1
EXHIBIT 13
STOCK PRICES
The Company's common stock trades on the American Stock Exchange. The ticker
symbol is "GSC." No cash dividends were paid by the Company during fiscal 1995.
There were 1,180 shareholders of record of the Company on July 31, 1995.
- ----------------------------------------------------------------------------------------------------------
Fiscal Year 1995 1994
- ----------------------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW
First Quarter 15.25 12.5 8.375 7
Second Quarter 15.875 11.625 11.25 7.375
Third Quarter 17.375 12 12.5 10
Fourth Quarter 19.875 17.75 14 10.125
HIGHLIGHTS
Dollars in Thousands, except per share data
- -------------------------------------------------------------------------------------------------------
Fiscal Year 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
Net Sales $103,503 $94,963 $86,209
Gross Margin 53,433 47,710 42,545
Net earnings 6,622 4,754+ 2,702
Primary earnings per share .92 .75+ .47
Stockholders' equity 58,773 30,435 22,256
Number of employees 829 844 827
+Net earnings includes an after-tax charge of $183,000 for early extinguishment
of debt. Without this charge, net earnings would have been $4.9 million or
$.78 per share.
2
SELECTED FINANCIAL DATA
Gelman Sciences Inc. and Subsidiaries
BALANCE SHEET DATA Dollars in Thousands, except per share data
- ---------------------------------------------------------------------------------------------------------
Year Ended July 31 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 3,010 $ 1,525 $ 1,142 $ 867 $ 811
Accounts receivable-net 23,985 20,859 17,088 16,529 16,348
Inventories 14,944 13,990 12,986 13,331 13,827
Working capital 31,910 23,450 19,133 8,211 21,943
Total assets 81,781 71,687 63,495 61,530 62,903
Long-term debt including current portion 6,017 23,649 23,854 25,624 30,415
Total liabilities 23,008 41,252 41,239 41,879 42,759
Stockholders' equity 58,773 30,435 22,256 19,651 20,144
Stockholders' equity per share 7.54 4.96 3.81 3.45 3.56
- ---------------------------------------------------------------------------------------------------------
OPERATING DATA
- ---------------------------------------------------------------------------------------------------------
Net sales $103,503 $ 94,963 $ 86,209 $ 81,460 $ 76,516
Gross margin 53,433 47,710 42,545 38,499 35,726
Pollution-related expense - - 543 4,988 806
Interest expense 1,314 1,689 2,006 2,590 2,851
Income taxes (credit) 3,365 2,600 2,030 (212) 250
Net earnings (loss) 6,622 4,754 2,702 (1,211) 88
Net earnings (loss) per share .92 .75 .47 (.21) .02
Return on average stockholders' equity 14.8% 18.0% 12.9% N.A. 0.4%
- ---------------------------------------------------------------------------------------------------------
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL YEAR 1995 COMPARED WITH FISCAL YEAR 1994
Net sales for fiscal 1995, increased $8.5 million or 9% to $103.5 million
compared to $95.0 million for fiscal 1994, which included non-recurring sales
of $4.4 million related to divested Australian non-core product lines.
International sales for fiscal 1995 were favorably affected by the weakened
U.S. dollar which increased reported sales by $2.1 million. The Company's sales
growth, adjusted for these items, was 12%.
Worldwide sales of medical devices increased 27% reflecting sales growth for
products in the intravenous therapy applications. Sales of process filtration
products increased 21% compared to fiscal 1994 reflecting strong growth in the
European and Asia/Pacific markets. Laboratory sales increased 9% and membrane
sales were level compared to fiscal 1994. Net sales to customers in the
Americas increased 11% over fiscal 1994 primarily due to a 31% increase in
sales of medical devices. Sales to customers in Europe increased 14% primarily
due to a 29% increase in sales of process products. Sales to customers in the
Asia/Pacific region declined 6% due to the above mentioned non-core product
line divestiture in late fiscal 1994. Without the affect of this divestiture,
sales in this region would have increased 43%. The increase was primarily
attributable to increases in sales of process filtration products in Japan and
Korea.
Gross profit, as a percentage of sales, was 51.6% in fiscal 1995 compared to
50.2% in fiscal 1994. The improvement in gross profit was primarily
attributable to improved operating efficiencies and the divestiture of non-core
product lines.
Selling and administration expense increased by $3.3 million or 9.6% to $37.0
million for fiscal 1995 compared to $33.8 million for fiscal 1994, primarily
due to the Company's drive to increase market share consistent with the overall
growth strategy. Other expense (income) includes gains on foreign currency
transactions and rental income related to the divestiture of non-core
operations. Interest expense decreased $375,000 due to repayment of
outstanding indebtedness and overall reduction in interest rates in the fourth
quarter. The Company's effective tax rate for fiscal 1995 and fiscal 1994 was
34%. During the year, the Company was granted future tax relief and job
training incentives worth $6.1 million from the Michigan Economic Growth
Authority and local government authorities in response to the Company's
decision to remain and expand its manufacturing operations and corporate
headquarters in Ann Arbor, Michigan. The term of the grant is 15 years. As a
condition for the grant, the Company is expected to maintain certain levels of
employment.
Net earnings increased $1.9 million or 39% to $6.6 million or $.92 per share in
fiscal 1995 compared to $4.8 million or $.75 per share in fiscal 1994. Net
earnings for fiscal 1994 included an extraordinary charge of $.03 per share
related to the refinancing of industrial revenue bonds. The weighted average
shares for fiscal 1995 and 1994 were 7.2 million and 6.3 million, respectively,
which includes the effect of the secondary public offering of 1,437,500 shares
of common stock in the third quarter of fiscal 1995.
As more fully described in Note G - Pollution Related Expenses, cash outflows
during fiscal 1995 for the remediation plan, settlement and legal costs
associated with groundwater contamination were $1.1 million. This includes
$425,000 of final payments on previously accrued settlements. The Company
estimates cash outflows for remediation and settlement activities in fiscal
1996 to be approximately $280,000. The ultimate costs incurred by the Company
as a result of the groundwater contamination will depend on the efficacy and
duration of the remediation plan. The ultimate costs to be incurred could
exceed the amount provided for at July 31, 1995. However, it is the opinion of
management that these additional costs, if any, will not have a material
adverse effect on the Company's operations.
Net sales in the fourth quarter of fiscal 1995 increased by 14% over the same
period for fiscal 1994, primarily attributable to a 17% increase in sales to
customers in Europe and Asia/Pacific. Net earnings for the fourth quarter of
fiscal 1995 was $2.2 million or $.27 per share compared to net earnings of $1.5
million or $.23 per share for the fourth quarter of fiscal 1994. Weighted
average shares for the fourth quarter of fiscal 1995 and 1994 were 8.1 million
and 6.5 million, respectively. The improved operating performance resulted
from increased sales volume along with lower interest expense resulting from
the repayment of outstanding indebtedness mentioned above.
FISCAL YEAR 1994 COMPARED WITH FISCAL YEAR 1993
Net sales for fiscal 1994 increased $8.8 million or 10% to $95.0 million as
compared to net sales of $86.2 million for fiscal 1993. Net sales to U.S.
customers were $59.8 million, an increase of $5.9 million or 11% over fiscal
1993. Sales to customers in international markets were $35.2 million, an
increase of $2.8 million or 9% as compared to fiscal 1993. The increase in
sales to U.S. customers was primarily attributable to growth in sales of
medical devices and microporous membranes. The international growth was
partially offset by fluctuations in foreign currency rates. Without the
effects of the fluctuations in foreign currency rates, the increase in
international sales in fiscal 1994 would have been 12% over fiscal 1993.
Worldwide sales of microporous membranes increased 36% compared to fiscal 1993.
This growth was attributable to fulfilling significant orders from original
equipment manufacturers that use bulk membrane in filtration applications and
diagnostic health care kits. Sales of products for the medical devices market
increased 24% in fiscal 1994 over fiscal 1993 due primarily to increased
4
sales of microfiltration products with hemodialysis treatment and intravenous
therapy applications. Industrial process product sales increased 11% in fiscal
1994, with particularly strong sales in the international markets. Laboratory
product sales increased 4% over fiscal 1993.
Gross profit increased $5.2 million or 12 % to $47.7 million in fiscal 1994 as
compared to $42.5 million in fiscal 1993. As a percentage of net sales, gross
profit was $50.2% compared to 49.4% in fiscal 1993. The improvement in the
Company's gross profit margin was attributable to increased sales volume and a
higher percentage of microporous membrane sales which have a higher gross
margin than other products sold by the Company.
Selling and administration expense increased $2.7 million or 9% to $33.8
million in fiscal 1994 compared to $31.0 million in fiscal 1993. As a
percentage of net sales, these expenses declined to 35.6% compared to 36.0%.
These expenses increased over the prior fiscal year due primarily to higher
selling expenses resulting from increased sales.
Research and development expenses increased $738,000 or 17.8% to $4.9 million
in fiscal 1994 compared to $4.1 million in fiscal 1993 due to a greater new
product development effort. As a percentage of net sales, research and
development expenses increased to 5.1% from 4.8% in fiscal 1993.
During fiscal 1994 all charges and cost recoveries related to pollution
expenses were recorded in a reserve maintained by the Company for
pollution-related charges. The Company had third party cost recoveries of
$750,000 from the settlement of a lawsuit against certain chemical companies.
The Company reached a settlement on a lawsuit for $561,000 with resident
located near its Ann Arbor facilities for damages related to groundwater
contamination. In addition, the Company incurred costs of $1.3 million related
to the implementation of a remediation plan and legal costs of $312,000 in
defense of the these lawsuits. At July 31, 1994, the Company had accrued $1.5
million to complete the remediation plan and to pay for other costs associated
with groundwater contamination
In a series of transactions in fiscal 1994, the Company's Australian subsidiary
sold all of its non-core product lines for cash and a note receivable.
Included in Other expense (income) is a gain of $108,000 or $.02 per share on
the sale of the assets relating to the non-core products. Sales from these
product lines were $4.4 million and $5.0 million for fiscal 1994 and 1993,
respectively.
Interest expense decreased $317,000 or 16% to $1.7 million in fiscal 1994
compared to $2.0 million in fiscal 1993. This change was due to steps taken by
management to secure more favorable interest rates.
The Company's effective tax rate for fiscal 1994 was 34.5% as compared to 42.9%
in fiscal 1993. The lower effective tax rate was attributable to use of net
operating loss carryforwards from certain foreign subsidiaries in fiscal 1994
and use of research and development tax credits.
Net earnings increased $2.1 million or 76% to $4.8 million or $.75 per share in
fiscal 1994 compared to $2.7 million or $.47 per share in fiscal 1993. Net
earnings included an extraordinary charge of $295,000 (net of $112,000 tax
benefit) or $.03 per share to write-off deferred finance charges and the
payment of a premium and fees incurred in connection with the redemption of
industrial development revenue bonds. Excluding these charges, net earnings
would have been $4.9 million or $.78 per share as compared with net earnings of
$2.7 million or $.47 per share in fiscal 1993.
Net sales in the fourth quarter of fiscal 1994 increased by 10% over the same
period for fiscal 1993, primarily attributable to a 15% increase in sales to
U.S. customers. Net earnings for the fourth quarter of fiscal 1994 was
$1,463,000 or $.23 per share compared to net earnings of $794,000 or $.13 per
share for the fourth quarter of fiscal 1993. The improved operating
performance resulted from increased sales volume, improved gross margins, along
with lower interest and pollution expense. Selling and administration expense
increased to 37% of sales for the fourth quarter fiscal 1994. This increase
was attributable to increased commissions related to sales volume and increased
marketing activities.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1995, the Company generated cash from operating activities of
$6.0 million compared to $4.5 million during fiscal 1994. At July 31, 1995,
$1.2 million in cash equivalents were held in an interest-bearing money market
mutual fund. Financing activities included proceeds of a secondary public
offering of $19.4 million used to repay $17 million in outstanding indebtedness
of the Company. Remaining funds plus cash from operating activities were used
for $7.8 million of capital expenditures. Budgeted capital expenditures for
fiscal 1996 are $8 to $10 million, a significant portion to be used for
manufacturing process automation and improvements and upgrades to the Company's
Ann Arbor facility. Management believes that funding for the required capital
expenditures will be achieved through operating cash flow and utilization of
the Company's renegotiated $15 million Credit Agreement.
During the year, the Company reduced its committed level under its revolving
credit facility to $15 million. The measure was taken to reduce fees while
maintaining adequate facilities for future needs. At July 31, 1995, the entire
credit facility was unused.
Working capital at July 31, 1995 and July 31, 1994 was $31.9 million and $23.4
million, respectively. The increased working capital was attributed mainly to
increased trade receivables and inventory levels as a result of higher sales
volume in fiscal 1995 compared to fiscal 1994.
5
CONSOLIDATED BALANCE SHEETS
Gelman Sciences Inc. and Subsidiaries
Consolidated Balance Sheets -- Assets Dollars in Thousands
- ------------------------------------------------------------------------------------------------------------
July 31 1995 1994
- ------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 3,010 $ 1,525
Accounts receivable less allowances (1995-$1,310; 1994-$790) 23,985 20,859
Inventories
Finished products 6,320 5,790
Work in process 1,572 1,555
Raw materials and purchased parts 7,052 6,645
- ------------------------------------------------------------------------------------------------------------
14,944 13,990
Other current assets 4,988 3,849
- ------------------------------------------------------------------------------------------------------------
Total Current Assets $ 46,927 40,223
- ------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 1,438 1,433
Buildings and improvements 19,302 18,851
Equipment 49,102 43,270
- ------------------------------------------------------------------------------------------------------------
69,842 63,554
Less allowances for depreciation (37,258) (34,392)
- ------------------------------------------------------------------------------------------------------------
32,584 29,162
INTANGIBLES AND OTHER ASSETS 2,270 2,302
- ------------------------------------------------------------------------------------------------------------
Total Assets $ 81,781 $ 71,687
- ------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS -- LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Notes payable to banks $ 1,368 $ 1,549
Accounts payable 3,813 5,611
Compensation and amounts withheld 5,310 4,273
Other accrued expenses 4,002 3,511
Current maturities of long-term debt 524 1,829
- ------------------------------------------------------------------------------------------------------------
Total Current Liabilities $ 15,017 16,773
- ------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, EXCLUSIVE OF CURRENT MATURITIES 5,493 21,820
OTHER LONG-TERM LIABILITIES 2,498 2,659
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share-authorized 500,000 shares,
none outstanding
Common stock, par value $.10 per share issued 7,790,000 shares
in 1995 and 6,131,000 shares in 1994. 779 613
Additional capital 35,145 14,055
Retained earnings 23,714 17,092
Foreign currency translation adjustments (565) (875)
Note receivable-common stock (300) (450)
- ------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 58,773 30,435
- ------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 81,781 $ 71,687
- ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF OPERATIONS/STOCKHOLDERS' EQUITY
Gelman Sciences Inc. and Subsidiaries
Consolidated Statements of Operations Dollars in Thousands, except per share data
- --------------------------------------------------------------------------------------------------------------
Year Ended July 31 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
Net Sales $ 103,503 $ 94,963 $ 86,209
Cost and expenses:
Cost of products sold 50,070 47,253 43,664
Selling and administration 37,043 33,785 31,044
Research and development 5,498 4,877 4,139
Pollution-related expense - - 543
Other expense (income)-net (409) (178) 81
- --------------------------------------------------------------------------------------------------------------
Operating earnings 11,301 9,226 6,738
Interest expense 1,314 1,689 2,006
- --------------------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary item 9,987 7,537 4,732
Income taxes 3,365 2,600 2,030
- --------------------------------------------------------------------------------------------------------------
Net earnings before extraordinary item 6,622 4,937 2,702
- --------------------------------------------------------------------------------------------------------------
Extraordinary item - 183 -
- --------------------------------------------------------------------------------------------------------------
Net earnings $ 6,622 $ 4,754 $ 2,702
- --------------------------------------------------------------------------------------------------------------
Primary earnings per share before extraordinary item $ .92 $ .78 $ .47
Primary earnings per share $ .92 $ .75 $ .47
Fully diluted earnings per share before extraordinary item $ .92 $ .78 $ .45
Fully diluted earnings per share $ .92 $ .75 $ .45
- --------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity Dollars in Thousands
- ------------------------------------------------------------------------------------------------------------------------
Foreign
Currency Notes
Common Additional Retained Translation Receivable
Stock Capital Earnings Adjustments Common Stock
- ------------------------------------------------------------------------------------------------------------------------
Balances at July 31, 1992 $253 $11,826 $ 9,643 $ (329) $ (1,742)
- ------------------------------------------------------------------------------------------------------------------------
Net earnings for 1993 2,702
Stock issued under employee plans - 68,050 shares 7 682
Currency translation adjustments (936)
ESOP loan payment 150
- ------------------------------------------------------------------------------------------------------------------------
Balances at July 31, 1993 260 12,508 12,345 (1,265) (1,592)
- ------------------------------------------------------------------------------------------------------------------------
Net earnings for 1994 4,754
Stock issued under employee plans - 161,270
shares 16 1,276
ESOP loan payment 150
Three for two common stock splits 337 (337) (7)
Tax benefit from exercise of stock options 608
Currency translation adjustment 390
Officer loan repayment 992
- ------------------------------------------------------------------------------------------------------------------------
Balances at July 31, 1994 613 14,055 17,092 (875) (450)
- ------------------------------------------------------------------------------------------------------------------------
NET EARNINGS FOR 1995 6,622
STOCK ISSUED:
EMPLOYEE PLANS - 221,730 SHARES 22 1,181
PUBLIC OFFERING - 1,437,500 SHARES 144 19,278
ESOP LOAN PAYMENT 150
TAX BENEFIT FROM EXERCISE OF NON-QUALIFIED STOCK
OPTIONS 631
CURRENCY TRANSLATION ADJUSTMENT 310
- ------------------------------------------------------------------------------------------------------------------------
BALANCES AT JULY 31, 1995 $779 $35,145 $23,714 $ (565) $ (300)
- ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOW
Gelman Sciences Inc. and Subsidiaries
Consolidated Statements of Cash Flow Dollars in Thousands
- ---------------------------------------------------------------------------------------------------------
Year Ended July 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 6,622 $ 4,754 $ 2,702
Extraordinary loss related to early extinguishment of debt,
before tax benefit - 295 -
Depreciation and amortization 4,495 4,396 4,452
Increase (decrease) in deferred income taxes 144 627 275
Loss (gain) on sale of property, plant and equipment 54 (196) 31
Stock issued for employee service 389 360 300
Contribution to employee stock ownership plan 150 150 150
(Increase) decrease in inventories (615) (1,431) (47)
(Increase) decrease in accounts receivable (3,071) (3,391) (1,051)
(Increase) decrease in other current assets (1,100) (276) (433)
Increase (decrease) in current liabilities (686) 382 2,285
Increase (decrease) in liabilities for environmental activities (597) (1,154) (515)
Other 179 (25) 21
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,964 4,491 8,170
FINANCING ACTIVITIES
Long-term debt borrowings 25,365 33,011 25,700
Net increase (decrease) in short-term borrowings 60 114 (116)
Principal payments on long-term debt (43,070) (33,196) (28,327)
Net Proceeds from secondary Stock Offering 19,422 - -
Proceeds from exercised stock options 818 924 389
Tax benefit from exercised stock options 631 608 -
Fees paid on early retirement of debt - (52) -
Payment received - note receivable common stock - 992 -
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,226 2,401 (2,354)
INVESTING ACTIVITIES
Capital expenditures (7,825) (6,682) (5,860)
Proceeds from sale of property, plant and equipment 43 537 50
(Increase) decrease in intangibles and other assets (47) (347) 66
- ---------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (7,829) (6,492) (5,744)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 124 (17) 203
- ---------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,485 383 275
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,525 1,142 867
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,010 $ 1,525 $ 1,142
- ---------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gelman Sciences Inc. and Subsidiaries
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
Principles of Consolidation: The consolidated financial statements include the
accounts of all subsidiaries after elimination of intercompany accounts and
transactions. The financial data of foreign subsidiaries is translated
using current exchange rates at the end of the year for balance sheet
accounts and average exchange rates for operations. Translation gains and
losses are reflected in stockholders' equity, while transaction gains and
losses are reflected in the statements of operations. Foreign exchange
gains (losses) of $233,000, $77,000 and $(129,000) were recognized in 1995,
1994 and 1993, respectively.
Cash and Cash Equivalents: Cash equivalents consist of highly liquid
money market mutual funds. The carrying amount approximates fair value. At
July 31, 1995, $1.2 million in cash equivalents were held.
Inventories: Inventories are stated at the lower of cost or market. Cost
was determined by the last-in, first-out (LIFO) method at the U.S.
locations, representing approximately 77% and 78% of the July 31, 1995 and
1994 inventories, respectively, and by the first-in, first-out (FIFO)
method for the foreign locations. The current cost of inventories exceeded
their LIFO carrying amount by approximately $2,961,000 and $2,556,000 at
July 31, 1995 and 1994, respectively.
Properties and Depreciation: Properties are stated at cost. Depreciation
is computed using the straight-line method based on the estimated useful
life of the related asset. Included in property, plant and equipment are
capitalized computer software costs. At July 31, 1995 and 1994 the
unamortized amount of these costs was $18,600 and $92,700, respectively.
The amount amortized and charged to expense was $74,100, $153,300 and
$194,000 for the fiscal years ended July 31, 1995, 1994 and 1993,
respectively. The Company capitalized interest costs associated with the
construction of certain capital assets of $74,000 and $91,000 in 1995 and
1994, respectively. No interest was capitalized in 1993.
Intangibles and Other Assets: Intangibles and Other Assets consist
principally of the excess of cost over net assets of acquired companies,
amortized over 30 years and a note receivable related to the sale of
non-core product lines in Australia.
Earnings) Per Share: Primary earnings per share for fiscal 1995, 1994 and
1993 are based on the weighted average of common and common
equivalent shares of 7,235,273, 6,307,388 and 5,750,543, respectively.
Common share equivalents included in the computation represent shares
issuable upon assumed exercise of stock options and warrants which would
have dilutive effect. Fully diluted earnings per share for fiscal 1993 is
based on the weighted average of common and common equivalent shares of
5,952,710. Full dilution had no material effect on earnings per share in
fiscal 1995 and 1994. Fiscal 1995 weighted average shares includes the
effect of the secondary public offering of 1,437,500 shares of common stock.
Financial Instruments: The Company enters into certain financial
instruments to reduce exposure to fluctuating foreign currency exchange
rates and interest rates. Realized and unrealized gains and losses on
forward exchange contracts are recorded as other expense (income)
currently. The Company enters into interest rate financial instruments to
manage exposure to interest rate fluctuations. The difference to be paid or
received on interest rate agreements are included in interest expense
currently. Gains and losses realized upon settlement of these agreements
are deferred and amortized to interest expense over a period relevant to the
agreement if the underlying hedged instrument remains outstanding or
immediately if the underlying hedged instrument is settled. The fee paid on
a interest rate cap agreement is amortized over the life of the agreement.
9
NOTE B-FINANCING
Financing consisted of the following obligations Dollars in Thousands
- -------------------------------------------------------------------------------------------------------------
as of July 31: 1995 1994
- -------------------------------------------------------------------------------------------------------------
Industrial Development Revenue Bonds
with maturities through July 1, 2004 $ 4,697 $ 5,045
Borrowings under revolving credit agreement - 13,000
Borrowings under term loan agreement - 4,000
Note payable, State of Michigan, bearing interest
at 7.5%, through January 6, 2002 744 850
Notes payable to banks 1,368 1,549
Other 576 754
- -------------------------------------------------------------------------------------------------------------
Total debt 7,385 25,198
Less current maturities and short-term debt 1,892 3,378
- -------------------------------------------------------------------------------------------------------------
Long-term debt $ 5,493 $21,820
- -------------------------------------------------------------------------------------------------------------
During fiscal 1995, the Company used proceeds from a common stock offering to
repay outstanding indebtedness under the Company's term loan and revolving
credit agreements.
During fiscal 1995, the Company renegotiated its unsecured revolving Credit
Agreement to reduce the total commitment from $22.5 million to $15 million
reflecting revised working capital needs, obtain market pricing on the total
commitment, and ease financial covenants. The term of the Agreement was
extended to June 2000. Various interest rate options are available to the
Company, including a market rate option which permits the Company to seek
competitive bids from the bank group before a loan is made.
In fiscal 1994, the Company redeemed the 7.98% Industrial Development Revenue
Bonds issued in 1989. The redemption was funded by the issuance of 1994
Industrial Development Revenue Bonds. The 1994 Industrial Development Revenue
Bonds bear interest at 120% of the 90 day Eurodollar rate (approximately 7.3%
at July 31, 1995) with principal and interest due quarterly through July, 2004.
As more fully discussed in Note K-Extraordinary Item, the Company recorded a
$295,000 extraordinary charge in connection with the redemption.
Notes payable to banks of $1,368,000 are short-term borrowings under foreign
subsidiaries' local currency credit lines, supported by a parental guarantee.
Maturities of long-term debt, including the current portion, for the five years
following July 31, 1995 are as follows: $864,000 in 1996; $534,000 in 1997;
$567,000 in 1998; $602,000 in 1999; $641,000 in 2000 and $2,698,000 thereafter.
Interest paid during the years ended July 31, 1995, 1994 and 1993 was
$1,629,000, $1,433,000 and $2,020,000, respectively.
10
NOTE C-INCOME TAXES
The components of earnings (loss) before income taxes and extraordinary items
consisted of the following:
Dollars in Thousands
- ------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------
U.S. $7,860 $6,132 $5,336
Foreign 2,127 1,405 (604)
- ------------------------------------------------------------------------------------------------------
$9,987 $7,537 $4,732
The provision (benefit) for income taxes is as follows:
- ------------------------------------------------------------------------------------------------------
Current payable:
U.S. $ 1,957 $ 1,469 $ 1,481
State 110 88 149
Foreign 1,011 489 138
Deferred (credit):
U.S. 418 556 277
Foreign (131) (2) (15)
- ------------------------------------------------------------------------------------------------------
$ 3,365 $ 2,600 $ 2,030
- ------------------------------------------------------------------------------------------------------
Income tax benefit attributable to the extraordinary item in fiscal year 1994
amounted to $112,000.
A reconciliation between the provision for income taxes and the amount compared
through the application of the U.S. statutory tax rate (34%) to earnings
before income taxes and extraordinary items is as follows:
- -----------------------------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------
Income taxes at statutory rate $3,396 $2,563 $ 1,609
Add (deduct):
Effect of foreign losses that had no tax benefit 53 47 342
Foreign rates in excess of U.S. statutory rate 89 104 (30)
Non-deductible travel and entertainment 59 34 13
Operating loss carryforward utilization (38) (161) (13)
Reduction of valuation allowance (210) -- --
State income taxes, net of federal income tax benefit 73 58 98
Foreign sales corporation benefit (89) (26) (10)
Tax Credits and other items 32 (19) 21
- -----------------------------------------------------------------------------------------------------
$3,365 $2,600 $2,030
- -----------------------------------------------------------------------------------------------------
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GELMAN SCIENCES INC. AND SUBSIDIARIES
NOTE C-INCOME TAXES (CONTINUED)
Deferred income taxes for 1995 and 1994 reflect the impact of "temporary
differences" between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. Temporary differences and
carryforwards which give rise to a significant portion of deferred tax assets
and liabilities are as follows at July 31:
Dollars in Thousands
- ---------------------------------------------------------------------------------------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------
Deferred tax assets
Allowance for doubtful accounts $ 131 $ 146
Litigation accruals - 91
Inventory-related transactions 354 283
Administrative and general expenses
not currently deductible 781 779
Environmental accrual 511 720
Foreign operating loss carryforwards 420 460
- ---------------------------------------------------------------------------------------------------------------
$ 2,197 $ 2,479
Less excess tax over book depreciation and amortization 1,823 1,676
- ---------------------------------------------------------------------------------------------------------------
Gross deferred tax asset 374 803
Valuation allowance (210) (460)
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 164 $ 343
- ---------------------------------------------------------------------------------------------------------------
Current deferred tax asset $1,597 $ 1,506
Non-current deferred tax liability $1,433 $ 1,163
- ---------------------------------------------------------------------------------------------------------------
The Company has reduced its valuation allowance on foreign operating loss
carryforwards, to reflect the ability to utilize certain subsidiary losses
against future earnings on a more likely than not basis. Net current deferred
tax assets of $1,597,000 and $1,506,000 for fiscal 1995 and 1994 respectively,
are included in other current assets and net non-current deferred tax
liabilities of $1,433,000 and $1,163,000 for fiscal 1995 and 1994,
respectively, are included in other long-term liabilities based on their
relationship to assets and liabilities that generated the temporary difference.
Income taxes paid during the years ended July 31, 1995, 1994, and 1993 were
$1,571,000, $1,210,000 and $2,190,000, respectively. Taxes paid in 1995 and
1994 reflect the benefit received from exercise of stock options under the non-
qualified stock option plan.
No deferred income taxes have been provided on undistributed earnings of
foreign subsidiaries since those earnings are expected to be reinvested
indefinitely in the subsidiaries or will not result in incremental income tax
expense.
NOTE D-SAVINGS AND RETIREMENT PLANS
The Company has a Savings Plan and an Employee Stock Ownership Plan (ESOP)
covering substantially all U.S. employees. The Company contributes to the
Savings Plan $.85 for every dollar contributed by employees up to 6% of their
compensation, with one half of the Company's contribution in Company common
stock. Company contributions charged to operations under these plans were
$875,000, $861,000 and $714,000 for the years ended July 31, 1995, 1994 and
1993, respectively
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GELMAN SCIENCES INC. AND SUBSIDIARIES
Note E -- Stockholders' Equity
During the year, the shareholders' approved an increase in the number of
authorized shares of common stock from 8 million to 15 million. Also, the
Company issued 1,437,500 shares of common stock at a price of $14.625 per share
in a public common stock offering. The net proceeds of $19.4 million were used
to repay a term note payable to NBD Bank N.A. and to reduce outstanding
indebtedness under the Company's Credit Agreement.
In fiscal 1994, the Company declared two, three-for-two stock splits. A total
of 3,372,523 shares of common stock were issued in connection with the two
splits. The stated par value per share of common stock remained at $.10 and the
value of the shares at par of $337,252 was transferred from additional capital
to common stock. All per share amounts have been restated to retroactively
reflect the stock splits. In September 1990, the Company issued 128,000 shares
(pre-split) of its common stock to an officer of the Company at market value
in exchange for a $992,000 promissory note and cancellation of 128,000 stock
options outstanding. During fiscal 1994, this note was repaid in full plus
accrued interest on the note.
In October 1982, the Trust under the Company's Employee Stock Ownership Plan
acquired 200,000 shares (pre-split) of the Company's common stock. The purchase
price of $2,250,000 was financed by a loan from the Company to the Trust,
repayable over a 15 year period at a 13.5% interest rate. The Company is making
annual contributions to the Trust during the 15-year period of $150,000 per
year to cover the principal payments plus additional contributions to cover
interest.
The Corporation is entitled to a tax deduction for income tax purposes of the
amount that an employee reports as ordinary income from non-qualified stock
options. Since the Corporation recognizes no compensation expense from the
exercise of the options, the tax benefit received is recorded as a reduction to
income taxes payable and an increase to additional capital.
NOTE F-STOCK OPTIONS AND WARRANTS
The Company has granted options under the Company's stock option plans to
certain key employees to purchase the Company's common stock at fair market
value on the date of grant. The options generally become exercisable
cumulatively, in equal installments over a period of four or five years
commencing one year from date of grant and expiring ten years after date of
grant. Changes in the number of shares available under outstanding options
during fiscal years 1993, 1994 and 1995 were as follows:
- -----------------------------------------------------------------------------------------------------
Number of Shares Exercise Price
- -----------------------------------------------------------------------------------------------------
Outstanding at July 31, 1992 315,325 $6.75 to $10.00
Granted 91,150 7.75 to 16.00
Exercised (47,225) 6.75 to 10.00
Canceled (16,300) 7.75 to 10.00
- -----------------------------------------------------------------------------------------------------
Outstanding at July 31, 1993 342,950 $6.75 to $16.00
Granted 110,300 14.25 to 18.38
Exercised (144,149) 4.50 to 10.00
Canceled (5,141) 5.08 to 10.25
Adjustment for Stock Splits 369,398 3.00 to 12.25
- -----------------------------------------------------------------------------------------------------
OUTSTANDING AT JULY 31, 1994 673,358 $3.00 TO $12.25
Granted 189,000 13.50 TO 18.88
Exercised (181,689) 3.00 TO 12.25
Cancelled (38,738) 3.39 TO 12.25
- -----------------------------------------------------------------------------------------------------
OUTSTANDING AT JULY 31, 1995 641,931 $3.39 TO $18.88
- -----------------------------------------------------------------------------------------------------
At July 31, 1995, 1994 and 1993, options for 305,823, 259,252 and 148,175
shares, respectively were exercisable and options for 80,996, 231,258 and
242,736 shares, respectively, were available for future grants.
During the year, warrants to acquire 40,000 shares of common stock were
exercised at prices ranging from $3.78 to $8.11 and warrants to acquire 9,000
shares at $14.25 were granted. In fiscal 1994, 200 warrants were exercised at
$10.00 and 18,000 warrants were granted to purchase shares at $16.38. These
warrants are exercisable 6 months after the date of grant. At July 31, 1995
and 1994, warrants were outstanding and exercisable to purchase 113,900 and
144,900 shares, respectively, at exercise prices ranging from $3.33 to $14.25.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GELMAN SCIENCES INC. AND SUBSIDIARIES
NOTE G - POLLUTION-RELATED EXPENSES
The Company has settled several legal suits related to groundwater
contamination and has begun remediation activities. The remediation plan
requires the Company to treat the groundwater to the extent necessary to reduce
the contaminants to a defined level. The following table shows
pollution-related balance sheet activity:
Dollars in Thousands
- --------------------------------------------------------------------------------------------------------------
Accrued Liability Long-term Debt
- --------------------------------------------------------------------------------------------------------------
Balance as of July 31, 1993 $2,881 $1,375
Remediation costs charged to accrued liability (1,258)
Settlement with chemical companies, cost recovery 750
Payments relating to settlements (561) (250)
Defense cost on settlement (312)
- --------------------------------------------------------------------------------------------------------------
Balance as of July 31, 1994 1,500 1,125
Remediation costs charged to accrued liability (567)
Payments relating to settlements (180) (381)
- --------------------------------------------------------------------------------------------------------------
Balance as of July 31, 1995 $ 753 $ 744
- --------------------------------------------------------------------------------------------------------------
During the year, the Company made final payments on several settlements which
had been accrued for in previous years. At July 31, 1995, $175,000 of the total
accrued liability is classified as other accrued expenses with the remainder
classified as other long-term liabilities. Of the total long-term debt,
$106,250 is classified as current maturities.
Total costs to the Company of pollution-related activities will be dependent
upon the efficacy and duration of the remediation plan. The ultimate costs to
be incurred could exceed the amount provided for at July 31, 1995. However, it
is the opinion of management that these additional costs, if any, will not have
a material adverse effect on the Company's operations because the cash outflows
would be spread over many future years.
NOTE H-OTHER EXPENSE (INCOME)
For the year ended July 31, 1995, other expense (income) includes interest and
rental income of $173,000 related to Australian properties and foreign exchange
gains of $233,000. For the year ended July 31, 1994, other expense (income)
includes a gain of $108,000 on the sale of Australian assets relating to the
Laminar Air Flow product line. Also included are royalties and gains and
losses on sales of other assets.
14
NOTE I-OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The principal products of the Company are grouped into two segments: the
Filtration Products Group and the Health Products Group. Filtration Products
are primarily comprised of laboratory products, certain membranes and process
filtration products for the biotechnology, pharmaceutical, environmental and
industrial markets. Health Products are primarily comprised of products for
the medical and health industries, including custom-manufactured disposable
filters and certain membranes for original equipment manufacturers in the
healthcare field. In both of the segments, sales and distribution of the
Company's products both domestically and internationally are through Company
salespeople and a network of distributors.
Dollars in Thousands
- ---------------------------------------------------------------------------------------------------------------------
Net Operating Identifiable Depreciation Capital
INDUSTRY SEGMENTS Sales Earnings Assets Expense Expenditures
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 1995
FILTRATION PRODUCTS GROUP $ 66,355 $11,036 $54,975 $3,042 $3,400
HEALTH PRODUCTS GROUP 34,807 6,295 25,626 1,278 4,259
OTHER 2,341 160 1,096 31 166
- ---------------------------------------------------------------------------------------------------------------------
TOTALS $103,503 $17,491 $81,697 $4,351 $7,825
- ---------------------------------------------------------------------------------------------------------------------
Year Ended July 31, 1994
Filtration Products Group $ 62,916 $ 9,749 $49,431 $3,039 $4,223
Health Products Group 29,461 4,833 20,918 1,325 2,338
Other 2,586 115 1,245 41 121
- ---------------------------------------------------------------------------------------------------------------------
Totals $ 94,963 $14,697 $71,594 $4,405 $6,682
- ---------------------------------------------------------------------------------------------------------------------
Year Ended July 31, 1993
Filtration Products Group $ 56,900 $ 7,407 $44,407 $3,069 $3,717
Health Products Group 26,394 4,375 17,356 1,114 2,114
Other 2,915 (14) 1,542 58 29
- ---------------------------------------------------------------------------------------------------------------------
Totals $ 86,209 $11,768 $63,305 $4,241 $5,860
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Net Operating Identifiable
GEOGRAPHIC AREA DATA Sales Earnings Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 1995
U.S. OPERATIONS $ 87,952 $15,521 $62,805 $18,423
EUROPE 16,514 995 10,775 1,965
ASIA/PACIFIC 8,088 872 7,012 2,523
OTHER 3,297 103 1,105 97
ELIMINATION - INTER-AREA SALES (12,348) - - -
- ---------------------------------------------------------------------------------------------------------------------
TOTALS $103,503 $17,491 $81,697 $23,008
- ---------------------------------------------------------------------------------------------------------------------
Year Ended July 31, 1994
U.S. Operations $ 80,147 $13,477 $56,685 $37,026
Europe 13,631 809 7,579 1,428
Asia/Pacific 9,300 328 6,264 2,649
Other 3,095 83 1,066 149
Elimination - Inter-area sales (11,210) - - -
- ---------------------------------------------------------------------------------------------------------------------
Totals $ 94,963 $14,697 $71,594 $41,252
- ---------------------------------------------------------------------------------------------------------------------
Year Ended July 31, 1993
U.S. Operations $ 72,589 $11,932 $50,517 $37,049
Europe 10,564 163 5,938 1,057
Asia/Pacific 8,958 (35) 5,684 2,991
Other 3,142 (292) 1,166 142
Elimination - Inter-area sales (9,044) - -
- ---------------------------------------------------------------------------------------------------------------------
Totals $ 86,209 $11,768 $63,305 $41,239
- ---------------------------------------------------------------------------------------------------------------------
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GELMAN SCIENCES INC. AND SUBSIDIARIES
NOTE I-OPERATIONS BY INDUSTRY SEGMENT
AND GEOGRAPHIC AREA (CONTINUED)
Operating earnings are total revenues less operating expenses excluding other
expense (income) and corporate expenses of: 1995 - $6,599,000; 1994 -
$5,649,000; 1993 - $4,949,000. Corporate expenses include an allocated share
of administrative costs and pollution-related expenses. Identifiable assets by
industry segment include both assets directly identified with those operations
and an allocated share of jointly used assets. Corporate assets consist of an
allocated share of the buildings, furniture and fixtures, and equipment.
Asia/Pacific operations are represented by subsidiaries located in Japan and
Australia. European operations are represented by subsidiaries located in the
United Kingdom, Ireland, France, Germany and Italy. Inter-area sales are
accounted for at prices comparable to unaffiliated customer sales. Export
sales to unaffiliated customers were: 1995 - $9,667,000; 1994 - $9,239,000;
1993 - $10,018,000. Net sales to two major customers who distribute the
Company's products approximated $20,176,000, $19,725,000 and $18,245,000 in
1995, 1994 and 1993, respectively.
NOTE J-FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Foreign Exchange Instruments - The Company enters into forward exchange
contracts to hedge foreign currency transactions on a continuing basis. At July
31, 1995 the Company had contracts outstanding to exchange foreign currencies
for U.S. dollars amounting to approximately $3.4 million denominated in
British pounds, Japanese yen, French francs, Canadian dollars and German
deutschemarks, maturing at various dates. Maximum market risk is limited to
the difference between the spot rate on the date of delivery and the contract
price.
Interest rate instruments - At July 31, 1995, the Company had outstanding a
7.5% interest rate cap on $5 million notional amount effective May 1, 1995
through May 1,1998. During the year, the Company settled its interest rate swap
agreement on $5 million notional amount at a gain of $48,000. The gain was
recorded as a reduction to interest expense as the underlying hedged instrument
was settled during the year. The interest rate cap agreement has been entered
into with a major financial institution which is expected to fully perform
under the terms of the agreement.
NOTE K-EXTRAORDINARY ITEM
During the year ended July 31, 1994, the Company redeemed the 7.98% Industrial
Development Revenue Bonds issued in 1989. The Company recorded a charge of
$295,000 net of $112,000 tax benefit or $.03 per share to write-off deferred
finance charges and record a redemption premium and fees related to the 1989
Bonds.
NOTE L-SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial information for fiscal years ended July 31, 1995
and July 31, 1994 is presented below:
- -----------------------------------------------------------------------------------------------------------------
1995 QUARTER ENDED 1994 Quarter Ended
OCT 31 JAN 31 APR 30 JULY 31 Oct 31 Jan 31 Apr 30 July 31
- -----------------------------------------------------------------------------------------------------------------
Net sales $24,167 $24,018 $26,893 $28,425 $22,294 $23,282 $24,377 $25,010
Gross margin 12,157 12,445 14,068 14,763 10,918 11,628 12,042 13,122
Research and development 1,308 1,316 1,366 1,508 1,220 1,106 1,188 1,363
Earnings before income
taxes and extraordinary item 1,909 1,989 3,104 2,985 1,388 1,733 2,266 2,150
Income taxes 678 733 1,133 821 490 639 784 687
Extraordinary expense - - - - - - 183 -
Net earnings 1,231 1,256 1,971 2,164 898 1,094 1,299 1,463
Net earnings per share $ .19 $ .19 $ .26 $ .27 $ .15 $ .18 $ .20 $ .23
- -----------------------------------------------------------------------------------------------------------------
For the third quarter ended April 30, 1994, the Company recorded an
extraordinary charge of $295,000 net of $112,000 tax benefit or $.03 per share
associated with the refinancing of the 1989 Industrial Development Revenue
Bonds.
16
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Gelman Sciences Inc.
Ann Arbor, Michigan
We have audited the consolidated balance sheets of Gelman Sciences
Inc. and Subsidiaries as of July 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended July 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Gelman
Sciences Inc. and Subsidiaries as of July 31, 1995 and 1994, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended July 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note G to the financial statements, the Company has
agreed to perform a remediation program for groundwater contamination. The
ultimate costs of the remediation program could exceed the amount estimated and
accrued at July 31, 1995.
/s/ Coopers & Lybrand L.L.P.
Detroit, Michigan
September 8, 1995
ANNUAL REPORT TO SEC PRINCIPLE BANKS
The Form 10-K Annual Report NBD Bank, N.A., Detroit, Michigan
to the Securities and Exchange Comerica Bank-Detroit, Michigan
Commission provides certain
additional information and GENERAL COUNSEL
is available to Gelman Sciences Brouse & McDowell, Akron, Ohio
Inc. stockholders upon written
request to:
GELMAN SCIENCES INC. AUDITORS
Shareholder Relations Coopers & Lybrand L.L.P., Detroit, Michigan
600 S. Wagner Road
Ann Arbor, MI 48103-9019 TRANSFER AGENT AND REGISTRAR
Society National Bank, Cleveland, Ohio