EXHIBIT 13.1 Bio-Rad Laboratories, Inc. SUMMARY OF OPERATIONS (In thousands, except per share data) ________________________________________________________________________________________________________________________ Year Ended December 31, 1997 1996 1995 1994 1993 1992 Net sales $426,914 $418,789 $396,618 $355,299 $328,553 $330,301 Cost of goods sold (1) 189,331 182,046 171,942 155,805 151,063 138,173 Gross profit 237,583 236,743 224,676 199,494 177,490 192,128 Selling, general and administrative expense 164,792 155,516 150,272 132,591 129,187 133,934 Product research and development expense 46,138 39,580 34,714 30,172 34,204 34,655 Restructuring costs - 2,700 1,500 - 3,816 9,023 Income from operations 26,653 38,947 38,190 36,731 10,283 14,516 Other income (expense): Interest expense (1,216) (3,027) (4,465) (6,138) (8,406) (9,368) Other, net (2,709) 553 (183) (6,596) 2,801 22,357 Income before taxes and extraordinary charge 22,728 36,473 33,542 23,997 4,678 27,505 Provision for income taxes 6,364 9,118 8,386 8,399 1,877 11,951 Income before extraordinary charge 16,364 27,355 25,156 15,598 2,801 15,554 Extraordinary charge (2) - (1,176) - - - - Net income $ 16,364 $ 26,179 $ 25,156 $ 15,598 $ 2,801 $ 15,554 Basic earnings per share before extraordinary charge (3) $1.33 $2.23 $2.06 $1.29 $0.23 $1.31 Extraordinary charge (2)(3) - (.10) - - - - Basic earnings per share (3) $1.33 $2.13 $2.06 $1.29 $0.23 $1.31 Weighted average common shares (3) 12,260 12,273 12,206 12,113 11,990 11,886 Cash dividends paid per common share - - - - - - Total assets $351,876 $284,925 $285,098 $263,650 $259,890 $272,730 Long-term debt, net of current maturities $ 38,952 $ 6,721 $ 20,922 $ 26,287 $ 47,834 $ 57,909 _______________________________________________________________________________________________________________________ <FN> (1) In 1996, cost of goods sold includes a charge of $2.1 million for write-down of inventory associated with the restructuring costs. (2) Extraordinary charge for redemption of subordinated debt: 1996 - $1,176, net of tax effect of $817. (3) Restated to give effect to a stock split in the form of a 50% stock dividend in 1996. 1 Bio-Rad Laboratories, Inc. Consolidated Balance Sheets (In thousands) ________________________________________________________________________________________ December 31, Assets 1997 1996 Current Assets: Cash and cash equivalents $ 10,843 $ 9,390 Accounts receivable, less allowance of $3,374 in 1997 and $3,688 in 1996 96,965 97,795 Inventories 91,428 69,738 Deferred tax assets 15,524 14,947 Prepaid expenses and other current assets 12,658 6,665 Total current assets 227,418 198,535 Property, Plant and Equipment: Land and improvements 8,057 8,057 Buildings and leasehold improvements 55,477 52,050 Equipment 115,097 107,847 Total property, plant and equipment 178,631 167,954 Accumulated depreciation (99,953) (96,092) Net property, plant and equipment 78,678 71,862 Marketable Securities 18,092 7,432 Goodwill and Other Assets 27,688 7,096 Total Assets $351,876 $284,925 ________________________________________________________________________________________ The accompanying notes are an integral part of these statements. 2 Bio-Rad Laboratories, Inc. Consolidated Balance Sheets (In thousands, except share data) __________________________________________________________________________________________ December 31, Liabilities and Stockholders' Equity 1997 1996 Current Liabilities: Notes payable $ 9,872 $ 4,484 Current maturities of long-term debt 930 1,058 Accounts payable 32,385 21,262 Accrued payroll and employee benefits 24,825 23,717 Sales, income and other taxes payable 5,055 3,988 Other current liabilities 27,715 24,630 Total current liabilities 100,782 79,139 Long-Term Debt, net of current maturities 38,952 6,721 Deferred Tax Liabilities 15,465 15,557 Total liabilities 155,199 101,417 Commitments and Contingent Liabilities Stockholders' Equity: Preferred stock, $1.00 par value, 2,300,000 shares authorized; none outstanding - - Class A common stock, $1.00 par value, 15,000,000 shares authorized; outstanding 1997 - 9,824,509; 1996 - 9,740,922 9,825 9,741 Class B common stock, $1.00 par value, 6,000,000 shares authorized; outstanding 1997 - 2,596,069; 1996 - 2,579,803 2,596 2,580 Additional paid-in capital 18,426 17,067 Class A treasury stock, 193,539 shares in 1997 and (5,206) (839) 31,216 shares in 1996 at cost Class B treasury stock, 30,000 shares in 1997 and 1996 at cost (800) (800) Retained earnings 167,182 151,003 Currency translation (1,149) 3,570 Net unrealized holding gain on marketable securities 5,803 1,186 Total stockholders' equity 196,677 183,508 Total Liabilities and Stockholders' Equity $351,876 $284,925 __________________________________________________________________________________________ The accompanying notes are an integral part of these statements. 3 Bio-Rad Laboratories, Inc. Consolidated Statements of Income (In thousands, except per share data) ______________________________________________________________________________________________________________________ Year Ended December 31, 1997 1996 1995 Net sales $426,914 $418,789 $396,618 Cost of goods sold 189,331 182,046 171,942 Gross profit 237,583 236,743 224,676 Selling, general and administrative expense 164,792 155,516 150,272 Product research and development expense 46,138 39,580 34,714 Restructuring costs - 2,700 1,500 Income from operations 26,653 38,947 38,190 Other income (expense): Interest expense (1,216) (3,027) (4,465) Investment income, net 1,601 2,385 1,230 Other, net (4,310) (1,832) (1,413) Income before taxes and extraordinary charge 22,728 36,473 33,542 Provision for income taxes 6,364 9,118 8,386 Income before extraordinary charge 16,364 27,355 25,156 Extraordinary charge, net of tax effect of $817 - (1,176) - Net income $ 16,364 $ 26,179 $ 25,156 Basic earnings per share: Income before extraordinary charge $1.33 $2.23 $2.06 Extraordinary charge - (.10) - Net income $1.33 $2.13 $2.06 Weighted average common shares 12,260 12,273 12,206 Diluted earnings per share: Income before extraordinary charge $1.32 $2.19 $2.02 Extraordinary charge - (.09) - Net income $1.32 $2.10 $2.02 Weighted average common shares 12,394 12,472 12,430 _____________________________________________________________________________________________________________________ The accompanying notes are an integral part of these statements. 4 Bio-Rad Laboratories, Inc. Consolidated Statements of Cash Flows (In thousands) ________________________________________________________________________________________________________ Year Ended December 31, 1997 1996 1995 Cash flows from operating activities: Cash received from customers $414,694 $409,144 $387,729 Cash paid to suppliers and employees (381,489) (354,641) (339,702) Interest paid (1,155) (3,710) (4,008) Income tax payments (10,950) (16,923) (5,679) Miscellaneous receipts (payments) 9 (717) (108) Net cash provided by operating activities 21,109 33,153 38,232 Cash flows from investing activities: Capital expenditures, net (23,571) (15,235) (12,307) Payments for acquisitions (31,238) (1,290) (829) Purchases of marketable securities and investments (8,352) (2,710) (3,098) Sales of marketable securities and investments 3,419 2,968 2,959 Foreign currency hedges, net 3,817 1,423 (638) Net cash used in investing activities (55,925) (14,844) (13,913) Cash flows from financing activities: Net borrowings under line-of-credit arrangements 4,665 (8,940) (8,063) Long-term borrowings 87,275 5,024 59,400 Payments on long-term debt (55,329) (20,841) (65,535) Proceeds from issuance of common stock 1,459 1,262 1,093 Purchase of treasury stock (5,302) (1,887) - Reissuance of treasury stock 750 215 - Net cash provided by (used in) financing activities 33,518 (25,167) (13,105) Effect of exchange rate changes on cash 2,751 1,474 (191) Net increase (decrease) in cash and cash equivalents 1,453 (5,384) 11,023 Cash and cash equivalents at beginning of year 9,390 14,774 3,751 Cash and cash equivalents at end of year $ 10,843 $ 9,390 $ 14,774 ________________________________________________________________________________________________________ The accompanying notes are an integral part of these statements. 5 Bio-Rad Laboratories, Inc. Consolidated Statements of Changes in Stockholders' Equity (In thousands, except share data) ______________________________________________________________________ Year Ended December 31, 1997 1996 1995 Common Shares: Balance at beginning of year 12,320,725 12,239,346 12,159,190 Issuance of common stock 99,853 81,631 80,156 Cash paid in lieu of fractional shares on 3-for-2 stock split - (252) - Balance at end of year 12,420,578 12,320,725 12,239,346 _______________________________________________________________________ Common Stock: Balance at beginning of year $ 12,321 $ 12,239 $ 12,159 Issuance of common stock 100 82 80 Balance at end of year 12,421 12,321 12,239 Additional Paid-In Capital: Balance at beginning of year 17,067 15,887 14,874 Issuance of common stock 1,359 1,188 1,013 Cash paid in lieu of fractional shares on 3-for-2 stock split - (8) - Balance at end of year 18,426 17,067 15,887 Treasury Stock: Balance at beginning of year (1,639) - - Purchase of treasury stock (5,302) (1,887) - Reissuance of treasury stock 935 248 - Balance at end of year (6,006) (1,639) - Retained Earnings: Balance at beginning of year 151,003 124,857 99,701 Net income 16,364 26,179 25,156 Loss on reissuance of treasury stock (185) (33) - Balance at end of year 167,182 151,003 124,857 Currency Translation: Balance at beginning of year 3,570 3,527 2,566 Change in currency translation (4,719) 43 961 Balance at end of year (1,149) 3,570 3,527 Net Unrealized Holding Gain On Marketable Securities: Balance at beginning of year 1,186 549 518 Change in net unrealized holding gain 4,617 637 31 Balance at end of year 5,803 1,186 549 ________ ________ ________ Total Stockholders' Equity $196,677 $183,508 $157,059 _________________________________________________________________________ The accompanying notes are an integral part of these statements. 6 Bio-Rad Laboratories, Inc. Notes to Consolidated Financial Statements _________________________________________________________________ 1. Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Bio-Rad Laboratories, Inc. and all subsidiaries ("Bio-Rad" or the "Company") after elimination of intercompany balances and transactions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in such estimates may affect amounts reported in the future. Certain amounts in the financial statements of prior years have been reclassified to be consistent with the 1997 presentation. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid in- vestments with original maturities of three months or less which are readily convertible into cash. Cash equivalents are stated at cost, which approximates market value. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of trade accounts receivable. The Company performs credit evaluation procedures and with the exception of the Pacific Rim, generally does not require collateral. As a result of increased risk in certain Pacific Rim countries, many Bio-Rad sales are subject to collateral letters of credit. Credit risk is limited due to the large number of customers and their dispersion across many geographic areas. However, a significant amount of trade receivables are with national healthcare systems in countries within the European Economic Community. The Company does not currently anticipate a credit risk associated with these receivables. Inventory Valuation Inventories are valued at the lower of average cost or market and include material, labor and overhead costs. Property, Plant and Equipment Property, plant and equipment are carried at historical cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets ranging from two to thirty years. Leasehold improvements are amortized over the lives of the respective leases or the lives of the improvements, whichever is shorter. 7 Goodwill Goodwill, representing the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses, is stated at cost and is amortized on a straight-line basis over the estimated future periods to be benefited, primarily ten years. The Company reviews the recoverability of goodwill annually. Revenue Recognition and Warranty Bio-Rad recognizes revenues when products are shipped or services are rendered and all significant obligations of the Company have been met. Where appropriate, the Company also establishes a concurrent reserve for returns and allowances. The Company warrants certain equipment against defects in design, materials and workmanship, generally for one year. Upon shipment of equipment sold at a price which includes a warranty, the Company establishes, as part of cost of goods sold, a reserve for the expected costs of such warranty. Foreign Currency Translation Balance sheet accounts of international subsidiaries are translated at the current exchange rate as of the end of the accounting period. Income statement items are translated at average exchange rates. The resulting translation adjustment is recorded as a separate component of stockholders' equity. Forward Exchange Contracts The Company does not use derivative financial instruments for speculative or trading purposes. As part of distributing its products, the Company regularly enters into intercompany transactions. The Company enters into forward foreign exchange contracts to hedge against future movements in foreign exchange rates that affect foreign currency denominated intercompany receivables and payables. These contracts have maturity dates of 60 days or less, relate primarily to currencies of industrial countries and are marked to market at each balance sheet date. The resulting gains or losses are included in other income and expense offsetting exchange losses or gains on the related receivables and payables. Unrealized gains and losses are not deferred. Exchange gains and losses on these contracts are net of premiums and discounts resulting from interest rate differentials between the U.S. and the countries of the currencies being traded. The cash flows related to these contracts are classified as cash flows from investing activities in the statement of cash flows. 8 Stock Compensation Plans Stock-based compensation is recognized using the intrinsic value method. For disclosure purposes, pro forma net income and earnings per share are provided as if the fair value method had been applied. Earnings Per Share Basic earnings per share are calculated on the basis of the weighted average number of common shares outstanding for each period. Diluted earnings per share are calculated assuming the exercise of certain stock options. Treasury stock is not considered outstanding for purposes of calculating weighted average shares. Fair Value of Financial Instruments For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, notes payable, accounts payable and forward exchange contracts, the carrying amounts approximate fair value. The fair values of other instruments are disclosed in relevant notes to the financial statements. _________________________________________________________________ 2. Acquisitions In December 1997, the Company acquired, for cash, the assets used by Chiron Diagnostics Corporation in the business of manufacturing, marketing and sale of diagnostic controls (exclusive of blood gas controls). The business is being combined with the Clinical Diagnostics controls business based in southern California. In October 1997, the Company acquired, for cash, substantially all of the assets of Protein Databases, Inc. The assets purchased will be utilized by the Life Science segment in its imaging products. In September 1997, the Company acquired, for cash, certain assets related to the design and manufacture of the optical production profiler from Pacific Scientific Company. This expands the semiconductor products offered by the Analytical Instruments segment. In conjunction with these acquisitions, liabilities were assumed and incurred as follows (in thousands): Assigned value of assets acquired $12,173 Goodwill 20,959 Cash paid (31,238) Liabilities assumed and incurred $ 1,894 _________________________________________________________________ 9 3. Inventories The principal components of inventories are as follows (in thousands): December 31, 1997 1996 Raw materials $ 27,257 $ 26,920 Work in process 21,242 19,866 Finished goods 42,929 22,952 Inventories $ 91,428 $ 69,738 At December 31, 1997, inventories from acquisitions amounted to $9,052,000 and were comprised principally of the controls inventory purchased in December. ________________________________________________________________ 4. Marketable Securities The Company's marketable securities are classified as available-for- sale and are recorded at current market value. Unrealized holding gains and losses are included as a separate component of stockholders' equity. Realized gains and losses are included in investment income. The Company's portfolio is comprised principally of equity securities with an aggregate market value of $18,092,000 and $7,432,000 and cost of $12,289,000 and $6,246,000 at December 31, 1997 and 1996, respectively. At December 31, 1997, gross unrealized holding gains and losses were $6,039,000 and $236,000, respectively. At December 31, 1996, gross unrealized holding gains and losses were $1,465,000 and $279,000, respectively. For the purpose of determining realized gains and losses, the cost of securities sold is based upon specific identification. Information regarding the proceeds and gross realized gains and losses from sales of securities is as follows (in thousands): Year Ended December 31, 1997 1996 1995 Proceeds $ 3,419 $ 2,968 $ 2,959 Gross realized gains $ 1,211 $ 1,130 $ 1,118 Gross realized losses (82) - (123) Net realized gain $ 1,129 $ 1,130 $ 995 _________________________________________________________________ 5. Notes Payable and Long-Term Debt Notes payable include local credit lines maintained by the Company's subsidiaries aggregating approximately $29,535,000, of which $21,535,000 was unused at December 31, 1997. The weighted average interest rate on these lines was 5.78% and 7.68% at December 31, 1997 10 and 1996, respectively. The parent company guarantees most of these credit lines. The carrying amounts of notes payable, which includes borrowings under these lines and cash overdrafts, approximate their fair value. The principal components of long-term debt are as follows (in thousands): December 31, 1997 1996 Revolving credit agreement $38,000 $ 5,000 Capitalized leases 1,046 1,530 Other 836 1,249 39,882 7,779 Less current maturities 930 1,058 Long-Term Debt $38,952 $ 6,721 The Company has a $60 million revolving credit agreement which provides for borrowings on an unsecured basis through April 2000. Interest is based on money market rates or the prime rate. The applicable interest rate at December 31, 1997 and 1996 was 6.49% and 5.98%, respectively. A fee ranging from 0.15% to 0.30% annually is charged on the daily unborrowed portion of the commitment. The Company redeemed all of its 10.9% Subordinated Notes in December 1996. This redemption resulted in an extraordinary charge of $1,176,000, net of income tax benefits of $817,000. The debt was extinguished with current operating funds and $5,000,000 borrowed from the Company's revolving credit agreement. The revolving credit agreement (including amendments) requires the Company, among other things, to comply with certain financial ratio covenants. The Company was in compliance with all financial ratio covenants as of December 31, 1997. This agreement also contains certain other restrictions, including the limitation of cash dividends. Approximately $2,811,000 of retained earnings were available for payment of cash dividends at December 31, 1997. Maturities of long-term debt at December 31, 1997, are as follows: 1998 - $930,000; 1999 - $777,000; 2000 - $38,130,000; 2001 - $45,000; subsequent to 2001 - $0. The fair value of the Company's long-term debt is estimated based on the current rates available to the Company for similar issues of comparable maturities. At December 31, 1997, the estimated fair value is $39,882,000. 11 _________________________________________________________________ 6. Income Taxes The U.S. and international components of income before taxes and extraordinary charge are as follows (in thousands): Year Ended December 31, 1997 1996 1995 U.S. $ 11,343 $ 23,766 $ 24,592 International 11,385 12,707 8,950 Income before taxes and extraordinary charge $ 22,728 $ 36,473 $ 33,542 The provision for income taxes consists of (in thousands): Year Ended December 31, 1997 1996 1995 Current: U.S. Federal $ 3,277 $ 7,613 $ 6,764 International 3,226 6,070 2,115 U.S. State 552 1,122 1,008 7,055 14,805 9,887 Deferred: U.S. Federal (705) (4,473) (1,843) International 376 (699) 695 U.S. State (362) (515) (353) (691) (5,687) (1,501) Provision for income taxes $ 6,364 $ 9,118 $ 8,386 12 The Company's income tax provision differs from the amount computed by applying the U.S. federal statutory rate to income before taxes as follows (dollars in thousands): Year Ended December 31, 1997 1996 1995 Amount % Amount % Amount % U.S. statutory tax rate $ 7,955 35% $12,766 35% $11,740 35% State taxes, net of federal income tax benefit 124 1 395 1 426 1 Effect of international losses and differences between international and U.S. tax rates 842 4 1,806 5 781 2 Foreign Sales Corporation tax benefit (1,370) (6) (1,343) (4) (1,539) (4) Research and development tax credit (546) (2) (413) (1) (265) (1) Benefit of excess foreign tax credits on repatriation of foreign earnings (684) (3) (253) (1) (908) (3) Loss carryforwards utilized (1,279) (6) (1,518) (4) (1,678) (5) Amortization of goodwill 565 2 46 - - - Other 757 3 (2,368) (6) (171) - Provision for income taxes $ 6,364 28% $ 9,118 25% $ 8,386 25% 13 Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows (in thousands): December 31, 1997 1996 Deferred Tax Assets: Reserves for obsolete inventory, warranty and bad debts $ 10,418 $ 10,167 Eliminated intercompany profit 3,483 3,610 Tax benefit of foreign loss carryforwards 1,822 3,157 Other 3,086 3,585 18,809 20,519 Valuation allowance (3,285) (5,572) Deferred Tax Assets $ 15,524 $ 14,947 Deferred Tax Liabilities: Deferred gain on condemnation $ 4,426 $ 6,717 Depreciation 1,921 602 Development cost of Hercules facility 1,438 1,445 Other 7,680 6,793 Deferred Tax Liabilities $ 15,465 $ 15,557 The valuation allowance is needed to reduce the deferred tax assets to an amount that is more likely than not to be realized. The net change in the valuation allowance in 1997 and 1996 was a decrease of $2,287,000 and $906,000, respectively, primarily resulting from unanticipated utilization of foreign loss carryforwards. At December 31, 1997, Bio-Rad's international subsidiaries had combined net operating loss carryforwards of $5,353,000. A portion of these loss carryforwards will expire in the following years: 2000 - $162,000; 2001 - $13,000; 2002 - $1,041,000 and 2004 - $228,000. The remainder of these loss carryforwards have no expiration date. The utilization of these carryforwards is limited to the separate taxable income of each individual subsidiary. Bio-Rad does not provide for taxes which would be payable if the cumulative undistributed earnings of its international subsidiaries, approximately $19,442,000 at December 31, 1997, were remitted to the U.S. parent company. Unless it becomes advantageous for tax or foreign exchange reasons to remit a subsidiary's earnings, such earnings are indefinitely reinvested in subsidiary operations. The withholding tax and U.S. federal income taxes on these earnings, if remitted, would in large part be offset by tax credits. _________________________________________________________________ 14 7. Stockholders' Equity Stock Classification The Company's outstanding stock consists of Class A Common Stock (Class A) and Class B Common Stock (Class B). Each share of Class A and Class B participates equally in the earnings of Bio-Rad, and is identical in most other respects except that (i) Class A has limited voting rights, each share of Class A being entitled to one-tenth of a vote on most matters and each share of Class B being entitled to one vote; (ii) Class A stockholders are entitled to elect 25% of the Board of Directors (rounded up to the nearest whole number) and Class B stockholders are entitled to elect the balance of the directors; (iii) cash dividends may be paid on Class A shares without paying a cash dividend on Class B shares, but no cash dividend may be paid on Class B shares unless an at least equal cash dividend is paid on Class A shares; and (iv) Class B shares are convertible at any time into Class A shares on a one-for-one basis at the option of the stockholder. Stock Split Retroactive adjustments have been made, as appropriate, to common stock and per share amounts to reflect the 3-for-2 stock split effected in the form of a 50% stock dividend in May 1996. Stock Option Plans Bio-Rad maintains incentive and non-qualified fixed stock option plans for officers and certain other key employees. Under the 1994 Stock Option Plan, the Company may grant options to its employees for up to 675,000 shares of common stock provided that no option shall be granted after March 1, 2004. The Amended and Restated 1984 Stock Option Plan provided that no option could be granted after March 1, 1994. Under both plans, Class A and Class B options are granted at prices not less than fair market value on the date of grant, are exercisable on a cumulative basis at a rate not greater than 25% per annum commencing one year after the date of grant and expire five years after the date of grant. The Company has made no charge to income with respect to any stock options. At the time options are exercised, the par value of the shares is credited to common stock and the excess is credited to additional paid-in capital. The Company may receive income tax benefits from the exercise of non-qualified stock options and from certain dispositions of stock received by employees under qualified or incentive stock options. The fair value of each option granted since January 1, 1995, was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions for grants in 1997, 1996 and 1995, respectively: no dividend yield for all periods; expected lives of 1.8 and 2.8 years for all periods; expected volatility of 33%, 33% and 38%; and risk-free interest rates ranging from 5.63% to 6.15%, 4.85% to 5.27% and 6.78% to 7.43%. 15 Activity under the plans is summarized below (amounts reported in the Price columns represent the weighted average exercise price): Year Ended December 31, 1997 1996 1995 Shares Price Shares Price Shares Price Outstanding at beginning of year 482,900 $16.34 427,457 $12.39 356,640 $ 9.66 Granted 147,050 32.54 147,000 26.55 145,800 18.27 Exercised (90,445) 11.88 (59,576) 11.12 (39,552) 9.91 Forfeited (19,909) 25.38 (31,981) 20.21 (35,431) 11.96 Expired (2,578) 12.04 - - - - Outstanding at end of year 517,018 21.40 482,900 16.34 427,457 12.39 Options exercisable at year-end 172,689 149,605 103,437 Weighted average fair value of options granted during the year $10.76 $8.57 $6.76 The following table summarizes information about fixed stock options outstanding at December 31, 1997: Options Outstanding Options Exercisable Number Weighted Average Number Range of Outstanding Remaining Weighted Average Exercisable Weighted Average Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price $ 7.37 - $ 9.46 123,681 0.9 years $ 8.33 85,877 $ 8.53 $10.36 - $20.03 130,750 1.9 17.07 55,989 16.85 $25.92 - $31.63 155,938 3.3 27.59 30,823 26.53 $32.63 - $35.89 106,649 4.1 32.81 - - $ 7.37 - $35.89 517,018 2.5 21.40 172,689 14.44 16 Employee Stock Purchase Plan Under the Amended 1988 Employee Stock Purchase Plan (the Plan), the Company has authorized the sale of 645,000 shares of Class A to eligible employees. The purchase price of the shares under the Plan is the lesser of 85% of the fair market value on the first day of each calendar quarter, or 85% of the fair market value on the last day of each calendar quarter. Employees may designate up to 10% of their compensation for the purchase of stock. Under the Plan, the Company sold 43,785 shares for $982,000, 30,888 shares for $742,000 and 40,603 shares for $670,000 to employees in 1997, 1996 and 1995, respectively. At December 31, 1997, 115,572 shares remained authorized under the Plan. The fair value of the employees' purchase rights since January 1, 1995, was estimated using the Black-Scholes model with the following assumptions for 1997, 1996 and 1995, respectively: no dividend yield for all periods; an expected life of three months for all periods; expected volatility ranging from 19% to 30%, from 26% to 38% and from 20% to 32%; and risk-free interest rates ranging from 5.02% to 5.41%, from 4.90% to 4.99% and from 5.12% to 5.66%. The weighted average fair value of those purchase rights granted in 1997, 1996 and 1995 was $5.50, $6.81 and $4.45, respectively. Pro Forma Disclosures Had compensation cost for the Company's stock-based compensation plans been determined based upon the fair value at grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Year Ended December 31, 1997 1996 1995 Net income As reported $16,364 $26,179 $25,156 Pro forma $15,173 $25,348 $24,651 Diluted earnings per As reported $1.32 $2.10 $2.02 share Pro forma $1.22 $2.03 $1.98 Under the requirements of SFAS No. 123, the above disclosures relate only to options granted after December 15, 1994, and do not include the impact of outstanding options that were made prior to the period for which SFAS No. 123 is effective. During the initial phase-in period of SFAS No. 123, since the employee stock options vest over several years and additional grants are likely to be made in future years, the disclosures are not likely to be representative of the effects on reported pro forma net income or earnings per share in future years. 17 8. Earnings Per Share In the fourth quarter of 1997, Bio-Rad adopted SFAS No. 128, "Earnings per Share". Basic earnings per share as required by SFAS No. 128 are equal to earnings per share as historically reported by Bio-Rad. No historical restatement was necessary. Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 134,000, 199,000 and 224,000 shares, for the years ended December 31, 1997, 1996 and 1995, respectively. Options to purchase 133,000 shares of common stock were outstanding during 1997, but were excluded from the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the common shares. The options were still outstanding at the end of 1997. No options were excluded in 1996 or 1995. 9. Restructuring Costs In the fourth quarter of 1996, the Clinical Diagnostics segment provided a $2,700,000 restructuring charge and a $2,100,000 charge to cost of goods sold related to product line restructuring in the immunoassay market and closure of the related production and research facility in northern California. The restructuring charge consisted primarily of lease-related costs and write-offs of production and research equipment dedicated to the Company's closed system immunoassay product line. The charge to cost of goods sold reflected the adjustment to inventory necessary to reduce the carrying value of inventory to its net realizable value. Cash outlays are primarily for lease-related costs and commenced in the first quarter of 1997. Future lease payments have been reserved through 2000. This reserve may be offset in the future should the Company be successful in efforts to sublease the property. In the third quarter of 1995, the Life Science segment announced it would close its sales office and warehouse located in New York. The functions performed at this location were considered redundant and have been absorbed by the California operations. In conjunction with this decision, the Company recorded $1,500,000 of restructuring costs. These charges consisted primarily of lease-related costs and employee separation costs. Cash outlays related to this restructuring were made with current operating funds, and were completed in 1996 with the exception of lease-related costs. Future lease payments have been reserved through 2001. ___________________________________________________________________ 18 10. Other Income and Expense Other, net includes the following income and (expense) components (in thousands): Year Ended December 31, 1997 1996 1995 Exchange gains (losses) $ (711) $ (641) $ 118 Other non-operating litigation costs, net (1,606) (971) (1,350) Miscellaneous other items (381) (88) (181) Amortization of goodwill (1,612) (132) - Other, net $(4,310) $(1,832) $(1,413) Exchange gains (losses) include premiums and discounts on forward foreign exchange contracts. ________________________________________________________________ 19 11. Supplemental Cash Flow Information The reconciliation of net income to net cash provided by operating activities is as follows (in thousands): December 31, 1997 1996 1995 Net income $16,364 $26,179 $25,156 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,470 17,870 16,681 Foreign currency hedge transactions, net (4,001) (1,275) 649 Gains on dispositions of marketable securities (1,129) (1,130) (995) Increase in accounts receivable, net (6,176) (6,670) (9,261) (Increase) decrease in inventories (14,831) 5,339 (984) (Increase) decrease in other current assets (6,369) 435 1,560 Increase in accounts payable and other current liabilities 18,775 1,411 5,531 Increase (decrease) in income taxes payable 1,122 (2,926) 1,153 Decrease in deferred taxes (1,276) (4,879) (1,321) Other (840) (1,201) 63 Net cash provided by operating activities $21,109 $33,153 $38,232 ______________________________________________________________________________ 20 12. Commitments and Contingent Liabilities Rents and Leases Net rental expense under operating leases was $11,339,000 in 1997, $11,505,000 in 1996 and $11,105,000 in 1995. Leases are principally for facilities and automobiles. Annual future minimum lease payments at December 31, 1997, under operating leases are as follows: 1998 - $10,775,000; 1999 - $8,114,000; 2000 - $4,678,000; 2001 - $3,151,000; 2002 - $3,026,000; subsequent to 2002 - $12,637,000. Deferred Profit Sharing Retirement Plan The Company has a profit sharing plan covering substantially all U.S. employees. Contributions are made at the discretion of the Board of Directors. Bio-Rad has no liability other than for the current year's contribution. Contributions charged to income were $3,285,000, $3,165,000 and $2,870,000 in 1997, 1996 and 1995, respectively. Foreign Exchange Contracts The Company enters into forward foreign exchange contracts as a hedge against foreign currency denominated intercompany receiv- ables and payables. At December 31, 1997, the Company had contracts maturing in January 1998 to sell foreign currency with a market value of $37,651,000 and to purchase foreign currency with a market value of $559,000. At December 31, 1996, the Company had contracts maturing in January and February 1997 to sell foreign currency with a market value of $26,157,000 and to purchase foreign currency with a market value of $680,000. _________________________________________________________________ 13. Legal Proceedings In the third quarter of 1996, Bio-Rad and Fuji Photo Film Co., Ltd. reached a settlement in the action filed in Civil Department No. 29 of the Tokyo District Court in July 1994 alleging in- fringement of a Japanese patent which covers an autoradiographic process. The settlement amounts were provided for in 1995 and 1994. The Company is a party to various other claims, legal actions and complaints arising in the ordinary course of business. One such action relates to the U.S. Environmental Protection Agency which has informed the Company that it may be a potentially responsible party under the Comprehensive Environmental Response, Compensa- tion and Liability Act, as amended, at one site in Colorado. In the opinion of management the outcome of this and other claims, legal actions and complaints would have no material adverse effect on the future results of operations or the financial position of the Company. _________________________________________________________________ 21 14. Related Party Transactions The Company regularly contracts for legal services with the law firm of Townsend and Townsend and Crew. Albert J. Hillman was Of Counsel in this law firm during 1997 and a non-employee member of the Company's Board of Directors. The rate charged the Company for these services is comparable to the rates charged others for similar services. _________________________________________________________________ 22 15. Industry Segment Information Bio-Rad is a multinational manufacturer and worldwide distributor of life science research products, clinical diagnostics and analytical instruments. Information regarding geographic areas at December 31, 1997, 1996 and 1995 and for the years then ended is as follows (in thousands): Consoli- North Pacific Elimi- dated Worldwide Operations America Europe Rim nations Total Net sales to unaffiliated 1997 $199,390 $133,263 $ 94,261 $ - $426,914 customers 1996 184,325 141,413 93,051 - 418,789 1995 169,350 138,288 88,980 - 396,618 Net intercompany sales 1997 106,575 49,439 2,128 (158,142) - 1996 103,411 44,390 1,847 (149,648) - 1995 98,734 42,335 6,164 (147,233) - Total net sales 1997 305,965 182,702 96,389 (158,142) 426,914 1996 287,736 185,803 94,898 (149,648) 418,789 1995 268,084 180,623 95,144 (147,233) 396,618 Income from operations 1997 17,194 4,692 4,767 - 26,653 1996 24,633 10,514 3,800 - 38,947 1995 25,076 11,030 2,084 - 38,190 Identifiable assets 1997 241,198 73,932 36,746 - 351,876 1996 176,900 74,412 33,613 - 284,925 1995 178,738 69,502 36,858 - 285,098 Net intercompany sales and income from operations are recorded on the basis of intercompany prices established by the Company. 23 Net sales in North America include export sales from the Company's United States operations of approximately $8,188,000, $7,577,000 and $6,163,000 in 1997, 1996 and 1995, respectively. Information regarding industry segments at December 31, 1997, 1996 and 1995 and for the years then ended is as follows (in thousands): Consoli- Life Clinical Analytical dated Market Segments Science Diagnostics Instruments Corporate Total Net sales to unaffiliated 1997 $201,016 $150,098 $ 75,800 $ - $426,914 customers 1996 195,810 148,945 74,034 - 418,789 1995 193,145 137,426 66,047 - 396,618 Income (loss) from operations 1997 5,835 19,981 832 5 26,653 1996 15,828 17,397 5,136 586 38,947 1995 17,250 17,465 3,873 (398) 38,190 Identifiable assets 1997 116,933 134,792 43,504 56,647 351,876 1996 106,394 93,721 39,887 44,923 284,925 1995 115,256 94,321 32,804 42,717 285,098 Capital expenditures 1997 7,461 14,432 1,991 832 24,716 1996 7,103 7,514 2,133 791 17,541 1995 5,598 6,624 1,514 655 14,391 Depreciation 1997 7,164 7,553 1,792 804 17,313 1996 7,063 7,724 1,456 1,160 17,403 1995 6,986 6,510 1,555 1,181 16,232 Sales between segments are immaterial. Capital expenditures include capitalized leases of $331,000, $872,000 and $778,000 in 1997, 1996 and 1995, respectively. ___________________________________________________________________________ 24 16. Quarterly Financial Data - (unaudited) Summarized quarterly financial data for 1997 and 1996 are as follows (in thousands, except per share data): First Second Third Fourth Quarter Quarter Quarter Quarter 1997 Net sales $105,854 $105,752 $ 99,491 $115,817 Gross profit 62,141 58,721 54,835 61,886 Net income 7,494 4,899 2,614 1,357 Basic earnings per share $0.61 $0.40 $0.21 $0.11 Diluted earnings per share $0.60 $0.39 $0.21 $0.11 1996 Net sales $108,272 $ 99,981 $ 96,559 $113,977 Gross profit 61,432 58,277 55,847 61,187 Income before extraordinary charge 9,461 7,511 6,699 3,684 Extraordinary charge - - - (1,176) Net income 9,461 7,511 6,699 2,508 Basic earnings per share before extraordinary charge $0.77 $0.61 $0.55 $0.30 Basic earnings per share $0.77 $0.61 $0.55 $0.20 Diluted earnings per share before extraordinary charge $0.76 $0.60 $0.54 $0.29 Diluted earnings per share $0.76 $0.60 $0.54 $0.20 ______________________________________________________________________ 17. Information Concerning Common Stock - (unaudited) The Company's Class A and Class B Common Stock are listed on the American Stock Exchange with the symbols BIO.A and BIO.B, respec- tively. The following sets forth, for the periods indicated, the high and low sales prices for the Company's Class A and Class B Common Stock. Class A Class B High Low High Low 1997 First Quarter 33-1/2 25-1/2 32 26-3/4 Second Quarter 27-15/16 23-3/8 27-1/2 23-1/4 Third Quarter 30-3/4 26 30-1/8 26-1/4 Fourth Quarter 30-1/4 23-7/16 29-3/8 29 1996 First Quarter 28-1/2 24-11/12 27-5/6 25-11/12 Second Quarter 37 28 36-3/4 29-1/12 Third Quarter 36-5/8 26-5/8 36-3/8 26-1/2 Fourth Quarter 31 24 30-1/2 25-1/8 25 At February 17, 1998, the Company had 618 holders of record of Class A Common Stock and 305 holders of record of Class B Common Stock. Bio-Rad has never paid a cash dividend and has no present plans to pay cash dividends. 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Bio-Rad Laboratories, Inc.: We have audited the accompanying consolidated balance sheets of Bio-Rad Laboratories, Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 1997. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bio-Rad Laboratories, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP San Francisco, California, February 4, 1998 27 Bio-Rad Laboratories, Inc. Management's Discussion and Analysis ________________________________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion should be read in conjunction with the information contained in the Company's Consolidated Financial Statements and the accompanying notes which are an integral part of the statements. References are to the Notes to Consolidated Financial Statements. The following table shows operating income and expense items as a percentage of net sales: Year Ended December 31, 1997 1996 1995 Net sales 100.0 100.0 100.0 Cost of goods sold 44.3 43.5 43.4 Gross profit 55.7 56.5 56.6 Selling, general and administrative 38.7 37.1 37.9 Product research and development 10.8 9.5 8.7 Restructuring costs - 0.6 0.4 Income from operations 6.2 9.3 9.6 ===== ===== ===== Income before extraordinary charge 3.8 6.5 6.3 ===== ===== ===== Corporate Results -- Sales, Margins and Expenses Bio-Rad's net sales (sales) in 1997 amounted to $426.9 million, an increase of 1.9% over sales in 1996. Again in 1997, the continuing effect of an ever strengthening U.S. dollar throughout 1997 caused a reduction in sales growth of 4.6% or approximately $19.2 million. When 1997 sales are compared to 1996 at constant 1996 exchange rates, sales for the Company grew 6.5%. Sales increased in all segments of the Company's business. Eliminating the effects of a strengthened U.S. dollar, sales increased 7.5% in Life Science, 6.3% in Analytical Instruments and 5.4% in Clinical Diagnostics. Life Science sales growth was generated by its imaging product equipment and related software, gene transfer products, convenience electrophoresis and chromotography products. Analytical Instruments saw continued growth in the products sold into the semiconductor test and manufacturing equipment market. Bio-Rad's sales in 1996 were $418.8 million, an increase of 5.6% over sales in 1995. The effect of the strengthened U.S. dollar in 1996 exchange rates compared to 1995 exchange rates resulted in an approximate 2% or $8.5 million decrease in consolidated sales. Sales 28 increased in all segments of the Company's business. Excluding the effects of the strengthened U.S. dollar, sales increased 16% in Analytical Instruments, 8% in Clinical Diagnostics and 4% in Life Science. The growth in Analytical Instruments was led by increased sales of spectroscopy equipment but also included increased sales of the Company's semiconductor test and manufacturing equipment, especially in the fourth quarter. Clinical Diagnostics experienced worldwide growth led by increases in U.S. sales. Consolidated gross margins were 55.7% for 1997 compared to 56.5% for 1996. Gross margins overall were adversely affected in part by lower prices on international sales caused by the strengthening U.S. dollar and a majority of manufacturing costs being U.S. dollar denominated. Clinical Diagnostics gross margins declined by 0.6% of sales after adjustment for the $2.1 million (or 1.4% of sales impact) from the fourth quarter 1996 write-down of inventory associated with a closed system immunoassay analyzer product line (see Note 9). Analytical Instruments gross margins declined 0.7% of sales largely in the Company's spectroscopy equipment product line as a number of re- engineering and organizational changes were made to the manufacturing operations of this product line. The initiatives undertaken included selective headcount reductions, the outsourcing of some components, redesign of manufacturing processes and the lowering of manufacturing overhead. Life Science margins declined 2.2% of sales. In addition to the impact of lower overall prices mentioned above, this segment experienced increased warranty and service expenses, increased returns and allowances, and unfavorable manufacturing overhead absorption from not achieving planned growth. Consolidated gross margins were 56.5% for 1996 compared to 56.6% for 1995. Gross margins were negatively impacted by 0.5% from a $2.1 million charge in the fourth quarter of 1996 for the write-down of Clinical Diagnostics inventory associated with the development and production of a closed system immunoassay analyzer product line (see Note 9). Improved gross margins in the Analytical Instruments segment were the result of sales increases. Gross margins in Clinical Diagnostics were relatively unchanged excluding the impact of the fourth quarter inventory adjustment. In Life Science gross margins were down less than 1% when compared to 1995; this was attributed to a number of factors including exchange rates, sales mix and factory inefficiencies. Consolidated selling, general and administrative expense (SG&A) increased to 38.7% of sales in 1997 from 37.1% in 1996. Spending increased in absolute dollars in all segments, with each segment growing SG&A faster than sales. While headcount grew approximately 2.5% (excluding the acquisition in December 1997), salaries rose at an even faster rate particularly in the United States as the labor market became tighter and the cost of retaining and recruiting personnel increased. Additionally, the Company increased its expenditures on information technology to add the necessary infrastructure for Bio-Rad to remain competitive in serving its worldwide customer base. Beyond personnel cost increases, Life Science increases were for advertising. Analytical Instruments directed increased spending towards its semiconductor product lines. Clinical Diagnostics had increased costs 29 for recruiting and for providing demonstration equipment in support of sales. During 1996, SG&A decreased to 37.1% of sales from 37.9% in 1995. While spending increased in absolute dollars in all segments, the Clinical Diagnostics and Analytical Instruments segments succeeded in growing sales faster than SG&A in 1996. In the Life Science segment the growth in SG&A was proportional to the growth in sales. Product research and development expense (R&D) increased in 1997 by 16.6% to $46.1 million compared to $39.6 million for the year 1996. While spending increased in each segment, Clinical Diagnostics remained virtually unchanged as spending increased $0.3 million. Life Science increased spending 23%. Analytical Instruments increased spending 27% as it prepared to meet new specifications for the next generation of test and measurement equipment and for new products that will complement the existing product line. R&D increased in 1996 when compared to 1995, both in absolute dollars and as a percent of sales. As planned, R&D was expanded and spending increased in the Analytical Instruments and Life Science segments as part of Bio-Rad's continuing commitment to long-term growth. R&D spending declined approximately $0.6 million in the Clinical Diagnostics segment. In the fourth quarter of 1996, the Clinical Diagnostics segment made a provision of $2.7 million for lease-related costs and write-down of certain dedicated fixed assets associated with its closed system immunoassay analyzer product line (see Note 9). Management determined the marketing strategy was not competitive and has redirected resources to an open systems approach. The Life Science segment made a $1.5 million provision for the cost of closing its New York warehouse and distribution center in the third quarter of 1995 (see Note 9). Closing this facility has reduced costs and enabled the Company to more efficiently use its remaining distribution space. Corporate Results -- Non-Operating Items Interest expense represents 0.3% of sales in 1997 compared to 0.7% in 1996 and 1.1% in 1995. The decline is attributable to an overall reduction in the amount of interest bearing debt. Average borrowings for the years 1997, 1996 and 1995 were $14.7 million, $27.9 million and $42.4 million, respectively. Interest expense will increase in the coming year as a result of the borrowings made in connection with the acquisitions in the fourth quarter of 1997 (see Note 2). In December 1996, the Company repaid the $20.0 million 10.9% Subordinated Notes resulting in an extraordinary charge (see Note 5). Investment income in 1997, 1996 and 1995 includes gains on sales of marketable securities. 1996 includes interest income of $0.8 million from short-term investments as a result of accumulating cash prior to repaying the 10.9% Subordinated Notes. 30 Net other income and expense for 1997 included non-operating litigation costs, amortization of goodwill and exchange losses (see Note 10). Net other income and expense for 1996 was principally non- operating litigation costs and exchange losses. Net other income and expense for 1995 was principally non-operating litigation costs. Bio- Rad's hedging program is limited to nonspeculative forward foreign exchange contracts (with major financial institutions) which hedge the exposure of intercompany receivables and payables. The net exchange gain or loss results from the estimating inherent in projecting intercompany balances and transaction charges. Bio-Rad's consolidated tax provision was 28% in 1997 and 25% in both 1996 and 1995. The higher effective tax rate for 1997 is the result of changes in the source of taxable income and the diminishing availability of loss carryforwards. The tax rate for all years reflects the utilization of loss carryforwards, foreign sales corporation benefits and foreign tax credits. These benefits are not expected to continue at the same level in 1998 resulting in the tax rate rising slowly over time. Financial Condition Historically, the Company's ongoing and principal capital requirement was for working capital to fund its growth in operations. Since 1994, the Company's efforts to improve profitability and emphasize working capital control have limited much of this requirement. At December 31, 1997, the Company had available $10.8 million in cash and cash equivalents, $21.5 million under its international lines of credit, $22.0 million under its principal revolving credit agreement (see Note 5) and marketable securities with a market value of $18.1 million, a majority of which could be readily converted into cash (see Note 4). Net cash provided by operations was $21.1 million, $33.2 million and $38.2 million in 1997, 1996 and 1995, respectively. The 1997 decrease in net cash provided by operations was caused by an increase in inventories as discussed below. Consolidated net accounts receivable decreased 0.8% in 1997 when compared to 1996. The effect of a strengthened U.S. dollar caused a decline in net accounts receivable denominated in foreign currency. This decline was offset by increased sales in the fourth quarter, by a slowing in payments from certain customers purchasing large instruments and by customers in Asia. Bio-Rad's management regularly reviews the allowance for uncollectible receivables and believes net receivables are fully realizable. For the year ended December 1997, consolidated inventories, excluding additions from current year acquisitions, rose 18% to $82.4 million. Year-end inventories from acquisitions amounted to $9.0 million and were comprised principally of the controls inventory purchased in December 1997. The Life Science segment added significantly to the increase in inventory for new products, to accommodate customer demands for greater inventory availability levels and to support 31 increased sales efforts. Additionally, the Analytical Instruments segment added inventory to its semiconductor product line which is generally built-to-order but has some planned 1998 new product releases. Management regularly reviews the impact of obsolescence in current inventory caused by the introduction of new products. Management will renew its focus on inventory control in the coming year to moderate capital requirements. A valuation reserve is necessary for deferred tax assets (see Note 6) primarily because realization of tax attribute carryforwards is uncertain. Net capital expenditures in 1997 totaled $23.6 million compared to $15.2 million and $12.3 million in 1996 and 1995, respectively. Expenditures in 1997 included the relocation of the Clinical Diagnostics segment's southern California manufacturing operations to a new leased facility. Expenditures in all years include clinical diagnostic equipment placed with customers to be used with the Company's diagnostic reagents. Management regularly approves capital spending in the normal course of business. Capital expenditures are expected to increase in 1998 when compared to the past three years. The Life Science segment's northern California distribution and instrument manufacturing facility lease expires late in 1998 and may require a major investment. The Company is reviewing several options including relocating and leasing, or constructing a facility on its Hercules campus. Additionally, the Company will continue its investment in information technology begun in earnest in 1997 to provide the enterprise-wide infrastructure necessary for achieving greater competitiveness, further cost efficiencies and year 2000 compliance. Modifications to existing computer systems and applications required to meet year 2000 needs have not had, and are not expected to have, a material impact on the results of operations. Bio-Rad's liquidity remained strong in 1997 by historical standards. Available funds and cash flow from operations are adequate to meet the Company's objectives for operations, research and development, and investment in plant and equipment. In February 1998, the Board of Directors authorized the Company to repurchase up to an additional $10 million of common stock over an indefinite period of time. This is the third such authorization since July 1996 bringing the total authorized to $18 million. Through January 1998, the Company has repurchased 236,700 shares of Class A common stock and 30,000 shares of Class B common stock for a total of $7.2 million. The repurchase is designed to improve shareholder value and to satisfy the Company's obligations under the employee stock purchase and stock option plans. In December 1997, the Company's Clinical Diagnostics segment acquired the assets used by Chiron Diagnostics Corporation in the business of the manufacturing, marketing and sale of diagnostic controls (exclusive of blood gas controls). Assets acquired included inventory, equipment, leasehold improvements, a number of intangible assets and an agreement to supply product to Chiron Diagnostics for up to 10 years. Additionally, in the fourth quarter of 1997, the Life 32 Science segment acquired certain assets, primarily source code, to complement its imaging products and the Analytical Instruments segment acquired certain assets, primarily inventory, related to the design and manufacture of the optical production profiler. Funding for these acquisitions came from the Company's existing revolving credit agreement. These acquisitions have been accounted for using the purchase method (see Note 2). The Company continues to regularly review acquisition opportunities; currently no material acquisitions have reached a stage beyond exploratory discussions. New Financial Accounting Standards In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", effective for fiscal years beginning after December 15, 1997. Under SFAS No. 130, the Company will be required to report all items comprising comprehensive income in a financial statement that is displayed with the same prominence as other financial statements. Since much of the required information is already disclosed, the Company does not expect the adoption of the requirements of this statement to have a material effect on its financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", effective for fiscal years beginning after December 15, 1997. Under SFAS No. 131, the Company will be required to modify its segment disclosures. The Company does not expect the adoption of the requirements of this statement to have a material effect on its financial statements. Forward Looking Statements Other than statements of historical fact, statements made in this Annual Report include forward looking statements, such as statements with respect to the Company's future financial performance, operating results, plans and objectives. Actual results may differ materially from those currently anticipated depending on a variety of risk factors. 33