-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CemYmdbZZaSQTozTdpyR1J+2Iw3cKQohiN80gsMvr1LDYInwZRG1Ij+XNRLuY8+l 4zPZjUxcwvJDu/HLtuW/zg== 0000927016-99-003722.txt : 19991117 0000927016-99-003722.hdr.sgml : 19991117 ACCESSION NUMBER: 0000927016-99-003722 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MILLIPORE CORP CENTRAL INDEX KEY: 0000066479 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 042170233 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-09781 FILM NUMBER: 99751810 BUSINESS ADDRESS: STREET 1: 80 ASHBY RD CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 7815336000 MAIL ADDRESS: STREET 1: 80 ASHBY ROAD CITY: BEDFORD STATE: MA ZIP: 01730 FORMER COMPANY: FORMER CONFORMED NAME: MILLIPORE FILTER CORP DATE OF NAME CHANGE: 19661116 10-K/A 1 FORM 10-K/A ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Mark One) |X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 or ----------------- |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to ______________ Commission File Number 0-1052 ------ MILLIPORE CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-2170233 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 80 Ashby Road, Bedford, MA 01730 (Address of principal executive offices) (Zip Code) (781) 533-6000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Exchange on Which Registered -------------- ------------------------------------ Common Stock, $1.00 Par Value New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of Form 10-K or any amendment to this Form 10-K. |_| As of February 26, 1999, the aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was approximately $1,048,190,000 based on the closing price on that date on the New York Stock Exchange. As of February 26, 1999, 44,074,626 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Document Incorporated into Form 10-K/A -------- ----------------------------- Definitive Proxy Statement, dated March 19, 1999 Part III ================================================================================ PART I Item 1. Business. The Company Millipore Corporation was incorporated under the laws of Massachusetts on May 3, 1954. Millipore is a market leader in the field of separations technology and develops, manufactures and sells products which are used primarily for the analysis, identification, monitoring and purification of liquids and gasses. In addition, Millipore sells products to control critical aspects of the manufacturing process for integrated circuits (semiconductors). Millipore's separations products are based on a variety of membrane and other technologies that effect separations through physical and chemical methods and are applied primarily to biological and environmental laboratory research and testing, to pharmaceutical and food and beverage research, manufacturing and quality control and to the purification and control of process liquids and gasses for integrated circuit ("IC") manufacturing operations. Millipore's IC process control products use electro-mechanical, pressure differential and related technologies to permit IC manufacturers to monitor and control the flow and condition of process gasses used in the IC fabrication process. Millipore is an integrated multinational manufacturer of these products. Millipore's role as a market leader has been recognized by independent surveys of filtration markets. Unless the context otherwise requires, the terms "Millipore" or the "Company" mean Millipore Corporation and its subsidiaries. Information About Operating Segments Millipore operates in two business segments: Biopharmaceutical & Research and Microelectronics. Millipore has traditionally organized its business and management structures around the markets and customers which it serves. The Biopharmaceutical & Research segment includes products and services sold to pharmaceutical companies, biotechnology companies, food and beverage companies, university and government laboratories and research institutes; the Microelectronics segment includes products and services sold to semiconductor fabrication companies as well as OEM and material suppliers to those companies. While there is some overlap in the products sold to each business segment, the economic environments in which these two segments operate are distinct. The Biopharmaceutical and Research business segment is characterized by customer needs for reliability and consistency of standardized products used in validated production processes and for assured continuity and comparability of analytical results; this segment has demonstrated relatively stable patterns of revenue growth and profitability. While technical innovation is important to the Biopharmaceutical and Research business segment, the adoption of new technologies and products often requires that a lengthy validation process be completed prior to adoption. On the other hand, the Microelectronics business segment is characterized by rapid technological change and economic cycles with dramatic shifts in revenue growth and decline with corresponding impacts on profitability. During 1998 approximately 74% of Millipore's net sales were made to customers in the Biopharmaceutical & Research segment and approximately 26% to customers in the Microelectronics segment. In addition, approximately 60% of Millipore's net sales were made to customers outside the United States. Industry and geographic segment information is discussed in Note Q to the Millipore Corporation Consolidated 2 Financial Statements (the "Financial Statements") included in Item 8 below, which Note is hereby incorporated herein by reference. Products, Technologies and Applications Millipore sells more than 10,000 products. Most of the Company's products are listed in its catalogs and are sold as standard items, systems or devices. For special applications, the Company assembles custom products, usually based upon standard modules and components. In certain instances, the Company also designs and engineers process filtration systems and process chromatography systems to meet specific needs of the customer. The Company's products also include, in some cases, proprietary software designed to operate and/or integrate certain of its other products or systems (particularly membrane ultrafiltration and chromatography systems and gas monitoring equipment). Biopharmaceutical & Research Business Segment. The products that the Company sells to customers in the Biopharmaceutical & Research business segment include disc filters, OEM membranes, filter devices and ancillary equipment and supplies, filter-based test kits, laboratory water purification systems, cartridge filters and housings of various sizes and configurations, process liquid chromatography systems and process filtration systems. The principal separation technologies utilized by products sold to Biopharmaceutical & Research segment customers are based on membrane filters and on certain chemistries and resins as well as liquid chromatography. Membranes are used to filter either the wanted or the unwanted particulate, bacterial, molecular or viral entities from fluids. Some of the Company's newer membrane materials also use affinity, ion-exchange or electrical charge mechanisms to effect the desired separation. Membranes are incorporated into both microfiltration and ultrafiltration devices, cartridges and modules of different configurations to address a variety of customer fluid separation needs. The Company's laboratory water purification products combine membrane, resin and other separations technologies to provide ultrapure water for critical applications. Customers use the Company's products in the Biopharmaceutical & Research segment to gain knowledge about a molecule, compound or micro-organism by detecting, identifying and quantifying the relevant components of a fluid sample. In addition Millipore products are used for the purification of small and large volumes of critical fluids. The Company's products are also used by pharmaceutical manufacturing and research operations to isolate and purify specific components of fluid streams for analysis and to concentrate identified compounds for further processing. The Company's laboratory water purification products are used by customers to provide ultrapure water for critical laboratory analysis and for clinical testing. Microelectronics Business Segment. The products sold to customers in the Microelectronics business segment include polymeric cartridge filters and housings of various sizes, materials and configurations, metal filters, precision liquid dispense filtration pumps, resin based gas purifiers and gas monitors as well as mass flow controllers and pressure and vacuum control products. Membrane products sold to customers in the Microelectronics business segment are based on essentially the same membrane technologies described above but with membranes and housings 3 made from distinct polymers as required by the nature of the liquids being purified. Gas purification and monitoring products rely on resin based chemistries which react with process gasses to either remove contaminants or to monitor the purity of the process gas. In addition, the Company's IC process control products use thermal-dynamic, pressure differential and electromechanical technologies to create pressurized or vacuum environments to precisely measure and control the flow of IC process gases. The Company's separations products are used by Microelectronics customers in manufacturing operations to remove contaminants in a process liquid stream and to purify and precisely dispense process liquids during critical IC fabrication operations. The Company's products are also used in process gas applications to precisely monitor and control the purity of and rate at which process gases are introduced into the IC process chamber, the conditions in the chamber during processing and the rate at which the gas is evacuated from the IC process chamber. Customers and Markets Within each customer group served by Millipore, the Company focuses its sales efforts upon those segments where customers have specific requirements which can be satisfied by the Company's products. Biopharmaceutical & Research Business Segment. Major customer groups served by this business segment include pharmaceutical/biotechnology and food and beverage companies and government, university and private research and testing analytical laboratories. The Company's products are used by the pharmaceutical/biotechnology industry in sterilization, including virus reduction, and sterility testing of products such as antibiotics, vaccines, vitamins and protein solutions; concentration and fractionation of biological molecules such as vaccines and blood protein products; cell harvesting; isolation and purification of compounds from complex mixtures and the purification of water for laboratory use. The Company's membrane products also play an important role in the development of new drugs by offering customers a continuum of products capable of being scaled-up to match customer needs at different stages during the development process from laboratory research through full scale drug production. In addition, Millipore has developed and is developing products for biopharmaceutical applications in order to meet the purification requirements of the biotechnology industry. The Company also sells its analytical products, filter cartridges and laboratory water purification systems to chemical manufacturers and processors. The Food and Beverage Industry uses the Company's products for quality control and process applications principally to monitor for microbiological contamination; and to prevent spoilage by removal of bacteria and yeast from products such as wine, beer and bottled juices and water. Universities, governments and private and corporate research and testing laboratories, environmental science laboratories and regulatory agencies purchase a wide range of the Company's products. Typical applications include: purification of proteins; cell culture, and cell structure studies and interactions; concentration of biological molecules; fractionation of complex molecular mixtures; and collection of microorganisms. The Company's water purification products are used extensively by these organizations to prepare high purity water for sensitive assays and the preparation of tissue culture media. 4 Sales to the Biopharmaceutical & Research Business Segment accounted for approximately 74% of Millipore's 1998 consolidated sales and 65% of 1997 consolidated sales. Microelectronics Business Segment. Major customer groups served by this business segment include IC manufacturers and OEM manufacturers that sell a variety of equipment used in the manufacture of ICs to IC manufacturers. IC manufacturers use the Company's products to purify (by removing particles and unwanted contaminating molecules), deliver, control and monitor the liquids and gases used in the manufacturing processes of semiconductors and other microelectronics components. The Company's mass flow and pressure control products and precision liquid dispense filtration products are sold to OEM capital equipment suppliers to semiconductor manufacturers as well as directly to manufacturers of ICs. Sales to the Microelectronics business segment accounted for approximately 26% of Millipore's 1998 consolidated sales as contrasted with 35% of 1997 consolidated sales. As noted above, this business segment has experienced historic volatility, and the effect of such volatility has, in the past, affected Millipore's sales growth. While no single customer is material to the Company taken as a whole, the Microelectronics business segment does rely on a relatively narrow group of customers, some of whom purchase significant quantities of the Company's products. Sales and Marketing The Company sells its products to both business segments within the United States primarily to end users through its own direct sales force and, in the case of analytical products, to a limited extent through an independent distributor. The Company sells its products to both business segments in international markets through the sales forces of its subsidiaries and branches located in more than 30 major industrialized and developing countries as well as through independent distributors in other parts of the world. As of December 31, 1998, the Company's marketing, sales and service forces consisted of approximately 915 employees worldwide of which 819 were employed in the Biopharmaceutical and Research Business Segment and 96 were employed in the Microelectronics Business Segment. The Company's marketing efforts focus on application development for existing products and on new and differentiated products for other existing, newly-identified and proposed customer uses. The Company seeks to educate customers as to the variety of analytical, purification and process control problems which may be addressed by its products and to adapt its products and technologies to separations and process control problems identified by its customers. The Company believes that its technical support services are important to its marketing efforts. These services include assisting in defining the customer's needs, evaluating alternative solutions, designing a specific system to perform the desired separation; training users, and assisting customers in compliance with relevant government regulations. In addition, the Company maintains a network of service centers located in the United States and in key international markets to support its process gas measurement/control products as well as its laboratory water products. Research and Development 5 In its role as a pioneer of membrane separations, Millipore has traditionally placed heavy emphasis on research and development. This emphasis has permitted Millipore to be the first company to introduce a number of major new enabling separations membranes and membrane devices (examples include: nitrocellulose microfiltration membrane in 1954, compact high purity laboratory water systems in 1972, membrane based syringe filter devices in 1973, membrane based filters for intravenous drug therapy in 1975, tangential flow filtration cassette devices in 1975, polyvinylidene fluoride membrane in 1978, continuous electro-deionization water purification systems in 1988, composite ultrafiltration membranes in 1989, composite microfiltration membranes for the removal of viruses from solution in 1991, melt-cast PFA membranes in 1990, ultra-high weight polythylene membrane in 1993, high flow high efficiency metal membrane for gas filtration in 1996 and non-dewetting PTFE membrane in 1997). Research and development activities include the extension and enhancement of existing separations technologies to respond to new applications, the development of new membranes, and the upgrading of membrane based systems to afford the user greater purification capabilities. Research and development efforts also identify new separations applications to which disposable separations devices would be responsive, and develop new configurations into which membrane and ion exchange separations media can be fabricated to efficiently respond to the applications identified. Instruments, hardware, and accessories are also developed to incorporate membranes, modules and devices into total separations systems. Research and development activities related to the Company's IC process control products focuses upon developments which will address the evolving needs of IC manufacturers and development of enabling technologies which will anticipate those needs. Introduction of new applications frequently requires considerable market development prior to the generation of revenues. Millipore performs most of its own research and development and does not provide material amounts of research services for others. Millipore's aggregate research and development expenses in 1998 and 1997 were $53,578,000 and $55,899,000, respectively. In 1996 Millipore's aggregate research and development expenses were $38,429,000 (excluding pre-acquisition amounts spent by Amicon and Tylan). For discussions of research and development write-offs relating to the Amicon and Tylan acquisitions, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Acquisitions and Note E to the Financial Statements, which discussions are hereby incorporated herein by reference. In addition, the Company has followed a practice of supplementing its internal research and development efforts by licensing newly developed technology from unaffiliated third parties and/or acquiring distribution rights with respect thereto, when it believes it is in its long term interests to do so. Millipore has been granted a number of patents and licenses and has other patent applications pending both in the United States and abroad. While these patents and licenses are viewed as valuable assets, Millipore's patent position is not of material importance to its operations. Millipore also owns a number of trademarks, the most significant being "Millipore." 6 Competition The Company faces intense competition in all of its markets. The Company believes that its principal competitors in the Biopharmaceutical & Research business segment include Pall Corporation, Barnstead Thermolyne Corporation, Sartorius GmbH and United States Filter Corporation. The principal competitors in the Microelectronics business segment are Pall Corporation, United States Filter Corporation, Aera and MKS Instruments. Certain of the Company's competitors are larger and have greater resources than the Company. However, the Company believes that, within the markets it serves, it offers a broader line of products, making use of a wider range of separations and IC process control technologies and addressing a broader range of applications than any single competitor. While price is an important factor, the Company competes primarily on the basis of technical expertise, product quality and responsiveness to customer needs, including service and technical support. Environmental Matters The Company is subject to numerous federal, state and foreign laws and regulations that impose strict requirements for the control and abatement of air, water and soil pollutants and the manufacturing, storage, handling and disposal of hazardous substances and waste. The federal laws and regulations include the Comprehensive Environmental Response, Compensation, and Liability Act, the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act. The Company is in substantial compliance with applicable environmental requirements. Because regulatory standards under environmental laws and regulations are becoming increasingly stringent, however, there can be no assurance that future developments will not cause the Company to incur material environmental liabilities or costs. Under the Clean Air Act Amendments of 1990 ("CAA"), the U.S. Environmental Protection Agency has been directed, among other things, to develop standards and permit procedures with respect to certain air pollutants. Because many of the implementing regulations have not yet been promulgated, the Company cannot make a final assessment of the impact of the CAA. Based upon its preliminary review of the CAA, however, the Company currently believes that compliance with the CAA will not have a material adverse impact on the operations or financial condition of the Company. Other Information Since April of 1988, the Company has had in place a shareholder rights plan (the "Rights Plan") pursuant to which Millipore declared a dividend to its shareholders of the right to purchase (a "Right"), for each share of Millipore Common Stock owned, one additional share of Millipore Common Stock at a price of $80 for each share (after giving effect to the 1995 two for one stock split). In April of 1998, the Rights Plan was amended and restated to, among other things, extend the expiration date until April 30, 2008, to increase the purchase price on the exercise of a Right to $200, to permit the Directors to exchange certain of the Rights for shares of Company Common Stock (on a 1 for 1 basis) under certain circumstances and to make certain other updating changes. The Rights Plan, as amended and restated, is designed to protect Millipore's shareholders from attempts by others to acquire Millipore on terms or by using tactics that could 7 deny all shareholders the opportunity to realize the full value of their investment. The Rights will be exercisable only if a person or group of affiliated or associated persons acquires beneficial ownership of 20% or more of the outstanding shares of the Company Common Stock or commences a tender or exchange offer that would result in a person or group owning 20% or more of the outstanding Common Stock. In such event, or in the event that Millipore is subsequently acquired in a merger or other business combination, each Right will entitle its holder to purchase, at the then current exercise price, shares of the common stock of the surviving company having a value equal to twice the exercise price. Millipore's products are made from a wide variety of raw materials which are generally available in quantity from alternate sources of supply; as a result, Millipore is not substantially dependent upon any single supplier. As of December 31, 1998, Millipore employed 4,289 persons worldwide, of whom 2,027 were employed in the United States and 2,173 were employed overseas. Executive Officers of Millipore The following is a list, as of March 1, 1999, of the Executive Officers of Millipore. All of the following individuals were elected to serve until the Directors Meeting next following the 1999 Annual Stockholders Meeting.
First Elected ------------------------ An To Present Name Age Office Officer Office - ---- --- ------ ------- ------ C. William Zadel 55 Chairman of the Board, 1996 1996 President and Chief Executive Officer of the Corporation Michael P. Carroll 48 Vice President of the 1992 1997 Corporation and President (As President of of Millipore Asia, Ltd. Millipore Asia Ltd.) First Elected ------------------------ An To Present Name Age Office Officer Office - ---- --- ------ ------- ------ Douglas B. Jacoby 52 Vice President 1989 1989 of the Corporation John E. Lary 52 Vice President 1994 1994 of the Corporation Francis J. Lunger 53 Vice President, Treasurer 1997 1997 and Chief Financial Officer of the Corporation Joanna Nikka 47 Vice President 1996 1996 of the Corporation
8 Jeffrey Rudin 47 Vice President 1996 1996 of the Corporation and General Counsel Hideo Takahashi 58 Vice President of 1996 1979 the Corporation and (As President President of Nihon of Nihon Millipore Millipore)
Mr. Zadel was elected President, Chief Executive Officer and Chairman on February 20, 1996. Mr. Zadel had been, since 1986, President and Chief Executive Officer of Ciba Corning Diagnostics Corp., a company that develops, manufactures and sells medical diagnostic products. Prior to that he was Senior Vice President of Corning Glass Works' (now Corning Inc.) Americas Operations (1985) and Vice President of business development (1983). Mr. Zadel currently serves on the Boards of Directors of Kulicke and Soffa Industries, Inc. and Matritech, Inc. Mr. Zadel is Chairman of the Board of Directors of the Massachusetts High Technology Council (February 1999). He has also served as the Chairman of the Health Industry Manufacturers Association (1994 - 1995). Mr. Carroll joined Millipore in 1986 as Vice President/Finance for the Membrane Products Division following a ten-year career in the general practice audit division of Coopers and Lybrand. In 1988, Mr. Carroll assumed the position of Vice President of Information Systems (worldwide) and in December of 1990, he became the Vice President of Finance for the Company's Waters Chromatography Division. Mr. Carroll was elected Corporate Vice President, Chief Financial Officer and Treasurer in February, 1992. In 1997 Mr. Carroll was elected President of Millipore Asia Ltd.; he remains a Corporate Vice President. Mr. Jacoby joined Millipore in 1975. After serving in various sales and marketing capacities, Mr. Jacoby became Director of Marketing for the Millipore Membrane Products Division in 1983 and in 1985 he assumed the position of General Manager of the Membrane Pharmaceutical Division. In 1987, Mr. Jacoby assumed responsibility for the Company's process membrane business and in 1994 assumed responsibility for the sales, marketing and R&D for all of the Company's worldwide business. Mr. Jacoby was elected a Corporate officer in December, 1989. Mr. Lary was elected a Corporate Vice President in November 1994, and is responsible for the worldwide operations of the Company. From May of 1993 until his election as a Corporate Vice President, Mr. Lary served as Senior Vice President and General Manager of the Americas Operation. For the ten years prior to that time, he served as Senior Vice President of the Membrane Operations Division of Millipore. Mr. Lunger was elected Vice President, Chief Financial Officer and Treasurer of Millipore upon joining the Company in June 1997. Mr. Lunger had been, since 1995, Senior Vice President and Chief Financial Officer of Oak Industries, Inc., a developer, manufacturer and supplier of components to the telecommunications industry. From 1994 until 1995, Mr. Lunger had been acting Chief Executive Officer and Chief Administrative Officer of Nashua Corporation, a 9 conglomerate with diverse businesses ranging from office supplies to photo finishing. During the period 1983-1994, Mr. Lunger served in various business operations and financial management positions with Raychem Corporation, an international material science company serving the telecommunication, automotive, energy and defense markets, including Vice President and Group General Manager (1992-1994); Vice President and Assistant Sector General Manager (1991-1992) and Vice President, Finance (1988-1991). Ms. Nikka was elected Corporate Vice President for Human Resources in November 1996. Ms. Nikka was Vice President at Fidelity Investments from 1991 to November 1996. Prior to joining Fidelity in 1991, Ms. Nikka was Vice President of Human Resources at Symbolics, Inc. Mr. Rudin was elected Corporate Vice President and General Counsel in December 1996. Prior to joining Millipore, Mr. Rudin served Ciba Corning Diagnostics Corporation as Senior Vice President and General Counsel (since 1993) and as Vice President and General Counsel (1988 - 1993). Prior to that, Mr. Rudin was Assistant Division Counsel for the Pharmaceutical Division of Ciba-Geigy Corporation. Mr. Takahashi joined Millipore in 1979 as President and Chief Executive Officer of its Japanese subsidiary, Nihon Millipore Ltd. Mr. Takahashi was elected as a Vice President of the Company on February 8, 1996. 10 Item 2. Properties. Millipore operates 19 manufacturing sites located in the United States, France, Japan, Ireland, United Kingdom, Brazil and China. The following table identifies the major production sites which are owned by Millipore and describes the purpose, floor space and land area of each.
Business Floor Space Land Area Segment Location Facility Sq. Ft. Acres Served - -------- -------- ------- ----- ------ Bedford, Executive Offices, research, 352,000 31 B&R; MA membrane manufacturing Micro. & warehouse Danvers Manufacturing and office 65,000 16 B&R MA Jaffrey, Manufacturing, warehouse 177,000 31 B&R; Micro. NH and office Cidra, Manufacturing, warehouse 125,000 29 B&R Puerto Rico and office Molsheim, Manufacturing, warehouse 148,000 20 B&R France and office Cork, Manufacturing 98,000 20 B&R Ireland Yonezawa, Manufacturing and warehouse 169,000 7 B&R; Japan Micro.
================================================================================ B&R = Biopharmaceutical & Research Business Segment. Micro. = Microelectronics Business Segment Millipore owns a total of approximately 1.25 million square feet of facilities worldwide which are used for office, research and development, manufacturing (including the manufacturing facilities listed above) and warehouse purposes. All of these facilities are owned in fee and are not subject to any material encumbrances. In addition to its owned properties, Millipore currently leases various manufacturing, sales, warehouse, and administrative facilities throughout the world. Such leases expire at different times through 2008. The aggregate area of rented space is approximately 960,000 square feet and cost was approximately $12,033,000 in 1998. The following leased facilities are the most significant: 11 1. A lease of a 198,000 square foot building located on 13 acres in Allen, Texas (Dallas-Fort Worth vicinity). This lease expires in 2008 and provides for two 5 year extension options. This facility is used to support the Microelectronics business segment. 2. A lease for premises abutting the Company's Bedford headquarters; this lease makes 75,000 square feet of building available to Millipore, provides for a term expiring in 2005 and contains rights of first refusal and options with respect to the purchase of the premises by Millipore and the sale of the premises to Millipore. This building supports both business segments. 3. A lease of a 134,000 square foot building which is adjacent to the leased property referred to in preceding paragraph for a term ending in 2006, with renewal options for an aggregate of 20 years, as well as a purchase option. This building is used primarily to serve the Biopharmaceutical & Research business segment 4. A lease of a building of 130,000 square feet located in Burlington, Massachusetts, approximately 5 miles from Millipore's Bedford headquarters. This lease was amended during 1997 to, among other things, extend the initial term until February 2002 and to provide for a single 3-year extension option. This building supports both business segments. With the exception of the Allen lease described above, in the opinion of Millipore, no single lease is material to the Company's operations. Except for the facilities located in Allen, Texas, Cidra, Puerto Rico and Yonezawa, Japan, which currently operate at approximately 50%, 75% and 70%, respectively, of capacity, none of the above listed owned and leased major facilities are materially underutilized. Millipore is of the opinion that all the facilities owned or leased by it are well maintained, appropriately insured, in good operating condition and suitable for their present uses. Item 3. Legal Proceedings. The Company currently is not a party to any material legal proceeding and the Company knows of no material legal proceeding contemplated by any governmental authority. However, as has been previously disclosed, Millipore has, in the past, been named as a potentially responsible party ("PRP") under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA" or "Superfund") by the U.S. Environmental Protection Agency ("EPA") with respect to a "release" (as defined in Section 101 of CERCLA), at twelve sites to which chemical wastes generated by the manufacturing operations of Millipore or one of its divisions may have been sent. The Company has settled its liability pursuant to consent decrees releasing Millipore from further liability with respect to certain covered matters related to all of the Superfund sites at which the Company has been named a PRP. However, as is typical with consent decrees in such Superfund proceedings, EPA and the relevant state agencies reserved the right to maintain actions against the settling parties, including the Company, in the event certain actions occur or do not occur. 12 In 1991 the Company brought suit against The Travelers Indemnity Company, Hartford Accident and Indemnity Company and Insurance Company of North America in U.S. District Court for the District of Massachusetts with respect to four of the Superfund sites and one other site at which the Company had been named a PRP, seeking recovery of the full costs of defending the actions at such sites, indemnification for its liability and damages for unfair and deceptive insurance practices. The case against Hartford Accident and Indemnity Company has been settled. The case against Insurance Company of North America is awaiting action on remand by the District Court after a successful appeal by the Company of a dismissal of the case. The appeal of the dismissal of the case against The Travelers Indemnity Company was unsuccessful. Item 4. Submission of Matters to a Vote of Security Holders. This item is not applicable. PART II Item 5. Market for Millipore's Common Stock, and Related Stockholder Matters. Millipore's Common Stock, $1.00 par value, is listed on the New York Stock Exchange and is traded under the symbol "MIL". The following table sets forth, for the indicated fiscal periods, the high and low sales prices of Millipore's Common Stock (as reported on the New York Stock Exchange Composite Tape) and the dividends declared (on a per share basis). As of February 26, 1999 there were approximately 3,230 shareholders of record.
Range of Stock Prices Dividends Declared -------------------------------------------- ------------------ 1998 1997 1998 1997 ------------------- ------------------- ---- ---- High Low High Low (Per Share) ---- --- ---- --- First Quarter $38.44 $30.00 $45.63 $38.88 $0.10 $0.09 Second Quarter $36.94 $26.82 $44.88 $37.25 $0.11 $0.10 Third Quarter $27.50 $17.50 $51.88 $41.06 $0.11 $0.10 Fourth Quarter $29.88 $17.25 $52.00 $33.50 $0.11 $0.10
Item 6. Selected Financial Data. The following selected consolidated financial data for Millipore are derived from the Company's Financial Statements and related notes thereto. The following selected consolidated financial data should be read in connection with and is qualified in its entirety by Millipore's Financial Statements and related notes thereto and other financial information included elsewhere in this Form 10-K/A report. 13 Millipore Corporation -- Five-year Summary of Operations
(In thousands, except per share data) 1998 1997(2) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Net sales $ 699,307 $ 758,919 $ 618,735 $ 594,466 $ 497,252 Cost of sales 364,467 342,237 249,443 243,849 212,675 ----------------------------------------------------------------------- Gross profit 334,840 416,682 369,292 350,617 284,577 Selling, general and administrative expenses 236,521 245,585 202,140 195,026 159,591 Research and development expenses 53,578 55,899 38,429 36,515 34,327 Purchased research & development expense -- 114,091 68,311(2) -- -- Settlement of litigation 11,766(1) -- -- -- -- Restructuring charge 33,641(1) -- -- -- -- ----------------------------------------------------------------------- Operating (loss) income (666) 1,107 60,412 119,076 90,659 Gain on sale of equity securities 35,594(1) 8,330 5,329 -- -- Other income (expense), net -- -- -- -- (10,800)(3) Interest income 3,090 2,937 2,780 1,682 4,091 Interest expense (29,474) (30,484) (11,498) (10,623) (7,035) ----------------------------------------------------------------------- Income (loss) from continuing operations before income taxes 8,544 (18,110) 57,023 110,135 76,915 (Benefit) provision for income taxes (1,320) 20,674 13,401 24,781 17,306 ----------------------------------------------------------------------- Income (loss) from continuing operations 9,864 (38,784) 43,622 85,354 59,609 Loss on disposal of discontinued operations -- -- 2,036(4) -- 7,211(4) ----------------------------------------------------------------------- Net Income (loss) $ 9,864 $ (38,784) $ 41,586 $ 85,354 $ 52,398 ======================================================================= Basic net income (loss) per share: Income (loss) from continuing operations $ 0.22 $ (0.89) $ 1.00 $ 1.90 $ 1.09 Net income (loss) per share $ 0.22 $ (0.89) $ 0.95 $ 1.90 $ 0.96 Diluted net income (loss) per share: Income (loss) from continuing operations $ 0.22 $ (0.89) $ 0.98 $ 1.86 $ 1.07 Net income (loss) per share $ 0.22 $ (0.89) $ 0.94 $ 1.86 $ 0.94 Cash dividends declared per share $ 0.43 $ 0.39 $ 0.35 $ 0.315 $ 0.295 Weighted average shares outstanding: Basic 43,864 43,527 43,602 44,985 54,726 Diluted 44,289 43,527 44,457 45,887 55,644 Financial Data Working capital $ 6,071 $ 36,169 $ 90,708 $ 88,160 $ 98,472 Total assets 762,440 772,301 682,387 529,849 535,884 Long-term debt 299,110 286,844 224,359 105,272 109,327 Shareholders' equity $ 136,908 $ 143,147 $ 211,758 $ 222,664 $ 217,466 ==============================================================================================================================
1. See Note B on page F-9 below, Note C on page F-10 below, Note D on page F-11 below and Note M on page F-19 below of the Notes to the Financial Statements. 2. See Note E on page F-12 below of the Notes to the Financial Statements. 3. The $10,800 reflects a litigation settlement which arose from the Company's sales of its Process Water Division in 1989. 4. Represents a loss on the disposal of discontinued operations related to the sale of its Waters Chromatography Division and certain assets of its non-membrane bioscience business. See Note B on page F-9 below and Note D on page F-11 below of the Notes to the Financial Statements. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in connection with Millipore's Consolidated Financial Statements and related notes thereto and other financial information included elsewhere in this Form 10-K report. ACQUISITIONS AMICON On December 31, 1996, the Company acquired the net assets of the Amicon Separation Science Business of W.R. Grace & Co. ("Amicon") for a price of $129.3 million in cash, including transaction costs. The Amicon acquisition was accounted for as a purchase and resulted in a write-off for purchased in-process research and development ("IPR&D") of $68.3 million in the fourth quarter of 1996. Since this transaction was completed on the last business day of 1996, the accompanying 1996 consolidated statement of income excludes all 1996 business activity conducted by Amicon. The major IPR&D project acquired as a part of Amicon which was included in the IPR&D write-off related to the development of a novel sample preparation platform and had an estimated fair value of $48.3 million. If proven to be technologically feasible, the valuable element of this project was that the technology represented a new approach to micro sample handling, which was intended to address the shift in trends in the analytical laboratory market toward smaller quantities of highly specific samples. As of the acquisition date, the expected cost required to complete this project was $0.5 million, the estimated time required to complete this project was approximately four man years of technical and engineering time (generally, the Company regards 2,000 hours as comprising one "man year") and this project was expected to generate significant revenues over the estimated life of the resulting products. This project was written off because, as of December 31, 1996, the project had not achieved technological feasibility and there were a large number of obstacles facing the successful completion of the project described above, including the fact that there existed a wide variety of manufacturability, product cost, technology and application issues. Also the technology underlying this project had no alternative future uses not included in its estimated fair value within the markets served by the Company. In addition, there was significant uncertainty as to whether the production processes could be scaled up to a full scale commercial level of manufacturing and as to whether these products could be made to conform to laboratory standards for small sample sizes. The first products derived from the novel sample preparation platform were introduced in late 1998, approximately one year later than planned. Although development is continuing, the estimated cost and time required to achieve technological feasibility increased from $0.5 million and four man years to $1.0 million and eight man years while the anticipated revenues from this technology are now expected to be significantly less than originally estimated. The actual costs 15 incurred through December 31, 1998 were approximately $1.0 million. The reduction in anticipated revenues is primarily a result of strategic marketing decisions made after the acquisition of Amicon to focus this technology on a limited number of served and strategically important markets which eliminated potential revenue from the broader range of applications originally envisioned. In addition, the Amicon acquisition included ten other IPR&D projects, with an aggregate value of $20 million, not considered to be individually significant. These minor projects were expected to cost an aggregate of $1.2 million and an aggregate of twelve and one-half man years to complete. These projects were written off because technological feasibility had not been demonstrated as of December 31, 1996. As of December 31, 1998, three of these ten projects have been completed, three have been cancelled, three are ongoing and one has been suspended. As of December 31, 1998, an aggregate of $1.3 million had been invested on these individually insignificant IPR&D projects and it was estimated that an additional $0.5 million would be required to achieve technological feasibility for the three ongoing projects. In order to integrate Amicon's business operations with those of Millipore, a plan was adopted pursuant to which management undertook the following activities: replacement of Amicon's business systems with the Company's common business information systems, elimination of redundant executive and administrative personnel, realignment of product distribution channels to achieve compatibility with those of Millipore, termination of supply agreements, resolution of redundant and overlapping product lines and streamlining and consolidation of facilities. This plan provided for the termination of 160 Amicon employees; this reduction in force was implemented without alteration. As of December 31, 1998 the integration of the Amicon business into Millipore was substantially completed except for the relocation of certain manufacturing operations, which has been delayed pending the construction of a facility to receive those operations, and the resolution of a supply agreement termination dispute both of which the Company expects to be completed during 2000. TYLAN GENERAL, INC. On January 22, 1997, the Company completed its cash tender offer for all of the outstanding common shares of Tylan General, Inc. ("Tylan") for $16.00 per share. Tylan became a wholly owned subsidiary of the Company on January 27, 1997. The aggregate purchase price was $133.0 million, plus the assumption of Tylan's outstanding debt, net of cash, totaling $23.6 million. This acquisition was accounted for as a purchase and resulted in a write-off for IPR&D of $114.1 million in the first quarter of 1997. Included in the IPR&D write-off were two major IPR&D projects acquired as a part of Tylan. The first of these was a project to develop intracavity laser spectroscopy technologies for application in semiconductor and related industries. This project had an estimated fair value of $53.5 million, was expected to require the investment of an additional $3.2 million and twenty-two man years to complete. If proven to be technologically feasible, it was expected that this project would yield a break-through enabling technology and would become a major revenue source for the Company. The products expected to result from this project were to be used in 16 monitoring moisture and other contaminant levels within vacuum deposition chambers for semiconductor manufacturing. The valuable element of this project was that the expected future products would be differentiated from Tylan's current products, would offer enhanced sensitivity and the ability to monitor corrosive gas streams and would also have applications for different target gases and sample environments. While Tylan retained management direction over this project, development was performed by a third party pursuant to a development and license agreement. Under the development and license agreement Tylan directed the research with the objective of developing intracavity laser spectroscopy technologies for application in semiconductor, flat panel, and fiber optic manufacturing industries. According to this agreement, Tylan was to have the rights and responsibilities to utilize the technology, were it to be successfully developed, and to manufacture products for sale to the above industries. This agreement provided for aggregate development fees of $8.0 million, payable $0.3 million at signing and the balance in equal quarterly installments thereafter over the five year term of the agreement. The agreement was terminable at will by Tylan but required the payment of a termination fee equal to six quarters of development fees ($2.4 million). Development fees were charged against research and development expense. This project was written off because, at the time of the Tylan acquisition, it was very early in the development process and had not achieved technological feasibility. There was also significant uncertainty as to the precise configuration and market requirements of the expected products based on the intracavity laser spectroscopy technology. In addition, there was considerable uncertainty as to how long it would take to develop a commercializable product from this technology. Further, technological feasibility for potential alternative future uses of this technology had not been achieved. As a result of the prolonged downturn in the microelectronics industry, the Company has reprioritized research and development programs and further development of this project was suspended in late 1997. This resulted in a decision to terminate the third party development and license agreement in December 1997 and the termination fee was charged to the acquisition reserve. The Company retains certain post-termination residual rights to this technology and is currently re-evaluating the future of this project. The second significant IPR&D project acquired with Tylan which has been written off was the development of a new more versatile, sensitive and easily manufactured transducer based on thin film technology. This project had an estimated fair value of $15.0 million, was expected to require the investment of an additional $1.2 million and ten man years to complete and was anticipated to generate significant revenues over the estimated life of the resulting products. If proven technologically feasible, the valuable element of this project was that it was expected to generate a transducer which was superior to current transducers in that it could operate in both high and low pressure environments with enhanced sensitivity and would be easier and less expensive to manufacture. 17 This project was written off because, as of the date of the Tylan acquisition, it was unknown whether or not the thin film transducer technology could be manufactured successfully on a large scale. Significant issues relating to manufacturability and whether product physical dimensions and other product criteria could be achieved remained to be resolved. In addition, there was uncertainty concerning customer acceptance of this product. Further, the technology underlying this project had no alternative future uses not included in its estimated fair value within the markets served by the Company. This project has successfully achieved technological feasibility and has yielded one commercializable product which is expected to be launched during 1999. However, the objective of ease and cost effectiveness to manufacture continues to be a challenge. Accordingly, the current revenue projection for the resulting products is approximately one-third of the original estimate. The estimated cost to complete this project is currently expected to be less than one-half of the original estimate. In addition, to the foregoing IPR&D projects, the Tylan acquisition included eight other IPR&D projects with an aggregate value of $45.6 million, not considered to be individually significant and which were expected to cost an aggregate of $2.5 million and twenty-nine man years to complete. These projects were written off because technological feasibility had not been demonstrated as of the date of the acquisition of Tylan. As of December 31, 1998, three of these eight projects have been completed, two have been cancelled, one is ongoing, one has had a major change in its scope and has been integrated into a post acquisition project and one has been suspended. As of December 31, 1998, an aggregate of $4.9 million had been invested on these individually insignificant Tylan IPR&D projects and it was estimated that an additional $0.5 million would be required to achieve technological feasibility for the one ongoing project. The reasons for the aggregate increase in investment in these insignificant IPR&D projects included the change in the direction of three of these IPR&D projects to adapt to the evolving needs of the target customer base, the unanticipated technical complexity in adapting promising miniaturization technologies from other industries to Tylan product applications and the expansion of the scope of certain of these projects since the date of the Tylan acquisition. In order to integrate Tylan's business operations with those of Millipore, a plan was adopted pursuant to which management undertook the following activities: replacement of Tylan's business systems with the Company's common business information systems, elimination of redundant executive and administrative personnel, realignment of product distribution channels to achieve compatibility with those of Millipore, termination of supply agreements, divestiture of non-strategic product lines and consolidation of manufacturing plants in the U.S. and Japan. This integration plan provided for the termination of 300 Tylan employees and was extended to include additional U.S. manufacturing plants in the consolidation. This extended integration plan was implemented with no major change. As of December 31, 1998, the redundant Tylan facilities in the U.S. had been closed and their operations consolidated into the Allen, Texas facility. The integration activities for this acquisition are complete with final cash payments for contractual agreements continuing through 2000. 18 RESULTS OF OPERATIONS The Company reported a profit of $0.22 per share for 1998 compared to a loss of $0.89 per share for 1997 and a profit of $0.94 per share for 1996. Excluding restructuring charges and unusual items, the Company would have reported diluted earnings per share from continuing operations of $0.60, $1.65 and $2.06 for 1998, 1997 and 1996, respectively. Restructuring Charges and Unusual Items In the second quarter of 1998, the Company announced a restructuring program to improve the competitive position of the Company by streamlining worldwide operations and reducing the overall cost structure. The restructuring program was initiated to bring operating costs in line with lower revenues resulting from the financial difficulties in Asian economies, the strong U.S. dollar and the continuation of the semiconductor industry slump. Key initiatives include: 1. Discontinue non-strategic product lines and rationalize product offerings to improve product line focus. The non-strategic product lines consisted of high pressure liquid chromatography equipment, semiconductor fab monitoring and control software and various filtration devices. The rationalization of product offerings is a result of management's review which identified specific products with limited profitability or products which were inconsistent with current strategic marketing plans, such as non-standard products. These actions to improve product line focus were completed by September 30, 1998. 2. Consolidate certain manufacturing operations to eliminate duplicate manufacturing processes. Identified manufacturing operations in Ireland and the U.S. will be consolidated into existing facilities within the Company, resulting in similar production activities occurring at the same locations. The consolidation of manufacturing operations will be completed in 2000. 3. Realign European country organizational structure to focus on operating business units and establish a regional transaction service center, resulting in the consolidation of financial and administrative activities into a single location. The Company plans to complete the transition to the service center by the end of 1999. 4. Reduce administrative and management infrastructure costs in Asia. These cost reductions will result in a lower overhead structure for administrative and management infrastructure in Asia and will be achieved through reduced facility costs and administrative positions as offices in the region were consolidated during 1998. 5. Renegotiate marketing, research and development and supply agreements. These agreements were amended to eliminate the cost of maintaining certain exclusivity rights and to reduce purchasing commitments for non-strategic products. These actions will be completed by the end of 1999. 19 6. Streamline the supply chain management function through the centralization of worldwide procurement functions and the consolidation of vendors to significantly reduce the aggregate number of vendors, resulting in cost savings and shorter cycle time within the procurement function as well as materials cost reductions. These actions will be completed during 1999. In the third quarter of 1998, the Company recorded an expense associated with these activities of $42.8 million ($29.1 million after tax) including a restructuring charge of $33.6 million and a $6.2 million charge for inventory and $3.0 million of fixed asset write-offs against cost of sales. The $33.6 million restructuring charge included $18.3 million of employee severance costs, $9.5 million write-off of real and intangible assets associated with discontinued product lines and with the termination of certain rights under two technology development collaborations, $3.8 million of lease cancellation costs and $2.0 million of contract termination costs. During 1998, approximately $5.6 million of restructuring costs, consisting primarily of severance, were paid and $18.5 million remains accrued and will be substantially paid in 1999 and with the remainder in future years. The restructuring initiatives combined with the consolidation of the Company's Microelectronics plants will result in the elimination of 620 positions worldwide. Notification to employees was completed in the third quarter of 1998, however a small number of these employees will continue in their existing positions through 2000 with their related salary costs charged to operations as incurred. Under the terms of the severance agreements, the Company expects to pay severance and associated benefits through the early part of 2000. When fully implemented the combination of the restructuring programs and the Microelectronics consolidation are expected to yield annual savings of $38.0 million. The savings will result in reduced wages, facility related costs, depreciation and amortization and will be primarily reflected as reductions in cost of sales. The savings began in 1998 but will not be fully realized until 1999. The Company also recorded an incremental provision for excess and obsolete inventory of $6.0 million during the third quarter of 1998 in response to adverse changes in demand attributable to declining business conditions in Asia and the slowdown in the semiconductor industry. See the discussion of Gross Margins, Gain on Sale of Equity Securities, Net Loss on Disposal of Discontinued Operations and Legal Proceedings below for additional information related to the other items on the following schedule. 20 The summary of restructuring charges and unusual items is as follows:
Summary of Restructuring Charges and Unusual Items: Year Ended (In millions, except per share data) December 31, 1998 1997 1996 ----------------------------------- Cost of sales Write-off of inventory and manufacturing equipment $ 9.2 $ -- $ -- Provision for excess and obsolete inventory 6.0 -- Purchase accounting adjustment -- 5.0 -- ----------------------------------- Impact on gross margin (15.2) (5.0) -- Operating expenses Purchased research and development expenses -- 114.1 68.3 Restructuring charges 33.6 -- -- Litigation settlements 11.8 -- -- ----------------------------------- Loss from continuing operations before income taxes (60.6) (119.1) (68.3) Gain on sale of equity securities 35.6 8.3 5.3 ----------------------------------- Impact on loss from continuing operations before income taxes (25.0) (110.8) (63.0) Tax impact of restructuring charges and unusual items (8.4) 1.2 (14.8) ----------------------------------- Net loss from continuing operations (16.6) (112.0) (48.2) Net loss on disposal of discontinued operations ($2.6 pre-tax) -- -- (2.0) ----------------------------------- Net loss from restructuring charges and unusual items $ (16.6) $(112.0) $ (50.2) =================================== Net loss per share from restructuring charges and unusual items $ (0.37) $ (2.54) $ (1.13) ===================================
Local Currency Results The following discussion of Net Sales, Gross Profit Margins and Operating Expenses includes reference to revenue, margins and expenses in "local currencies". For comparability of financial results, the foreign currency balances, in all periods presented, are translated at Millipore's 1998 budgeted exchange rates which differ from actual rates of exchange. This provides a clearer presentation of underlying trends in the Company's business, before the impact of foreign currency translation. Net Sales Consolidated net sales, measured in U.S. dollars, decreased 8 percent in 1998, compared to an increase of 23 percent in 1997, and an increase of 4 percent in 1996. The net sales decrease in 1998 compared to 1997 was primarily due to the continued downturn in the semiconductor industry, the ongoing economic difficulties in Asian markets and negative currency effects. The higher sales growth rate in 1997 compared to 1996 was primarily attributable to the acquisitions of Amicon and Tylan. Without these acquisitions, sales in 1997 declined by 1 percent from 1996 levels. Sales growth in 1997 was adversely impacted by a cyclical downturn in the semiconductor industry, unfavorable foreign currency exchange rate comparisons and certain other factors discussed below. During 1998 and 1997 the U.S. dollar strengthened against most of the European and Asian currencies in which the Company transacts business. The net effect of this currency movement in 1998 was to increase the rate of the sales decline by 3 percentage points. In 1997 the stronger 21 dollar decreased reported sales growth and sales growth excluding acquisitions by 9 percentage points and 7 percentage points, respectively. The U.S. dollar increased in value against the Japanese yen in 1996 with the net result of decreasing the reported sales growth by 5 percentage points (approximately 22% of Millipore's net sales are to customers in Japan). As a general matter, a stronger U.S. dollar will adversely affect the sales growth of both business segments. However, since the Microelectronics segment has a higher percentage of sales in Asia, strengthening of the dollar against Asian currencies will have a somewhat larger impact on that segment. Price changes have not significantly affected the comparability of sales during the past three years. Sales growth by business segment and geography, measured in local currencies and U.S. dollars, is summarized in the table below.
Sales Growth in Local Sales Growth in U.S. Dollars --------------------- ---------------------------- Currencies ---------- With Without With Without ---- ------- ---- ------- Acquisitions Acquisitions Acquisitions Acquisitions ------------ ------------ ------------ ------------ 1998 1997 1997 1996 1998 1997 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- Biopharmaceutical & Research ........... 7% 19% 7% 10% 5% 12% (0)% 6% Microelectronics ...... (28)% 64% 4% 7% (32)% 50% (4)% 0% --- --- --- --- --- --- --- --- Consolidated ....... (5)% 32% 6% 9% (8)% 23% (1)% 4% --- --- --- --- --- --- --- --- Americas .............. (9)% 48% 7% 7% (9)% 48% 6% 7% Europe ................ 8% 28% 8% 6% 7% 15% (3)% 4% Asia/Pacific .......... (13)% 15% 3% 14% (21)% 3% (8)% 2% --- --- --- --- --- --- --- --- Consolidated ....... (5)% 32% 6% 9% (8)% 23% (1)% 4% --- --- --- --- --- --- --- ---
Biopharmaceutical & Research sales, measured in local currencies, increased 7 percent in 1998 compared to 19 percent in 1997. The growth of the Biopharmaceutical & Research segment in 1998 reflects the combination of increased demand for consumable products and process equipment used in the production of sterile drugs and analytical and water filtration devices used in research laboratories. The growth in the Americas and Europe for this segment is attributable to an increase in the number of new drugs developed through synthetic and natural methods ("New Chemical Entities") approved and in production. This segment was adversely affected in Asia by a decrease in demand as a result of region-wide recessionary pressures. Excluding the impact of the Amicon acquisition, sales to the Biopharmaceutical & Research business segment grew 7 percent in 1997 in local currencies compared to growth of 10 percent in 1996. Sales of large protein processing systems in 1997 to biotechnology customers were level with those in 1996. In addition, sales to a beer-manufacturing customer in Japan were lower in 1997 as compared to 1996. These two factors, which were significant in boosting the 1996 overall segment growth rate, combined to depress the sales growth rate in 1997. New product introductions in 1997 and 1996, particularly for laboratory water and applied microbiology products, and new distribution alliances launched late in 1996 in the United States have enhanced sales growth in this market. Sales growth in 1997 was strongest in Europe and the Americas. 22 Microelectronics segment sales growth measured in local currency declined 28 percent in 1998 compared to an increase of 64 percent for 1997. Sales growth for 1997 excluding the acquisition of Tylan was 4 percent. The decrease in 1998 sales was directly attributable to the continuation of the semiconductor industry slump, which began in the middle of 1996. The reduction in Microelectronics segment revenues generated from the sale of equipment was adversely impacted in Asia and the Americas by a significant reduction in semiconductor plant construction. Sales of consumable gas and liquid purification devices declined to a lesser extent, consistent with lower worldwide semiconductor plant capacity utilization. The moderate segment growth of 4 percent before acquisitions in 1997 reflects the impact of the aforementioned semiconductor downturn coupled with the Asian financial difficulties which began late in that year. Gross Profit Margins Gross profit margins in local currencies were 48.0 percent in 1998, 53.1 percent in 1997, and 57.1 percent in 1996. Gross profit margins in 1998 were 50.1 percent excluding the effect of the $9.2 million charge for the write-off of inventory and manufacturing equipment associated with product line rationalization activities and a provision of $6.0 million for excess and obsolete inventory. Local currency gross profit margins in 1997 were 53.8 percent excluding the effect of an inventory write-up to net realizable value of $5.0 million related to acquisition accounting which in turn resulted in very low margins when this inventory was sold. Gross profit margin percentages, excluding these charges, were lower in 1998 than those in 1997 reflecting the impact of significantly reduced volumes in the Company's manufacturing plants serving the Microelectronics segment combined with duplicative manufacturing costs resulting from concurrent operations at three existing plants located in California and Texas and operations at the new manufacturing facility in Allen, Texas. The redundant facilities were closed in September 1998 and their operations consolidated into the Allen, Texas facility. The lower gross profit margin in 1997 is primarily a result of the impact from the acquired companies. The gross margin percentages of the acquired businesses, particularly Tylan, were less than those of the pre-existing Company's businesses. Operating Expenses Selling, general and administrative ("S,G&A") expenses in local currencies decreased 1 percent in 1998, and increased 29 percent in 1997. The decrease in 1998 is due to cost containment programs initiated as part of the restructuring activities. The increase in 1997 is due to incremental expenses associated with the acquired businesses. Despite the decrease in spending in 1998, the Company continued to invest in sales, service and marketing resources focused on maintaining or improving customer services, supporting the launch of new products and development of future sales initiatives aimed at improving the Company's competitive positions. Research and development expenses in local currencies decreased 4 percent in 1998, and increased 49 percent in 1997. The decrease in 1998 was primarily due to the elimination of research and development expenses for non-strategic product lines in the Microelectronics segment. The significant increase in 1997 was due to the addition of the acquired businesses. 23 Litigation settlements totaling $11.8 million were recorded in the first quarter of 1998 and are described in "Legal Proceedings" below. Gain on Sale of Equity Securities Gain on sale of equity securities in 1998 primarily reflects the sale of the Company's holdings in PerSeptive Biosystems common shares. As of December 31, 1997, the Company held 2.2 million shares of PerSeptive Biosystems common stock and 1,000 shares of PerSeptive Biosystems preferred stock. On January 22, 1998, PerSeptive merged with The Perkin-Elmer Corporation. Pursuant to the merger, all of the Company's holdings of common and preferred shares in PerSeptive were converted into an aggregate of 587,000 shares of Perkin-Elmer common stock. In the first quarter of 1998, the Company sold all of its shares of Perkin-Elmer stock for approximately $32.5 million in cash. The Company also sold all of its common shares of Glyko Biomedical Ltd. in the first quarter of 1998 and recognized a gain of $3.1 million. Gain on sale of equity securities in 1997 reflected the sale of a portion of the Company's holdings in PerSeptive Biosystems common shares. Gain on sale of equity securities in 1996 reflected the sale of a significant portion of the Company's stock holdings in a Japanese company. The Company sold these securities to fund a new headquarters and research and development facility in Japan. The cost of moving to this new facility was $2.0 million and was recorded in S,G&A expense. Net Interest Expense Net interest expense in 1998 was $1.2 million less than 1997, primarily as a result of a yen debt swap agreement entered into during December 1997. Net interest expense in 1997 was significantly higher than net interest expense in 1996 due to increased borrowings, which were used to acquire both Amicon and Tylan. Provision for Income Taxes The effective income tax rate in 1998, including the restructuring program, was a benefit of 15.4 percent. Excluding the effect of the restructuring program, the effective income tax rate was 21.0 percent. The Company's effective income tax rate in 1997, excluding the non-tax deductible write-off of purchased research and development associated with the Tylan acquisition, was 21.0 percent compared to 23.5 percent in 1996. The lower effective tax rate in 1997 as compared to 1996 reflected a higher proportion of income generated by low tax rate manufacturing sites. Net Loss on Disposal of Discontinued Operations In 1994 the Company sold it's Waters Chromatography Division and, in a separate transaction, sold certain assets of its non-membrane bioscience business. During the third quarter of 1998, the Company completed a comprehensive review of its accounting for these divestitures and recorded a $5.8 million (after tax) net loss on the disposal of these businesses. As a result of correspondence with the staff of the Securities and Exchange Commission, the financial statements for all periods affected have been restated to reflect a net loss on the disposal of 24 discontinued operations, net of taxes, of $0 in 1998, $2.0 million in 1996 and $3.8 million in 1994. This change reflects the corrected accounting of the remaining assets and liabilities associated with these divested operations. Earnings Per Share Earnings per share in 1998 were impacted by restructuring charges and several unusual items. Both 1997 and 1996 earnings per share included significant write-offs of purchased research and development associated with the Company's acquisition of Amicon and Tylan. Earnings per share in 1996 were also impacted by the charge to discontinued operations discussed above. The impact of these items is reflected in the above schedule of Restructuring Charges and Unusual Items. Additionally, earnings per share were adversely impacted by the comparatively stronger U.S. dollar, reducing earnings by $0.33 per share in 1998 as compared to 1997 and $0.26 per share in 1997 as compared to 1996. MARKET RISK The Company is exposed to market risks, which include changes in interest rates and changes in foreign currency exchange rates as measured both against the U.S. dollar and each other. The Company manages these market risks through its normal financing and operating activities and, when appropriate, through the use of derivative financial instruments. The Company does not invest in derivative financial instruments for speculative purposes. Foreign Exchange The Company derives approximately 60 percent of its revenues from customers outside of the United States. This business is transacted through the Company's network of international subsidiaries generally in the local currency. This exposes the Company to risks associated with changes in foreign currency that can impact revenues, net income and cash flow. Sourcing of product from international subsidiary plants and active management of cross border currency flows partially mitigates the impact of changes in foreign currency. However, the Company has significant exposure to changes in the Japanese yen that can not be mitigated through normal financing or operating activities. Accordingly, this risk is managed through the use of derivative financial instruments. The income and cash flow exposure is managed through the use of option contracts and the net equity exposure is hedged through the use of debt swap agreements. 25 The Company enters into foreign currency option contracts to sell yen on a continuing basis in amounts and timing consistent with the underlying currency transactions. The gains on these transactions, if any, partially offset the realized foreign exchange losses on the underlying exposure. Gains, net of premium costs, of $2.2 million in 1998, $4.4 million in 1997 and $2.7 million in 1996 were realized from these contracts and were recorded in cost of sales. At December 31, 1998, the Company had open option contracts to sell yen aggregating $47.3 million. All open options expire within 15 months. Premiums to purchase foreign currency option contracts are amortized over the life of the contract. Unamortized premiums of $1.4 million were included in other current assets as of December 31, 1998. The Company's net equity exposure to the Japanese yen has been effectively hedged through debt swap agreements covering both principal and interest. Pursuant to these agreements $110,000 of debt with a weighted average fixed interest rate of 6.7 percent was swapped for an equivalent value of yen at a weighted average exchange rate of 114.6 yen to the dollar and a weighted average fixed interest rate of 3.6 percent. The swap agreements mature in 2003 and 2004. Although the Company mitigates its foreign currency exchange risk through the above activities, when the U.S. dollar strengthens against currencies in which the Company transacts its business, sales and net income will be adversely impacted. Credit Risk The Company is exposed to concentrations of credit risk in cash and cash equivalents, trade receivables and derivative financial instruments. Cash and cash equivalents are placed with major financial institutions with high quality credit ratings. The amount placed with any one institution is limited by policy. Trade receivables credit risk exposure is limited due to the large number of customers and their dispersion across different industries and geographies. The Company is exposed to credit related risks associated with the potential nonperformance by counterparties to the debt swap agreements. The counterparties to these contracts are major financial institutions. The Company continually monitors its positions and the credit ratings of its counterparties and limits the amount of contracts it enters into with any one party. CAPITAL RESOURCES AND LIQUIDITY Cash flow provided from operations was $51.5 million in 1998, $54.0 million in 1997 and $102.2 million in 1996. Reported cash flow from operations was reduced by $28.1 million in 1998 and $23.3 million in 1997 for costs associated with the 1998 restructuring activities and the integration of the Amicon and Tylan acquisitions. Excluding the restructuring and acquisition related expenditures, cash flow from operations was $79.6 million in 1998 and $77.3 million in 1997. The improvement in 1998 cash flow from operations over 1997, excluding the restructuring and acquisition related expenditures, is the result of a decrease in working capital offset by a significant decline in operating income before restructuring charges and unusual items. The favorable working capital comparisons were a combination of a decrease in accounts receivable balances, lower inventory levels and a reduction in other current assets. The improvement in receivables reflects the impact of the lower sales volume and improved collection experience. The improvement in inventory utilization was attributable to asset management initiatives launched in 26 1998 and reserve actions taken as part of the 1998 restructuring program. The reduction in other current assets reflects the sale of equity securities in 1998. The decline in operating income resulted from the downturn in the semiconductor industry, the financial difficulties in Asia and the strength of the U.S. dollar. The decrease in cash flow in 1997, excluding the expenditures related to the Amicon and Tylan acquisitions, compared to that of 1996 is attributable to higher levels of working capital and an increase in interest cost. Operating income before these acquisition related charges in 1997 was slightly less than that of 1996. The increase in working capital comparisons were a combination of increases in both accounts receivable balances and inventory levels as a result of the Tylan acquisition in January 1997 and an increase in other current assets. The increase in accounts receivable was attributable to significantly higher revenues in the fourth quarter of 1997 versus the comparable period of the prior year. The increase in fourth quarter 1997 revenues was principally attributable to the acquisition of Tylan in the first quarter of 1997. Inventory balances increased in anticipation of future demand from customers in the semiconductor market which failed to materialize. The increase in other current assets reflects the pending sale of equity securities in the first quarter of 1998. These securities had previously been recorded in other assets. The increase in interest expense in 1997 is directly related to borrowings used for the acquisition of Amicon and Tylan. During 1999 the Company expects to spend approximately $17.0 million in cash for costs accrued in connection with the restructuring program and for costs to complete the integration of Amicon and Tylan. This will be funded by cash flow from operating activities. Cash generated by the Company during 1998 was used to invest in property, plant and equipment, and to pay dividends. Property, plant and equipment expenditures for 1998 exceeded 1997 expenditures by $18.7 million primarily due to $10.0 million spent for the expansion of the Biopharmaceutical membrane manufacturing facility in Cork, Ireland and $24.4 million spent for the construction of the new Microelectronics manufacturing facility in Allen, Texas. The total cost of the Allen facility will be approximately $28.0 million. The Company expects capital expenditures for 1999 to be in the range of $40.0 to $45.0 million. Depreciation expense in 1999 is expected to be slightly higher than in 1998 as a result of the increased capital expenditures in 1998. The Company has no significant commitments for capital expenditures at December 31, 1998. In 1997, cash generated from operating activities, along with increased borrowings, was used for the acquisition of Tylan, the purchase of certain assets and technology of FAStar Ltd. and FAS Holding Company, and capital expenditures. In 1996 the Company used $58.4 million of cash from operations to purchase shares of its outstanding common stock. During 1997 and 1996 the Company continued to invest in capacity expansions and the upgrade of manufacturing facilities and in information technology systems and equipment. The net cash outflow of $2.2 million and $3.5 million in 1998 and 1997, respectively, for operations discontinued in 1994 were in line with the Company's expectations. At December 31, 27 1998, the Company had no significant remaining obligations related to these discontinued operations. In May 1998, the Company reduced the maximum funds available under its unsecured Revolving Credit Agreement, dated January 22, 1997 (the "Credit Agreement") from $350 million to $250 million. The Company's financial results for the quarter ended September 30, 1998 made it necessary for the Company to renegotiate certain financial covenants relating to operating cash flow and interest coverage under the Credit Agreement, and under the $100 million 6.88 percent note due in 2004 (the "2004 note"). Pursuant to this renegotiation, the lenders involved waived defaults under those covenants and accepted less restrictive operating cash flow and interest coverage covenants for 1999 and a portion of 2000. The Company agreed to an additional minimum earnings covenant, the payment of amendment fees totaling approximately $0.6 million, and to increases in both the interest rate and the facility fees thereunder. Interest is payable under the Credit Agreement at a floating U.S. dollar deposit rate, defined as LIBOR, plus a margin. The Company agreed to an increase in this margin from a range of 0.18 to 0.65 percent to a range of 0.23 to 1.125 percent. The Company also agreed to an increase in the facility fee under the Credit Agreement from a rate ranging from 0.10 to 0.25 percent to a rate ranging from 0.125 to 0.375 percent. The interest rate under the 2004 note also increased from 6.88 percent to 7.23 percent as of November 2, 1998. In November 1998 Moody's Investor Services downgraded the Company's debt rating to Ba2 from Baa3; a rating which Moody's characterizes as below "investment grade". Standard & Poors Corporation also downgraded the Company's debt rating from BBB- to BB+. The Company expects that this development may make it more difficult for the Company to access money markets should it become necessary to do so. The use of debt to finance the acquisitions of Amicon and Tylan substantially increased the Company's debt to equity ratio. In the first quarter of 1997, the Company successfully completed a public debt offering. Proceeds from the offering of $197.9 million were used to repay borrowings outstanding under the Credit Agreement. At December 31, 1998, the Company had additional borrowing capacity of $80.0 million under its Credit Agreement. The Company believes that its balances of cash and cash equivalents, funds available under the Credit Agreement and cash flows expected to be generated by future operating activities will be sufficient to meet its cash requirements over the next twelve to twenty-four months. However, given the Company's current debt ratings, if the Company should need to obtain additional borrowings, there can be no assurance that such borrowings could be obtained at favorable rates. DIVIDENDS 28 The quarterly dividend was increased in the second quarter of 1998 from $0.10 to $0.11 per share. Dividends paid in 1998 were $18.4 million. EURO On January 1, 1999, several member countries of the European Union established fixed conversion rates between their existing sovereign "legacy" currencies, and adopted the Euro as their new common legal currency. As of that date, the Euro began trading on currency exchanges and the legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. The Euro conversion may affect cross-border competition by creating greater cross-border price transparency. The Company is assessing its pricing/marketing strategy in order to ensure that it remains competitive in a broader European market. The Company has assessed its information technology systems to allow for transactions to take place in both the legacy currencies and the Euro and the eventual elimination of the legacy currencies, and is reviewing whether certain existing customer pricing and vendor contracts will need to be modified. The currency risk and risk management for operations in participating countries may be reduced as the legacy currencies are converted to the Euro. Final accounting, tax and governmental legal and regulatory guidance are not available. The Company is evaluating issues involving introduction of the Euro. The Company began processing customer orders and invoicing in Euro during the first week of January 1999. Based on current information and current assessments, the Company does not expect that the Euro conversion will have a material adverse effect on its business or financial condition. YEAR 2000 The Company is aware of the "Year 2000" issue that will affect certain products and systems that were not designed to properly handle the transition between the twentieth and twenty-first centuries. The Company has recognized the need to ensure that its business operations will not be adversely impacted by the Year 2000. Accordingly, the Company has authorized an internal team to assess the Company's Year 2000 readiness and to determine the steps necessary to address its Year 2000 issues. Among the areas that have been or are being assessed are the Company's internal information systems, its manufacturing equipment, its facilities and its products. In addition, the team has begun the assessment of the Year 2000 readiness of the Company's key suppliers and financial institutions. As part of the assessment of its Year 2000 readiness, the Company has identified and substantially completed testing of its key internal information systems (which includes order entry, manufacturing and financial systems) as well as its facilities, manufacturing and other key systems for Year 2000 compliance. The testing to date has identified no significant issues. By mid-1999, the Company expects to complete implementation of all modifications or replacements necessary to make all key systems Year 2000 compliant. 29 The Company has nearly completed its testing of the Year 2000 compliance of its products. A large majority of the Company's products do not present Year 2000 compliance issues, and for those products that do present issues the Company has communicated with its customers regarding appropriate solutions. In addition to testing of the Company's internal systems and its products, the Company has begun implementing its plan of communication with its suppliers and financial institutions regarding their Year 2000 readiness and the Year 2000 compliance of the products and services that they provide to the Company. As of December 31, 1998 the Company has not identified any important Year 2000 readiness issues of its key supply-chain partners. The Company expects to substantially complete its risk analysis and to develop contingency plans where reasonably possible for dealing with any risks raised by such non-readiness before July 1999. The Company currently estimates that the total costs that will be incurred in its Year 2000 assessment and remediation program will be in the range of $1.0 million to $3.0 million, of which approximately $0.5 million has been incurred through December 31, 1998. Incremental spending has not been and is not expected to be material because most Year 2000 readiness costs will be met with amounts that are normally budgeted for procurement and maintenance of the Company's information systems and infrastructure. However, the redirection of spending to the implementation of its Year 2000 readiness program may in some instances delay productivity improvements. The Year 2000 presents a number of risks and uncertainties that could affect the Company notwithstanding the successful implementation of its Year 2000 readiness program. Those risks and uncertainties include, but are not limited to, failure of utilities or transportation systems, competition for personnel skilled in remediation of Year 2000 issues, and the nature of government responses to the Year 2000. Though the Company continues to believe that the Year 2000 will not have a material impact on its business, financial condition or results of operations, the occurrence of any of the above risks or uncertainties or the failure to successfully implement the Company's Year 2000 readiness program could result in such a material impact. LEGAL PROCEEDINGS On May 2, 1997, the Environmental Quality Board ("EQB") of Puerto Rico served an administrative order on Millipore Cidra, Inc., a wholly-owned subsidiary of the Company. The administrative order ("EQB order") alleged: (i) that the nitrocellulose filter membrane scrap produced by Millipore Cidra's manufacturing operations is a hazardous waste as defined in EQB regulations; (ii) that Millipore Cidra, Inc. failed to manage, transport and dispose of the nitrocellulose membrane scrap as a hazardous waste; and (iii) that such failure violated EQB regulations. The EQB order proposed penalties in the amount of $96.5 million and ordered Millipore Cidra, Inc. to manage the nitrocellulose membrane scrap as a hazardous waste. The Company recorded a charge of $5.0 million in the first quarter of 1998 reflecting its costs to settle this matter. 30 The Company also recorded a charge of $3.1 million in the first quarter of 1998 reflecting its costs to settle a separate lawsuit with an intervening party in the EQB administrative case described above. The Company recorded a charge of $3.7 million in the first quarter of 1998 to settle a patent lawsuit with Mott Metallurgical Corporation. In the lawsuit, each party claimed infringement of one of its patents by the other. As part of the settlement, the parties agreed to cross license the two patents at issue. The Company and Waters Corporation were engaged in an arbitration proceeding and a related litigation in the Superior Court, Middlesex, Massachusetts, both of which commenced in the second quarter of 1995 with respect to the amount of assets required to be transferred by the Company's Retirement Plan in connection with the Company's divestiture of its former Chromatography Division. In the second quarter of 1996, Waters filed a Complaint in the Federal District Court of Massachusetts alleging that the Company's operation of its Retirement Plan violated ERISA and certain sections of the Internal Revenue Code. Judgments in the Company's favor were handed down by both the Massachusetts Superior Court and the Federal District Court in May 1997 and July 1997, respectively. Waters appealed the federal court judgment, which was affirmed by the United States Court of Appeals for the First Circuit by opinion dated April 3, 1998. On June 2, 1998, the Company transferred $2.4 million (including interest through the date of transfer) from its Retirement Plan to the Waters Retirement Plan as provided by the amended and restated Purchase and Sale Agreement. In order to fund the transfer, in the second quarter of 1998 the Company made a contribution of $2.2 million to its Retirement Plan in accordance with ERISA funding requirements. BUSINESS OUTLOOK AND UNCERTAINTIES The following statements are based on current expectations. These statements are forward looking and actual results may differ materially. Sales: The semiconductor industry in which the Microelectronics business segment participates is highly cyclical. The current downturn began in the middle of 1996 and is expected to continue into 1999. Independent market research for the semiconductor industry suggests that a moderate growth cycle will begin in the second half of 1999 with stronger growth in 2000. However, capital equipment sales, which represents approximately 40 percent of the Microelectronics segment revenues, could lag the industry upturn due to excess capacity in certain segments of the market. The Biopharmaceutical & Research segment has demonstrated relatively stable patterns of revenue growth. Customers in this segment, particularly those involved in the production of sterile drugs, purchase standardized products for use in validated production processes. Accordingly, it is important to participate in the development of new drugs / New Chemical Entities in order to be designed into the ultimate manufacturing process. Adoption of new technologies and products requires a lengthy validation process prior to adoption. The growth of 31 this segment is highly leveraged on the development and approval of New Chemical Entities. It is difficult to ascertain the number or timing of such approvals, however, the number of drugs at various stages in the approval process has increased significantly over the past two years. The remaining driver of this segment is research and development spending which has been relatively stable and is expected to continue with growth in the mid single digits. Both of the Company's business segments were adversely impacted by the financial difficulties in the Asian economies, which began in late 1997 and continued through 1998. The continuation of these conditions would moderate the growth rate of both segments. Approximately 60 percent of the Company's sales are to customers outside of the United States and are generally made in local currency. As previously noted, 1998 sales and earnings were negatively impacted by a strong US dollar, particularly against the Japanese yen and the Korean won. Late in 1998, both of these currencies began to show signs of strengthening. However, in early 1999, European currencies have weakened offsetting the impact of the stronger Asian currencies. Therefore if foreign exchange rates remain at the March 3, 1999 level, there will be a minimal foreign exchange impact on first quarter 1999 and full-year 1999 reported sales growth as compared to 1998. Any change in foreign exchange rates will be reflected in the results of operations. Gross Margins: The Company expects gross margin percentages in 1999 to improve as compared with those of 1998. Margins will benefit from the impact of various restructuring programs and the increased volume in the Company's manufacturing plants to support anticipated sales growth. To the extent that foreign currency exchange rates relative to the U.S. dollar remain at March 3, 1999 levels, first quarter 1999 and full year margins will not be significantly impacted from foreign currency exchange rate fluctuations. Operating Expenses: The Company expects that operating expenses in local currencies, as a percentage of sales, in 1999 will be consistent with the percentage achieved in previous years. Interest Expense: The Company expects net interest expense in 1999 will be slightly higher than 1998 as a result of the revised terms for the Credit Agreement and the 2004 note, as previously noted, net of the impact of anticipated reduced short-term borrowings. Provision for Income Taxes: The effective tax rate in 1999 is projected to be in the range of 21 percent; consistent with the effective rate for 1998, excluding the effect of the restructuring program. The tax rate estimate is based on the Company's current expectations for 1999 income and current tax law and, therefore, is subject to change. At December 31, 1998, the Company had a net deferred tax asset of $108.5 million. Although realization of the asset is not assured, the Company believes it is more likely than not that this net deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced if the near term estimates of future taxable income are reduced, which could result in the Company's 1999 effective tax rate increasing above the expected range of 21 percent. 32 Capital Spending: The Company expects to spend between $40.0 to $45.0 million for fixed asset additions in 1999. The Company does not believe it needs to significantly expand or add manufacturing capacity in 1999 to handle its anticipated 1999 sales growth. The Company will continue to invest in tooling within its manufacturing plants and in information technology. Accordingly, the Company also expects that 1999 depreciation expense will be higher than 1998 depreciation expense. FORWARD-LOOKING STATEMENTS The matters discussed herein, as well as in future oral and written statements by management of the Company, that are forward-looking statements, are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. When used herein or in such statements, the words "anticipate", "believe", "estimate", "expect", "may", "will", "should" or the negative thereof and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. In addition to the matters discussed herein, potential risks and uncertainties that could affect the Company's future operating results include, without limitation, foreign exchange rates; increased regulatory concerns on the part of the biopharmaceutical industry; further consolidation of drug manufacturers; competitive factors such as new membrane technology, and/or a new method of chip manufacture which relies less heavily on purified chemicals and gases; availability of component products on a timely basis; inventory risks due to shifts in market demand; change in product mix; conditions in the economy in general, including uncertainties in selected Asian economies, and in the microelectronics manufacturing market in particular; the difficulty in integrating acquired companies; the failure to realize the savings contemplated by certain restructuring activities; potential environmental liabilities; the inability to utilize technology in current or planned products due to overriding rights by third parties, and the other risk factors described elsewhere in this Form 10-K/A Annual Report, and in particular the matters described in Item 1 above under the heading "Environmental Matters". Specific reference is also made to the risks and uncertainties described in the Registration Statement on Form S-3 (Registration 333-23025) filed by the Company in connection with its offering of $300 million of Debt Securities in May 1997 ( in particular, to those risks described under "Factors Which May Affect Future Results"). See also "Legal Proceedings" and "Business Outlook and Uncertainties" above. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information called for by this item is set forth under the heading "Market Risk" in Management's Discussion and Analysis contained in Item 7 above which information is hereby incorporated by reference. Item 8. Financial Statements and Supplementary Data. The information called for by this item is set forth in the Financial Statements at the end of this report commencing at the pages indicated below: Consolidated Statements of Income for the three years ended December 31, 1998, 1997 and 1996............................................F-2
33 Consolidated Balance Sheets for the years ended December 31, 1998 and 1997......F-3 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1998, 1997 and 1996................................F-4 Consolidated Statements of Cash Flows for the three years ended December 31, 1998, 1997 and 1996......................................F-5 Notes to Consolidated Financial Statements......................................F-6 Report of Independent Accountants...............................................F-29 Quarterly Results (Unaudited)...................................................F-30
All of the foregoing Financial Statements are hereby incorporated by reference. Item 9. Disagreements on Accounting and Financial Disclosure. This item is not applicable. 34 PART III Item 10. Directors and Executive Officers of Millipore. The information called for by this item with respect to registrant's directors and compliance with Section 16(a) of the Securities Exchange Act of 1934 as amended is set forth under the caption "Management and Election of Directors--Nominees for Election as Directors" in Millipore's definitive Proxy Statement for Millipore's Annual Meeting of Stockholders to be held on April 22, 1999, and to be filed with the Securities and Exchange Commission on or about March 19, 1999, which information is hereby incorporated herein by reference. Information called for by this item with respect to registrant's executive officers is set forth under "Executive Officers of Millipore" in Item 1 of this report. Item 11. Executive Compensation. The information called for by this item is set forth under the caption "Management and Election of Directors-Executive Compensation" in Millipore's definitive Proxy Statement for Millipore's Annual Meeting of Stockholders to be held on April 22, 1999, and to be filed with the Securities and Exchange Commission on or about March 19, 1999, which information is hereby incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information called for by this item is set forth under the caption "Ownership of Millipore Common Stock" in Millipore's definitive Proxy Statement for Millipore's Annual Meeting of Stockholders to be held April 22, 1999, and to be filed with the Securities and Exchange Commission on or about March 19, 1999, which information is hereby incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. This item is not applicable. 35 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as a part of this Report: 1. Financial Statements. The following Financial Statements are filed as part of this report (See index on page F-1): Consolidated Statements of Income for the three years ended December 31, 1998, 1997 and 1996 Consolidated Balance Sheets for the years ended December 31, 1998 and 1997 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the three years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Report of Independent Accountants Quarterly Results (Unaudited) 2. Financial Statement Schedules. No financial statement schedules have been included because they are not applicable or not required under Regulation S-X. 3. List of Exhibits. A. The following exhibits are incorporated by reference:
Reg. S-K Item 601(b) Referenced Document on Reference Document Incorporated file with the Commission - --------- --------------------- ------------------------ (3) (i) Restated Articles of Organization, Form 10-K Report for year ended December as amended May 6, 1996 31, 1996 [Commission File No. 0-1052] (ii) By Laws, as amended Form 10-K Report for year ended December 31, 1990 [Commission File No. 0-1052] (4) Indenture dated as of May 3, 1995, Registration Statement on Form S-4 relating to the issuance of $100,000,000 (No. 33-58117) and an accompanying principal amount of Company's Form T-1) 6.78% Senior Notes due 2004 (4) Indenture dated as of April 1, 1997, Registration Statement on Form S-3 relating to the issuance of Debt (No. 333-23025) and an accompanying Securities in Series Form T-1)
36
Reg. S-K Item 601(b) Referenced Document on Reference Document Incorporated file with the Commission - --------- --------------------- ------------------------ (10) Shareholder Rights Agreement Form 8-K Report for April, 1998 [cont'd] dated as of April 15, 1988, as amended [Commission File No. 0-1052] and restated April 16, 1998 between Millipore and The First National Bank of Boston Distribution Agreement, dated as of Form 10-K Report for the year July 1, 1996, by and among Company ended December 31, 1996 and Fisher Scientific Company [Commission File No. 0-1052] Revolving Credit Agreement, dated as of Form 10-K Report for the year January 22, 1997, among Millipore ended December 31, 1996 Corporation and The First National [Commission File No. 0-1052] Bank of Boston, ABM AMRO Bank N.V. and certain other lending institutions Long Term Restricted Stock (Incentive) Form 10-K Report for the year ended Plan for Senior Management* December 31,1984 [Commission File No. 0-1052] 1995 Combined Stock Option Plan, Form 10-K Report for the year ended as amended* December 31, 1997 [Commission File No. 0-1052] 1985 Combined Stock Option Plan* Form 10-K Report for the year ended December 31, 1985 [Commission File No. 0-1052] Supplemental Savings and Retirement Form 10-K Report for the year Plan for Key Salaried Employees of ended December 31, 1984 Millipore Corporation* [Commission File No. 0-1052] Executive Termination Form 10-K Report for the year Agreement* ended December 31, 1984 [Commission File No. 0-1052] 1995 Employee Stock Purchase Plan Form 10-K Report for the year ended December 31, 1994 [Commission File No. 0-1052] 1995 Management Incentive Plan* Form 10-K Report for the year ended December 31, 1994 [Commission File No. 0-1052]
- -------------------------------------------------------------------------------- * A "management contract or compensatory plan" 37
Reg. S-K Item 601(b) Referenced Document on Reference Document Incorporated file with the Commission - --------- --------------------- ------------------------ (10) Second Amendment, effective as of Form 10-K Report for the year [cont'd] September 30, 1998, to Revolving ended December 31, 1998 Credit Agreement, dated as of [Commission File No. 0-1052] January 22, 1997, among Millipore Corporation and The First National Bank of Boston, ABM AMRO Bank N.V. and certain other lending institutions Note Purchase and Exchange Agreement, Form 10-K Report for the year as amended through November 2, 1998, ended December 31, 1998 between Millipore Corporation and [Commission File No. 0-1052] Metropolitan Life Insurance Company Form of letter agreement with directors Form 10-K Report for the year relating to the deferral of directors fees ended December 31, 1998 and conversion into phantom stock units* [Commission File No. 0-1052] 1989 Stock Option Plan for Form 10-K Report for the year Non-Employee Directors* ended December 31, 1998 [Commission File No. 0-1052] 1989 Stock Option Plan Form 10-K Report for the year for Non-Employee Directors* ended December 31, 1998 [Commission File No. 0-1052] Commercial Lease Agreement Form 10-K Report for the year between EBP 3, Ltd. and ended December 31, 1998 Millipore Corporation with respect [Commission File No. 0-1052] to Premises located in Allen, Texas (11) Computation of Per Share Earnings The computation can be clearly determined from the material set forth in Note F to the Financial Statements contained on page F-14 (21) Subsidiaries of Millipore Form 10-K Report for the year ended December 31, 1998 [Commission File No. 0-1052]
- -------------------------------------------------------------------------------- * A "management contract or compensatory plan" 38 B. The following Exhibits are filed herewith: Reg. S-K Item 601(b) Reference Documents Filed Herewith - --------- ------------------------ (10) ISDA Master Agreement, dated January 27, 1994, as amended, with Morgan Guaranty Trust Company of New York (23) Consent of Independent Accountants relating to the incorporation of their report on the Consolidated Financial Statements into Company's Securities Act Registration Nos. 2-72124, 2-85698, 2-91432, 2-97280, 33-37319, 33-37323, 33-11-790, 33-59005, 33-10801, 333-79227 and 333-90127 on Form S-8, Securities Act Registration Nos. 2-84252, 33-9706, 33-22196, 33-47213 and 333-23025 on Form S-3, Securities Act Registration No. 333-80781 on Form S-3/A and Securities Act Registration No. 33-58117 on Form S-4. (24) Power of Attorney (27) Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K have been filed by Registrant during the last quarter of the fiscal year ended December 31, 1998. (c) Exhibits. The Company hereby files as exhibits to this Annual Report on Form 10-K/A those exhibits listed in Item 14(a)(3)(B) above, which are attached hereto. (d) Financial Statement Schedules. No financial statement schedules have been included because they are not applicable or are not required under Regulation S-X. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MILLIPORE CORPORATION Dated: November 12, 1999 By /s/ JEFFREY RUDIN ----------------------------- Jeffrey Rudin, Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated. SIGNATURE TITLE DATE - --------- ----- ---- C.WILLIAM ZADEL* Chairman, President, November 12, 1999 - ----------------------- Chief Executive Officer, C. William Zadel and Director /s/ FRANCIS J. LUNGER Vice President, November 12, 1999 - ----------------------- Chief Financial Officer Francis J. Lunger /s/ KATHLEEN B. ALLEN Corporate Controller November 12, 1999 - ----------------------- Kathleen B. Allen SAMUEL C. BUTLER* Director November 12, 1999 - ----------------------- Samuel C. Butler ROBERT C. BISHOP* Director November 12, 1999 - ----------------------- Robert C. Bishop ROBERT E. CALDWELL* Director November 12, 1999 - ----------------------- Robert E. Caldwell ELAINE L. CHAO* Director November 12, 1999 - ----------------------- Elaine L. Chao MAUREEN A. HENDRICKS* Director November 12, 1999 - ----------------------- Maureen A. Hendricks 40 Director November 12, 1999 - ----------------------- Mark Hoffman Director November 12, 1999 - ----------------------- Thomas O. Pyle /s/ RICHARD J. LANE* Director November 12, 1999 - ----------------------- Richard J. Lane Director November 12, 1999 - ----------------------- John F. Reno *By /s/ JEFFREY RUDIN - --------------------------------- Jeffrey Rudin, Attorney-in-Fact 41 MILLIPORE CORPORATION INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statements of Income for the three years ended December 31, 1998, 1997 and 1996...........F-2 Consolidated Balance Sheets for the years ended December 31, 1998 and 1997.....................F-3 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1998, 1997 and 1996...........F-4 Consolidated Statements of Cash Flows for the three years ended December 31, 1998, 1997 and 1996...........F-5 Notes to Consolidated Financial Statements..............................F-6 Report of Independent Accountants.......................................F-29 Quarterly Results (Unaudited)...........................................F-30 F-1 MILLIPORE CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31 ------------------------------------ 1998 1997 1996 --------- --------- --------- (In thousands except per share data) Net sales ....................................................... $ 699,307 $ 758,919 $ 618,735 Cost of sales ................................................... 364,467 342,237 249,443 --------- --------- --------- Gross profit ............................................... 334,840 416,682 369,292 Selling, general and administrative expenses .................... 236,521 245,585 202,140 Research and development expenses ............................... 53,578 55,899 38,429 Purchased research and development expense ...................... -- 114,091 68,311 Restructuring charges ........................................... 33,641 -- -- Settlement of litigation ........................................ 11,766 -- -- --------- --------- --------- Operating (loss) income .................................... (666) 1,107 60,412 Gain on sale of equity securities ............................... 35,594 8,330 5,329 Interest income ................................................. 3,090 2,937 2,780 Interest expense ................................................ (29,474) (30,484) (11,498) --------- --------- --------- Income (loss) from continuing operations before income taxes .... 8,544 (18,110) 57,023 (Benefit) provision for income taxes ............................ (1,320) 20,674 13,401 --------- --------- --------- Net income (loss) from continuing operations .................... 9,864 (38,784) 43,622 Net loss on disposal of discontinued operations ................. -- -- 2,036 --------- --------- --------- Net income (loss) ............................................... $ 9,864 $ (38,784) $ 41,586 ========= ========= ========= Basic net income (loss) per share Income (loss) from continuing operations ................... $ 0.22 $ (0.89) $ 1.00 Net income (loss) per share ................................ $ 0.22 $ (0.89) $ 0.95 Diluted net income (loss) per share Income (loss) from continuing operations ................... $ 0.22 $ (0.89) $ 0.98 Net income (loss) per share ................................ $ 0.22 $ (0.89) $ 0.94 Weighted average shares outstanding Basic ...................................................... 43,864 43,527 43,602 Diluted .................................................... 44,289 43,527 44,457
The accompanying notes are an integral part of the consolidated financial statements. F-2 MILLIPORE CORPORATION CONSOLIDATED BALANCE SHEETS
December 31 --------------------- 1998 1997 --------- --------- (In thousands) ASSETS Current assets: Cash and cash equivalents ...................................................... $ 36,022 $ 20,269 Accounts receivable (less allowance for doubtful accounts of $3,149 in 1998 and $3,010 in 1997) ......................................................... 154,258 176,585 Inventories .................................................................... 107,241 127,192 Other current assets ........................................................... 7,231 28,362 --------- --------- Total current assets ...................................................... 304,752 352,408 Property, plant and equipment, net .................................................. 237,414 220,094 Intangible assets (less accumulated amortization of $17,289 in 1998 and $10,000 in 1997) . 76,507 77,394 Deferred income taxes ............................................................... 108,545 90,455 Other assets . 35,222 31,950 --------- --------- Total assets .............................................................. $ 762,440 $ 772,301 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable .................................................................. $ 171,340 $ 165,576 Accounts payable ............................................................... 39,729 46,088 Accrued expenses ............................................................... 75,544 79,660 Dividends payable .............................................................. 4,847 4,369 Accrued retirement plan contributions .......................................... 6,931 7,088 Accrued income taxes payable ................................................... 290 13,458 --------- --------- Total current liabilities ................................................. 298,681 316,239 Long-term debt ...................................................................... 299,110 286,844 Other liabilities ................................................................... 27,741 26,071 Commitments and contingent liabilities .............................................. -- -- Shareholders' equity: Common stock, par value $1.00 per share, 120,000 shares authorized; 56,988 shares issued as of December 31, 1998 and 1997 ....................... 56,988 56,988 Additional paid-in capital ..................................................... 11,780 10,927 Retained earnings .............................................................. 472,746 484,442 Accumulated other comprehensive loss ........................................... (27,668) (21,720) --------- --------- 513,846 530,637 Less: Treasury stock at cost, 12,921 and 13,291 shares as of December 31, 1998 and 1997, respectively (376,938) (387,490) --------- --------- Total shareholders' equity ................................................ 136,908 143,147 --------- --------- Total liabilities and shareholders' equity .......................................... $ 762,440 $ 772,301 ========= =========
The accompanying notes are an integral part of the consolidated financial statements F-3 MILLIPORE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996 (In thousands, except per share data)
Accumulated Other ----------------- Comprehensive Income (Loss) --------------------------- Common Stock ------------ Additional Unrealized ---------- ---------- Par Paid-in Retained gain (loss) on --- ------- -------- -------------- Shares Value Capital Earnings securities ------ ----- ------- -------- ---------- Balance at December 31, 1995.......................... 56,988 $ 56,988 $ -- $ 519,822 $ -- ====== ========== ========= ========== =========== Comprehensive income: Net income........................................ 41,586 Unrealized holding gains arising during period, net of tax of $9,075............... 13,613 Less: reclassification adjustment for gains realized in net income, net of tax of $1,252............................... (4,077) ----------- Net unrealized gain on securities available for sale, net of income tax expense of $6,358........................... 9,536 Translation adjustments........................ Total comprehensive income........................ Cash dividends declared, $0.35 per share.............. (15,261) Treasury stock acquired............................... Impact of stock plans................................. (3,396) U.S. tax benefit from stock plan activity............. 8,800 --------- ---------- ----------- Balance at December 31, 1996.......................... 56,988 $ 56,988 $ 8,800 $ 542,751 $ 9,536 ====== ========== ========= ========== =========== Comprehensive loss: Net loss.......................................... (38,784) Unrealized holding gains arising during period, net of tax of $10,107............... 15,160 Less: reclassification adjustment for gains realized in net income, net of tax of $1,749............................... (6,581) ----------- Net unrealized gain on securities available for sale, net of income tax expense of $5,719........................... 8,579 Translation adjustments........................ Total comprehensive loss.......................... Cash dividends declared, $0.39 per share.............. (17,028) Impact of stock plans................................. (2,497) U.S. tax benefit from stock plan activity............. 2,127 --------- ---------- ----------- Balance at December 31, 1997.......................... 56,988 $ 56,988 $ 10,927 $ 484,442 $ 18,115 ====== ========== ========= ========== =========== Comprehensive loss: Net income........................................ 9,864 Unrealized holding gains arising during period, net of tax of $6,564................ 9,846 Less: reclassification adjustment for gains realized in net income, net of tax of $7,475............................... (28,119) ----------- Net unrealized loss on securities available for sale, net of income tax benefit of $(12,182)........................ (18,273) Translation adjustments........................ Total comprehensive loss.......................... Cash dividends declared, $0.43 per share.............. (18,905) Impact of stock plans................................. (2,655) U.S. tax benefit from stock plan activity............. 853 --------- ---------- ----------- Balance at December 31, 1998.......................... 56,988 $ 56,988 $ 11,780 $ 472,746 $ (158) ====== ========== ========= ========== =========== Accumulated Other ----------------- Comprehensive Income (Loss) --------------------------- Treasury Stock -------------- Translation Total ----------- Shareholders' Adjustments Total Shares Cost Equity ----------- ----- ------ ---- ------ Balance at December 31, 1995.......................... $ 375 $ 375 (12,727) $ (354,521) $ 222,664 ========= ========= ======= ========== ========= Comprehensive income: Net income........................................ 41,586 Unrealized holding gains arising during period, net of tax of $9,075............... Less: reclassification adjustment for gains realized in net income, net of tax of $1,252............................... Net unrealized gain on securities available for sale, net of income tax expense of $6,358........................... 9,536 9,536 Translation adjustments........................ (8,655) (8,655) (8,655) --------- Total comprehensive income........................ 42,467 Cash dividends declared, $0.35 per share.............. (15,261) Treasury stock acquired............................... (1,462) (58,362) (58,362) Impact of stock plans................................. 523 14,846 11,450 U.S. tax benefit from stock plan activity............. 8,800 --------- --------- ---------- --------- Balance at December 31, 1996.......................... $ (8,280) $ 1,256 (13,666) $ (398,037) $ 211,758 ========= ========= ======= ========== ========= Comprehensive loss: Net loss.......................................... (38,784) Unrealized holding gains arising during period, net of tax of $10,107............... Less: reclassification adjustment for gains realized in net income, net of tax of $1,749............................... Net unrealized gain on securities available for sale, net of income tax expense of $5,719........................... 8,579 8,579 Translation adjustments........................ (31,555) (31,555) (31,555) --------- Total comprehensive loss.......................... (61,760) Cash dividends declared, $0.39 per share.............. (17,028) Impact of stock plans................................. 375 10,547 8,050 U.S. tax benefit from stock plan activity............. 2,127 --------- --------- ------- ---------- --------- Balance at December 31, 1997.......................... $ (39,835) $ (21,720) (13,291) $ (387,490) $ 143,147 ========= ========= ======= ========== ========= Comprehensive loss: Net income........................................ 9,864 Unrealized holding gains arising during period, net of tax of $6,564................ Less: reclassification adjustment for gains realized in net income, net of tax of $7,475............................... Net unrealized loss on securities available for sale, net of income tax benefit of $(12,182)........................ (18,273) (18,273) Translation adjustments........................ 12,325 12,325 12,325 --------- Total comprehensive loss.......................... 3,916 Cash dividends declared, $0.43 per share.............. (18,905) Impact of stock plans................................. 370 10,552 7,897 U.S. tax benefit from stock plan activity............. 853 --------- --------- ---------- --------- Balance at December 31, 1998.......................... $ (27,510) $ (27,668) (12,921) $ (376,938) $ 136,908 ========= ========= ======= ========== =========
The accompanying notes are an integral part of the consolidated financial statements. F-4 MILLIPORE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 --------------------------------------- 1998 1997 1996 --------- --------- --------- (In thousands) Cash Flows from Operating Activities: Net income (loss) ......................................................... $ 9,864 $ (38,784) $ 41,586 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Restructuring charges ................................................ 42,816 -- -- Net loss on disposal of discontinued operations ...................... -- -- 2,036 Purchased research and development expense ........................... -- 114,091 68,311 Write-off of acquired inventory step-up .............................. -- 5,000 -- Gain on sale of securities ........................................... (35,594) (8,330) (5,329) Depreciation and amortization ........................................ 44,409 40,661 30,587 Deferred income tax (benefit) provision .............................. (12,762) 5,835 (8,212) Change in operating assets and liabilities: Decrease (increase) in accounts receivable ...................... 32,327 (24,468) 247 Decrease (increase) in inventories .............................. 21,053 (13,361) (11,612) Decrease (increase) in other current assets ..................... 3,558 (6,937) 1,661 (Increase) in other assets ...................................... (267) (8,648) (8,747) (Decrease) in accounts payable and accrued expenses ............. (37,972) (21,629) (11,087) (Decrease) increase in accrued retirement plan contributions .... (342) 2,557 (36) (Decrease) increase in accrued income taxes ..................... (15,545) 1,050 1,723 Other ........................................................... (10) 6,942 1,058 --------- --------- --------- Net cash provided by operating activities ................................. 51,535 53,979 102,186 Cash Flows from Investing Activities: Additions to property, plant and equipment ................................ (59,787) (41,063) (30,427) Additions to intangible assets ............................................ (3,953) (6,135) (1,760) Acquisitions, net of cash acquired ........................................ -- (159,158) (122,576) Other investments ......................................................... -- (1,646) (4,010) Net cash used by discontinued businesses .................................. (2,255) (3,516) (7,939) Proceeds from sale of securities .......................................... 35,594 8,330 5,745 --------- --------- --------- Net cash used in investing activities ..................................... (30,401) (203,188) (160,967) Cash Flows from Financing Activities: Treasury stock acquired ................................................... -- -- (58,362) Issuance of treasury stock under stock plans .............................. 6,274 6,956 11,450 Net change in short-term debt ............................................. 5,821 65,036 20,045 Proceeds from issuance of long-term debt .................................. -- 197,950 124,397 Payments on long-term debt ................................................ -- (126,018) -- Dividends paid ............................................................ (18,427) (16,558) (14,899) --------- --------- --------- Net cash (used by) provided by financing activities ....................... (6,332) 127,366 82,631 Effect of foreign exchange rates on cash and cash equivalents ............. 951 (4,758) (738) --------- --------- --------- Net increase (decrease) in cash and cash equivalents ...................... 15,753 (26,601) 23,112 Cash and cash equivalents on January 1 .................................... 20,269 46,870 23,758 --------- --------- --------- Cash and cash equivalents on December 31 .................................. $ 36,022 $ 20,269 $ 46,870 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-5 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data) NOTE A-- Summary of Significant Accounting Policies Nature of Operations Millipore Corporation and its subsidiaries are engaged primarily in the development, manufacture and sale of products which are based on separations technology and which are used for the analysis, identification, monitoring and purification of liquids and gasses. To a lesser extent, Millipore also generates revenues from the manufacture and sale of products based on electro-mechanical and pressure differential technologies to control critical aspects of the manufacturing process for integrated circuits (semiconductors). Millipore is an integrated multinational manufacturer and markets its products throughout the world. The principal customer groups to which the Company's products are sold include pharmaceutical companies, biotechnology companies, food and beverage companies, university and government laboratories and research institutes as well as semiconductor fabrication companies and OEM and material suppliers to the semiconductor industry. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany balances and transactions have been eliminated. Translation of Foreign Currencies For all of the Company's foreign subsidiaries, assets and liabilities are translated at exchange rates prevailing on the balance sheet date, revenues and expenses are translated at average exchange rates prevailing during the period, and elements of shareholders' equity are translated at historical rates. Any resulting translation gains and losses are reported separately in shareholders' equity. The aggregate transaction gains and losses included in the consolidated statements of income are not material. Cash Equivalents Cash equivalents consisting primarily of time deposits, are classified as available for sale and are carried at cost plus accrued interest, which approximates market value. All cash equivalents have maturities of three months or less. Inventories The Company values its inventories at actual cost on a first-in, first-out (FIFO) basis. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Expenditures for maintenance and repairs are charged to expense while the costs of significant improvements which extend the life of the underlying asset are capitalized. Assets are primarily depreciated using straight-line methods. Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are eliminated and related gains or losses reflected in income. The estimated useful lives of the Company's depreciable assets are as follows: Leasehold Improvements..........................Life of the Lease Buildings and Improvements......................10-40 Years Production and Other Equipment..................3-15 Years F-6 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) Intangible Assets Intangible assets consist primarily of patents, acquired technology, trade names, licenses and goodwill. The assets are recorded at cost and amortized on a straight-line basis over periods ranging from 3 to 20 years. On a periodic basis the value of the intangible assets is reviewed to determine if impairment has taken place due to changed business conditions or technological obsolescence. The amount of such impairment, if any, is computed by comparing the present value of the future cash flows associated with the underlying intangible asset to the then current net book value. If an impairment exists, the net book value of the intangible asset is reduced accordingly. Marketable Securities The Company's investments in equity securities are categorized as available-for-sale as defined by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Equity securities are included in both Other current assets and Other assets in the accompanying consolidated balance sheets and are recorded at fair value. The cost of each investment is determined primarily on a specific identification method. Unrealized holding gains and losses are reflected, net of income tax, as a separate component of accumulated other comprehensive loss. Marketable securities had a fair value of $2,078 as of December 31, 1998 which approximated cost. Financial Instruments The Company has entered into U.S. dollar to Japanese Yen debt swap agreements and foreign exchange option contracts to manage interest and foreign currency exchange rate exposures. The Company does not hold or issue derivative financial instruments for trading purposes. The cash differential paid or received under the interest rate component of the debt swap agreements are accrued and recognized as an adjustment to interest expense. Net amounts receivable or payable to counterparties are included in Other Current Assets or Accrued Expenses. Cash flows related to the interest rate swap are classified as part of Operating Activities in the Consolidated Statement of Cash Flows consistent with the interest payments on the underlying debt. The U.S. dollar to Japanese yen principal swap is designated and is effective as a hedge of the Company's net investment exposure. Unrealized gains and losses are recorded as an adjustment of the underlying Long-Term Debt and the cumulative Translation Adjustments in Shareholders' Equity. The ultimate gain or loss realized upon maturity of the agreements is recognized as a translation adjustment in Shareholders' Equity. The Company has entered into option contracts to hedge against significant fluctuations in the value of the U.S. dollar versus the Japanese yen. Gains realized on the exercise of the option contracts are recorded as an offset to the loss on the underlying transactions. Contract premiums are recorded in Other Current Asset and amortized over the term of the contract. The realized gains and the amortization of the contract premiums are recorded in cost of sales. Cash flows related to the exercise of the option contracts are included in Operating Activities in the Consolidated Statement of Cash Flows. Income Taxes Deferred tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. With respect to the unremitted earnings of the Company's foreign and Puerto Rican subsidiaries, deferred taxes are provided only on amounts expected to be repatriated. F-7 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) Treasury Stock Treasury stock is recorded at its cost on the date acquired and is relieved at its weighted average cost upon reissuance. The excess of cost over the proceeds of reissued treasury stock is charged to retained earnings. Net Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing the net income (loss) for the period by the weighted average number of shares outstanding for the period. Diluted net income (loss) per share is calculated by considering the impact of common stock equivalents (outstanding stock options) as if they were converted into common stock at the beginning of the period. Common stock equivalents are not included in periods of net losses as they are anti-dilutive. Revenue Recognition Sales of products and services are recorded principally at the time of product shipment or performance of services. Certain contract revenues associated with the Company's process equipment business are recorded on the percentage of completion method. Revenue is recognized based on the ratio of hours expended compared to the total estimated hours to complete the construction of the process equipment. The cumulative impact of any revisions in estimates of the percent complete is reflected in the period in which the changes become known. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash and cash equivalents, accounts receivable and derivative financial instruments. The Company places its temporary cash and cash equivalents with high credit qualified financial institutions, and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company's customer base, and their dispersion across different industries and geographies. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to these contracts are major financial institutions. The Company continually monitors its positions and the credit ratings of its counterparties and limits the amount of contracts it enters into with any one party. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to prior years' financial statements to conform with the 1998 presentation. F-8 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) New Accounting Pronouncements In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income or loss, unrealized gain or loss on securities available for sale and foreign currency translation adjustments and is presented in the Consolidated Statements of Shareholders' Equity. The adoption of SFAS 130 had no impact on total shareholders' equity. In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. SFAS 131 establishes a new framework on which to base segment reporting. Note Q reflects the Company's segment disclosure in accordance with SFAS 131. In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" which establishes new increased requirements for disclosure of a Company's pensions and other postretirement benefit obligations. The Company adopted and included the increased disclosure requirements of SFAS No. 132 in Note P. In 1998, the Company adopted Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance on applying generally accepted accounting principles in addressing whether and under what conditions the costs of internal-use software should be capitalized. The adoption of SOP 98-1 was not material to the results of operations for 1998. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2000 for the Company. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company is currently assessing the impact of this new statement on its consolidated financial position, liquidity and results of operations. NOTE B--Subsequent Event On February 5, 1999, the Company received a letter from the staff of the Securities and Exchange Commission in which the staff inquired, among other things, about certain charges taken in 1997 and 1996 for purchased research and development expenses recorded in connection with the Amicon and Tylan acquisitions as discussed in Note E. The Company has exchanged correspondence with the staff of the Commission concerning these charges as well as other accounting matters including the charge for the loss on the sale of discontinued operations. As a result of this correspondence, the Company has revised certain disclosures and has restated its financial statements to recognize the charges relating to discontinued operations in prior periods as follows and as described in Note D below. No further comments of the Commission staff are pending and the Company believes that all questions raised by the staff have been resolved. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
- -------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Income - -------------------------------------------------------------------------------------------------------------------- December 31, 1998 December 31, 1996 December 31, 1994 - -------------------------------------------------------------------------------------------------------------------- Previously As Previously As Previously As Restated Reported Restated Reported Restated Reported - -------------------------------------------------------------------------------------------------------------------- Net loss on disposal of discontinued operations $ 5,847 $ -- $ -- $ 2,036 $ 3,400 $ 7,211 - -------------------------------------------------------------------------------------------------------------------- Net income 4,017 9,864 43,622 41,586 56,209 52,398 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Net income per share: - -------------------------------------------------------------------------------------------------------------------- Basic $ 0.09 $ 0.22 $ 1.00 $ 0.95 $ 1.03 $ 0.96 - -------------------------------------------------------------------------------------------------------------------- Diluted $ 0.09 $ 0.22 $ 0.98 $ 0.94 $ 1.01 $ 0.94 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------- Consolidated Balance Sheets - ---------------------------------------------------------------- Year ended December 31, 1997 - ---------------------------------------------------------------- Previously Reported As Restated - ---------------------------------------------------------------- - ---------------------------------------------------------------- Total assets $772,806 $772,301 - ---------------------------------------------------------------- Accrued expenses 74,856 79,660 - ---------------------------------------------------------------- Other liabilities 25,533 26,071 - ---------------------------------------------------------------- Retained earnings 490,289 484,442 - ---------------------------------------------------------------- Shareholders' equity 148,994 143,147 - ---------------------------------------------------------------- NOTE C--Restructuring Charges and Provision for Excess Inventory In the second quarter of 1998, the Company announced a restructuring program which was undertaken to improve the competitive position of the Company by streamlining worldwide operations and reducing the overall cost structure. The program includes the consolidation of certain manufacturing operations, realignment of various international subsidiary organizations to focus on operating business units, discontinuance of non-strategic product lines and the rationalization of its product offerings to improve product line focus. This rationalization process included a management review of product offerings to identify and eliminate specific products with limited profitability as well as products which were inconsistent with current strategic marketing plans, such as non-standard products. In the third quarter of 1998, the Company recorded an expense associated with these activities of $42,816 ($29,115 after tax) including a restructuring charge of $33,641 and a $6,244 charge against cost of sales for inventory provisions and $2,931 for fixed asset write-offs. The non-strategic product lines consisted of high pressure liquid chromatography equipment, semiconductor fab monitoring and control software and various filtration devices. The $33,641 restructuring charge included $18,290 of employee severance costs, $3,847 of lease cancellation costs, $2,049 of marketing, research and supply contract termination costs, $7,667 for the write-off of intangible assets including those associated with the discontinued product lines consisting of both unpatented completed technology and tradenames as well as with termination of certain rights under two technology development collaborations and $1,788 for the write-off of fixed assets. As of September 30,1998, there were no assets that remained in use which had been written off. During the fourth quarter of 1998 assets which had been held for disposal relating to one of the non-strategic product lines were divested. There are no remaining assets being held for disposal. The restructuring initiatives combined with the consolidation of the Company's microelectronics plants will result in the elimination of 620 positions worldwide (400 positions in manufacturing operations, 160 in selling, general and administrative positions and 60 in research and development). Notification to employees was completed in 1998, although a small number of the employees affected will continue working in their existing positions through 1999 with their related salary costs charged to operations as incurred. As of December 31, 1998, 490 employees had left the Company pursuant to this initiative. Under the terms of the severance agreements, the Company expects to pay severance and associated benefits through the early part of 2000. F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) Following is a summary of the restructuring charges and related reserve balances at December 31, 1998:
1998 1998 1998 Balance at ---- ---- ---- ---------- Restruc- Other Cash December 31, -------- ----- ---- ------------ turing Activity Disbursements 1998 ------ -------- ------------- ---- Charge ------ Employee severance costs ................ $18,290 $ -- $ 5,447 $12,843 Lease cancellation costs ................ 3,847 -- 169 3,678 Contract terminations and other costs ... 2,049 86 -- 1,963 Write-off of intangible assets .......... 7,667 7,667 -- -- Write-off of fixed assets ............... 1,788 1,788 -- -- ------- ------- ------- ------- Total .............................. $33,641 $ 9,541 $ 5,616 $18,484 ======= ======= ======= =======
The Company also recorded an incremental provision for excess and obsolete inventory of $6,000 during the third quarter of 1998 in response to adverse changes in demand attributable to recessionary conditions in Asia and the slowdown in the semiconductor industry. NOTE D--Discontinued Operations In August 1994 the Company sold it's Waters Chromatography Division and, in a separate transaction, sold certain assets of its non-membrane bioscience business. At that time the Company recorded a $69,000 reserve in connection with these transactions representing the estimate of costs to abandon facilities, terminate employees, transfer employee benefit obligations and to provide ongoing administrative and contract support services. During the third quarter of 1998 the Company completed a comprehensive review of its accounting for these divestitures; as a result of this review a $7,542 additional charge ($5,847 net of income taxes) on the disposal of discontinued operations was recorded. This charge reflects the corrected accounting of the remaining assets and liabilities associated with these divested operations. This charge is comprised of numerous different items, which may be grouped into three general categories: $2,200 of manufacturing assets previously used by the combined operations of Millipore and the Waters Division in Puerto Rico prior to the divestiture of the Waters Division; these assets were not sold to Waters as a part of the divestiture and ultimately had no further use to Millipore after the divestiture; $4,842 of costs associated with the divestiture of the non-membrane bioscience business; and $500 of retirement benefits for Japanese employees of the Waters Chromatography Division. As a result of correspondence with the staff of the Securities and Exchange Commission, the Company restated its financial statements to recognize the $5,847 charge to discontinued operations in prior periods as follows: $2,036 in 1996 and $3,811 in 1994. In partial consideration for the sale of its non-membrane bioscience instrument division in 1994, the Company received four thousand shares of preferred stock of PerSeptive Biosystems, Inc ("PerSeptive"). The preferred stock was redeemable in four equal annual installments of $10,000, commencing in August 1995, in the equivalent value as of each redemption date in common stock, $0.01 par value of PerSeptive. Effective January 22, 1998, PerSeptive completed a merger with The Perkin-Elmer Corporation ("Perkin-Elmer") pursuant to which PerSeptive became a wholly-owned subsidiary of Perkin-Elmer. Pursuant to this merger all of the Company's remaining holdings in PerSeptive, which consisted of 2,213,357 shares of common stock and the one thousand shares of preferred stock were converted into 586,541 shares of Perkin-Elmer common stock. The Company sold all 586,541 shares of Perkin-Elmer common stock in the first quarter of 1998 and recorded a gain on the sale of these securities of $32,500. At December 31, 1997, the 2,213,375 shares of PerSeptive common stock were considered available for sale in accordance with SFAS No. 115. These shares of common stock were recorded at a fair value of $16,766, net of taxes, in Other Current Assets. The $27,944 of gross unrealized gain related to these shares was recorded in Shareholder's Equity, net of taxes of $11,178. F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) NOTE E--Acquisitions On December 31, 1996, the Company acquired the net assets of the Amicon Separation Science Business of W.R. Grace & Co. (Amicon) for approximately $129,265 in cash, including transaction costs. Amicon manufactures protein purification tools for the research laboratory and for biotechnology manufacturing. The acquisition was accounted for as a purchase, and accordingly, the purchase price has been allocated to the identifiable tangible and intangible assets based on estimated fair market values of those assets. The Company accrued approximately $27,000 for additional costs associated with the acquisition. These costs included severance payable to Amicon employees, abandonment of duplicate Amicon manufacturing and sales facilities, and termination of certain Amicon contractual obligations. The facilities abandoned were leased sales offices in Europe and Asia as well as an owned manufacturing facility in England. The terminated contractual obligations included a supply agreement. The purchase included, at estimated fair value, current assets of $30,328, property, plant and equipment of $15,474, other assets of $596 and the assumption of liabilities of $9,197. Identifiable intangible assets were valued at $50,753 and included $25,046 of tradenames and $6,857 of patented and $18,850 of unpatented completed technology. These intangible assets will be amortized over their estimated useful lives ranging from five to twenty years. In-process research and development valued at $68,311 was charged to earnings in the fourth quarter of 1996. This charge was taken because neither the projects nor any potential alternative future uses for the technology on which the projects were based had achieved technological feasibility. The purchase was financed through the Company's Revolving Credit Agreement as discussed in Notes I and J. As of December 31, 1998 the integration activities relating to the Amicon business were substantially completed except for the integration of the manufacturing operations from England to the U.S. which was delayed pending the construction of a facility to receive this manufacturing operation, and the resolution of certain vendor agreement termination disputes both of which the Company expects to be completed in 2000. The remaining liability as of December 31, 1998 consists of $1,200 of employee severance costs, $1,000 of costs associated with the termination of an Amicon pre-acquisition supply agreement, $485 for the write-off of assets and $315 of other integration costs. On January 22, 1997, the Company completed a cash tender offer for all of the outstanding common shares of Tylan General, Inc. (Tylan). Tylan, which became a wholly-owned subsidiary on January 27, 1997, supplies precision mass flow controllers, and pressure and vacuum measurement and control equipment to the semiconductor industry. The aggregate purchase price, including the assumption of Tylan debt and transaction costs, was $163,371. The acquisition was accounted for as a purchase, and accordingly, the purchase price has been allocated to the identifiable tangible and intangible assets based on estimated fair market values of those assets. The Company accrued approximately $32,000 for additional integration costs associated with the acquisition. These costs included severance costs, abandonment and consolidation of facilities, and termination of certain Tylan contractual obligations. The facilities abandonment and consolidation costs include the closure of all of the acquired Tylan manufacturing facilities in the U.S. and the transfer of those operations to a new facility in Allen, Texas. All of the vacated facilities were under long-term operating lease agreements. The contractual obligations included payouts with respect to two former officers of Tylan, the termination of supply agreements and the termination of a third party research and development agreement. The final adjusted purchase price included at estimated fair value, current assets of $42,544, property and equipment of $15,559, other assets of $16,477 and liabilities of $22,042. Intangible assets were valued at $28,742 and included $2,717 of tradenames, $5,698 of patented and $7,995 of unpatented completed technology and $12,332 of goodwill. These intangible assets are being amortized over their estimated useful lives ranging from five to twenty years. In-process research and development valued at $114,091 was charged to earnings in the first quarter of 1997. This charge was taken because neither the projects nor any potential alternative future uses for the technology on which the projects were based had achieved technological feasibility. The purchase was financed through the Company's Revolving Credit Agreement discussed in Notes I and J. As of December 31, 1998, the redundant Tylan facilities were closed and their operations consolidated into the Allen, Texas facility. The integration activities for this acquisition are complete with final cash payments for contractual agreements continuing through 2000. The remaining F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) liability as of December 31, 1998 consists of $2,300 of employee severance costs, $890 of contract termination costs and $914 of facility related costs. The integration of the Amicon business was accomplished as originally planned but the employee severance and facility related costs for this integration were $15,000 less than accrued. As the Company undertook implementation of the integration plan during 1997 it was determined that the plan could be completed with significantly less cost. Among the factors which contributed to these savings were the cultural compatibility of the two organizations which permitted the assignment of certain Amicon personnel to vacancies within the Millipore organization as an alternative to termination and the proximity of the Amicon facilities to those of the Company which facilitated the use of those facilities for other Millipore operations. The integration plan for the Tylan business was completed by December 31, 1997. During this year the scope of the U.S. manufacturing consolidation was extended from a consolidation of four existing plants into two existing facilities to the consolidation of all existing plants into a new facility. The finalization of the plan to integrate the Tylan business resulted in additional costs totaling $15,000 primarily for additional employee costs relating to the closure of all Tylan manufacturing facilities. These amounts included additional employee retention costs necessary to maintain the Tylan manufacturing facilities until the Allen, Texas site was operational and additional employee relocation and severance costs. At December 31,1997, no purchase accounting adjustments for either acquisition were recorded as the incremental effect to the Company's financial position and results of operations in 1997 related to the acquisitions of Amicon and Tylan was immaterial. The final integration plan with respect to the Amicon and Tylan acquisitions included the termination of an aggregate of 460 employees. As of December 31, 1998, the Company had terminated 450 employees in connection with these acquisitions (of which 300 where involved with manufacturing operations and 150 with general and administrative functions). There have been no significant changes to the combined integration plans or to the aggregate costs of integrating these acquisitions. Following is a summary of the acquisition reserve for 1997 and 1998. The beginning reserve balance represents the acquisition reserve accruals for both Tylan and Amicon:
Beginning --------- Reserve ------- Balance Cash Payments Asset Write-offs ------- ------------- ---------------- Reserve Balance at ---------- Tylan Amicon Tylan Amicon December 31, 1997 ----- ------ ----- ------ ----------------- Employee costs .............. $31,903 $10,808 $ 3,993 $ -- $ -- $17,102 Facilities-related costs .... 6,963 600 842 -- -- 5,521 Contract termination costs .. 5,431 199 1,085 -- -- 4,147 Write-off of assets ......... 6,594 -- -- 1,591 999 4,004 Other integration expenses .. 8,109 4,225 1,590 -- -- 2,294 ------- ------- ------- ------- ------- ------- Total . $59,000 $15,832 $ 7,510 $ 1,591 $ 999 $33,068 ======= ======= ======= ======= ======= =======
F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
Reserve ------- Balance at Reserve ---------- ------- December 31, Cash Payments Asset Write-offs Balance at ------------ ------------- ---------------- ---------- 1997 December 31, ---- ------------ 1998 ---- Tylan Amicon Tylan Amicon ----- ------ ----- ------ Employee costs .................. $17,102 $13,207 $ 395 $ -- $ -- $ 3,500 Facilities-related costs ........ 5,521 4,424 183 -- -- 914 Contract termination costs ...... 4,147 2,257 -- -- -- 1,890 Write-off of assets ............. 4,004 -- -- 3,276 243 485 Other integration expenses ...... 2,294 1,824 155 -- -- 315 ------- ------- ------- ------- ------- ------- Total . $33,068 $21,712 $ 733 $ 3,276 $ 243 $ 7,104 ======= ======= ======= ======= ======= =======
The acquisitions of Amicon and Tylan each included in-process research and development for which technological feasibility had not been achieved resulting in charges to earnings of $68,300 in the fourth quarter of 1996 and of $114,000 in the first quarter of 1997, respectively. The estimation of the fair value of the purchased in-process research and development is primarily the responsibility of management. In determining the valuation of in-process research and development projects for both acquisitions, the discounted cash flow approach was used. A range of discount rates from 25 percent to 35 percent was applied depending upon the relative risk of the in-process technology and the market risks for the related product. Revenue projections reflected the estimated useful life of the technology and ranged from 5 to 12 years. Cash flows were reduced in contemplation of on-going operating needs (including working capital) to support the technology and by amounts associated with the use of "core technology" in products under development. The assumptions made regarding pricing, margins and expenses were consistent with the acquired companys' historical trends. The following table reflects unaudited pro forma combined results for 1996 of the Company, Amicon and Tylan on the basis that both acquisitions had taken place on January 1, 1996. 1996 ---------- Revenues................................... $ 824,555 Net Income................................. $ 24,139 Net Income per common share--Basic.......... $ 0.55 Shares used in computation................. 43,602 These pro forma results are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisitions had been effective at the beginning of 1996. Pro forma results for 1997 resulting from the acquisition of Tylan would not have been materially different from the results reported. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) NOTE F--Basic and Diluted Earnings per Share For 1997, basic and diluted earnings per share are the same, as the Company was in a loss position. The following table sets forth the computation of basic and diluted earnings per share for 1998, 1997 and 1996:
1998 1997 1996 -------- -------- -------- Numerator: Net income (loss) ................................. $9,864 $(38,784) $41,586 ======== ======== ======== Denominator: Basic weighted average shares outstanding ......... 43,864 43,527 43,602 Effect of dilutive securities-stock options ....... 425 -- 855 -------- -------- -------- Diluted weighted average shares outstanding ....... 44,289 43,527 44,457 ======== ======== ======== Net income (loss) per share: Basic ............................................. $0.22 $(0.89) $0.95 Diluted ........................................... $0.22 $(0.89) $0.94
NOTE G--Inventories Inventories at December 31, stated at the lower of first-in, first-out (FIFO) cost or market, consisted of the following: 1998 1997 --------- --------- Raw materials....... $ 35,433 $ 42,518 Work in process..... 18,620 16,545 Finished goods...... 53,188 68,129 --------- --------- $107,241 $ 127,192 ========= ========= NOTE H--Property, Plant and Equipment Property, plant and equipment at December 31 consisted of the following: 1998 1997 --------- --------- Land................................ $ 9,248 $ 8,750 Leasehold improvements.............. 30,154 18,846 Buildings and improvements.......... 132,783 118,923 Production and other equipment...... 229,115 223,720 Construction in progress............ 24,375 16,440 --------- --------- 425,675 386,679 Less: accumulated depreciation...... 188,261 166,585 --------- --------- $ 237,414 $ 220,094 ========= ========= Depreciation expense for the years ended 1998, 1997, and 1996 was $36,778, $32,797 and $27,972, respectively. F-15 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) NOTE I--Notes Payable Short-term borrowings and related lines of credit at December 31 are summarized as follows:
1998 1997 ----------- -------- Notes payable................................................... $ 171,340 $165,576 ----------- -------- Unused lines of credit.......................................... $ 80,000 $204,424 Average amount outstanding at month-end during the year......... $ 184,239 $226,379 Maximum amount outstanding at month-end during the year......... $ 214,113 $392,817 Weighted average interest rate during the year.................. 6.1% 6.0% Weighted average interest rate at year-end...................... 6.3% 6.1%
On January 22, 1997, the Company entered into an unsecured Revolving Credit Agreement with a group of banks. The agreement allowed for borrowings of up to $450,000 and expires on January 22, 2002. In July, 1997, the Company reduced the maximum funds available under the agreement from $450,000 to $350,000 and in May, 1998, the amount was reduced from $350,000 to $250,000. Individual borrowings under the Revolving Credit Agreement are made on terms not to exceed six months. At December 31, 1998 the Company had $80,000, available under this facility. Interest is payable on outstanding borrowings at a floating rate defined in the agreement as LIBOR plus a margin. The agreement also calls for a facility fee. The exact amount of the margin and the facility fee is dependent on the Company's debt rating. The agreement calls for the Company to maintain certain financial covenants in the areas of operating cash flow and interest coverage. At December 31, 1998 the Company also had $1,340 of other short-term borrowings. The Company's financial results for the quarter ended September 30, 1998 made it necessary for the Company to renegotiate certain financial covenants relating to operating cash flow and interest coverage under the agreement. Pursuant to this renegotiation, the lenders involved waived defaults under those covenants and accepted less restrictive operating cash flow and interest coverage covenants for 1999 and a portion of 2000. The Company agreed to an additional minimum earnings covenant, the payment of amendment fees totaling $647, and to increases in both the interest rate margin and the facility rate thereunder. The Company agreed to an increase in the interest rate from a margin range over LIBOR of 0.18 to 0.65 percent to a range of 0.23 to 1.125 percent. The Company also agreed to an increase in the facility rate under the agreement from a rate ranging from 0.10 to 0.25 percent to a rate ranging from 0.125 to 0.375 percent. In addition, at December 31, 1997, the Company had access to a $20,000 short-term unused line of credit which was cancelled during 1998. NOTE J--Long-term Debt Long-term debt at December 31 consisted of the following:
1998 1997 -------- -------- 7.23% unsecured notes due in 2002........................... $100,000 $100,000 7.60% unsecured notes due in 2007........................... 100,000 100,000 7.23% notes payable due in 2004............................. 100,000 100,000 Unrealized gain on revaluation of yen-denominated debt...... (890) (13,156) -------- -------- Long-term debt.............................................. $299,110 $286,844 ======== ========
F-16 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) In March, 1997, the Company sold $100,000 of 7.23 percent unsecured notes due in 2002 and $100,000 of 7.60 percent unsecured notes due in 2007, pursuant to a public offering. Net proceeds from the offering of $197,950 were used to repay borrowings outstanding under the Company's revolving credit agreement. Interest on the new notes is payable semi-annually in April and October. At December 31, 1998, these notes had a fair market value of $94,020 and $86,770, respectively. The Company's financial results for the fiscal quarter September 30, 1998 made it necessary for the Company to renegotiate certain financial covenants relating to operating cash flow and interest coverage under the $100,000 note due in 2004. Pursuant to this renegotiation, the lender involved waived defaults under those covenants and accepted less restrictive operating cash flow and interest coverage covenants for 1999 and a portion of 2000. The Company agreed to an increase in the interest rate on the $100,000 note due in 2004 from 6.88 percent to 7.23 percent as of November 2, 1998. The interest on these notes is payable semi-annually in March and September. As these notes are not publicly traded, a determination of their fair value is not readily determinable. However, the Company believes that the carrying values approximate fair value. In January, 1994, the Company exchanged $80,000 of dollar debt service obligations for a yen denominated obligation of 8,760,000 yen, which bears interest at a rate of 4.49 percent. This swap matures in 2004. In December 1997, the Company entered into a currency swap maturing in 2003. Under the terms of this swap, the Company exchanged $30,000 of dollar debt service obligations for a yen-denominated obligation of 3,840,000 yen, which bears interest at a rate of 1.39 percent. The Company's foreign currency obligations had U.S. dollar effective weighted average interest rates of 4.60 and 4.53 percent in 1998 and 1997, respectively. The effect of foreign currency exchange rate fluctuations resulting from the yen swap agreements open at December 31, 1998 are included in translation adjustments. The Company capitalized interest costs associated with the construction of certain capital assets of $1,282 in 1998, $753 in 1997 and $785 in 1996. Interest paid on short-term and long-term debt during 1998, 1997, and 1996 amounted to $30,690, $25,579 and $12,171 respectively. NOTE K--Foreign Exchange A significant volume of the Company's business is transacted in currencies other than the U.S. dollar. This exposes the Company to risks associated with currency rate fluctuations which impact the Company's sales and net income. The Company has entered into foreign currency option contracts to sell yen, on a continuing basis in amounts and timing consistent with the underlying currency exposure so that gains on these transactions partially offset the realized foreign exchange losses on the underlying exposure. The Company realized gains, net of premiums, of $2,232 in 1998, $4,375 in 1997 and $2,687 in 1996 relating to these contracts. At December 31, 1998, the Company has only option contracts to sell yen aggregating $47,288. In the event of a significant strengthening of the U.S. dollar against the yen, the exercise of these options will partially mitigate losses which would be incurred by the Company on the underlying currency exposure. The unamortized premiums associated with these option contracts was $1,389 as of December 31, 1998. F-17 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) NOTE L--Income Taxes Income taxes have been provided in accordance with the provisions of SFAS No. 109. The Company's provisions for income taxes are summarized as follows:
1998 1997 1996 -------- -------- -------- Domestic and foreign income before income taxes: Domestic .................................................. $(27,116) $(69,479) $ (2,432) Foreign ................................................... 35,660 51,369 56,828 -------- -------- -------- 8,544 (18,110) 54,396 Less: Income (loss) on disposal of discontinued operations ...... -- -- (2,627) -------- -------- -------- Income (loss) from continuing operations before income taxes .................................................. $ 8,544 $(18,110) $ 57,023 ======== ======== ======== Domestic and foreign provisions for income taxes: Domestic .................................................. $ (4,801) $ 6,873 $ (2,953) Foreign ................................................... 3,295 13,011 15,427 State ..................................................... 186 790 336 -------- -------- -------- (1,320) 20,674 12,810 Less: portion applied to discontinued operations .......... -- -- (591) -------- -------- -------- $ (1,320) $ 20,674 $ 13,401 ======== ======== ======== Current and deferred provisions for income taxes: Current ................................................... $ 9,747 $ 14,839 $ 21,613 Deferred .................................................. (11,067) 5,835 (8,803) -------- -------- -------- $ (1,320) $ 20,674 $ 12,810 -------- -------- --------
A summary of the differences between the Company's consolidated effective tax rate and the United States statutory federal income tax rate is as follows:
1998 1997 1996 -------- -------- -------- U.S. statutory income tax rate .................................. 35.0% 35.0% 35.0% Puerto Rico tax rate benefits ................................... (10.8) (4.0) (6.4) Ireland tax rate benefits ....................................... (25.8) (8.2) (11.0) State income tax, net of federal income tax benefit ............. 1.4 .5 .4 Foreign Sales Corporation income not taxed ...................... (15.2) (2.3) (4.0) Change in valuation allowance ................................... -- -- 9.5 -------- -------- -------- Effective tax rate applicable to operations ..................... (15.4) 21.0 23.5 Non-deductible charge for purchased research and development .... -- 93.2 -- -------- -------- -------- Effective tax rate .............................................. (15.4)% 114.2% 23.5% ======== ======== ========
Tax exemptions relating to Puerto Rico and Ireland operations are effective through 2004 and 2010, respectively. Income taxes paid (net of refunds) during 1998, 1997, and 1996 were $20,359, $18,704, and $24,228, respectively. F-18 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) The Company has not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. These earnings amounted to approximately $135,968 at December 31, 1998. If earnings of such foreign subsidiaries were not indefinitely reinvested, a deferred tax liability of approximately $37,769 would have been required. At December 31, 1998, the Company has foreign tax credit carryforwards of approximately $9,300 that expire in the years 1999 through 2003. General business credit carryforwards of approximately $5,900 expire in the years 2001 through 2010. Net operating loss carryforwards of $86,854 expire through the year 2013. In addition, the Company has alternative minimum tax credit carryforwards of approximately $15,166 which can be carried forward indefinitely. Significant components of the Company's net deferred tax assets are as follows:
1998 1997 --------- --------- Intercompany and inventory related transactions .............. $ 18,467 $ 15,962 Postretirement benefits other than pensions .................. 3,555 3,605 Tax credits (including foreign tax credits on unremitted earnings) ................................................. 44,396 50,064 Net operating loss carryforwards ............................. 30,399 10,750 Deferred gain on sale of securities .......................... -- 8,750 Restructuring and divestiture related costs .................. 12,484 -- Amortization of intangible assets ............................ 20,483 22,247 Depreciation ................................................. (4,610) (3,756) Other, net ................................................... (3,508) 4,968 --------- --------- 121,666 112,590 Valuation allowance .......................................... (13,121) (22,135) --------- --------- Net deferred tax asset ....................................... $ 108,545 $ 90,455 ========= =========
The valuation allowance is provided primarily against foreign tax credit carryforwards and foreign tax credits on unremitted earnings which can be utilized against future taxable income in the United States. The change in valuation allowance for the year results from the write down of certain tax credits for which the valuation allowance had been previously established. These tax credits have expired and are no longer available to the Company. Although realization is not assured, the Company believes it is more likely than not that the remainder of the deferred tax asset, net of the valuation allowance, will be realized primarily because of the anticipated increase of taxable income in the U.S. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. NOTE M--Legal Proceedings On May 2, 1997, the Environmental Quality Board ("EQB") of Puerto Rico served an administrative order on Millipore Cidra, Inc., a wholly-owned subsidiary of the Company. The administrative order ("EQB order") alleged: (i) that the nitrocellulose filter membrane scrap produced by Millipore Cidra's manufacturing operations is a hazardous waste as defined in EQB regulations; (ii) that Millipore Cidra, Inc. failed to manage, transport and dispose of the nitrocellulose membrane scrap as a hazardous waste; and (iii) that such failure violated EQB regulations. The EQB order proposed penalties in the amount of $96,500 and ordered Millipore Cidra, Inc. to manage the nitrocellulose membrane scrap as a hazardous waste. The Company recorded a charge of $5,000 in the first quarter of 1998 reflecting its costs to settle this matter. F-19 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) The Company also recorded a charge of $3,100 in the first quarter of 1998 reflecting its costs to settle a separate lawsuit with an intervening party in the EQB administrative case described above. The Company recorded a charge of $3,666 in the first quarter of 1998 to settle a patent lawsuit with Mott Metallurgical Corporation. In the lawsuit, each party claimed infringement of one of its patents by the other. As part of the settlement, the parties agreed to cross license the two patents at issue. The Company and Waters Corporation were engaged in an arbitration proceeding and a related litigation in the Superior Court, Middlesex, Massachusetts, both of which commenced in the second quarter of 1995 with respect to the amount of assets required to be transferred by the Company's Retirement Plan in connection with the Company's divestiture of its former Chromatography Division. In the second quarter of 1996, Waters filed a Complaint in the Federal District Court of Massachusetts alleging that the Company's operation of the Retirement Plan violated ERISA and certain sections of the Internal Revenue Code. Judgments in the Company's favor were handed down by both the Massachusetts Superior Court and the Federal District Court in May 1997 and July 1997, respectively. Waters appealed the federal court judgment, which was affirmed by the United States Court of Appeals for the First Circuit by opinion dated April 3, 1998. On June 2, 1998, the Company transferred $2,439 (including interest through the date of transfer) from its Retirement Plan to the Waters Retirement Plan as provided by the amended and restated Purchase and Sale Agreement. In order to fund the transfer, in the second quarter of 1998 the Company made a contribution of $2,255 to its Retirement Plan in accordance with ERISA funding requirements. In the past the Company has been named as a potentially responsible party by the Environmental Protection Agency ("EPA") at twelve hazardous waste ("Superfund") sites and prior to 1995, the Company had paid $14,000 to settle claims at those sites. However, as is typical with settlements in such Superfund proceedings, EPA and the relevant state agencies reserved the right to maintain actions against the settling parties, including the Company, in the event certain actions occur or do not occur. Due to the fact that Superfund sites at which the Company was named a potentially responsible party are in the late stages of remedy and a significant portion of the remedy cost has already been funded, the Company believes that its probable future financial obligation at December 31, 1998 will not materially affect its future financial condition and results of operations. Amounts paid by the Company in 1998 and 1997 with respect to the Superfund obligations were insignificant. During 1998 the Company was named as a potentially responsible party in a Massachusetts proceeding with respect to two sites to which chemical wastes from one of the above federal Superfund sites were transshipped. Massachusetts law imposes joint and several liability for cleanup costs incurred on potentially responsible parties at state designated hazardous waste sites, without regard to fault or negligence, analogous to federal law. Although the full cost of remediation at these sites has yet to be determined, Millipore believes that the aggregate of any future potential liabilities should not have a material adverse effect on Millipore's financial condition or results of operations. This belief is based on the following factors: (i) the number and size of financially solvent corporations which have also been named potentially responsible parties with respect to these sites; (ii) the volume of Millipore waste alleged to have been sent to these sites, and (iii) Millipore's belief that the remedies required at these sites will be modest. The Company is also subject to a number of other claims and legal proceedings which, in the opinion of the Company's management, are incidental to the Company's normal business operations. In the opinion of the Company, although final settlement of these suits and claims may impact the Company's financial statements in a particular period, they will not, in the aggregate, have a material adverse effect on the Company's financial condition and results of operations. F-20 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) NOTE N--Leases Operating lease agreements cover sales offices, manufacturing and warehouse space. These leases have expiration dates through 2008. Certain land and building leases contain renewal options for periods ranging from one to ten years and purchase options at fair market value. Rental expense was $12,033 in 1998, $11,849 in 1997, and $9,034 in 1996. At December 31, 1998 future minimum rents payable under noncancelable leases with initial terms exceeding one year were as follows: 1999.......... $11,684 2000.......... 8,957 2001.......... 4,509 2002.......... 3,973 2003.......... 3,317 2004-2008..... 9,672 At December 31, 1998, the Company had long-term lease obligations related to three Tylan manufacturing sites vacated as part of the Tylan integration. Amounts associated with these leases are excluded from the above presentation. Costs expected to be incurred by the Company to vacate these premises prior to completion of each respective lease term are accrued as discussed in Note E. As part of the announced restructuring program, the Company plans to establish regional transaction service centers resulting in the elimination of duplicate facilities. The Company will vacate these facilities by 2000. Accordingly, future rents payable under these leases are included for 1999 through 2000. Costs expected to be incurred by the Company to vacate these premises prior to completion of each respective lease term are accrued, as discussed in Note C. NOTE O--Stock Plans Stock Option Plans The Company has two fixed option plans which reserve shares of common stock for issuance to key employees and directors, respectively. The Company also has a stock purchase plan which allows employees to purchase shares of the Company's common stock as discussed below. The Company has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's net income and basic earnings per share would have been reduced by $3,748 or $0.08 per share in 1998, $2,112 or $0.05 per share in 1997, and $1,015 or $0.02 per share in 1996. The weighted average fair value of options granted under the stock option plan was $8.29 in 1998, $11.13 in 1997, and $12.48 in 1996. The weighted average fair value of shares issued under the employee stock purchase plan was $4.61 in 1998 and 1997, and $3.97 in 1996. The pro forma expense amounts assume that the fair value assigned to the option grants was amortized over the vesting period of the F-21 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) options, which is four years, while the fair value assigned to grants under the stock purchase plan is recognized in full at the date of grant. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes model with the following assumptions in 1998, 1997 and 1996: expected life of five years and an expected annual dividend increase of $.04 per year. The expected volatility was 30 percent in 1998 and 25 percent in 1997 and 1996. The weighted average risk-free interest rate was 4.5 percent in 1998, 5.9 percent in 1997 and 6.1 percent in 1996. This rate approximated that of 5 year U.S. government interest bearing securities. 1995 Combined Stock Option Plan During 1996, the Company adopted the "1995 Combined Stock Option Plan", which replaced the "1985 Combined Stock Option Plan". The terms of the 1995 Plan are substantially similar to those of the 1985 Plan. In conjunction with the adoption of the 1995 Plan, shares authorized for issuance under the Plan, when aggregated with shares authorized under the 1985 Plan, were increased from 8,100,000 to 9,131,000. The Plan provides that the option price per share may not be less than the fair market value of the stock at the time the option is granted and that options must expire not later than 10 years from the date of grant. Non-Employee Director Stock Option Plan Under the Company's Non-Employee Director Stock Option Plan, each eligible director receives an option to purchase 4,000 shares of Millipore common stock on the date of his or her first election, and thereafter automatically receives an additional option to purchase 2,000 shares at the first board of directors meeting following the Annual Meeting of Shareholders. The plan provides that the option price per share may not be less than the fair market value of the stock at the time the option is granted. At December 31, 1998, 153,500 options are both issued and outstanding. Stock activity under both the 1995 Combined Stock Option Plan and the Non-Employee Director Stock Option Plan is presented as follows:
Weighted Average ---------------- Option Option Exercise Price ------ ------ -------------- Shares Price Per Share ------ ----- --------- Outstanding at December 31, 1995............. 3,056,000 $13.56-$37.63 $ 20.76 Granted................................ 479,000 $37.63-$42.00 $ 41.29 Exercised.............................. (384,000) $13.56-$37.63 $ 17.37 Canceled............................... (62,000) $16.88-$37.63 $ 25.06 --------- ------------- ---------- Outstanding at December 31, 1996............. 3,089,000 $13.81-$42.00 $ 24.28 --------- ------------- ---------- Granted................................ 699,000 $36.94-$44.13 $ 37.98 Exercised.............................. (303,000) $13.81-$37.63 $ 18.25 Canceled............................... (24,000) $17.44-$42.00 $ 29.19 --------- ------------- ---------- Outstanding at December 31, 1997............. 3,461,000 $13.81-$44.13 $ 27.54 --------- ------------- ---------- Granted................................ 884,000 $18.88-$48.13 $ 29.07 Exercised.............................. (155,000) $14.50-$23.69 $ 17.32 Canceled............................... (79,000) $17.25-$43.50 $ 36.74 --------- ------------- ---------- Outstanding at December 31, 1998............. 4,111,000 $13.81-$48.13 $ 28.08 --------- ------------- ---------- Exercisable at: December 31, 1998...................... 2,408,000 December 31, 1997...................... 2,092,000 December 31, 1996...................... 1,926,000
F-22 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) The following table summarizes information about stock options at December 31, 1998:
Options Outstanding Options Exercisable ---------------------------------------------------------- ------------------------------ Weighted -------- Average Weighted ------- -------- Options Remaining Average Weighted ------- --------- ------- -------- Range of Outstanding Contractual Exercise Exercisable Average -------- ----------- ----------- -------- ----------- ------- Exercise Price at 12/31/98 Life Price at 12/31/98 Exercise Price -------------- ----------- ---- ----- ----------- -------------- $13.81-$23.69 1,771,000 5 $ 18.68 1,763,000 $ 18.67 $26.38-$37.50 1,431,000 10 $ 32.06 148,000 $ 36.27 $37.63-$48.13 909,000 8 $ 40.14 497,000 $ 39.61 ------------- --------- --------- $13.81-$48.13 4,111,000 2,408,000
Employees' Stock Purchase Plan Under the Company's Employees' Stock Purchase Plan, all employees of the Company and its subsidiaries who have 90 days continuous service prior to the beginning of the plan year, May 1, may purchase shares of Millipore common stock by payroll deduction. The purchase price per share during the plan year is the lesser of the fair market value of the common stock at the time of purchase or on May 1. In 1998, 1997 and 1996, shares issued under the Plan were 38,000, 33,000 and 72,000, respectively. As of December 31, 1998, 225,000 shares of Millipore common stock were available for sale to employees under the Plan. Incentive Plan for Senior Management Under this plan, Millipore common stock is awarded to key members of senior management at no cost to them. The stock cannot be sold, assigned, transferred or pledged during a restriction period which is normally four years but in some cases may be less. In most instances, shares are subject to forfeiture should employment terminate during the restriction period. The stock issued under the plan is recorded at its fair market value on the award date; the related deferred compensation is amortized to selling, general and administrative expenses over the restriction period. At the end of 1998, 1997, and 1996, 139,000, 117,000 and 119,000 shares, respectively, were outstanding under the plan. Plan expense was $800 in 1998, $657 in 1997 and $559 in 1996. As of December 31, 1998, 9,500 shares of Millipore common stock were available for future awards under this plan. NOTE P--Employee Retirement Plans Participation and Savings Plan The Millipore Corporation Employees' Participation and Savings Plan ("Participation and Savings Plan"), maintained for the benefit of all U.S. employees, combines both a defined contribution plan ("Participation Plan") and an employee savings plan ("Savings Plan"). Contributions to the Participation Plan are allocated among the U.S. employees of the Company who have completed at least two years of continuous service on the basis of the compensation they received during the year for which the contribution is made. The Savings Plan allows employees with one year of continuous service to make certain tax-deferred voluntary contributions which the Company matches with a 25 percent contribution (50 percent contribution for employees with 10 or more years of service). Total expense under the Participation and Savings Plan was $7,392 in 1998, $6,700 in 1997 and $4,866 in 1996. F-23 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) Retirement Plan The Company's Retirement Plan for Employees of Millipore Corporation ("Retirement Plan") is a defined benefit plan for all U.S. employees which provides benefits to the extent that assets of the Participation Plan, described above, do not provide guaranteed retirement income levels. Guaranteed retirement income levels are determined based on years of service and salary level as integrated with Social Security benefits. Employees are eligible under the Retirement Plan after one year of continuous service and are vested after five years of service. For accounting purposes, the Company uses the projected unit credit method of actuarial valuation. The actuarial method for funding purposes is the entry age normal method. The Company contributes annually to the Retirement Plan, subject to Internal Revenue Service and ERISA funding limitations. No contributions were required for 1998, 1997 and 1996. Plan assets are invested primarily in mutual funds and money market funds. In addition to the Retirement Plan, the Company sponsors several unfunded defined benefit postretirement plans covering all U.S. employees, which are included in Other Benefits. The plans provide medical and life insurance benefits and are, depending on the plan, either contributory or non-contributory. Plan data as of December 31, 1997 includes assets and obligations pertaining to employees of the Company's former Waters Division, as the assets subject to these former employees had not yet been transferred to Waters Corporation. In the second quarter of 1998, the Company transferred $2,440 of plan assets (including interest through the date of the transfer) and $400 of benefit obligations from its Retirement Plan to the Waters Retirement Plan. In order to fund the transfer, the Company made a contribution of $2,255 to its Retirement Plan in accordance with ERISA funding requirements. These amounts had been previously accrued and included in net loss on disposal of discontinued operations in 1994. The following tables summarize the funded status of the Employee Retirement Plans and amounts reflected in the Company's consolidated balance sheets at December 31, based on Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. F-24 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data)
Pension Benefits Other Benefits ---------------- -------------- 1998 1997 1998 1997 -------- -------- -------- -------- Change in benefit obligation: Benefit obligation at beginning of year .......... $ 7,824 $ 7,022 $ 6,584 $ 6,809 Service cost ..................................... 27 270 379 317 Interest cost .................................... 524 523 448 418 Plan participants' contributions ................. 321 245 75 71 Actuarial loss (gain) ............................ 552 423 515 (777) Acquisitions ..................................... -- -- -- 150 Benefits paid .................................... (1,006) (659) (428) (404) Settlement ....................................... (400) -- -- -- -------- -------- -------- -------- Benefit obligation at end of year ................ $ 7,842 $ 7,824 $ 7,573 $ 6,584 ======== ======== ======== ======== Change in plan assets: Fair value of plan assets at beginning of year ... $ 8,794 $ 7,657 $ -- $ -- Actual return on plan assets ..................... 1,311 1,551 -- -- Company contributions ............................ 2,255 -- 353 333 Plan participant contribution .................... 321 245 75 71 Benefits paid .................................... (1,006) (659) (428) (404) Settlement ....................................... (2,440) -- -- -- -------- -------- -------- -------- Fair value of plan assets at end of year ......... $ 9,235 $ 8,794 $ -- $ -- ======== ======== ======== ======== Funded status ........................................... $ 1,394 $ 970 $ (7,573) $ (6,584) Unrecognized net loss (gain) ............................ 2,235 2,542 (2,939) (3,587) Unrecognized prior service cost ......................... 89 100 -- -- Unrecognized net transition obligation .................. (311) (411) -- -- -------- -------- -------- -------- Prepaid (accrued) benefit cost .......................... $ 3,407 $ 3,201 $(10,512) $(10,171) ======== ======== ======== ========
Pension Benefits Other Benefits ---------------- -------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Weighted average assumptions as of December 31: Discount rate................................ 6.5% 7.0% 7.5% 6.5% 7.0% 7.5% Expected return on plan assets............... 8.0% 8.0% 8.0% N/A N/A N/A Rate of compensation increase................ 5.0% 5.0% 5.0% N/A N/A N/A
For measurement purposes, a 6 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5 percent for 2000 and remain at that level thereafter.
Pension Benefits Other Benefits ---------------- -------------- 1998 1997 1996 1998 1997 1996 ----- ----- ----- ----- ----- ----- Components of net periodic benefit cost: Service cost (benefit) ................... $ 27 $ 270 $ (29) $ 379 $ 317 $ 298 Interest cost ............................ 524 523 499 449 418 453 Expected return on plan assets ........... (690) (589) (569) -- -- -- Amortization of unrecognized gain ........ (82) (84) (84) (133) (166) (205) Amortization of prior service cost ....... 11 11 11 -- -- -- Recognized actuarial loss ................ 121 187 274 -- -- -- ----- ----- ----- ----- ----- ----- Net periodic benefit cost ................ $ (89) $ 318 $ 102 $ 695 $ 569 $ 546 ===== ===== ===== ===== ===== =====
F-25 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects.
1% Point 1% Point -------- -------- Increase Decrease -------- -------- Effect on total of services and interest cost components... $ 133 $ (114) Effect on postretirement benefit obligations............... 960 (852)
NOTE Q--Business Segment Information The Company adopted Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" (FAS 131) as of December 31, 1998 and prior year information was restated in conformity with this accounting standard. The Company has two reportable business segments as defined by the FAS 131--Biopharmaceutical & Research and Microelectronics. The Biopharmaceutical & Research segment develops, manufactures and sells consumable products and capital equipment to pharmaceutical companies, biotechnology companies, food and beverage companies, university and government laboratories and research institutes. The segment also provides process design, engineering and repair services to it customers. The product offering of the Biopharmaceutical & Research segment include membranes, membrane based filter and separation devices, test kits, laboratory water purification systems, resin based cartridge filters, laboratory test equipment and manufacturing process equipment. The segment's products are used in laboratory and research applications for detecting and identifying molecules, compounds or micro-organisms in a fluid sample. Filters, separation devices and process equipment sold by the segment are used in manufacture of pharmaceutical products, diagnostic devices and beverages to isolate and purify specific components or to remove contaminants in a fluid stream. The products are sold worldwide principally through a direct sales force. Distributors are used in selected regions for specific product lines. The Microelectronics segment develops, manufactures and sells consumables and capital equipment to semiconductor fabrication companies as well as OEM suppliers to those companies. The segment also provides capital equipment warranty and repair services to its customers. Microelectronics products include membrane and metal based filters, housings, precision liquid dispense filtration pumps, resin based gas purifiers and mass flow and pressure controllers. The segment's products are used by customers in manufacturing operations to remove contaminants in process fluid streams and process gas applications to purify process gases, to measure and control flow rates in process gas streams and to control and monitor pressure and vacuum levels in process chambers. The products are sold worldwide through a direct sales force. The operating segment results for Biopharmaceutical & Research, Microelectronics and Corporate included below are presented in "local currencies". For comparability of financial results, the foreign currency balances, in all periods presented, are translated at Millipore's 1998 budgeted exchange rates which differ from actual rates of exchange. The foreign exchange impact is shown separately and reconciles the local currency reporting to the consolidated results at the actual rates of exchange. This provides a clearer presentation of underlying trends in the Company's business, before the impact of foreign currency translation. F-26 MILLIPORE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands except share and per share data) Operating Segments:
Consolidated Net Sales ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Biopharmaceutical & Research ............... $ 526,982 $ 491,369 $ 409,831 Microelectronics ........................... 188,222 261,810 159,944 Foreign exchange ........................... (15,897) 5,740 48,960 ---------- ---------- ---------- Total net sales ....................... $ 699,307 $ 758,919 $ 618,735 ========== ========== ==========
Consolidated Operating (Loss) Income ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Biopharmaceutical & Research ............... $ 107,932 $ 100,190 $ 82,292 Microelectronics ........................... (16,627) 33,748 40,021 Corporate .................................. (26,820) (27,726) (23,366) Restructuring and unusual charges .......... (60,582) (119,091) (68,311) Foreign exchange ........................... (4,569) 13,986 29,776 ---------- ---------- ---------- Total operating (loss) income ......... $ (666) $ 1,107 $ 60,412 ========== ========== ==========
Depreciation and Amortization Expense, -------------------------------------- included in Operating (Loss) Income ----------------------------------- 1998 1997 1996 ---------- ---------- ---------- Biopharmaceutical & Research ............... $ 18,013 $ 15,200 $ 13,420 Microelectronics ........................... 12,567 9,892 3,847 Corporate .................................. 13,109 14,504 10,334 Foreign exchange ........................... 720 1,065 2,986 ---------- ---------- ---------- Total depreciation and amortization ... $ 44,409 $ 40,661 $ 30,587 ========== ========== ==========
Segment Assets-- ---------------- Inventory only -------------- 1998 1997 --------- --------- Biopharmaceutical & Research....... $ 77,274 $ 82,245 Microelectronics................... 28,368 37,578 Corporate.......................... (1,083) 11,095 Foreign exchange................... 2,682 (3,726) --------- --------- Total segment assets.......... $ 107,241 $ 127,192 ========= ========= F-27 Geographical Segments: The Company attributes net sales and long-lived assets to different geographic areas on the basis of the location of the customer. The Company has three geographic regions. The United States represents greater than 90% of the Americas region. Net sales and long-lived asset information by geographic area in U.S. dollars as of December 31, 1998, 1997 and 1996 and for each of the three years ended December 31, 1998 is presented as follows: Net Sales ------------------------------ 1998 1997 1996 -------- -------- -------- Americas........... $292,173 $321,634 $217,700 Europe . 237,786 222,452 192,827 Japan and Asia..... 169,348 214,833 208,208 -------- -------- -------- Total......... $699,307 $758,919 $618,735 ======== ======== ======== Long-Lived Assets ------------------- 1998 1997 -------- -------- Americas........... $254,017 $246,264 Europe . 58,179 50,002 Japan and Asia..... 36,947 33,172 -------- -------- Total......... $349,143 $329,438 ======== ======== F-28 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Millipore Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity, and of cash flows, after the restatement described in Note B, present fairly, in all material respects, the financial position of Millipore Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts January 20, 1999, except for Note B, for which the date is November 12, 1999 F-29 Quarterly Results (Unaudited) The Company's unaudited quarterly results are summarized below.
First Second Third Fourth Quarter Quarter Quarter Quarter Year --------- --------- --------- --------- --------- (In thousands, except per share data) 1998 Net sales ........................................ $ 185,662 $ 175,172 $ 159,181 $ 179,292 $ 699,307 Cost of sales .................................... 86,429 85,507 101,493 91,038 364,467 --------- --------- --------- --------- --------- Gross profit ................................ 99,233 89,665 57,688 88,254 334,840 Selling, general and administrative expenses ..... 61,687 60,809 56,588 57,437 236,521 Research and development expenses ................ 13,135 13,910 13,301 13,232 53,578 Restructuring charges ............................ -- -- 33,641 -- 33,641 Settlement of litigation ......................... 11,766 -- -- -- 11,766 --------- --------- --------- --------- --------- Operating income (loss) ..................... 12,645 14,946 (45,842) 17,585 (666) Gain on sale of equity securities ................ 35,594 -- -- -- 35,594 Interest income .................................. 614 761 877 838 3,090 Interest expense ................................. (7,073) (7,058) (7,098) (8,245) (29,474) --------- --------- --------- --------- --------- Income (loss) before income taxes ........... 41,780 8,649 (52,063) 10,178 8,544 Provision (benefit) for income taxes ............. 10,370 1,816 (15,643) 2,137 (1,320) --------- --------- --------- --------- --------- Net income (loss) ............................. $ 31,410 $ 6,833 $ (36,420) $ 8,041 $ 9,864 ========= ========= ========= ========= ========= Net income (loss) per share: Basic ....................................... $ 0.72 $ 0.16 $ (0.83) $ 0.18 $ 0.22 Diluted ..................................... $ 0.71 $ 0.15 $ (0.83) $ 0.18 $ 0.22 Weighted average shares outstanding Basic ....................................... 43,727 43,819 43,891 44,005 43,864 Diluted ..................................... 44,307 44,327 43,891 44,294 44,289 1997 Net sales . $ 178,839 $ 192,498 $ 184,544 $ 203,038 $ 758,919 Cost of sales .................................... 80,634 86,424 82,372 92,807 342,237 --------- --------- --------- --------- --------- Gross profit ................................ 98,205 106,074 102,172 110,231 416,682 Selling, general and administrative expenses ..... 59,777 63,273 58,965 63,570 245,585 Research and development expenses ................ 13,151 15,003 14,353 13,392 55,899 Purchased research and development expense ....... 114,091 -- -- -- 114,091 --------- --------- --------- --------- --------- Operating (loss) income ..................... (88,814) 27,798 28,854 33,269 1,107 Gain on sale of equity securities ................ 1,769 -- 5,304 1,257 8,330 Interest income .................................. 761 636 708 832 2,937 Interest expense ................................. (6,024) (8,159) (8,026) (8,275) (30,484) --------- --------- --------- --------- --------- (Loss) income before income taxes ........... (92,308) 20,275 26,840 27,083 (18,110) Provision (benefit) for income taxes ............. 5,454 3,894 5,637 5,689 20,674 --------- --------- --------- --------- --------- Net (loss) income ........................... $ (97,762) $ 16,381 $ 21,203 $ 21,394 $ (38,784) ========= ========= ========= ========= ========= Net (loss) income per share: Basic .................................... $ (2.25) $ 0.38 $ 0.49 $ 0.49 $ (0.89) Diluted .................................. $ (2.25) $ 0.37 $ 0.48 $ 0.48 $ (0.89) Weighted average shares outstanding Basic ....................................... 43,391 43,512 43,565 43,629 43,527 Diluted ..................................... 43,391 44,274 44,428 44,344 43,527
F-30 EX-10.17 2 ISDA MASTER AGREEMENT - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A ANNUAL REPORT OF MILLIPORE CORPORATION For the Fiscal Year Ended December 31, 1998 **************** EXHIBITS **************** - -------------------------------------------------------------------------------- INDEX TO EXHIBITS
Exhibit Volume Exhibit No. Description Page No. - ----------- ----------- -------- 3.1 Restated Articles of Organization, as amended May 6, 1996......... ** 3.2 By Laws, as amended............................................... ** 4.1 Indenture dated as of May 3, 1995, relating to the issuance of $100,000,000 principal amount of Company's 6.78% Senior Notes due 2004.................................................... ** 4.2 Indenture dated as of April 1, 1997, relating to the issuance Debt Securities in Series............................ ** 10.1 Distribution Agreement, dated as of July 1, 1996, by and among the Company and Fisher Scientific Company................... ** 10.2 Revolving Credit Agreement, dated as of January 22, 1997, among Millipore Corporation and The First National Bank of Boston, ABM AMRO Bank N.V. and certain other lending institutions which are or become parties thereto............................... ** 10.3 Shareholder Rights Agreement, dated as of April 15, 1988, between Millipore and The First National Bank of Boston........... ** 10.4 Long Term Restricted Stock (Incentive) Plan for Senior Management ** 10.5 1985 Combined Stock Option Plan................................... ** 10.6 Supplemental Savings and Retirement Plan for Key Salaried Employees of Millipore Corporation....................... ** 10.7 Executive Termination Agreement................................... ** 10.8 Executive "Sale of Business" Incentive Termination Agreements..... ** 10.9 1995 Employee Stock Purchase Plan................................. ** 10.10 1995 Management Incentive Plan.................................... ** 10.11 1995 Combined Stock Option Plan, as amended....................... ** 10.12 Second Amendment, effective as of September 30, 1998, to Revolving Credit Agreement, dated as of January 22, 1997, among Millipore Corporation and The First National Bank of Boston, ABM AMRO Bank N.V. and certain other lending institutions...................................................... ** 10.13 Note Purchase and Exchange Agreement, as amended through November 2, 1998, between Millipore Corporation and Metropolitan Life Insurance Company............................... **
- -------------------------------------------------------------------------------- ** Incorporated by Reference to a prior filing with the Commission INDEX TO EXHIBITS [Cont'd]
Exhibit Volume Exhibit No. Description Page No. - ----------- ----------- -------- 10.14 Form of letter agreement with directors relating to the deferral of directors fees and conversion into phantom stock units....................................................... ** 10.15 1989 Stock Option Plan for Non-Employee Directors................. ** 10.16 Commercial Lease Agreement between EBP 3, Ltd. and Millipore Corporation with respect to Premises located in Allen, Texas................................................... ** 10.17 ISDA Master Agreement, dated January 27, 1994, as amended, with Morgan Guaranty Trust Company of New York.................... 5 11 Computation of Per Share Earnings................................. *+ 21 Subsidiaries of Millipore Corporation............................. ** 23 Consent of Coopers & Lybrand L.L.P............................... 65 24 Power of Attorney................................................. 67 27 Financial Data Schedule........................................... 70++++
- -------------------------------------------------------------------------------- *+ Incorporated by reference to Note F to Financial Statements on page F-13 ++++ EDGAR Filing only EXHIBIT 10.17 ISDA(R) InterNational Swap Dealers Association, Inc. MASTER AGREEMENT dated as of January 27, 1994 MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN") AND MILLIPORE CORPORATION (THE "COUNTERPARTY") have entered and/or anticipate entering into one or more transactions (each a "Transaction") that are or will he governed by this Master Agreement which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties confirming those Transactions. Accordingly, the parties agree as follows:- 1. INTERPRETATION (a) DEFINITIONS. The terms defined in Section 14 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement. (b) INCONSISTENCY. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction. (c) SINGLE AGREEMENT. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions. 2. OBLIGATIONS (a) GENERAL CONDITIONS. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement. (b) CHANGE OF ACCOUNT. Either Party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. (c) NETTING. If on any date amounts would otherwise be payable:- (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other, then, on such date, each party's obligation to make Payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election, together with the starting date (in which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of Offices through which the parties make and receive payments or deliveries. (d) DEDUCTION OR WITHHOLDING FOR TAX. (i) Gross-Up. All payments under this Agreement will be made without any deduction or withholding for or on account of any Tax unless such deduction or withholding is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, then in effect. If a party is so required to deduct or withhold, then that party ("X") will:- (1) promptly notify the other party ("Y") of such requirement; (2) pay to the relevant authorities the full amount required to be deducted or withheld (including the full amount required to be deducted or withheld from any additional amount paid by X to Y under this Section 2(d)) promptly upon the earlier of determining that such deduction or withholding is required or receiving notice that such amount has been assessed against Y: (3) promptly forward to Y an official receipt (or a certified copy), or other documentation reasonably acceptable to Y, evidencing such payment to such authorities: and (4) if such Tax is an Indemnifiable Tax, pay to Y, in addition to the payment to which Y is otherwise entitled under this Agreement, such additional amount as is necessary to ensure that the net amount actually received by Y (free and clear of Indemnifiable Taxes. Whether assessed against X or Y) will equal the full amount Y would have received had no such deduction or withholding been required. However, X will not be required to pay any additional amount to Y to the extent that it would not he required to be paid but for:- (A) the failure by Y to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d): or (B) the failure of a representation made by Y pursuant to Section 3(f) to be accurate and true unless such failure would not have occurred but for (1) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (11) a Change in Tax Law. (ii) LIABILITY. If:- (1) X is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, to make any deduction or withholding, in respect of which X would not be required to pay an additional amount to Y under Section 2(d)(i)(4); (2) X does not so deduct or withhold; and (3) a liability resulting from such Tax is assessed directly against X, then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will promptly pay to X the amount of such liability (including any related liability for interest, but including any related liability for penalties only if Y has failed to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)). (e) DEFAULT INTEREST; OTHER AMOUNTS. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement. 3. REPRESENTATIONS. Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3(l). at all times until the termination of this Agreement) that:- (A) BASIC REPRESENTATIONS. (i) STATUS. It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing; (ii) POWERS. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance; (iii) NO VIOLATION OR CONFLICT. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; (iv) CONSENTS. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and (v) OBLIGATIONS BINDING. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). (b) ABSENCE OF CERTAIN EVENTS. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party. (c) ABSENCE OF LITIGATION. There is not pending or, to its knowledge, threatened against it or any of its Affiliates any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document. (d) ACCURACY OF SPECIFIED INFORMATION. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect. (e) PAYER TAX REPRESENTATION. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(e) is accurate and true. (f) PAYEE TAX REPRESENTATIONS. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(f) is accurate and true. 4. AGREEMENTS Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party:- (a) FURNISH SPECIFIED INFORMATION. It will deliver to the other party or, in certain cases under subparagraph (iii) below, to such government or taxing authority as the other party reasonably directs:- (i) any forms, documents or certificates relating to taxation specified in the Schedule or any Confirmation; (ii) any other documents specified in the Schedule or any Confirmation; and (iii) upon reasonable demand by such other party, any form or document that may be required or reasonably requested in writing in order to allow such other party or its Credit Support Provider to make a payment under this Agreement or any applicable Credit Support Document without any deduction or withholding for or on account of any Tax or with such deduction or withholding at a reduced rate (so long as the completion, execution or submission of such form or document would not materially prejudice the legal or commercial position of the party in receipt of such demand), with any such form or document to be accurate and completed in a manner reasonably satisfactory to such other party and to be executed and to be delivered with any reasonably required certification, in each case by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable. (b) MAINTAIN AUTHORISATIONS. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future. (c) COMPLY WITH LAWS. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party. (d) TAX AGREEMENT. It will give notice of any failure of a representation made by it under Section 3(f) to be accurate and true promptly upon learning of such failure. (e) PAYMENT OF STAMP TAX. Subject to Section 11, it will pay any Stamp Tax levied or imposed upon it or in respect of its execution or performance of this Agreement by a jurisdiction in which it is incorporated, organised, managed and controlled, or considered to have its seat, or in which a branch or office through which it is acting for the purpose of this Agreement is located ("Stamp Tax Jurisdiction") and will indemnify the other party against any Stamp Tax levied or imposed upon the other party or in respect of the other party's execution or performance of this Agreement by any such Stamp Tax Jurisdiction which is not also a Stamp Tax Jurisdiction with respect to the other party. 5. EVENTS OF DEFAULT AND TERMINATION EVENTS (a) EVENTS OF DEFAULT. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party:- (i) FAILURE TO PAY OR DELIVER. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party; (ii) BREACH OF AGREEMENT. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) or to give notice of a Termination Event or any agreement or obligation under Section 4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party; (iii) CREDIT SUPPORT DEFAULT. (1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed; (2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or (3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document; (iv) MISREPRESENTATION. A representation (other than a representation under Section 3(e) or (f)) made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated; (v) DEFAULT UNDER SPECIFIED TRANSACTION. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party (1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of an acceleration of obligations under, or an early termination of, that Specified Transaction, (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of, or any payment on early termination of a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period) or (3) disaffirms, disclaims, repudiates or reject, in whole or in part, a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (vi) CROSS DEFAULT. If "Cross Default" is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event or default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period); (vii) BANKRUPTCY. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:- (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or (viii) MERGER WITHOUT ASSUMPTION. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer:- (1) the resulting surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the Other party to this Agreement; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement. (b) TERMINATION EVENTS. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes an illegality if the event is specified in (i) below, a Tax Event if the event is specified in (ii) below or a Tax Event Upon Merger if the event is specified in (iii) below, and, if specified to be applicable. a Credit Event Upon Merger if the event is specified pursuant to (iv) below or an Additional Termination Event if the event is specified pursuant to (v) below:- (i) ILLEGALITY. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party);- (1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or (2) to perform, or for any Credit Support Provider of such party to perform any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction; (ii) TAX EVENT. Due to (x) any action taken by a tax authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (y) a Change in Tax Law, the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Payment Date (1) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B)); (iii) TAX EVENT UPON MERGER. The party (the "Burdened Party") on the next succeeding Scheduled Payment Date will either (1) be required to pay an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount has been deducted or withheld for or on account of any Indemnifiable Tax in respect of which the other party is not required to pay an additional amount (other than by reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a party consolidating or amalgamating with, or merging with or into, or transferring all or substantially all its assets to, another entity (which will be the Affected Party) where such action does not constitute an event described in Section 5(a)(viii); (iv) CREDIT EVENT UPON MERGER. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, such party ("X"), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or (v) ADDITIONAL TERMINATION EVENT. If any "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation). (c) EVENT OF DEFAULT AND ILLEGALITY. If an event or circumstance which would otherwise constitute or give rise to an Event of Default also constitutes an Illegality, it will be treated as an Illegality and will not constitute an Event of Default. 6. EARLY TERMINATION (a) RIGHT TO TERMINATE FOLLOWING EVENT OF DEFAULT. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a )(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (b) RIGHT TO TERMINATE FOLLOWING TERMINATION EVENT. (i) NOTICE. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) TRANSFER TO AVOID TERMINATION EVENT. If either an Illegality under Section 5(b)(i)(1) or a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected Party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, excluding immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist. If the Affected Party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i). Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such other party's policies in effect at such time would permit it to enter into transactions with a transferee on the terms proposed. (iii) TWO AFFECTED PARTIES. If an Illegality under Section 5(b)(i)(1) or a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event. (iv) Right to Terminate. If:- (1) a transfer under Section 6(b)(ii) or an agreement under Section 6(b)(iii), as the case may be, has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or (2) an Illegality under Section 5(b)(i)(2), a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax Event Upon Merger occurs and the Burdened Party is not the Affected Party, either party in the case of an Illegality, the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event or an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions. (c) EFFECT OF DESIGNATION. (i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). (d) CALCULATIONS. (i) STATEMENT. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation the records of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation. (ii) PAYMENT DATE. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment) in the Termination Currency, from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (e) PAYMENTS ON EARLY TERMINATION. If an Early Termination Date occurs, the following Provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) EVENTS OF DEFAULT. If the Early Termination Date results from an Event of Default:- (1) FIRST METHOD AND MARKET QUOTATION. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. (2) FIRST METHOD AND LOSS. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party's Loss in respect of this Agreement. (3) SECOND METHOD AND MARKET QUOTATION. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (4) SECOND METHOD AND LOSS. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (ii) TERMINATION EVENTS. If the Early Termination Date results from a Termination Event:- (1) ONE AFFECTED PARTY. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and. if Loss applies and fewer than all the Transactions are being terminated, Loss shall be calculated in respect of all Terminated Transactions. (2) TWO AFFECTED PARTIES. If there are two Affected Parties:- (A) if Market Quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (i) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount ("X") and the Settlement Amount of the party with the lower Settlement Amount ("Y") and (b) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (ii) the Termination Currency Equivalent of the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between the Loss of the party with the higher Loss ("X") and the Loss of the party with the lower Loss ("Y"). If the amount payable is a positive number, Y will pay it to X. If it is a negative number, X will pay the absolute value of that amount to Y. (iii) ADJUSTMENT FOR BANKRUPTCY. In circumstances where an Early Termination Date occurs because "Automatic Early Termination" applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) PRE-ESTIMATE. The parties agree that if Market Quotation applies in amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses. 7. TRANSFER Subject to Section 6(b)(ii), neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that:- (a) a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and (b) a party may make such a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under Section 6(c). Any purported transfer that is not in compliance with this Section will be void. 8. CONTRACTUAL CURRENCY (a) PAYMENT IN THE CONTRACTUAL CURRENCY. Each payment under this Agreement will be made in the relevant currency specified in this Agreement for that payment (the "Contractual Currency"). To the extent permitted by applicable law, any obligation to make payments under this Agreement in the Contractual Currency will not be discharged or satisfied by any tender in any currency other than the Contractual Currency, except to the extent such tender results in the actual receipt by the party to which payment is owed, acting in a reasonable manner and in good faith in converting the currency so tendered into the Contractual Currency, of the full amount in the Contractual Currency of all amounts payable in respect of this Agreement. If for any reason the amount in the Contractual Currency so received falls short of the amount in the Contractual Currency payable in respect of this Agreement the party required to make the payment will, to the extent permitted by applicable law, immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall. If for any reason the amount in the Contractual Currency so received exceeds the amount in the Contractual Currency payable in respect of this Agreement, the party receiving the payment will refund promptly the amount of such excess. (b) JUDGMENTS. To the extent permitted by applicable law, if any judgment or order expressed in a currency other than the Contractual Currency is rendered (i) for the payment of any amount owing in respect of this Agreement, (ii) for the payment of any amount relating to any early termination in respect of this Agreement or (iii) in respect of a judgment or order of another court for the payment of any amount described in (i) or (ii) above, the party seeking recovery, after recovery in full of the aggregate amount to which such party is entitled pursuant to the judgment or order, will be entitled to receive immediately from the other party the amount of any shortfall of the Contractual Currency received by such party as a consequence of sums paid in such other currency and will refund promptly to the other party any excess of the Contractual Currency received by such party as a consequence of sums paid in such other currency if such shortfall or such excess arises or results from any variation between the rate of exchange at which the Contractual Currency is converted into the currency of the judgment or order for the purposes of such judgment or order and the rate of exchange at which such party is able, acting in a reasonable manner and in good faith in converting the currency received into the Contractual Currency, to purchase the Contractual Currency with the amount of the currency of the judgment or order actually received by such party. The term "rate of exchange" includes, without limitation, any premiums and costs of exchange payable in connection with the purchase of or conversion into the Contractual Currency. (c) SEPARATE INDEMNITIES. To the extent permitted by applicable law, these indemnities constitute separate and independent obligations from the other obligations in this Agreement, will be enforceable as separate and independent causes of action, will apply notwithstanding any indulgence granted by the party to which any payment is owed and will not be affected by judgment being obtained or claim or proof being made for any other sums payable in respect of this Agreement. (d) EVIDENCE OF LOSS. For the purpose of this Section 8, it will be sufficient for a party to demonstrate that it would have suffered a loss had an actual exchange or purchase been made. 9. MISCELLANEOUS (a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. (b) AMENDMENTS. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system. (c) SURVIVAL OF OBLIGATIONS. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction. (d) REMEDIES CUMULATIVE. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law. (e) COUNTERPARTS AND CONFIRMATIONS. (i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. (ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex or electronic message constitutes a Confirmation. (f) NO WAIVER OF RIGHTS. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise of that right, power or privilege or the exercise of any other right, power or privilege. (g) HEADINGS. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to he taken into consideration in interpreting this Agreement. 10. OFFICES: MULTIBRANCH PARTIES (a) If Section 10(a) is specified in the Schedule as applying each party that enters into a Transaction through an Office other than its head or home office represents to the other party that, notwithstanding the place of booking office or jurisdiction of incorporation or organisation of such party, the obligations of such party are the same as if it had entered into the Transaction through its head or home office. This representation will be deemed to be repeated by such party on each date on which a Transaction is entered into. (b) Neither party may change the Office through which it makes and receives payments or deliveries for the purpose of a Transaction without the prior written consent of the other party. (c) If a party is specified as a Multibranch Party in the Schedule, such Multibranch Party may make and receive payments or deliveries under any Transaction through any Office listed in the Schedule, and the Office through which it makes and receives payments or deliveries with respect to a Transaction will be specified in the relevant Confirmation. 11. EXPENSES A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including 1egal fees and Stamp Tax incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection. 12. NOTICES (a) EFFECTIVENESS. Any notice or other communication in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated:- (i) if in writing and delivered in person or by courier, on the date it is delivered; (ii) if sent by telex, on the date the recipient's answerback is received; (iii) if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine); (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested) on the date that mail is delivered or its delivery is attempted; or (v) if sent by electronic massaging system, on the date that electronic message is received, unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Local Business Day. (b) CHANGE OF ADDRESSES. Either party may by notice to the other change the address, telex or facsimile number or electronic massaging system details at which notices or other communications are to be given to it. 13. GOVERNING LAW AND JURISDICTION (a) GOVERNING LAW. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. (b) JURISDICTION. With respect to any suit, action or proceedings relating to this Agreement ("Proceedings"), each party irrevocably:- (i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law or to the nonexclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and (ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction. (c) SERVICE OF PROCESS. Each party irrevocably appoints the Process Agent (if any) specified opposite its name in the Schedule to receive, for it and on its behalf, service of process in any Proceedings. If for any reason any party's Process Agent is unable to act as such, such party will promptly notify the other party and within 30 days, appoint a substitute process agent acceptable to the other party. The parties irrevocably consent to service of process given in the manner provided for notices in Section 12. Nothing in this Agreement will affect the right of either party to serve process in any other manner permitted by law. (d) WAIVER OF IMMUNITIES. Each party irrevocably waives to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, or jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery or property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings. 14. DEFINITIONS AS USED IN THIS AGREEMENT:- "ADDITIONAL TERMINATION EVENT" has the meaning specified in Section 5(b). "AFFECTED PARTY" has the meaning specified in Section 5(b). "AFFECTED TRANSACTIONS" means (a) with respect to any Termination Event consisting of an Illegality, Tax Event or Tax Event Upon Merger, all Transactions affected by the occurrence of such Termination Event and (b) with respect to any other Termination Event all Transactions. "AFFILIATE" means subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, "control" of any entity or person means ownership of a majority of the voting power of the entity or person. "APPLICABLE RATE" means:- (a) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate; (b) in respect of an obligation to pay an amount under Section 6(c) of either party from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate; (c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate; and (d) in all other cases the Termination Rate. "BURDENED PARTY" has the meaning specified in Section 5(b). "CHANGE IN TAX LAW" means the enactment promulgation, execution or ratification of, or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs on or after the date on which the relevant Transaction is entered into. "CONSENT" includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange control consent. "CREDIT EVENT UPON MERGER" has the meaning specified in Section 5(b). "CREDIT SUPPORT DOCUMENT" means any agreement or instrument that is specified as such in this Agreement. "CREDIT SUPPORT PROVIDER" has the meaning specified in the Schedule. "DEFAULT RATE" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum. "DEFAULTING PARTY" has the meaning specified in Section 6(a). "EARLY TERMINATION DATE" means the date determined in accordance with Section 6(a) or 6(b)(iv). "EVENT OF DEFAULT" has the meaning specified in Section 5(a) and, if applicable, in the Schedule. "ILLEGALITY" has the meaning specified in Section 5(b). "INDEMNIFIABLE TAX" means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction, or being or having been organised, present or engaged in a trade or business in such jurisdiction, or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document). "LAW" includes any treaty, law. rule or regulation (as modified in the case of tax matters by the practice of any relevant governmental revenue authority) and "lawful" and "unlawful" will be construed accordingly. "LOCAL BUSINESS DAY" means subject to the Schedule, a day on which commercial banks open for business (including dealings in foreign exchange and foreign currency deposits) (a) in relation to any obligation under Section 2(a)(i), in the place(s) specified in the relevant Confirmation or, if not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained or incorporated by reference in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located and, if different, in the principal financial centre, if any, of the currency of such payment, (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), in the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations for performance with respect to such Specified Transaction. "LOSS" means, with respect to this Agreement or one, or more Terminated Transactions as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or re-establishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made except so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out-of-pocket expenses referred to under Section 11. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. "MARKET QUOTATION" means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the "Replacement Transaction") that would have the effect of preserving for such Party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the "satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement Transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined. "NON-DEFAULT RATE" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount. "NON-DEFAULTING PARTY" has the meaning specified in Section 6(a). "OFFICE" means a branch or office of a party, which may be such party's head or home office. "POTENTIAL EVENT OF DEFAULT" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. "REFERENCE MARKET-MAKERS" means four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a) from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b) to the extent practicable, from among such dealers having an office in the same city. "RELEVANT JURISDICTION" means, with respect to a party, the jurisdictions (a) in which the party is incorporated, organised, managed and controlled or considered to have its seat, (b) where an Office through which the party is acting for purposes of this Agreement is located, (c) in which the party executes this Agreement and (d) in relation to any payment from or through which such payment is made. "SCHEDULED PAYMENT DATE" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction. "SET-OFF" means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under this Agreement, another contract, applicable law or otherwise) that is exercised by, or imposed on such payer. "SETTLEMENT AMOUNT" means, with respect to a party and any Early Termination Date, the sum of:-- (a) the Termination Currency Equivalent of the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such party's Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result. "SPECIFIED ENTITY" has the meaning specified in the Schedule. "SPECIFIED INDEBTEDNESS" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money. "SPECIFIED TRANSACTION" means, subject to the Schedule, (a) any transaction (including an agreement with respect thereto) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other group) which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. "STAMP TAX" means any stamp, registration, documentation or similar tax. "Tax" means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest, penalties and additions thereto) that is imposed by any government or other taxing authority in respect of any payment under this Agreement other than a stamp, registration, documentation or similar tax. "TAX EVENT" has the meaning specified in Section 5(b). "TAX EVENT UPON MERGER" has the meaning specified in Section 5(b). "TERMINATED TRANSACTIONS" means with respect to any Early Termination Date (a) if resulting from a Termination Event, all Affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating that early Termination Date (or, if "Automatic Early Termination" applies, immediately before that Early Termination Date). "TERMINATION CURRENCY" has the meaning specified in the Schedule. "TERMINATION CURRENCY EQUIVALENT" means, in respect of any amount denominated in the Termination Currency, such Termination Currency amount and, in respect of any amount denominated in a currency other than the Termination Currency (the "Other Currency"), the amount in the Termination Currency determined by the party making the relevant determination as being required to purchase such amount of such Other Currency as at the relevant Early Termination Date, or, if the relevant Market Quotation or Loss (as the case may be), is determined as of a later date that later date, with the Termination Currency at the rate equal to the spot exchange rate of the foreign exchange agent (selected as provided below) for the purchase of such Other Currency with the Termination Currency at or about 11:00a.m. (in the city in which such foreign exchange agent is located) on such date as would be customary for the determination of such a rate for the purchase of such Other Currency for value on the relevant Early Termination Date or that later date. The foreign exchange agent will, if only one party is obliged to make a determination under Section 6(e), be selected in good faith by that party and otherwise will be agreed by the parties. "TERMINATION EVENT" means an Illegality, a Tax Event or a Tax Event Upon Merger or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event. "TERMINATION RATE" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts. "UNPAID AMOUNTS" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest in the currency of such amounts, from (and including) the date such amounts obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall he reasonably determined by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the Termination Currency Equivalents of the fair market values reasonably determined by both parties. IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. MORGAN GUARANTY TRUST MILLIPORE CORPORATION COMPANY OF NEW YORK By: /s/ Michael Y. Leder By: /s/ Geoffrey Nunes --------------------------- ---------------------------- Name: Michael Y. Leder Name: Geoffrey Nunes Title: Vice President Title: Senior Vice President and Date: General Counsel Date: April 4, 1994 ISDA INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC. CREDIT SUPPORT ANNEX to the Schedule to the MASTER AGREEMENT dated as of January 27, 1994 between Morgan Guaranty Trust Company Millipore Corporation of New York ("Morgan") and ("Party B") ("Party A") This Annex supplements, forms part of, and is subject to, the above-referenced Agreement, is part of its Schedule and is a Credit Support Document under this Agreement with respect to each party. Accordingly, the parties agree as follows:- PARAGRAPH 1. INTERPRETATION (a) DEFINITIONS AND INCONSISTENCY. Capitalized terms not otherwise defined herein or elsewhere in this Agreement have the meanings specified pursuant to Paragraph 12, and all references in this Annex to Paragraphs are to Paragraphs of this Annex. In the event of any inconsistency between this Annex and the other provisions of this Schedule, this Annex will prevail, and in the event of any inconsistency between Paragraph 13 and the other provisions of this Annex, Paragraph 13 will prevail. (b) SECURED PARTY AND PLEDGOR. All references in this Annex to the "Secured Party" will be to either party when acting in that capacity and all corresponding references to the "Pledgor" will be to the other party when acting in that capacity; provided, however, that if Other Posted Support is held by a party to this Annex, all references herein to that party as the Secured Party with respect to that Other Posted Support will be to that party as the beneficiary thereof and will not subject that support or that party as the beneficiary thereof to provisions of law generally relating to security interests and secured parties. PARAGRAPH 2. SECURITY INTEREST Each party, as the Pledgor, hereby pledges to the other party, as the Secured Party, as security for its Obligations, and grants to the Secured Party a first priority continuing security interest in, lien on and right of Set-off against all Posted Collateral Transferred to or received by the Secured Party hereunder. Upon the Transfer by the Secured Party to the Pledgor of Posted Collateral, the security interest and lien granted hereunder on that Posted Collateral will be released immediately and, to the extent possible, without any further action by either party. PARAGRAPH 3. CREDIT SUPPORT OBLIGATIONS (a) DELIVERY AMOUNT. Subject to Paragraphs 4 and 5, upon a demand made by the Secured Party on or promptly following a Valuation Date, if the Delivery Amount for that Valuation Date equals or exceeds the Pledgor's Minimum Transfer Amount, then the Pledgor will Transfer to the Secured Party Eligible Credit Support having a Value as of the date of Transfer at least equal to the applicable Delivery Amount (rounded pursuant to Paragraph 13). Unless otherwise specified in Paragraph 13, the "DELIVERY AMOUNT" applicable to the Pledgor for any Valuation Date will equal the amount by which: (i) the Credit Support Amount exceeds (ii) the Value as of that Valuation Date of all Posted Credit Support held by the Secured Party. (b) RETURN AMOUNT. Subject to Paragraphs 4 and 5, upon a demand made by the Pledgor on or promptly following a Valuation Date, if the Return Amount for that Valuation Date equals or exceeds the Secured Party's Minimum Transferred Amount then the Secured Party will Transfer to the Pledgor Posted Credit Support specified by the Pledgor in that demand having a Value as of the date of Transfer as close as practicable to the applicable Return Amount (rounded pursuant to Paragraph 13). Unless otherwise specified in Paragraph 13, the "RETURN AMOUNT" applicable to the Secured Party for any Valuation Date will equal the amount by which: (i) the Value as of that Valuation Date of all Posted Credit Support held by the Secured Party exceeds (ii) the Credit Support Amount. "CREDIT SUPPORT AMOUNT" means, unless otherwise specified in Paragraph 13, for any Valuation Date (i) the Secured Party's Exposure for that Valuation Date plus (ii) the aggregate of all Independent Amounts applicable to the Pledgor, if any, minus (iii) all Independent Amounts applicable to the Secured Party, if any, minus (iv) the Pledgor's Threshold; provided, however, that the Credit Support Amount will be deemed to be zero whenever the calculation of Credit Support Amount yields a number less than zero. PARAGRAPH 4. CONDITIONS PRECEDENT, TRANSFER TIMING, CALCULATIONS AND SUBSTITUTIONS (a) CONDITIONS PRECEDENT. Each Transfer obligation of the Pledgor under Paragraphs 3 and 5 and of the Secured Party under Paragraphs 3, 4(d)(ii), 5 and 6(d) is subject to the conditions precedent that: (i) no Event of Default, Potential Event of Default or Specified Condition has occurred and is continuing with respect to the other party; and (ii) no Early Termination Date for which any unsatisfied payment obligations exist has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the other party. (b) TRANSFER TIMING. Subject to Paragraphs 4(a) and 5 and unless otherwise specified, if a demand for the Transfer of Eligible Credit Support or Posted Credit Support is made by the Notification Time, then the relevant Transfer will be made not later than the close of business on the next Local Business Day, if a demand is made after the Notification Time, then the relevant Transfer will be made not later than the close of business on the second Local Business Day thereafter. (c) CALCULATIONS. All calculations of Value and Exposure for purposes of Paragraphs 3 and 6(d) will be made by the Valuation Agent as of the Valuation Time. The Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) of its calculations not later than the Notification Time on the Local Business Day following the applicable Valuation Date (or in the case of Paragraph 6(d), following the date of calculation). (d) SUBSTITUTIONS. (i) unless otherwise specified in Paragraph 13, upon notice to the Secured Party specifying the items of Posted Credit Support to be exchanged, the Pledgor may, on any Local Business Day, Transfer to the Secured Party substitute Eligible Credit Support (the "Substitute Credit Support"); and (ii) subject to Paragraph 4(a), the Secured Party will Transfer to the Pledgor the items of Posted Credit Support specified by the Pledgor in its notice not later than the Local Business Day following the date on which the Secured Party receives the Substitute Credit Support, unless otherwise specified in Paragraph 13 (the "Substitution Date"); provided that the Secured Party will only be obligated to Transfer Posted Credit Support with a Value as of the date of Transfer of that Posted Credit Support equal to the Value as of that date of the Substitute Credit Support. PARAGRAPH 5. DISPUTE RESOLUTION If a party (a "Disputing Party") disputes (I) the Valuation Agent's calculation of a Delivery Amount or a Return Amount or (II) the Value of any Transfer of Eligible Credit Support or Posted Credit Support, then (1) the Disputing Party will notify the other party and the Valuation Agent (if the Valuation Agent is not the other party) not later than the close of business on the Local Business Day following (X) the date that the demand is made under Paragraph 3 in the case of (I) above or (Y) the date of Transfer in the case of (II) above, (2) subject to Paragraph 4(a), the appropriate party will Transfer the undisputed amount to the other party not later than the close of business on the Local Business Day following (X) the date that the demand is made under Paragraph 3 in the case of (I) above or (Y) the date of Transfer in the case of (II) above, (3) the parties will consult with each other in an attempt to resolve the dispute and (4) if they fail to resolve the dispute by the Resolution Time, then:(i) In the case of a dispute involving a Delivery Amount or Return Amount, unless otherwise specified in Paragraph 13, the Valuation Agent will recalculate the Exposure and the Value as of the Recalculation Date by:(A) utilizing any calculations of Exposure for the Transactions (or Swap Transactions) that the parties have agreed are not in dispute;(B) calculating the Exposure for the Transactions (or Swap Transactions) in dispute by seeking four actual quotations at mid- market from Reference Market-makers for purposes of calculating Market Quotation, and taking the arithmetic average of those obtained; provided that if four quotations are not available for a particular Transaction (or Swap Transaction), then fewer than four quotations may be used for that Transaction (or Swap Transaction); and if no quotations are available for a particular Transaction (or Swap Transaction), then the Valuation Agent's original calculations will be used for that Transaction (or Swap Transaction); and (C) utilizing the procedures specified in Paragraph 13 for calculating the Value, if disputed, of Posted Credit Support.(ii) In the case of a dispute involving the Value of any Transfer of Eligible Credit Support or Posted Credit Support, the Valuation Agent will recalculate the Value as of the date of Transfer pursuant to Paragraph 13. Following a recalculation pursuant to this Paragraph, the Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) not later than the Notification Time on the Local Business Day following the Resolution Time. The appropriate party will, upon demand following that notice by the Valuation Agent or a resolution pursuant to (3) above and subject to Paragraphs 4(a) and 4(b), make the appropriate Transfer. PARAGRAPH 6. HOLDING AND USING POSTED COLLATERAL (a) CARE OF POSTED COLLATERAL. Without limiting the Secured Party's rights under Paragraph 6(c), the Secured Party will exercise reasonable care to assure the safe custody of all Posted Collateral to the extent required by applicable law, and in any event the Secured Party will be deemed to have exercised reasonable care if it exercises at least the same degree of care as it would exercise with respect to its own property. Except as specified in the preceding sentence, the Secured Party will have no duty with respect to Posted Collateral, including, without limitation, any duty to collect any Distributions, or enforce or preserve any rights pertaining thereto. (b) ELIGIBILITY TO HOLD POSTED COLLATERAL; CUSTODIANS. (i) GENERAL. Subject to the satisfaction of any conditions specified in Paragraph 13 for holding Posted Collateral, the Secured Party will be entitled to hold Posted Collateral or to appoint an agent (a "Custodian") to hold Posted Collateral for the Secured Party. Upon notice by the Secured Party to the Pledgor of the appointment of a Custodian, the Pledgor's obligations to make any Transfer will be discharged by making the Transfer to that Custodian. The holding of Posted Collateral by a Custodian will be deemed to be the holding of that Posted Collateral by the Secured Party for which the Custodian is acting. (ii) FAILURE TO SATISFY CONDITIONS. If the Secured Party or its Custodian fails to satisfy any conditions for holding Posted Collateral, then upon a demand made by the Pledgor, the Secured Party will, not later than five Local Business Days after the demand, Transfer or cause its Custodian to Transfer all Posted Collateral held by it to a Custodian that satisfies those conditions or to the Secured Party if it satisfies those conditions. (iii) LIABILITY. The Secured Party will be liable for the acts or omissions of its Custodian to the same extent that the Secured Party would be liable hereunder for its own acts or omissions. (c) USE OF POSTED COLLATERAL. Unless otherwise specified in Paragraph 13 and without limiting the rights and obligations of the parties under Paragraphs 3, 4(d)(ii), 5, 6(d) and 8, if the Secured Party is not a Defaulting Party or an Affected Party with respect to a Specified Condition and no Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Secured Party, then the Secured Party will, notwithstanding Section 9- 207 of the New York Uniform Commercial Code. have the right to: sell, pledge, rehypothecate, assign, invest, use, commingle or otherwise dispose of, or otherwise use in its business any Posted Collateral it holds, free from any claim or right of any nature whatsoever of the Pledgor, including any equity or right of redemption by the Pledgor; and register any Postal Collateral in the name of the Secured Party, its Custodian or a nominee for either. For purposes of the obligation to Transfer Eligible Credit Support or Posted Credit Support pursuant to Paragraphs 3 and 5 and any rights or remedies authorized under this Agreement, the Secured Party will be deemed to continue to hold all Posted Collateral and to receive Distributions made thereon, regardless of whether the Secured Party has exercised any rights with respect to any Posted Collateral pursuant to (i) or (ii) above. (d) DISTRIBUTIONS AND INTEREST AMOUNT. (i) Distributions. Subject to Paragraph 4(a), if the Secured Party receives or is deemed to receive Distributions on a Local Business Day, it will Transfer to the Pledgor not later than the following Local Business Day any Distributions it receives or is deemed to receive to the extent that a Delivery Amount would not be created or increased by that Transfer, as calculated by the Valuation Agent (and the date of calculation will be deemed to be a Valuation Date for this purpose). (ii) Interest Amount. Unless otherwise specified in Paragraph 13 and subject to Paragraph 4(a), in lieu of any interest, dividends or other amounts paid or deemed to have been paid with respect to Posted Collateral in the form of Cash (all of which may be retained by the Secured Party), the Secured Party will Transfer to the Pledgor at the times specified in Paragraph 13 the Interest Amount to the extent that a Delivery Amount would not be created or increased by that Transfer, as calculated by the Valuation Agent (and the date of calculation will be deemed to be a Valuation Date for this purpose). The Interest Amount or portion thereof not Transferred pursuant to this Paragraph will constitute Posted Collateral in the form of Cash and will be subject to the security interest granted under Paragraph 2. PARAGRAPH 7. EVENTS OF DEFAULT For purposes of Section 5(a)(iii)(1) of this Agreement, an Event of Default will exist with respect to a party if: (i) that party fails (or fails to cause its Custodian) to make, when due, any Transfer of Eligible Collateral, Posted Collateral or the Interest Amount, as applicable, required to be made by it and that failure continues for two Local Business Days after notice of that fail are is given to that party; (ii) that party fails to comply with any restriction or prohibition specified in this Annex with respect to any of the rights specified in Paragraph 6(c) and that failure continues for five Local Business Days after notice of that failure is given to that party; or (iii) that party fails to comply with or perform any agreement or obligation other than those specified in Paragraphs 7(i) and 7(ii) and that failure continues for 30-days after notice of that failure is given to that party. PARAGRAPH 8. CERTAIN RIGHTS AND REMEDIES - ----------------------------------------- (a) SECURED PARTY'S RIGHTS AND REMEDIES. If at any time (1) an Event of Default or Specified Condition with respect to the Pledgor has occurred and is continuing or (2) an Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Pledgor, then, unless the Pledgor has paid in full all of its Obligations that are then due, the Secured Party may exercise one or more of the following rights and remedies: (i) all rights and remedies available to a secured party under applicable law with respect to Posted Collateral held by the Secured Party; (ii) any other rights and remedies available to the Secured Party under the terms of Other Posted Support, if any; (iii) the right to Set-off any amounts payable by the Pledgor with respect to any Obligations against any Posted Collateral or the Cash equivalent of any Posted Collateral held by the Secured Party (or any obligation of the Secured Party to Transfer that Posted Collateral); and (iv) the right to liquidate any Posted Collateral held by the Secured Party through one or more public or private sales or other dispositions with such notice, if any, as may be required under applicable law, free from any claim or right of any nature whatsoever of the Pledgor, including any equity or right of redemption by the Pledgor (with the Secured Party having the right to purchase any or all of the Posted Collateral to be sold) and to apply the proceeds (or the Cash equivalent thereof) from the liquidation of the Posted Collateral to any amounts payable by the Pledgor with respect to any Obligations in that order as the Secured Party may elect. Each party acknowledges and agrees that Posted Collateral in the form of securities may decline speedily in value and is of a type customarily sold on a recognized market, and, accordingly, the Pledgor is not entitled to prior notice of any sale of that Posted Collateral by the Secured Party, except any notice that is required under applicable law and cannot be waived. (b) PLEDGOR'S RIGHTS AND REMEDIES. If at any time an Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Secured Party, then (except in the case of an Early Termination Date relating to less than all Transactions (or Swap Transactions) where the Secured Party has paid in full all of its obligations that are then due under Section 6(e) of this Agreement): (i) the Pledgor may exercise all rights and remedies available to a pledgor under applicable law with respect to Posted Collateral held by the Secured Party; (ii) the Pledgor may exercise any other rights and remedies available to the Pledgor under the terms of Other Posted Support, if any;the Secured Party will be obligated immediately to Transfer all Posted Collateral and the Interest Amount to the Pledgor; and to the extent that posted Collateral or the Interest Amount is not so Transferred pursuant to (iii) above, the Pledgor may: (A) Set-off any amounts payable by the Pledgor with respect to any Obligations against any Posted Collateral or the Cash equivalent of any Posted Collateral held by the Secured Party (or any obligation of the Secured Party to Transfer that Posted Collateral); and (B) to the extent that the Pledgor does not Set-off under (iv)(A) above, withhold payment of any remaining amounts payable by the Pledgor with respect to any Obligations, up to the Value of any remaining Posted Collateral held by the Secured Party, until that Posted Collateral is Transferred to the Pledgor. (c) DEFICIENCIES AND EXCESS PROCEEDS. The Secured Party will Transfer to the Pledgor any proceeds and Posted Credit Support remaining after liquidation, Set-off and/or application under Paragraphs 8(a) and 8(b) after satisfaction in full of all amounts payable by the Pledgor with respect to any Obligations; the Pledgor in all events will remain liable for any amounts remaining unpaid after any liquidation, Set-off and/or application under Paragraphs 8(a) and 8(b). (d) FINAL RETURNS. When no amounts are or thereafter may become payable by the Pledgor with respect to any Obligations (except for any potential liability under Section 2(d) of this Agreement), the Secured Party will Transfer to the Pledgor all Posted Credit Support and the Interest Amount, if any. PARAGRAPH 9. REPRESENTATIONS Each party represents to the other party (which representations will be deemed to be repeated as of each date on which it, as the Pledgor, Transfers Eligible Collateral) that: (i) it has the power to grant a security interest in and lien on any Eligible Collateral it Transfers as the Pledgor and has taken all necessary actions to authorize the granting of that security interest and lien; (ii) it is the sole owner of or otherwise has the right to Transfer all Eligible Collateral it Transfers to the Secured Party hereunder, free and clear of any security interest, lien, encumbrance or other restrictions other than the security interest and lien granted under Paragraph 2; (iii) upon the Transfer of any Eligible Collateral to the Secured Party under the terms of this Annex, the Secured Party will have a valid and perfected first priority security interest therein (assuming that any central clearing corporation or any third-party financial intermediary or other entity not within the control of the Pledgor involved in the Transfer of that Eligible Collateral gives the notices and takes the action required of it under applicable law for perfection of that interest); and (iv) the performance by it of its obligations under this Annex will not result in the creation of any security interest, lien or other encumbrance on any Posted Collateral other than the security interest and lien granted under Paragraph 2. PARAGRAPH 10. EXPENSES (a) GENERAL. Except as otherwise provided in Paragraphs 10(b) and 10(c), each party will pay its own costs and expenses in connection with performing its obligations under this Annex and neither party will be liable for any costs and expenses incurred by the other party in connection herewith. (b) POSTED CREDIT SUPPORT. The Pledgor will promptly pay when due all taxes, assessments or charges of any nature that are imposed with respect to Posted Credit Support held by the Secured Party upon becoming aware of the same, regardless of whether any portion of that Posted Credit Support is subsequently disposed of under Paragraph 6(c), except for those taxes, assessments and charges that result from the exercise of the Secured Party's rights under Paragraph 6(c). (c) LIQUIDATION/APPLICATION OF POSTED CREDIT SUPPORT. All reasonable costs and expenses incurred by or on behalf of the Secured Party or the Pledgor in connection with the liquidation and/or application of any Posted Credit Support under Paragraph 8 will be payable, on demand and pursuant to the Expenses Section of this Agreement, by the Defaulting Party or, if there is no Defaulting Party, equally by the parties. PARAGRAPH 11. MISCELLANEOUS (a) DEFAULT INTEREST. A Secured Party that fails to make, when due, any Transfer of Posted Collateral or the Interest Amount will be obligated to pay the Pledgor (to the extent permitted under applicable law) an amount equal to interest at the Default Rate multiplied by the Value of the items of property that were required to be Transferred, from (and including) the date that Posted Collateral or Interest Amount was required to be Transferred to (but excluding) the date of Transfer of that Posted Collateral or Interest Amount. This interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (b) FURTHER ASSURANCES. Promptly following a demand made by a party, the other party will execute, deliver, file and record any financing statement, specific assignment or other document and take any other action that may be necessary or desirable and reasonably requested by that party to create, preserve, perfect or validate any security interest or lien granted under Paragraph 2, to enable that party to exercise or enforce its rights under this Annex with respect to Posted Credit Support or an Interest Amount or to effect or document a release of a security interest on Posted Collateral or an Interest Amount. (c) FURTHER PROTECTION. The Pledgor will promptly give notice to the Secured Party of, and defend against any suit, action, proceeding or lien that involves Posted Credit Support Transferred by the Pledgor or that could adversely affect the interest and then granted by it under Paragraph 2, unless that suit, action, proceeding or lien results from the exercise of the Secured Party's rights under Paragraph 6(c). (d) GOOD FAITH AND COMMERCIALLY REASONABLE MANNER. Performance of all obligations under this Annex, including, but not limited to, all calculations, valuations and detentions by either party, will be made in good faith and in a commercially reasonable manner. (e) DEMANDS AND NOTICE. All demands and notices made by a party under this Annex will be made as specified in the Notices Section of this Agreement, except as otherwise provided in Paragraph 13. (f) SPECIFICATIONS OF CERTAIN MATTERS. Anything referred to in this Annex as being specified in Paragraph 13 also may be specified in one or more Confirmations or other documents and this Annex will be construed accordingly. PARAGRAPH 12. DEFINITIONS As used in this Annex:- "CASH" means the lawful currency of the United States of America. "CREDIT SUPPORT AMOUNT" has the meaning specified in Paragraph 3. "CUSTODIAN" has the meaning specified in Paragraphs 6(b)(i) and 13. "DELIVERY AMOUNT" has the meaning specified in Paragraph 3(a). "DISPUTING PARTY" has the meaning specified in Paragraph 5. "DISTRIBUTIONS" means with respect to Posted Collateral other than Cash, all principal, interest and other payments and distributions of cash or other property with respect thereto, regardless of whether the Secured Party has disposed of that Posted Collateral under Paragraph 6(c). Distributions will not include any item of property acquired by the Secured Party upon any disposition or liquidation of Posted Collateral or, with respect to any Posted Collateral in the form of Cash, any distributions on that collateral, unless otherwise specified herein. "ELIGIBLE COLLATERAL" means, with respect to a party, the items, if any, specified as such for that party in Paragraph 13. "ELIGIBLE CREDIT SUPPORT" means Eligible Collateral and Other Eligible Support. "EXPOSURE" means for any Valuation Date or other date for which Exposure is calculated and subject to Paragraph 5 in the case of a dispute, the amount, if any, that would be payable to a party that is the Secured Party by the other party (expressed as a negative number) pursuant to Section 6(e)(ii)(2)(A) of this Agreement as if all Transactions (or Swap Transactions) were being terminated as of the relevant Valuation Time; provided that Market Quotation will be determined by the Valuation Agent using its estimates at mid-market of the amounts that would be paid for Replacement Transactions (as the term is defined in the definitions of "Market Quotation"). "INDEPENDENT AMOUNT" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "INTEREST AMOUNT" means, with respect to an Interest Period, the aggregate sum of the amounts of interest calculated for each day in that Interest Period on the principal amount of Posted Collateral in the form of Cash held by the Secured Party on that day, determined by the Secured Party for each such day as follows: (x) the amount of that Cash on that day; multiplied by (y) the Interest Rate in effect for that day; divided by (z) 360. "INTEREST PERIOD" means the period from (and including) the last Local Business Day on which an Interest Amount was Transferred (or, if no Interest Amount has yet been Transferred, the Local Business Day on which Posted Collateral in the form of Cash was Transferred to or received by the Secured Party) to (but excluding) the Local Business Day on which the current Interest Amount is to be Transferred. "INTEREST RATE" means the rate specified in Paragraph 13. "Local Business Day", unless otherwise specified in Paragraph 13, has the meaning specified in the Definitions Section of this Agreement, except that references to a payment in clause (b) thereof will be deemed to include a Transfer under this Annex. "MINIMUM TRANSFER AMOUNT" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "NOTIFICATION TIME" has the meaning specified in Paragraph 13. "OBLIGATIONS" means, with respect to a party, all present and future obligations of that party under this Agreement and any additional obligations specified for that party in Paragraph 13. "OTHER ELIGIBLE SUPPORT" means, with respect to a party, the items, if any, specified as such for that party in Paragraph 13. "OTHER POSTED SUPPORT" means all Other Eligible Support Transferred to the Secured Party that remains in effect for the benefit of that Secured Party. "PLEDGOR" means either party, when that party (i) receives a demand for or is required to Transfer Eligible Credit Support under Paragraph 3(a) or (ii) has Transferred Eligible Credit Support under Paragraph 3(a). "POSTED COLLATERAL" means all Eligible Collateral, other property, Distributions, and all proceeds thereof that have been Transferred to or received by the Secured Party under this Annex and not Transferred to the Pledgor pursuant to Paragraph 3(b), 4(d)(ii) or 6(d)(i) or released by the Secured Party under Paragraph 8. Any Interest Amount or portion thereof not Transferred pursuant to Paragraph 6(d)(ii) will constitute Posted Collateral in the form of Cash. "POSTED CREDIT SUPPORT" means Posted Collateral and Other Posted Support. "RECALCULATION DATE" means the Valuation Date that gives rise to the dispute under Paragraph 5; provided, however, that if a subsequent Valuation Date occurs under Paragraph 3 prior to the resolution of the dispute, then the "Recalculation Date" means the most recent Valuation Date under Paragraph 3. "RESOLUTION TIME" has the meaning specified in Paragraph 13. "RETURN AMOUNT" has the meaning specified in Paragraph 3(b). "SECURED PARTY" means either party, when that party (i) makes a demand for or is entitled to receive Eligible Credit Support under Paragraph 3(a) or (ii) holds or is deemed to hold Posted Credit Support. "SPECIFIED CONDITION" means, with respect to a party, any event specified as such for that party in Paragraph 13. "SUBSTITUTE CREDIT SUPPORT" has the meaning specified in Paragraph 4(d)(i). "SUBSTITUTION DATE" has the meaning specified in Paragraph 4(d)(ii). "THRESHOLD" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "TRANSFER" means with respect to any Eligible Credit Support, Posted Credit Support or Interest Amount and in accordance with the instructions of the Secured Party, Pledgor or Custodian as applicable: (i) in the case of Cash, payment or delivery by wire transfer into one or more bank accounts specified by the recipient; (ii) in the case of certificated securities that cannot be paid or delivered by book-entry payment or delivery in appropriate physical form to the recipient or its account accompanied by any duly executed instruments of transfer, assignments in blank, transfer tax stamps and any other documents necessary to constitute a legally valid transfer to the recipient; (iii) in the case of securities that can be paid or delivered by book- entry, the giving of written instructions to the relevant depository institution or other entity specified by the recipient, together with a written copy thereof to the recipient, sufficient if complied with to result in a legally effective transfer of the relevant interest to the recipient; and (iv) in the case of Other Eligible Support or Other Posted Support as specified in Paragraph 13. "VALUATION AGENT" has the meaning specified in Paragraph 13. "VALUATION DATE" means each date specified in or otherwise determined pursuant to paragraph 13. "VALUATION PERCENTAGE" means, for any item of Eligible Collateral, the percentage specified in Paragraph 13. "VALUATION TIME" has the meaning specified in Paragraph 13. "VALUE" means for any Valuation Date or other date for which Value is calculated and subject to Paragraph 5 in the case of a dispute, with respect to: (i) Eligible Collateral or Posted Collateral that is: (A) Cash, the amount thereof; and (B) a security, the bid price obtained by the Valuation Agent multiplied by the applicable Valuation Percentage, if any; (ii) Posted Collateral that consists of items that are not specified as Eligible Collateral, zero; and (iii) Other Eligible Support and Other Posted Support, as specified in Paragraph 13. CREDIT SUPPORT ANNEX to the Schedule to the Master Agreement dated as of January 27, 1994 between Morgan Guaranty Trust and Millipore Corporation Company of New York (the "Counterparty") ("Morgan") PARAGRAPH 13. ELECTIONS AND VARIABLES (a) Security Interest for "Obligations". The term "Obligations" as used in ----------------------------------- this Annex includes no additional obligations with respect to Morgan and the Counterparty. (b) Credit Support Obligations. -------------------------- (i) Delivery Amount, Return Amount and Credit Support Amount. -------------------------------------------------------- (A) "Delivery Amount" will have the meaning specified in Paragraph 3(a). (B) "Return Amount" will have the meaning specified in Paragraph 3(b). (C) "Credit Support Amount" will have the meaning specified in Paragraph 3(b). (ii) Eligible Collateral. The following items will qualify as "Eligible ------------------- Collateral":
"Valuation Counterparty Percentage" ------------ ---------- (A) Cash X [100]% (B) negotiable debt obligations issued by the U.S. Treasury Department having an original maturity at issuance of not more than one year ("Treasury Bills") X [98]%
"Valuation Counterparty Percentage" ------------ ---------- (C) negotiable debt obligations issued by the U.S. Treasury Department having an original maturity at issuance of more than one year but not more than ten years ("Treasury Notes") X [95]% (D) negotiable debt obligations issued by the U.S. Treasury Department having an original maturity at issuance of more than ten years ("Treasury Bonds") X [95]% (E) Other: Agency Securities having an original maturity at issuance of not more than ten years. X [98]% Agency Securities having an original maturity at issuance of more than ten years. X [95]%
As used herein, "Agency Securities" means negotiable debt obligations which are fully guaranteed as to both principal and interest by the Federal National Mortgage Association, the Government National Mortgage Corporation or the Federal Home Loan Mortgage Corporation, but excluding (i) interest only and principal only securities and (ii) Collateralized Mortgage Obligations, Real Estate Mortgage Investment Conduits and similar derivative securities. (iii) Other Eligible Support. There shall be no "Other Eligible Support" for ----------------------- either party for purposes of this Annex. (iv) Thresholds. ---------- (A) "Independent Amount" shall not apply for purposes of this Annex. (B) "Threshold" means the amounts determined on the basis of the lower of the Long Term Debt Ratings set forth in the following table, provided, however, that if (i) the Counterparty has no Long Term -------- ------- Debt Rating, or (ii) an Event of Default has occurred and is continuing with respect to the Counterparty, the Threshold shall be U.S.$0:
LONG TERM DEBT RATING THRESHOLD (S&P/Moody's) Counterparty --------------------- ------------ A-/A3 and above infinity BBB+/Baal US$15,000,000 BBB/Baa2 US$10,000,000 BBB-/Baa3 US$5,000,000 Below BBB-/Baa3 zero
As used herein: "Long Term Debt Rating" means, with respect to the Counterparty, the rating assigned by either S&P or Moody's to the long term, unsecured and unsubordinated indebtedness of the Counterparty, or, if applicable, the Credit Support Provider of the Counterparty. "S&P" means Standard & Poor's Ratings Group. "Moody's" means Moody's Investors Service, Inc. (C) "Minimum Transfer Amount" means U.S.$100,000, provided, however, that if an Event of Default has occurred and is continuing with respect to the Counterparty, the Minimum Transfer Amount shall be U.S.$0. (D) Rounding. The Delivery Amount and the Return Amount will be rounded up and down respectively to -the nearest integral multiple of U.S.$10,000. (c) Valuation and Timing. --------------------- (i) "Valuation Agent" means Morgan. (ii) "Valuation Date" means any Local Business Day. (iii) "Valuation Time" means the close of business in the city of the Valuation Agent on the Valuation Date or date of calculation, as applicable; provided that the calculations of Value and Exposure will be made as of -------- approximately the same time on the same date. (iv) "Notification Time" means by 1:00 p.m., New York time, on a Local Business Day. (d) Conditions Precedent. With respect to Morgan, an Illegality (if Morgan is ---------- the Affected Party with respect to such Termination Event) will be a "Specified Condition". With respect to the Counterparty, an Illegality and any Additional Termination Event (if the Counterparty is the Affected Party with respect to such Termination Events) will be a "Specified Condition". (e) Substitution. ------------ (i) "Substitution Date" has the meaning specified in Paragraph 4(d)(ii). (ii) Consent. Inapplicable. ------- (f) Dispute Resolution. ------------------ (i) "Resolution Time" means 1:00 p.m., New York time, on the Local Business Day following the date on which notice is given that gives rise to a dispute under Paragraph 5. (ii) Value. For the purpose of Paragraphs 5(i)(C) and 5(ii), the Value of ----- Posted Credit Support other than Cash will be calculated as follows: (A) with respect to any Treasury Bills, Treasury Notes, Treasury Bonds or Agency Securities (referred to herein as "Government Obligations"), the sum of (I) (x) the mean of the high bid and low asked prices quoted on such date by any principal market maker for such Government Obligations chosen by the Disputing Party, or (y) if no quotations are available from a principal market maker for such date, the mean of such high bid and low asked prices as of the day, next preceding such date, on which such quotations were available, plus (II) the accrued interest on such Government Obligations (except to the extent Transferred pursuant to any applicable provision of this Agreement or included in the applicable price referred to in (I) of this clause (A)) as of such date (iii) The provisions of Paragraph 5 will apply. (g) Holding and Using Posted Collateral. ----------------------------------- (i) Eligibility to Hold Posted Collateral; Custodians. Morgan will be ------------------------------------------------- entitled to hold Posted Collateral itself or through a Custodian pursuant to Paragraph 6(b), provided that the following conditions applicable to it -------- are satisfied: (1) Morgan is not a Defaulting Party (2) The Custodian is a Bank (as defined in the Federal Deposit insurance Act) whose rating with respect to its long term unsecured, unsubordinated indebtedness is at least BBB+ by S&P or Baal by Moody's. (ii) Use of Posted Collateral. The provisions of Paragraph 6(C) will not apply to Morgan or the Counterparty. (h) Distributions and Interest Amount. --------------------------------- (i) Interest Rate. The "Interest Rate" will be 0% unless the parties ------------- shall otherwise agree. (ii) Transfer of Interest Amount. The provisions of Paragraph 6(d)(ii) ---------------------------- will not apply. (i) Additional Representations. --------------------------- None. (j) Other Eligible Support and Other Posted Support. ------------------------------------------------ (i) "Value" shall have no meaning with respect to Other Eligible Support and Other Posted Support. (ii) "Transfer" shall have no meaning with respect to Other Eligible Support and Other Posted Support. (k) Demands and Notices. ------------------- All demands, specifications and notices made by a party to this Annex will be made pursuant to the Notices Section of this Agreement, unless otherwise specified here: With respect to Morgan. Morgan Guaranty Trust Company of New York Collateral Operations Department 36th Floor 60 Wall Street New York, N.Y. 10260-0060 Attention: Susan Mcgillion Telephone: (212) 648 4603 (l) Other Provisions. ----------------- (i) Modification to Paragraph 1: The following subparagraph (b) is ---------------------------- substituted for subparagraph (b) of the Annex: "(b) Secured Party and Pledgor. All references in this Annex to the ------------------------- "Secured Party" will be to Morgan and all corresponding references to the "Pledgor" will be to the Counterparty; provided, however, that if Other Posted -------- ------- Support is held by a party to this Annex, all references herein to that party as the Secured Party with respect to that Other Posted Support will be to that party as the beneficiary thereof and will not subject that support or that party as beneficiary thereof to provisions of law generally relating to security interests and secured parties." (ii) Modification to Paragraph 2: The following Paragraph 2 is substituted for ---------------------------- Paragraph 2 of this Annex: "PARAGRAPH 2. SECURITY INTEREST. The Pledgor hereby pledges to the Secured Party, as security for its Obligations, and grants to the Secured Party a first priority continuing security interest in, lien on and right of Set-off against all Posted Collateral Transferred to or received by the Secured Party hereunder. Upon the Transfer by the Secured Party to the Pledgor of Posted Collateral, the security interest and lien granted hereunder on that Posted Collateral will be released immediately and, to the extent possible, without any further action by either party." (iii) Modification to Paragraph 9: The following first clause of Paragraph 9 is ---------------------------- substituted for the first clause of this Annex: "PARAGRAPH 9. REPRESENTATIONS. The Pledgor represents to the Secured Party (which representations will be deemed to be repeated as of each date on which it Transfers Eligible Collateral) that:" (iv) Modifications to Paragraph 12: The following definitions of "Pledgor" and ------------------------------ "Secured Party" are substituted for the definitions of those terms contained in Paragraph 12 of this Annex: "PLEDGOR" means the Counterparty, when that party (i) receives a demand for or is required to Transfer Eligible Credit Support under Paragraph 3 (a) or (ii) has Transferred Eligible Credit Support under Paragraph 3(a). "SECURED PARTY" means Morgan, when that party (i) makes a demand for or is entitled to receive Eligible Credit Support under Paragraph 3(a) or (ii) holds or is deemed to hold Posted Credit Support. Please confirm your agreement to the terms of the foregoing Paragraph 13 by signing below. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Don Thompson ------------------------------------------------ Name: Don Thompson Title: Vice President and Assistant General Counsel MILLIPORE CORPORATION By: /s/ Francis J. Lunger ------------------------------------------------ Name: Francis J. Lunger Title: Vice President & CFO SCHEDULE TO THE MASTER AGREEMENT DATED AS OF JANUARY 27, 1994 between MORGAN GUARANTY TRUST AND MILLIPORE CORPORATION COMPANY OF NEW YORK (THE "COUNTERPARTY") ("MORGAN") PART 1 Termination Provisions ---------------------- In this Agreement:- (1) "Specified Entity" means: (a) in relation to Morgan, any Affiliate of Morgan for purposes of Section 5 (a)(v) and shall not apply for purposes of any other provision; and (b) in relation to the Counterparty, any Affiliate of the Counterparty for purposes of Sections 5(a)(v), (vi) and (vii) and shall not apply for purposes of any other provision. (2) "Specified Transaction, "will have the meaning specified in Section 14. (3) The "Cross Default" provisions of Section 5(a)(vi) will apply to Morgan, the Counterparty and any applicable Specified Entity, for such purpose: (a) "Specified Indebtedness" will have the meaning specified in Section 14; (b) "Threshold Amount" means, with respect to the Counterparty an amount equal to 3% of the Counterparty's issued share capital and retained earnings (as specified from time to time in its most recently published audited annual accounts); and (c) Section 5 (a) (vi) will be deemed to be amended to include the following Clause "(3)": entity to terminate its commitment under any agreement to lend or advance or make available funds to a party (or any applicable Specified Entity) in respect of an aggregate amount in excess of the Threshold Amount." (4) "Termination Currency" means United States Dollars. (5) The "Credit Event Upon Merger" provisions of Section 5(b)(iv) will not apply to Morgan. The Credit Event Upon Merger provisions of Section 5(b)(iv) will apply to the Counterparty and any applicable Specified Entity of the Counterparty. (6) The "Automatic Early Termination", provisions of Section 6(a) will not apply to Morgan or the Counterparty. (7) For purposes of computing amounts payable on early termination: (a) Market Quotation will apply to this Agreement; and (b) The Second Method will apply to this Agreement. PART 2 ------ Tax Representations ------------------- Representations of Morgan - ------------------------- (1) Payer Tax Representation. For the purpose of Section 3(e), Morgan hereby ------------------------ makes the following representation: (i) It is not required by any applicable law, as modified by the practice of any relevant governmental revenue authority, of any Relevant Jurisdiction to make any deduction or withholding for or on account of any Tax from any payment (other than interest under Section 2(e), 6(d)(ii) or 6(e)) to be made by it to the Counterparty under this Agreement. In making this representation, it may rely on: (a) the accuracy of any representations made by the Counterparty pursuant to Section 3(f); (b) the satisfaction of the agreement of the Counterparty contained in section 4 (a) (i) or 4(a) (iii) and the accuracy and effectiveness of any document provided by the Counterparty pursuant to Section 4(a)(i) or 4(a)(iii); and (c) the satisfaction of the agreement of the Counterparty contained in Section 4(d), provided that it shall not be a breach of this representation where reliance is placed on clause (b) and the Counterparty does not deliver a form or document under Section 4(a)(iii) by reason of material prejudice to its legal or commercial position. (ii) It (A) is entering into such Swap Transaction in the ordinary course of its trade as, and is, either (x) a recognized U.K. bank or (y) a recognized U.K. swaps dealer (in either case (x) or (y)), for purposes of the United Kingdom Inland Revenue Extra Statutory Concession on interest and currency swaps dated March 14, 1989), and (B) will bring into account payments made and received in respect of such Swap Transaction in computing its income for United Kingdom tax purpose. (2) Payee Tax Representations. For the purpose of Section 3(f), Morgan makes ------------------------- the representations specified below: (i) It (A) is entering into such Swap Transaction in the ordinary course of its trade as, and is, either (x) a recognized U.K. bank or (y) a recognized U.K. swaps dealer (in either case (x) or (y)), for purposes of the United Kingdom Inland Revenue Extra Statutory Concession on interest and currency swaps dated March 14, 1989), and (B) will bring into account payments made and received in respect of such Swap Transaction in computing its income for United Kingdom tax purpose. (ii) It is a banking corporation organized under the laws of the State of New York and is not a foreign corporation within the meaning of Section 7701(a)(5) of the United States Internal Revenue Code. Representations of the Counterparty - ----------------------------------- (1) Payer Tax representation. For the purpose of Section 3(e), the Counterparty ------------------------ hereby makes the following representation: It is not required by any applicable law, as modified by the practice of any relevant governmental revenue authority, of any Relevant Jurisdiction to make any deduction or withholding for or on account of any Tax from any payment (other than interest under Section 2(e), 6(d)(ii) or 6(e)) to be made by it to Morgan under this Agreement. In making this representation, it may rely on: (a) the accuracy of any representation made by Morgan pursuant to Section 3(f); (b) the satisfaction of the agreement of Morgan contained in Section 4 (a) (i) or 4(a)(iii) and the accuracy and effectiveness of any document provided by Morgan pursuant to Section 4 (a) (i) or 4 (a) (iii); and (c) the satisfaction of the agreement of Morgan contained in Section 4(d), provided that it shall not be a breach of this representation where reliance is placed on clause (b) and Morgan does not deliver a form or document under Section 4(a)(iii) by reason of material prejudice to its legal or commercial position. (2) Payee Tax Representations. For the purpose of Section 3(f), the ------------------------- Counterparty makes the representation specified below: (i) It is a corporation organized under the laws of the State of Massachusetts. Part 3 Agreement to Deliver Documents For the purpose of Sections 4 (a) (i) and (ii), each party agrees to deliver the following documents, as applicable: (1) Morgan will, on demand, deliver a certificate (or, if available, the current authorized signature book of Morgan) specifying the names, title and specimen signatures of the persons authorized to execute this Agreement and each Confirmation on its behalf. (2) The Counterparty will, on demand, deliver a certificate (or, if available, the current authorized signature book of the Counterparty) specifying the names, title and specimen signatures of the persons authorized to execute this Agreement and each Confirmation on its behalf. Each of the foregoing documents is covered by the representation contained in Section 3(d) of this Agreement. PART 4 Miscellaneous ------------- (1) Governing Law. This Agreement will be governed by and construed in ------------- accordance with the laws of the State of New York without reference to choice of law doctrine. (2) Notices. ------- (a) In connection with Section 12(a), all notices to Morgan shall, with respect to any particular Transaction, be sent to the address, telex number or facsimile number specified in the relevant Confirmation and any notice for purposes of Sections 5 or 6 of the Agreement shall be sent to the address or telex number specified below: Morgan Guaranty Trust Company of New York 60 Wall Street New York, New York 10260 Attention: Global Swaps Facsimile No.: (212) 648-5922 (b) In connection with Section 12 (a), all notices to the Counterparty shall, with respect to any particular Transaction, be sent to the address, telex number or facsimile number specified in the relevant Confirmation and any notice for purposes of Sections 5 or 6 of the Agreement shall be sent to the address or telex number specified below: Millipore Corporation 80 Ashby Road Bedford, Massachusetts Attention: Treasurer Facsimile No.: (781) 275-1071 Telephone No.: (781) 275-9200 (3) Netting of Payments. Subparagraph (ii) of Section 2(c) will not apply for ------------------- the purpose of Section 2(c) with respect to all Transactions under this Agreement with effect from the date of this Agreement. (4) Offices: Multibranch Party. For purposes of Section 10: --------------------------- (a) Section 10(a) shall apply to Morgan; and (b) For the purpose of section 10(c): (i) Morgan is a Multibranch Party and may act through its London and New York offices. (ii) The Counterparty is not a Multibranch Party. (5) Credit Support Documents. The Security Agreement between the Counterparty ------------------------ and Morgan dated as of the date hereof, substantially in the form attached hereto as Exhibit B, shall be a Credit Support Document with respect to the Counterparty for all purposes hereof. Part 5 - ------ Other Provisions ---------------- (1) ISDA Definitions. Reference is hereby made to the 1991 ISDA Definitions ---------------- (the "1991 Definitions") and the 1992 ISDA FX and Currency Option Definitions (the "FX Definitions"), each as published by the International Swap Dealers Association, Inc., which are hereby incorporated by reference herein. Any terms used and not otherwise defined herein which are contained in the 1991 Definitions or the FX Definitions shall have the meaning set forth therein. (2) Scope of Agreement. Notwithstanding anything contained in the Agreement to ------------------ the contrary, if the parties enter into any Specified Transaction, such Specified Transaction shall be subject to, governed by and construed in accordance with the terms of this Agreement unless the Confirmation relating thereto shall specifically state to the contrary. Each such Specified Transaction shall be a Transaction for the purposes of this Agreement. (3) Inconsistency. In the event of any inconsistency between any of the ------------- following documents, the relevant document first listed below shall govern: (i) a Confirmation; (ii) the Schedule; (iii) the 1991 Definitions or the FX Definitions; and (iv) the printed form of ISDA Master Agreement. (4) Right of Setoff. Without affecting the provisions of this Agreement --------------- requiring the calculation of certain net payment amounts, all payments under this Agreement shall be made without setoff or counterclaim and will not be subject to any conditions except as provided in Section 2 of this Agreement and except as provided in the following clauses (i) and (ii): (i) if there is a Defaulting Party, the Non-Defaulting Party will have the right to setoff, counterclaim or withhold payment in respect of any default by the Defaulting Party under this Agreement or any other agreement, whether matured or unmatured, between the parties, regardless in each case of the office or branch through which a party is acting, and the Non-Defaulting Party's obligations hereunder to the Defaulting Party shall be deemed to be satisfied and discharged to the extent of such setoff, counterclaim or withholding; and (ii) any obligation of a Non-Defaulting Party to make a payment to a Defaulting Party hereunder shall in any event be conditioned upon and subject to the condition precedent that and shall arise only upon the date that all indebtedness and obligations, whether matured or unmatured, of the Defaulting Party to the Non-Defaulting Party shall have been paid in full. (5) Calculation Agent. The Calculation Agent will be Morgan. ----------------- (6) Waiver of Jury Trial. Each party waives, to the fullest extent permitted -------------------- by applicable law, any right it may have to a trial by jury in respect of any suit, action or proceeding relating to this Agreement or any Credit Support Document. Each party (i) certifies that no representative, agent or attorney of the other party or any Credit Support Provider has represented, expressly or otherwise, that such other party would not, in the event of such a suit, action or proceeding, seek to enforce the foregoing waiver and (ii) acknowledges that it and the other party have been induced to enter into this Agreement and provide for any Credit support Document, as applicable, by, among other things, the mutual waivers and certifications in this Section. (7) Severability. In the event any one or more of the provisions contained in ------------ this Agreement should be held invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavour, in good faith negotiations, to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. Please confirm your agreement to the terms of the foregoing Schedule by signing below. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Michael Y. Leder -------------------- Name: Michael Y. Leder Title: Vice President MILLIPORE CORPORATION By: /s/ Geoffrey Nunes --------------------- Name: Geoffrey Nunes Title: Senior Vice President and General Counsel Millipore Corporation 80 Ashby Road Bedford, Massachusetts Attention: Treasurer AMENDMENT TO ISDA MASTER AGREEMENT Dear Ladies/Gentlemen: Reference is made to the ISDA Master Agreement between Morgan Guaranty Trust Company of New York ("Morgan") and Millipore Corporation (the "Counterparty") dated as of January 27, 1994 (the "Agreement"). The parties hereby agree to amend the Agreement as follows: 1. CREDIT SUPPORT DOCUMENT. Part 4, paragraph (5) of the Schedule to ----------------------- the Agreement is modified to read in its entirety as follows: "(5) CREDIT SUPPORT DOCUMENT. The ISDA Credit Support Annex and supplemental "Paragraph 13 Elections & Variables" dated as of January 27, 1994 in the form appended hereto will constitute a "Credit Support Document" for all purposes of this Agreement with respect to all of the obligations of each party hereunder, respectively." 2. AGREEMENT TO DELIVER DOCUMENTS. Part 3 of the Schedule to the ------------------------------ Agreement is modified by adding the following new paragraph "(3)": "(3) Both Morgan and the Counterparty will deliver the fully-executed Credit Support Document identified in Part 4, paragraph (5) of the Schedule to this Agreement, together with a certificate (or, if available, its current authorized signature book) bearing the name(s), title(s) and specimen signature(s) of the person(s) authorized to execute such Credit Support Document on behalf of the party." This Amendment shall be governed by, and construed in accordance with the law specified as the Governing Law in the Schedule to the Agreement and will be effective as of the date of the Agreement. In all other respects, the Agreement, as amended, shall remain in full force and effect. Very truly yours, MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Don Thompson --------------------------------------- Name: Don Thompson Title: Vice President and Assistant General Counsel Confirmed and agreed to as of The date first above written: MILLIPORE CORPORATION By: /s/ Francis J. Lunger ------------------------------- Name: Francis J. Lunger Title: Vice President, Treasurer & Chief Financial Officer EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements on Form S-8 (File Nos. 2-91432, 2-72124, 2-85698, 2-97280, 33-37319, 33-37323, 33-59005, 33-10801, 33-11790, 333-79227, 333-90127) on Form S-3 (File Nos. 2-84252, 33-9706, 33-22196, 33-47213, 333-23025) on Form S-3/A (File No. 333-80781) and on Form S-4 (File No. 33-58117) of Millipore Corporation of our report dated January 20, 1999, except for Note B, for which the date is November, 12, 1999 relating to the financial statements, which is incorporated in this Annual Report on Form 10-K/A. Boston, Massachusetts November 12, 1999 /s/ PriceWaterhouseCoopers LLP EX-24 4 POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Directors and Officers of Millipore Corporation (the "Corporation"), do hereby constitute and appoint C. William Zadel, Francis J. Lunger and Jeffrey Rudin and each of them individually, their true and lawful attorneys and agents to execute on behalf of the Corporation the Form 10-K/A Annual Report of the Corporation for the fiscal year ended December 31, 1998, and all such additional instruments related thereto which such attorneys and agents may deem to be necessary and desirable to enable the Corporation to comply with the requirements of the Securities Exchange Act of 1934, as amended, and any regulations, orders, or other requirements of the United States Securities and Exchange Commission thereunder in connection with the preparation and filing of said Form 10-K/A Annual Report, including specifically, but without limitation of the foregoing, power and authority to sign the names of each of such Directors and Officers on his behalf, as such Director or Officer, as indicated below to the said Form 10-K/A Annual Report or documents filed or to be filed as a part of or in connection with such Form 10-K/A Annual Report; and each of the undersigned hereby ratifies and confirms all that said attorneys and agents shall do or cause to be done by virtue thereof.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ C. WILLIAM ZADEL Chairman, President November 12, 1999 - -------------------- Chief Executive Officer C. William Zadel and Director /s/ ROBERT C. BISHOP Director November 12, 1999 - -------------------- Robert C. Bishop /s/ SAMUEL C. BUTLER Director November 12, 1999 - -------------------- Samuel C. Butler /s/ ROBERT E. CALDWELL Director November 12, 1999 - ---------------------- Robert E. Caldwell /s/ ELAINE L. CHAO Director November 12, 1999 - ------------------------ Elaine L. Chao /s/ MAUREEN A. HENDRICKS Director November 12, 1999 - ------------------------ Maureen A. Hendricks Director November 12, 1999 - ----------------------- Mark Hoffman /s/ RICHARD J. LANE Director November 12, 1999 - ---------------------- Richard J. Lane Director November 12, 1999 - --------------------- Thomas O. Pyle Director November 12, 1999 - --------------------- John F. Reno
EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 DEC-31-1998 36,022 0 157,407 3,149 107,241 304,752 425,675 188,261 762,440 298,681 0 56,988 0 0 79,920 762,440 699,307 699,307 364,467 364,467 335,506 0 29,474 8,544 (1,320) 9,864 0 0 0 9,864 0.22 0.22
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