities: $ (14,570) $ 27,904 $ 11,337 $-- $ 24,671 --------- --------- --------- --- --------- Cash flows from investing activities: Capital expenditures (150) (4,526) (1,669) -- (6,345) Proceeds from sales of property, plant and equipment -- 24 26 -- 50 Net payments for businesses acquired -- (34,591) (3,737) -- (38,328) --------- --------- --------- --- --------- Net cash provided by (used in) investing activities (150) (39,093) (5,380) -- (44,623) --------- --------- --------- --- --------- Cash flows from financing activities: Proceeds from long-term debt 68,700 383,200 -- -- 451,900 Principal payments on long-term debt -- (360,468) (6) -- (360,474) Proceeds from the exercise of stock options 1,746 -- -- -- 1,746 Other -- (8,290) 920 -- (7,370) --------- --------- --------- --- --------- Net cash provided by (used in) financing activities 70,446 14,442 914 -- 85,802 Effect of exchange rate on cash and cash equivalents -- -- (3,983) (3,983) --------- --------- --------- --- --------- Net (decrease) increase in cash and cash equivalents 55,726 3,253 2,888 -- 61,867 Cash and cash equivalents at beginning of year 4,145 (5,652) 10,699 -- 9,192 --------- --------- --------- --- --------- Cash and cash equivalents at end of year $ 59,871 $ (2,399) $ 13,587 $-- $ 71,059 ========= ========= ========= === ========= Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ -- $ 13,562 $ 80 $-- $ 13,642 ========= ========= ========= === ========= Income taxes $ 14,200 $ -- $ -- $-- $ 14,200 ========= ========= ========= === ========= Capital lease obligations incurred $ -- $ 30 $ -- $-- $ 30 ========= ========= ========= === =========
14 Condensed Consolidating Statements of Cash Flows
For the Three Months Ended December 31, 2000 ----------------------------------------------------------------------- Non Apogent Guarantor Guarantor (In thousands) Technologies Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Cash flows provided by operating activities: $ (68,099) $ 87,107 $ 3,412 $ 22,420 --------- --------- --------- --- --------- Cash flows from investing activities: Capital expenditures (249) (5,761) (1,369) -- (13,389) Proceeds from sales of property, plant and equipment -- 232 26 -- 258 Net cash inflow from SDS 46,394 -- -- -- 46,394 Net payments for businesses acquired -- (18,856) -- -- (18,856) --------- --------- --------- --- --------- Net cash used in investing activities 46,145 (24,385) (1,343) -- 20,417 --------- --------- --------- --- --------- Cash flows from financing activities: Proceeds from long-term debt -- 626,640 -- -- 626,640 Principal payments on long-term debt -- (688,748) (12) -- (688,760) Proceeds from the exercise of stock options 1,491 -- -- -- 1,491 Other 14,583 (3,900) -- -- 10,683 --------- --------- --------- --- --------- Net cash provided by financing activities 16,074 (66,020) -- -- (49,946) Effect of exchange rate on cash and cash equivalents -- -- (529) -- (529) --------- --------- --------- --- --------- Net (decrease) increase in cash and cash equivalents (5,880) (3,298) 1,540 -- (7,638) Cash and cash equivalents at beginning of year 7,086 (2,577) 7,902 -- 12,411 --------- --------- --------- --- --------- Cash and cash equivalents at end of year $ 1,206 $ (5,875) $ 9,442 $-- $ 4,773 ========= ========= ========= === ========= Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ -- $ 13,642 $ -- $-- $ 13,642 ========= ========= ========= === ========= Income taxes $ -- $ -- $ -- $-- $ -- ========= ========= ========= === ========= Capital lease obligations incurred $ -- $ -- $ -- $-- $ -- ========= ========= ========= === =========
15 Item 2. Management's Discussion and Analysis of Financial Condition and Result ---------------------------------------------------------------------- of Operations ------------- General The subsidiaries of Apogent are leading manufacturers of value-added products for the clinical diagnostics, labware and life sciences, and laboratory equipment markets in the United States and abroad. Apogent provides products under three business segments - Clinical Diagnostics, Labware and Life Sciences, and Laboratory Equipment. The primary subsidiaries in each of our business segments are as follows: Clinical Diagnostics Labware and Life Sciences -------------------- ------------------------- Applied Biotech, Inc. Advance Biotechnologies Ltd. Chase Scientific Glass, Inc. BioRobotics Group Limited Erie Electroverre S.A. Genevac Limited Erie Scientific Company Matrix Technologies Corporation Gerhard Menzel Glasbearbeitungswerk Molecular BioProducts, Inc. GmbH & Co. K.G. Nalge Nunc International Corporation Microgenics Corporation Nalge Nunc International K.K. Microm International GmbH National Scientific Company The Naugatuck Glass Company Nunc A/S Richard-Allan Scientific Company Remel Inc. Laboratory Equipment Samco Scientific Corporation -------------------- Barnstead Thermolyne Corporation Electrothermal Engineering, Ltd. Lab-Line Instruments, Inc. When we use the terms "we" or "our" in this report, we are referring to Apogent Technologies Inc. and its subsidiaries. Our fiscal year ends on September 30, and accordingly, all references to quarters refer to our fiscal quarters. The quarters ended December 31, 2001 and 2000 are the Company's first quarters of fiscal 2002 and 2001, respectively. Results of Operations Quarter Ended December 31, 2001 Compared to the Quarter Ended December 31, 2000 Net Sales Fiscal Fiscal Dollar Percent 2002 2001 Change Change -------- -------- -------- ------- (in thousands) Clinical Diagnostics $116,940 $109,865 $ 7,075 6% Labware and Life Sciences 99,524 84,863 14,661 17% Laboratory Equipment 24,732 26,030 (1,298) -5% -------- -------- ------ $241,196 $220,758 $ 20,438 9% ======== ======== ====== Overall Company. Net sales for the quarter ended December 31, 2001 increased by $20.4 million or 9% over the corresponding fiscal 2001 quarter. Clinical Diagnostics. Increased net sales in the clinical diagnostics segment resulted primarily from: (a) net sales of products of acquired companies (approximately $4.9 million), (b) price increases (approximately $3.6 million), (c) increased net sales of new products developed by us (approximately $1.5 million), and (d) foreign currency fluctuations (approximately $0.4 million). Net sales were partially reduced by a decrease in net sales of existing products (approximately $3.4 million). 16 Labware and Life Sciences. Increased net sales in the labware and life sciences segment resulted primarily from: (a) net sales of products of acquired companies (approximately $12.1 million), (b) increased net sales of new products developed by us (approximately $1.7 million), (c) increased net sales of existing products (approximately $0.8 million), and (d) price increases (approximately $0.3 million). Net sales were partially reduced by foreign currency fluctuations (approximately $0.2 million). Laboratory Equipment. Reduced net sales in the laboratory equipment segment resulted primarily from a decrease in net sales of existing products (approximately $2.2 million). Net sales were partially increased by: (a) increased net sales of new products developed by us (approximately $0.4 million) and (b) price increases (approximately $0.4 million). Gross Profit
Fiscal Percent Fiscal Percent Dollar Percent 2002 of Sales 2001 of Sales Change Change -------- -------- -------- -------- -------- ------- Clinical Diagnostics $ 54,565 47% $ 51,654 47% $ 2,911 6% Labware and Life Sciences 49,612 50% 43,257 51% 6,355 15% Laboratory Equipment 10,283 42% 11,042 42% (759) -7% -------- -------- -------- $114,460 47% $105,953 48% $ 8,507 8% ======== ======== ========
Overall Company. Gross profit for the quarter ended December 31, 2001 increased by $8.5 million or 8% over the corresponding fiscal 2001 quarter. Clinical Diagnostics. Increased gross profit in the clinical diagnostics segment resulted primarily from: (a) price increases (approximately $3.6 million), (b) decreased manufacturing overhead (approximately $2.8 million), (c) the effects of acquired companies (approximately $1.9 million), (d) inventory adjustments (approximately $0.9 million), (e) the effects of new products (approximately $0.7 million), and (f) foreign currency fluctuations (approximately $0.1 million). Gross profit was partially reduced by: (a) decreased volume (approximately $4.3 million) and (b) product mix (approximately $2.7 million). Labware and Life Sciences. Increased gross profit in the labware and life sciences segment resulted primarily from: (a) the effects of acquired companies (approximately $3.7 million), (b) product mix (approximately $2.6 million), (c) the effects of new products (approximately $0.6 million), (d) increased volume (approximately $0.6 million), and (e) price increases (approximately $0.3 million). Gross profit was partially reduced by: (a) increased manufacturing overhead (approximately $0.8 million), (b) foreign currency fluctuations (approximately $0.4 million), and (c) inventory adjustments (approximately $0.3 million). Laboratory Equipment. Decreased gross profit in the laboratory equipment segment resulted primarily from: (a) decreased volume (approximately $1.0 million), (b) inventory adjustments (approximately $0.3 million), and (c) increased manufacturing overhead (approximately $0.2 million). Gross profit was partially increased by: (a) price increases (approximately $0.4 million) and (b) the effects of new products (approximately $0.2 million). 17 Selling General and Administrative Expenses Fiscal Fiscal Dollar Percent 2002 2001 Change Change -------- -------- -------- ------- Clinical Diagnostics $ 24,507 $ 26,196 $ (1,689) -6% Labware and Life Sciences 28,044 25,004 3,040 12% Laboratory Equipment 4,854 5,616 (762) -14% -------- -------- -------- Subtotal 57,405 56,816 589 1% Other 203 (700) 2,867 -------- -------- -------- Total $ 57,608 $ 56,116 $ 3,456 6% ======== ======== ======== Overall Company. Selling, general and administrative expenses for the quarter ended December 31, 2001 increased by $3.4 million or 6% over the corresponding fiscal 2001 quarter. Clinical Diagnostics. Decreased selling, general and administrative expenses in the clinical diagnostics segment resulted primarily from a decrease in amortization expense as a result of the implementation of Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) - see Note 1 to the Unaudited Consolidated Financial Statements (approximately $3.8 million). Selling, general and administrative expenses were partially increased by: (a) marketing expenses (approximately $1.1 million), (b) general and administrative expenses (approximately $0.9 million), (c) research and development expenses (approximately $0.2 million), (d) acquired businesses (approximately $0.2 million), and (e) foreign currency fluctuations (approximately $0.2 million). Labware and Life Sciences. Increased selling, general and administrative expenses in the labware and life sciences segment resulted primarily from: (a) acquired businesses (approximately $2.9 million), (b) marketing expenses (approximately $1.6 million), (c) general and administrative expenses (approximately $0.5 million), and (d) research and development expense (approximately $0.5 million). Selling, general and administrative expenses were partially reduced by: (a) decreased amortization expense as a result of SFAS 142 (approximately $1.9 million), and (b) foreign currency fluctuations (approximately $0.3 million). Laboratory Equipment. Decreased selling, general and administrative expenses in the laboratory equipment segment resulted primarily from: (a) decreased amortization expense as a result of SFAS 142 (approximately $0.5 million) and (b) general and administrative expenses (approximately $0.1 million). Operating Income Fiscal Fiscal Dollar Percent 2002 2001 Change Change -------- -------- -------- ------- Clinical Diagnostics $ 30,058 $ 25,453 $ 4,605 18% Labware and Life Sciences 21,568 18,253 3,315 18% Laboratory Equipment 5,429 5,431 (2) 0% -------- -------- -------- Subtotal 57,055 49,137 7,918 16% Other (203) 700 (903) -------- -------- -------- Total $ 56,852 $ 49,837 $ 7,015 14% ======== ======== ======== As a result of the foregoing, operating income for the quarter ended December 31, 2001 increased by $7.0 million or 14% over the corresponding fiscal 2001 quarter. Excluding the impact of SFAS 142 on this fiscal 2002 quarter, operating income would have been $569 million, consistent with the corresponding fiscal 2001 quarter. Interest Expense Interest expense was $10.2 million for the quarter ended December 31, 2001, as compared to $12.5 million for the corresponding fiscal 2001 quarter. The decrease is the result of lower average interest rates. 18 Other Income Other income was $1.5 million for the quarter ended December 31, 2001, as compared to other expense of $0.2 million in the corresponding fiscal 2001 quarter. This increase is primarily due to investment income from minority interest in joint ventures of $1.4 million. Income Taxes Taxes on income from continuing operations for the quarter ended December 31, 2001 were $17.3 million, an increase of $2.5 million from the corresponding fiscal 2001 quarter. This increase resulted primarily from increased taxable earnings. Net Income As a result of the foregoing, net income was $30 million for the quarter ended December 31, 2001 as compared to $10.5 million for the corresponding fiscal 2001 quarter. SFAS 142 would have increased net income to $15.3 million for the fiscal 2001 quarter, had it been effective at the time. Impact of Recently Issued Accounting Standards The Company adopted Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) on October 1, 2001. SFAS 142 requires that all goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead tested for impairment at least annually. As a result the Company is no longer amortizing approximately $947 million of goodwill as of December 31, 2001. If SFAS 142 had been effective for the quarter ending December 31, 2000, income before extraordinary item and net income would have been $16.1 million and $15.3 million, respectively. The Company is required to perform initial impairment tests and it is not practical to estimate the impact of such tests. However, any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in our statement of earnings. Liquidity and Capital Resources As a result of the acquisition of our predecessor in 1987 and the acquisitions we completed since 1987, we have increased the carrying value of certain tangible and intangible assets consistent with accounting principles generally accepted in the United States. Accordingly, our results of operations include a significant level of non-cash expenses related to the depreciation of fixed assets and the amortization of intangible assets, including goodwill. Goodwill and intangible assets, net of amortization, increased by approximately $35 million during the first fiscal quarter of 2002, primarily as a result of continued acquisition activity. However, the non-cash amortization expense relating to intangible assets and goodwill have been reduced substantially following the adoption of SFAS 142 on October 1, 2001. Our capital requirements arise principally from indebtedness incurred in connection with our obligation to pay rent under the Sale/Leaseback facility (as defined herein), our working capital needs, primarily related to inventory and accounts receivable, our capital expenditures, primarily related to purchases of machinery and molds, the purchase of various businesses and product lines in execution of our acquisition strategy, and the periodic expansion of physical facilities. It is currently our intent to continue to pursue our acquisition strategy. Approximately $24.7 million of cash was generated from operating activities in the first quarter of fiscal 2002, an increase of $2.3 million or 10% from the corresponding fiscal 2001 quarter. Non-cash depreciation and amortization charged against net income decreased approximately $4.5 million, primarily as a result of the adoption of SFAS 142. The cash outflow resulting from the net change in working capital, net of the effects of acquisitions and divestitures, was $20.3 million for the first quarter of fiscal 2002, consistent with the corresponding fiscal 2001 quarter. These changes are set forth in detail in the Consolidated Statements of Cash Flows. 19 Investing activities in the first quarter of fiscal 2002 used approximately $44.6 million of cash. This outflow was due primarily to cash used for acquisitions of $38.3 million. Capital expenditures were $6.3 million for the first quarter of fiscal 2002, compared to $7.4 million in the corresponding fiscal 2001 quarter. Financing activities provided approximately $85.8 million of cash in the first quarter of fiscal 2002. Proceeds from our CODES offering (discussed below) were used to pay off approximately $208 million outstanding on the Revolving Credit facilities. Financing fees of $8.3 million were paid in connection with the CODES offering. As a result of the excess of proceeds from the CODES offering over the payments on the Revolving Credit Facilities and financing fees paid, the Company had $71 million of cash at December 31, 2001. On October 10, 2001, the Company issued $300 million of senior convertible contingent debt securities (CODES). The CODES have a fixed interest rate of 2.25% per annum. Interest is payable on April 15 and October 15 of each year, beginning April 15, 2002. The Company will also pay contingent interest during any six-month period if the average trading price of the CODES during a specified period of five trading days preceding the relevant six-month period is above specified levels. The CODES will mature on October 15, 2021. The CODES are convertible, subject to certain conditions (including but not limited to the sale price of the Company's common stock, trading prices of the CODES, maintenance of the Company's credit ratings, and the occurrence of specified corporate transactions), into Apogent Common Stock at a price of approximately $30.49 per share. The Company may redeem some or all of the CODES on or after October 20, 2004. The holders may require the Company to purchase all or a portion of their CODES on October 20, 2004 and on October 15, 2006, 2011 and 2016, or subject to specified exemptions, upon a change of control event. Certain of the Company's U.S. subsidiaries guarantee the Company's obligations under the CODES. The proceeds from the issuance were used to pay down the outstanding balance on our Revolving Credit Facility, and for general corporate purposes. The CODES, 8% Senior Notes, and Revolving Credit Facilities all contain certain cross default provisions. Some of these provisions include financial and operating covenants which, if not met, could cause acceleration of payments on outstanding balances. The covenants include, among other things; restrictions on investments, requirements that the Company maintain certain financial ratios, requirements that the Company maintain certain credit ratings, restrictions on the ability of the Company and its subsidiaries to create or permit liens, or to pay dividends or make other restricted payments (as defined), and limitations on incurrence of additional indebtedness. The Company is not aware of any violations of these covenants and does not foresee any such violations in light of current business conditions. Off-Balance Sheet Arrangements The Company holds a minority interest in two unconsolidated joint ventures that are accounted for as equity investments. In both instances the Company owns less than 50% of the underlying joint venture. As of December 31, 2001 equity investments in these entities, included in "Other Assets", totaled $7.6 million. Income from the joint ventures for the first quarter of fiscal 2002 was $1.4 million and is included in Other Income. The joint ventures are limited to the extent they can incur any debt other than trade payables arising out of their business activities and do not hold any assets other than inventory and trade receivables. As of December 31, 2001, the joint ventures did not have any debt other than trade payables arising out of their business activities. 20 Disclosures About Contractual Obligations and Commercial Commitments In its day-to-day business activities, the Company incurs certain obligations and commitments to make future payments under contracts such as debt and lease agreements. Maturities of these obligations are set forth in the following table (in millions):
---------------------------------------- --------------------------------------------------------------------- Payments Due by Period ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Less than 1 After 5 Contractual Obligations Total Year 1 - 3 Years 4 - 5 Years Years ---------------------------------------- ------------- ------------- ------------- ------------- ------------- ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Long-Term Debt $ 750.5 $ 73.6 $ 41.8 $ 1.2 $ 633.9 ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Capital Lease Obligations 0.6 0.3 0.3 --- --- ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Operating Leases 51.6 9.6 21.9 8.5 11.6 ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Unconditional Purchase Obligations 15.0 2.5 6.5 3.0 3.0 ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Other Long-Term Obligations None ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Total Contractual Cash Obligations 817.7 86.0 70.5 12.7 648.5 ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Amount of Commitment Expiration Per Period Total ------------------------------------------------------- Amounts Less Than 1 Other Commercial Commitments Committed Year 1 - 3 Years 4 - 5 Years Over 5 Years ---------------------------------------- ------------- ------------- ------------- ------------- ------------- ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Lines of Credit $ 10.7 $10.7 $ --- $--- $--- ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Standby Letters of Credit 107.9 34.8 73.1 ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Guarantees None (1) ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Standby Repurchase Obligations None ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Other Commercial Commitments None ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Total Commercial Commitments $118.6 $45.5 73.1 $--- $--- ---------------------------------------- ------------- ------------- ------------- ------------- -------------
(1) Certain of the Company's domestic subsidiaries are guarantors under the Revolving Line of Credit, 8% Senior Notes, and CODES. Cautionary Factors This report contains various forward-looking statements concerning our prospects that are based on the current expectations and beliefs of management. We may also make forward-looking statements from time to time in other reports and documents as well as oral presentations. When used in written documents or oral statements, the words "anticipate," "believe," "continue," "estimate," "goal," "expect," "objective," "outlook" and similar expressions are intended to identify forward-looking statements. The statements contained herein and such future statements involve or may involve certain assumptions, risks and uncertainties, many of which are beyond our control, that could cause our actual results and performance to differ materially from what is expected. In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could impact our business and financial prospects: Our holding company structure increases financial risks. We are organized as a holding company, with all of our net sales generated through our subsidiaries. Consequently, our operating cash flow and ability to service indebtedness depend in part upon the operating cash flow of our foreign subsidiaries and the payment of funds by them to us in the form of loans, dividends or otherwise. Their ability to pay dividends and make loans, advances and other payments to us depends upon statutory or other contractual restrictions that apply, which may include requirements to maintain minimum levels of working capital and other assets. 21 Our international operations pose currency and other risks. We have significant operations outside the United States, where a significant portion of our revenue is generated. We are therefore subject to risk factors affecting our international operations, including relevant foreign currency exchange rates, which can affect the cost of our products or the ability to sell our products in foreign markets, and the value in U.S. dollars of sales made in foreign currencies. Other factors include our ability to obtain effective hedges against fluctuations in currency exchange rates; foreign trade, monetary and fiscal policies; laws, regulations and other activities of foreign governments, agencies and similar organizations; risks associated with having major manufacturing facilities located in countries that have historically been less stable than the United States in several respects, including fiscal and political stability; and risks associated with an economic downturn in other countries. In addition, world events can increase the volatility of the currency markets, and such volatility could affect our financial results. Our failure to keep pace with the technological demands of our customers or with the products and services offered by our competitors could significantly harm our business. Some of the industries served by our products are characterized by rapid technological changes and new product introductions. Some of our competitors may invest more heavily in research or product development than we do. Successful new product offerings depend upon a number of factors, including our ability to: o accurately anticipate customer needs; o innovate and develop new technologies and applications; o successfully commercialize new products in a timely manner; o price our products competitively and manufacture and deliver our products in sufficient volumes and on time; and o differentiate our offerings from those of our competitors. If we do not introduce new products in a timely manner and make enhancements to meet the changing needs of our customers, some of our products could become obsolete over time, in which case our customer relationships, revenue, and operating results would suffer. Our operating results may suffer if the industries into which we sell our products are in downward cycles. Some of the industries and markets into which we sell our products are cyclical. Any significant downturn in our customers' markets or in general economic conditions could result in reduced demand for our products and could harm our business. Future acquisitions may not be available or may create transitional challenges. A significant portion of our growth over the past several years has been achieved through our acquisition program. Our rate of continued growth is therefore subject to factors affecting our ability to continue pursuing our current acquisition strategy and to be successful with that strategy. These factors include the cost of the capital required to effect our acquisition strategy, the availability of suitable acquisition candidates at reasonable prices, competition for appropriate acquisition candidates, our ability to realize the synergies expected to result from acquisitions, our ability to retain key personnel in connection with acquisitions and the ability of our existing personnel to efficiently handle increased transitional responsibilities resulting from acquisitions. We may incur restructuring or impairment charges that would reduce our earnings. We have in the past and may in the future restructure some of our operations. In such circumstances, we may take actions that would result in a charge and reduce our earnings. These restructurings have or may be undertaken to realign our subsidiaries, eliminate duplicative functions, rationalize our operating facilities and products and reduce our staff. These restructurings may be implemented to improve the operations of recently acquired subsidiaries as well as subsidiaries that have been part of our operations for many years. Additionally, on October 1, 2001 we adopted 22 SFAS 142, "Goodwill and Other Intangible Assets," which requires that goodwill and intangible assets that have an indefinite useful life be tested at least annually for impairment. This requires us to perform a transitional assessment for possible impairment as of October 1, 2001. We have not quantified the impact of adopting this standard. We rely heavily upon sales to key distributors and original equipment manufacturers, and could lose sales if any of them stop doing business with us. Our three most significant distributors represent a significant portion of our revenues. Our reliance on major independent distributors for a substantial portion of our sales subjects our sales performance to volatility in demand from distributors. We can experience volatility when distributors merge or consolidate, when inventories are not managed to end-user demand, or when distributors experience softness in their sales or make alternate sourcing decisions. We rely primarily upon the long-standing and mutually beneficial nature of our relationships with our key distributors, rather than on contractual rights, to protect these relationships. Volatility in end-user demand can also arise with large OEM customers to whom we sell directly. The loss of a substantial contract could adversely affect our business. Sales to our OEM customers are sometimes unpredictable and wide variances sometimes occur quarter to quarter. We could be injured by disruptions of our manufacturing operations. We rely upon our manufacturing operations to produce most of the products we sell. Any significant disruption of those operations for any reason, such as strikes, labor disputes or other labor unrest, power interruptions, fire, war, or other force majuere, could adversely affect our sales and customer relationships and therefore adversely affect our business. In particular, the supply of white glass, which is used in our clinical diagnostics segment's worldwide manufacturing operations, comes solely from our glass manufacturing facility in Switzerland. Risks include delays encountered in connection with the periodic rebuilding of the sheet glass furnace or furnace malfunctions. Although most of our raw materials are available from a number of potential suppliers, our operations also depend upon our ability to obtain raw materials at reasonable prices. The success of many of our products depends on the effectiveness of our patents, trademarks, and licenses to defend our intellectual property rights. Our success with many of our products depends, in part, on our ability to protect our current and future innovative products and to defend our intellectual property rights. Our subsidiaries' products are sold under a variety of trademarks and trade names. They own or license all of the trademarks and trade names we believe to be material to the operation of their businesses. We also rely upon a combination of non-disclosure and other contractual agreements and trade secret, copyright, patent, and trademark laws to protect our intellectual property rights. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. If we fail to adequately protect our intellectual property, competitors may manufacture and market products similar to ours. We could be hurt by product liability claims or other litigation. Our business is subject to the risks of claims involving our products and other legal and administrative proceedings, including the expense of investigating, litigating and settling any claims. Although we currently maintain insurance against some of these risks, uninsured losses could occur. Our business is subject to regulatory risks. Our ability to continue manufacturing and selling those of our products that are subject to regulation by the United States Food and Drug Administration or other domestic or foreign governments or agencies is subject to a number of risks. In the future, some of our products may be affected by the passage of stricter laws or regulations, reclassification of our products into categories subject to more stringent requirements, or the withdrawal of approvals needed to sell one or more of our products. Some of our products are affected by general levels of insurance and reimbursement. The demand for and pricing of some of our products can be affected by changing levels of public and private health care budgets, including reimbursement by private or governmental insurance programs. We could be harmed by the loss of key management. 23 The success of our operations depends in significant part upon the experience and expertise of our management team, both within Apogent and in our operating subsidiaries. Any loss of these key personnel could harm our business. We sometimes experience quarterly variations in our operating results. Our business is subject to quarterly variations in operating results caused by a number of factors, including business and industry conditions, timing of acquisitions, distribution and OEM customer issues, and other factors listed here. All these factors make it difficult to predict operating results for any particular period. Other risks may arise. We may be subject to risks arising from other business and investment considerations that may be disclosed from time to time in our Securities and Exchange Commission filings or in other publicly available written documents. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- There has been no substantial change in market risk to the Company since September 30, 2001, the end of our prior fiscal year. PART II - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- On October 10, 2001, the Company issued and sold, in a private placement, $300 million aggregate principal amount of 2.25% Senior Contingent Convertible Debt Securities ("CODES") due 2021. The CODES are convertible, subject to certain conditions, into common stock at a conversion rate of 32.7955 shares of common stock per $1,000 principal amount of CODES, which is equivalent to an initial conversion price of approximately $30.49 per share. In addition to fixed interest at the rate of 2.25% per year, the CODES also pay contingent interest under certain circumstances. The CODES were sold to Lehman Brothers Inc., Credit Suisse First Boston Corporation, Banc of America Securities LLC, ABN AMRO Rothschild LLC and UBS Warburg LLC, as "accredited investors" within the meaning of Rule 501 under the Securities Act of 1933, in reliance upon the private placement exemption afforded by Section 4(2) of that Act, and were offered and sold to "qualified institutional buyers" under Rule 144A of the Securities Act. Pursuant to a registration rights agreement entered into in connection with the private offering, the Company has filed a registration statement under the Securities Act to permit registered resales of the CODES and the common stock issuable upon conversion of the CODES. The aggregate offering price of the CODES was $300 million, 100% of the principal amount thereof. The purchase price paid to the Company by the initial purchasers was the initial offering price less a discount of $7,500,000, 2.5% of the principal amount of the CODES. A portion of the net proceeds from the sale of the CODES was used to repay borrowings under the Company's revolving credit facility. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- The Company, a Wisconsin corporation, held its Annual Meeting of Shareholders on January 28, 2002. A quorum was present at the Annual Meeting, with 100,135,313 shares out of a total of 106,129,455 shares entitled to cast votes represented in person or by proxy at the meeting. Proposal Number 1: To elect four directors to serve as Class I Directors until the 2005 Annual Meeting of Shareholders and until their respective successors are duly elected and qualified. The shareholders voted to elect William H. Binnie, Don H. Davis, Jr., Christopher L. Doerr and Richard W. Vieser to serve as Class I directors until the 2005 Annual Meeting of Shareholders and until their respective successors are duly elected and qualified. The results of the vote are as follows: Mr. Binnie Mr. Davis Mr. Doerr Mr. Vieser ---------- --------- --------- ---------- For 99,858,639 99,803,189 98,615,795 99,914,697 Withheld From 276,674 332,124 1,519,518 220,616 The terms of office as directors of Stephen R. Hardis, R. Jeffrey Harris, Frank H. Jellinek, Jr., William U. Parfet, Joe L. Roby and Kenneth F. Yontz continued after the meeting. Proposal Number 2: To approve the Company's 2001 Equity Incentive Plan. 24 The shareholders voted to approve the Company's 2001 Equity Incentive Plan. The results of the vote are as follows: For: 89,267,980 Against: 3,806,454 Abstentions: 81,136 Broker Non-Votes: 6,979,743 Proposal Number 3: To approve the Company's Employee Stock Purchase Plan. The shareholders voted to approve the Company's Employee Stock Purchase Plan. The results of the vote are as follows: For: 92,754,974 Against: 310,191 Abstentions: 90,405 Broker Non-Votes: 6,979,743 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: See Exhibit Index following the Signature page in this report, which is incorporated herein by reference. (b) Reports on Form 8-K: A Form 8-K dated October 3, 2001, was filed on October 3, 2001 to report under items 5 and 7, the Company's intention to commence a private placement of senior convertible contingent debt securities (CODES). An exhibit to the Form 8-K also consisted of a press release dated October 3, 2001, announcing the intended private placement. A Form 8-K dated October 4, 2001, was filed on October 5, 2001 to report under items 5 and 7, the pricing of senior convertible contingent debt securities (CODES) to be issued in a private placement. An exhibit to the Form 8-K also consisted of a press release dated October 4, 2001, announcing the pricing. A Form 8-K dated October 11, 2001, was filed on October 11, 2001 to report under items 5 and 7, the sale of the Company's 2.25% Senior Convertible Contingent Debt Securities (CODES) due 2021. Exhibits to the Form 8-K also included a press release dated October 11, 2001, announcing the completion of the related private placement and the indenture for the CODES. A Form 8-K dated November 15, 2001, was filed on November 15, 2001 to report under item 5 an updated description of the Company's Common Stock. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. APOGENT TECHNOLOGIES INC. ----------------------------------------- (Registrant) Date: February 14, 2002 /s/ JEFFREY C. LEATHE ----------------------- ----------------------------------------- Jeffrey C. Leathe Executive Vice President - Finance, Chief Financial Officer and Treasurer* * Executing as both the financial officer and the duly authorized officer of the Company 26 APOGENT TECHNOLOGIES INC. (the "Registrant") (Commission File No. 1-11091) EXHIBIT INDEX to QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2001
Exhibit Incorporated Herein By Filed Number Description Reference To Herewith ------- ----------- ---------------------- -------- 4.1 Purchase Agreement dated October Exhibit 4.8 to Registrant's Form 3, 2001 among the Registrant, the 10-K for fiscal year ended Subsidiary Guarantors named September 30, 2001 (the "2001 therein and the Initial Purchasers 10-K"). named therein 4.2 Indenture dated October 10, 2001 Exhibit 99.2 to the Registrant's among the Registrant, the Form 8-K dated October 11, 2001 Subsidiary Guarantors named therein and The Bank of New York 4.3 Resale Registration Agreement Exhibit 4.10 to the Registrant's dated as of October 10, 2001 among 2001 10-K the Registrant, the Subsidiary Guarantors named therein and the Initial Purchasers named therein. 10.1 Form of Employment Agreement with X President and Chief Executive Officer 10.2 Form of Employment Agreement with X certain executive officers 10.3 Schedule of executive officers who X are party to Employment Agreement filed as Exhibit 10.2 10.4 Apogent Technologies Inc. 2001 Appendix A to the Registrant's Equity Incentive Plan Proxy Statement dated December 26, 2001. 10.5 Apogent Technologies Inc. Employee Appendix B to the Registrant's Stock Purchase Plan Proxy Statement dated December 26, 2001. 10.6 Form of Indemnification Agreement Exhibit 10 to the Registrant's with each of the executive Form 8-K filed November 15, 2001. officers and directors identified on the schedule thereto
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