-----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, QqKNnlDtyqmZrOZxd6qEdX67AxR6hZnV/q2qMozjCbcxZuN8y7oYy3BIdA/mDfzu k6aYUxUEvGfBh+3R8IC4/A== 0000097745-02-000055.txt : 20020813 0000097745-02-000055.hdr.sgml : 20020813 20020813171434 ACCESSION NUMBER: 0000097745-02-000055 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020629 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMO ELECTRON CORP CENTRAL INDEX KEY: 0000097745 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 042209186 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08002 FILM NUMBER: 02730669 BUSINESS ADDRESS: STREET 1: 81 WYMAN ST STREET 2: PO BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02451 BUSINESS PHONE: 7816221000 MAIL ADDRESS: STREET 1: 81 WYMAN ST STREET 2: PO BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02451 10-Q 1 tmo2q02.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------------------------------------------- FORM 10-Q (mark one) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended June 29, 2002 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-8002 THERMO ELECTRON CORPORATION (Exact name of Registrant as specified in its charter) Delaware 04-2209186 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 81 Wyman Street, P.O. Box 9046 Waltham, Massachusetts 02454-9046 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 622-1000 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 and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at July 26, 2002 ----------------------------- ---------------------------- Common Stock, $1.00 par value 166,494,684 PART I - Financial Information Item 1 - Financial Statements - ----------------------------- THERMO ELECTRON CORPORATION Consolidated Balance Sheet (Unaudited) Assets
June 29, December 29, (In thousands) 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $ 234,910 $ 297,557 Short-term available-for-sale investments, at quoted market value (amortized cost of $654,079 and $697,757; Notes 4, 11, and 14) 741,522 744,321 Accounts receivable, less allowances of $26,042 and $26,525 411,146 410,960 Unbilled contract costs and fees 20,824 24,071 Inventories: Raw materials and supplies 157,865 149,817 Work in process 60,067 56,417 Finished goods (includes $14,491 and $14,918 at customer locations) 142,275 130,807 Deferred tax asset 85,055 82,766 Other current assets 46,081 68,494 ---------- ---------- 1,899,745 1,965,210 ---------- ---------- Property, Plant, and Equipment, at Cost 492,350 482,386 Less: Accumulated depreciation and amortization 221,548 211,674 ---------- ---------- 270,802 270,712 ---------- ---------- Long-term Available-for-sale Investments, at Quoted Market Value (amortized cost of $5,729) - 9,360 ---------- ---------- Other Assets 219,352 231,395 ---------- ---------- Goodwill (Notes 2, 8, and 12) 1,406,776 1,348,393 ---------- ---------- $3,796,675 $3,825,070 ========== ========== < 2 > THERMO ELECTRON CORPORATION Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment June 29, December 29, (In thousands except share amounts) 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- Current Liabilities: Short-term obligations and current maturities of long-term obligations (Notes 5 and 11) $ 451,748 $ 528,988 Accounts payable 100,315 111,950 Accrued payroll and employee benefits 80,371 92,262 Accrued income taxes 73,151 30,797 Deferred revenue 53,021 48,166 Accrued restructuring costs (Note 13) 43,698 60,685 Other accrued expenses (Note 2) 195,154 203,775 Net liabilities of discontinued operations (Note 14) 81,257 65,416 ---------- ---------- 1,078,715 1,142,039 ---------- ---------- Long-term Deferred Income Taxes and Other Deferred Items 48,176 40,486 ---------- ---------- Long-term Obligations: Senior convertible obligations 121,062 145,414 Senior notes (Note 10) 131,114 128,725 Subordinated convertible obligations 397,139 445,377 Other 6,828 7,986 ---------- ---------- 656,143 727,502 ---------- ---------- Minority Interest (Note 12) - 6,901 ---------- ---------- Shareholders' Investment: Preferred stock, $100 par value, 50,000 shares authorized; none issued Common stock, $1 par value, 350,000,000 shares authorized; 179,003,871 and 199,816,264 shares issued (Note 16) 179,004 199,816 Capital in excess of par value 1,358,475 1,758,567 Retained earnings 693,242 509,681 Treasury stock at cost, 10,441,652 and 23,458,555 shares (Note 16) (198,131) (457,475) Deferred compensation (2,021) (3,157) Accumulated other comprehensive items (Notes 7 and 10) (16,928) (99,290) ---------- ---------- 2,013,641 1,908,142 ---------- ---------- $3,796,675 $3,825,070 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. < 3 > THERMO ELECTRON CORPORATION Consolidated Statement of Operations (Unaudited) Three Months Ended --------------------------- June 29, June 30, (In thousands except per share amounts) 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------- Revenues $509,113 $542,472 -------- -------- Costs and Operating Expenses: Cost of revenues (Note 13) 279,325 304,410 Selling, general, and administrative expenses 139,371 155,498 Research and development expenses 39,754 44,706 Restructuring and other unusual costs, net (Note 13) 15,487 23,693 -------- -------- 473,937 528,307 -------- -------- Operating Income 35,176 14,165 Other Income (Expense), Net (Notes 4, 10, and 13) 38,289 (148) -------- -------- Income from Continuing Operations Before Provision for Income Taxes, Minority Interest, and Extraordinary Item 73,465 14,017 Provision for Income Taxes (23,975) (5,411) Minority Interest Income - 817 -------- -------- Income from Continuing Operations Before Extraordinary Item 49,490 9,423 Gain on Disposal of Discontinued Operations, Net (represents tax benefit in 2002; net of income tax provision of $17,259 in 2001; Note 14) 19,000 15,560 -------- -------- Income Before Extraordinary Item 68,490 24,983 Extraordinary Item (net of income tax provision of $14; Note 5) 27 - -------- -------- Net Income $ 68,517 $ 24,983 ======== ======== Earnings per Share from Continuing Operations Before Extraordinary Item (Note 6): Basic $ .29 $ .05 ======== ======== Diluted $ .28 $ .05 ======== ======== Earnings per Share (Note 6): Basic $ .40 $ .14 ======== ======== Diluted $ .38 $ .14 ======== ======== Weighted Average Shares (Note 6): Basic 171,122 181,628 ======== ======== Diluted 186,740 185,056 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. < 4 > THERMO ELECTRON CORPORATION Consolidated Statement of Operations (Unaudited) Six Months Ended ----------------------------- June 29, June 30, (In thousands except per share amounts) 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------- Revenues $1,000,439 $1,115,561 ---------- ---------- Costs and Operating Expenses: Cost of revenues 546,995 622,245 Selling, general, and administrative expenses 278,284 315,665 Research and development expenses 79,380 89,071 Restructuring and other unusual costs, net (Note 13) 23,870 34,575 ---------- ---------- 928,529 1,061,556 ---------- ---------- Operating Income 71,910 54,005 Other Income (Expense), Net (Notes 4, 10, and 13) 99,297 (3,894) ---------- ---------- Income from Continuing Operations Before Provision for Income Taxes, Minority Interest, Extraordinary Item, and Cumulative Effect of Change in Accounting Principle 171,207 50,111 Provision for Income Taxes (57,667) (19,668) Minority Interest Income 331 799 ---------- ---------- Income from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 113,871 31,242 Gain (Loss) on Disposal of Discontinued Operations, Net (includes tax benefit of $13,408 in 2002; net of tax benefit of $22,741 in 2001; Note 14) 70,370 (50,440) ---------- ---------- Income (Loss) Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 184,241 (19,198) Extraordinary Item (net of income tax benefit of $366; Note 5) (680) - ---------- ---------- Income (Loss) Before Cumulative Effect of Change in Accounting Principle 183,561 (19,198) Cumulative Effect of Change in Accounting Principle (net of income tax benefit and minority interest of $663) - (994) ---------- ---------- Net Income (Loss) $ 183,561 $ (20,192) ========== ========== Earnings per Share from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle (Note 6): Basic $ .66 $ .17 ========== ========== Diluted $ .63 $ .17 ========== ========== Earnings (Loss) per Share (Note 6): Basic $ 1.06 $ (.11) ========== ========== Diluted $ .98 $ (.11) ========== ========== Weighted Average Shares (Note 6): Basic 172,686 182,242 ========== ========== Diluted 195,464 186,117 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. < 5 > THERMO ELECTRON CORPORATION Consolidated Statement of Cash Flows (Unaudited) Six Months Ended ---------------------------- June 29, June 30, (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income (loss) $ 183,561 $ (20,192) (Gain) loss on disposal of discontinued operations, net (Note 14) (70,370) 50,440 --------- --------- Income from continuing operations 113,191 30,248 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization (Note 8) 28,372 48,536 Noncash restructuring and other unusual costs, net (Note 13) 9,653 28,383 Provision for losses on accounts receivable 1,447 1,591 Minority interest income (331) (799) Equity in earnings of unconsolidated subsidiaries (Note 4) (2,169) (1,260) Cumulative effect of change in accounting principle, net of income tax benefit and minority interest - 994 Change in deferred income taxes (12,430) (82) Gain on sale of businesses (2,629) 19 (Gain) loss on investments, net (Note 4) (93,986) 807 Extraordinary item, net of income taxes (Note 5) 680 - Other noncash items, net 3,058 4,066 Changes in current accounts, excluding the effects of acquisitions and dispositions: Accounts receivable 18,177 (1,869) Inventories (3,414) (25,986) Other current assets (2,062) (17,186) Accounts payable (16,504) (14,206) Other current liabilities (39,478) 9,532 --------- --------- Net cash provided by continuing operations 1,575 62,788 Net cash provided by (used in) discontinued operations (50,667) 38,136 --------- --------- Net cash provided by (used in) operating activities (49,092) 100,924 --------- --------- Investing Activities: Purchases of available-for-sale investments - (469,132) Proceeds from sale of available-for-sale investments (Note 4) 80,627 50,762 Proceeds from maturities of available-for-sale investments 68,172 176,358 Proceeds from sale of other investments (Note 4) 65,167 - Purchases of property, plant, and equipment (26,601) (46,657) Proceeds from sale of property, plant, and equipment 6,673 10,284 Acquisition of minority interest of subsidiary (Note 12) (22,022) - Acquisitions, net of cash acquired (Note 2) (46,193) (14,129) Collection of note receivables 48,630 - Proceeds from sale of businesses, net of cash divested 4,674 16,789 Advance to affiliates - (32,266) < 6 > THERMO ELECTRON CORPORATION Consolidated Statement of Cash Flows (continued) (Unaudited) Six Months Ended ---------------------------- June 29, June 30, (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------- Investing Activities (continued): Increase in other assets $ (6,981) $ (2,668) Other 1,919 1,804 --------- --------- Net cash provided by (used in) continuing operations 174,065 (308,855) Net cash provided by discontinued operations 106,397 379,528 --------- --------- Net cash provided by investing activities 280,462 70,673 --------- --------- Financing Activities: Redemption and repayment of long-term obligations (Note 5) (459,398) (23,397) Net proceeds from issuance of Company and subsidiary common stock 12,542 34,225 Purchases of Company common stock and subordinated convertible debentures (Note 5) (208,507) (97,810) Increase (decrease) in short-term notes payable (Note 11) 345,937 (5,284) Other 2,958 411 --------- --------- Net cash used in continuing operations (306,468) (91,855) Net cash provided by (used in) discontinued operations 86 (39,297) --------- --------- Net cash used in financing activities (306,382) (131,152) --------- --------- Exchange Rate Effect on Cash of Continuing Operations 8,324 (4,067) Exchange Rate Effect on Cash of Discontinued Operations (179) (363) --------- --------- Increase (Decrease) in Cash and Cash Equivalents (66,867) 36,015 Cash and Cash Equivalents at Beginning of Period 305,200 636,252 --------- --------- 238,333 672,267 Cash and Cash Equivalents of Discontinued Operations at End of Period (3,423) (165,916) --------- --------- Cash and Cash Equivalents at End of Period $ 234,910 $ 506,351 ========= ========= Noncash Activities: Fair value of assets of acquired businesses $ 56,636 $ 18,161 Cash paid for acquired businesses (46,335) (14,834) --------- --------- Liabilities assumed of acquired businesses $ 10,301 $ 3,327 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. < 7 > THERMO ELECTRON CORPORATION Notes to Consolidated Financial Statements 1. General The interim consolidated financial statements presented have been prepared by Thermo Electron Corporation (the Company), are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at June 29, 2002, the results of operations for the three- and six-month periods ended June 29, 2002, and June 30, 2001, and the cash flows for the six-month periods ended June 29, 2002, and June 30, 2001. Prior-period amounts have been reclassified to conform to the presentation in the current financial statements. Interim results are not necessarily indicative of results for a full year. The consolidated balance sheet presented as of December 29, 2001, has been derived from the audited consolidated financial statements as of that date. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain all of the information that is included in the annual financial statements and notes of the Company. The consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001, filed with the Securities and Exchange Commission (SEC). 2. Acquisitions In April 2002, the Company's Life and Laboratory Sciences segment acquired 11,265,873 shares (or approximately 97%) of CRS Robotics Corporation (CRS), a Toronto Stock Exchange-listed company, for 5.75 Canadian dollars per share (approximately $3.68 per share) in completion of the Company's cash tender offer to acquire all of the outstanding shares of CRS. In May 2002, the segment completed the acquisition of the remaining CRS shares outstanding and subsequently renamed the business Thermo CRS. The aggregate purchase price was approximately $42 million, including related expenses. Thermo CRS is a global supplier of lab automation robotics, software, and equipment to the drug-discovery market. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $23.7 million has been allocated as goodwill. In addition, during the second quarter of 2002, the Company acquired a product line of microbeam X-ray fluorescence (XRF) metrology tools for approximately $4 million in cash. Allocation of the purchase price for these acquisitions was based on estimates of the fair value of the net assets acquired and is subject to adjustment upon finalization of the purchase price allocation. The Company has gathered no information that indicates the final purchase price allocation will differ materially from the preliminary estimates. The results of operations of the acquisitions are included in the Company's consolidated financial statements from the respective dates of acquisition. Pro forma results are not presented as the acquisitions did not materially affect the Company's results of operations. The Company has undertaken restructuring activities at acquired businesses. The Company's restructuring activities, which were accounted for in accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing levels and the abandonment of excess facilities. In connection with these restructuring activities, as part of the cost of acquisitions, the Company established reserves, primarily for severance and excess facilities. In accordance with EITF 95-3, the Company finalizes its restructuring plans no later than one year from the respective dates of the acquisitions. Accrued acquisition expenses are included in other accrued expenses in the accompanying balance sheet. < 8 > THERMO ELECTRON CORPORATION 2. Acquisitions (continued) A summary of the changes in accrued acquisition expenses for acquisitions completed during 2002 is as follows:
Abandonment of Excess (In thousands) Severance Facilities Other Total - ------------------------------------------------------------------------------------------------------------------------------- Reserves established $ 739 $ 509 $ 21 $1,269 Payments (241) - - (241) Currency translation 36 57 2 95 ------ ------ ------ ------ Balance at June 29, 2002 $ 534 $ 566 $ 23 $1,123 ====== ====== ====== ====== The principal accrued acquisition expenses for 2002 acquisitions were for severance for approximately 40 acquired employees, primarily in manufacturing and research and development, and for closure of a Thermo CRS manufacturing facility in Austria, with a lease expiring in 2005. The operations of this facility will be consolidated into existing facilities in Canada. A summary of the changes in accrued acquisition expenses for acquisitions completed before and during 1999 is as follows:
1999 Acquisitions --------------------------------------------- Abandonment of Excess Pre-1999 (In thousands) Severance Facilities Other Acquisitions Total - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 29, 2001 $ 626 $ 10 $ 131 $6,216 $6,983 Payments (21) (11) (74) (290) (396) Decrease recorded as a reduction in other intangible assets (300) - - - (300) Decrease recorded as a reduction in goodwill (29) - (74) - (103) Currency translation 41 1 17 346 405 ------ ------ ------ ------ ------ Balance at June 29, 2002 $ 317 $ - $ - $6,272 $6,589 ====== ====== ====== ====== ====== The remaining accrued acquisition expenses for pre-1999 acquisitions represent lease obligations for four operating facilities in England with leases expiring through 2014. The principal accrued acquisition expenses for 1999 acquisitions were for severance for approximately 175 employees across all functions and for abandoned facilities, primarily at Spectra-Physics AB. The amounts captioned as "other" primarily represent relocation, contract termination, and other exit costs. The Company expects to pay amounts accrued for acquisition expenses primarily through 2002. The Company finalized its restructuring plans for Spectra-Physics and other 1999 acquisitions in 1999 and 2000. The Company did not establish material reserves for restructuring businesses acquired in 2000 or 2001. < 9 > THERMO ELECTRON CORPORATION 3. Business Segment Information
Three Months Ended Six Months Ended ----------------------------- ----------------------------- June 29, June 30, June 29, June 30, (In thousands) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- Revenues: Life and Laboratory Sciences $ 275,007 $ 270,669 $ 543,095 $ 545,523 Measurement and Control 147,654 171,432 293,399 362,746 Optical Technologies 88,596 103,906 168,547 213,629 Intersegment (a) (2,144) (3,535) (4,602) (6,337) ---------- ---------- ---------- ---------- $ 509,113 $ 542,472 $1,000,439 $1,115,561 ========== ========== ========== ========== Income from Continuing Operations Before Provision for Income Taxes, Minority Interest, Extraordinary Item, and Cumulative Effect of Change in Accounting Principle: Life and Laboratory Sciences (b) $ 41,865 $ 24,442 $ 85,953 $ 58,898 Measurement and Control (c) 14,211 3,426 28,878 13,174 Optical Technologies (d) (9,271) (934) (19,467) 6,961 ---------- ---------- ---------- ---------- Total Segment Operating Income (e) 46,805 26,934 95,364 79,033 Corporate/Other (f) 26,660 (12,917) 75,843 (28,922) ---------- ---------- ---------- ---------- $ 73,465 $ 14,017 $ 171,207 $ 50,111 ========== ========== ========== ========== Depreciation: Life and Laboratory Sciences $ 5,223 $ 5,348 $ 10,462 $ 10,419 Measurement and Control 2,580 3,007 5,306 6,227 Optical Technologies 3,577 3,812 7,884 7,372 Corporate 727 551 1,424 895 ---------- ---------- ---------- ---------- $ 12,107 $ 12,718 $ 25,076 $ 24,913 ========== ========== ========== ========== Amortization (Note 8): Life and Laboratory Sciences $ 1,101 $ 6,961 $ 2,070 $ 13,868 Measurement and Control 277 3,429 558 6,784 Optical Technologies 351 1,486 668 2,971 ---------- ---------- ---------- ---------- $ 1,729 $ 11,876 $ 3,296 $ 23,623 ========== ========== ========== ========== During the first six months of 2002, the Company transferred management responsibility for several businesses between segments as follows: (1) the spectroscopy businesses were moved to the renamed Life and Laboratory Sciences segment from the Measurement and Control segment; (2) the temperature-control businesses were moved to the Measurement and Control segment from the Optical Technologies segment; (3) the electrochemistry products business was moved to the Measurement and Control segment from the Life and Laboratory Sciences segment; and (4) the Thermo Projects unit was moved from a separate segment (previously included as "Other") to the Life and Laboratory Sciences segment. Prior-period segment information has been restated to reflect these changes. < 10 > THERMO ELECTRON CORPORATION 3. Business Segment Information (continued) (a) Intersegment sales are accounted for at prices that are representative of transactions with unaffiliated parties. (b) Includes restructuring and other unusual costs, net, of $3.6 million, $10.3 million, $3.3 million, and $13.1 million in the second quarter of 2002 and 2001 and first six months of 2002 and 2001, respectively. (c) Includes restructuring and other unusual costs, net, of $1.1 million, $14.9 million, $0.9 million, and $20.9 million in the second quarter of 2002 and 2001 and first six months of 2002 and 2001, respectively. (d) Includes restructuring and other unusual costs, net, of $11.4 million, $8.5 million, $19.7 million, and $8.9 million in the second quarter of 2002 and 2001 and first six months of 2002 and 2001, respectively. (e) Segment operating income is income before corporate general and administrative expenses, other income and expense, minority interest income, income taxes, extraordinary item, and cumulative effect of change in accounting principle. (f) Includes corporate general and administrative expenses and other income and expense. Includes corporate restructuring and other unusual costs of $0.9 million, $3.3 million, $1.6 million, and $4.9 million in the second quarter of 2002 and 2001 and first six months of 2002 and 2001, respectively. Other income, net, in the second quarter and first six months of 2002 includes gains of $31.6 million and $87.9 million, respectively, on sales of shares of FLIR Systems, Inc. Other expense, net, in the first six months of 2001 includes a charge of $2.0 million for impairment of an available-for-sale investment. 4. Other Income (Expense), Net The components of other income (expense), net, in the accompanying statement of operations are as follows: Three Months Ended Six Months Ended ---------------------- ---------------------- June 29, June 30, June 29, June 30, (In thousands) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- Interest Income $ 12,621 $ 15,776 $ 26,979 $ 33,450 Interest Expense (Note 10) (10,216) (18,533) (23,695) (37,976) Equity in Earnings of Unconsolidated Subsidiaries - 1,051 2,169 1,260 Gain (Loss) on Investments, Net 36,033 1,345 93,986 (807) Other Items, Net (149) 213 (142) 179 -------- -------- -------- -------- $ 38,289 $ (148) $ 99,297 $ (3,894) ======== ======== ======== ======== The Company sold 756,000 and 2,006,000 shares of FLIR Systems, Inc. common stock during the second quarter and first six months of 2002, respectively, and realized gains of $31.6 million and $87.9 million, including $8.8 million and $23.2 million from the recovery of amounts written down in prior years. The Company historically reported its pro-rata share of FLIR's results on a one-quarter lag. In December 2001, following a sale of shares, the Company's ownership of FLIR fell below 20%. In the first quarter of 2002, the Company recorded its share of FLIR's fourth quarter 2001 earnings through the date on which the Company's ownership fell below 20%. The Company's share of such earnings totaled $2.1 million. As of March 30, 2002, the Company accounts for its investment in FLIR as an available-for-sale security and no longer records its share of FLIR's earnings. As an available-for-sale security, the investment in FLIR is recorded at quoted market value in current assets and unrealized gains or losses are recorded as a part of accumulated other comprehensive items in the accompanying 2002 balance sheet. < 11 > THERMO ELECTRON CORPORATION 5. Redemption and Repurchase of Subordinated Convertible Debentures and Extraordinary Item In March 2002, the Company redeemed all of its outstanding 4 1/4% and 4 5/8% subordinated convertible debentures due 2003 with the objective of minimizing interest costs. The principal amounts redeemed for the 4 1/4% and 4 5/8% debentures were $398.4 million and $57.9 million, respectively. The redemption price was 100% of the principal amount of the debentures, plus accrued interest. During the first six months of 2002, the Company repurchased $41.6 million principal amount of its other subordinated convertible debentures for $41.2 million in cash. These transactions resulted in net extraordinary charges of $0.7 million for the first six months of 2002, net of taxes of $0.4 million. 6. Earnings (Loss) per Share Basic and diluted earnings (loss) per share were calculated as follows: Three Months Ended Six Months Ended ---------------------- ---------------------- June 29, June 30, June 29, June 30, (In thousands except per share amounts) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle $ 49,490 $ 9,423 $113,871 $ 31,242 Gain (Loss) on Disposal of Discontinued Operations, Net 19,000 15,560 70,370 (50,440) Extraordinary Item 27 - (680) - Cumulative Effect of Change in Accounting Principle - - - (994) -------- -------- -------- -------- Net Income (Loss) for Basic Earnings (Loss) per Share 68,517 24,983 183,561 (20,192) Effect of Convertible Debentures 3,011 - 8,919 - -------- -------- -------- -------- Income (Loss) Available to Common Shareholders, as Adjusted for Diluted Earnings (Loss) per Share $ 71,528 $ 24,983 $192,480 $(20,192) -------- -------- -------- -------- Basic Weighted Average Shares 171,122 181,628 172,686 182,242 Effect of: Stock options 2,054 2,996 2,514 3,415 Convertible debentures 13,564 432 20,264 460 -------- -------- -------- -------- Diluted Weighted Average Shares 186,740 185,056 195,464 186,117 -------- -------- -------- -------- < 12 > THERMO ELECTRON CORPORATION 6. Earnings (Loss) per Share (continued) Three Months Ended Six Months Ended ---------------------- ---------------------- June 29, June 30, June 29, June 30, (In thousands except per share amounts) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) per Share: Continuing operations before extraordinary item and cumulative effect of change in accounting principle $ .29 $ .05 $ .66 $ .17 Discontinued operations .11 .09 .41 (.28) Extraordinary item - - - - Cumulative effect of change in accounting principle - - - (.01) -------- -------- -------- -------- $ .40 $ .14 $ 1.06 $ (.11) ======== ======== ======== ======== Diluted Earnings (Loss) per Share: Continuing operations before extraordinary item and cumulative effect of change in accounting principle $ .28 $ .05 $ .63 $ .17 Discontinued operations .10 .08 .36 (.27) Extraordinary item - - - - Cumulative effect of change in accounting principle - - - (.01) -------- -------- -------- ------- $ .38 $ .14 $ .98 $ (.11) ======== ======== ======== ======== Options to purchase 10,898,000 and 4,890,000 shares of common stock for the second quarter of 2002 and 2001, respectively, and 9,237,000 and 3,855,000 shares of common stock for the first six months of 2002 and 2001, respectively, were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price for the common stock and their effect would have been antidilutive. The computation of diluted earnings per share for the second quarter and first six months of 2002 excludes the effect of assuming the conversion of the Company's 4 3/8% subordinated convertible debentures, with a principal balance of $74,618,000 as of June 29, 2002, and convertible at $111.83 per share, because the effect would be antidilutive. The computation of diluted earnings per share for the second quarter and first six months of 2001 excludes the effect of assuming the conversion of the Company's subordinated convertible debentures, except for the Company's 0% subordinated convertible debentures, because the effect would be antidilutive. 7. Comprehensive Income Comprehensive income combines net income and other comprehensive items, which represents certain amounts that are reported as components of shareholders' investment in the accompanying balance sheet, including currency-translation adjustments and unrealized net of tax gains and losses on available-for-sale investments and hedging instruments (Note 10). During the second quarter of 2002 and 2001, the Company had comprehensive income of $95.9 million and $14.6 million, respectively. During the first six months of 2002 and 2001, the Company had comprehensive income of $155.3 million and a comprehensive loss of $50.3 million, respectively. Comprehensive income in the first six months of 2002 excludes the effect on unrealized gains of $111 million that existed at the date the Company reclassified equity interests in FLIR and Thoratec Corporation to available-for-sale investments (Notes 4 and 14). < 13 > THERMO ELECTRON CORPORATION 8. Recent Accounting Pronouncements and Pro Forma Results In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." The Company adopted the requirements of SFAS No. 142 effective December 30, 2001. SFAS No. 142 requires companies to cease amortization of all goodwill. SFAS No. 142 also requires companies to annually test goodwill for impairment and to perform an initial test in the year of adoption. The Company has completed this initial test and determined that no impairment of goodwill existed at the adoption date. Goodwill amortization for the second quarter and first six months of 2001, was $10.1 million and $20.1 million, respectively. Pro forma results for the second quarter and first six months of 2001, as if the standard had been adopted at the beginning of 2001, are as follows:
Three Six Months Months Ended Ended June 30, June 30, (In thousands except per share amounts) 2001 2001 - -------------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle: As reported $ 9,423 $ 31,242 Pro forma 18,768 49,556 Basic Earnings per Share from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle: As reported .05 .17 Pro forma .10 .27 Diluted Earnings per Share from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle: As reported .05 .17 Pro forma .10 .27 Net Income (Loss): As reported $ 24,983 $(20,192) Pro forma 34,328 (1,878) Basic Income (Loss) per Share: As reported .14 (.11) Pro forma .19 (.01) Diluted Income (Loss) per Share: As reported .14 (.11) Pro forma .19 (.01) In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." The standard provides guidance on measuring impairment of long-lived assets and applying discontinued operations accounting upon adoption. The Company adopted the standard during the first quarter of 2002. Adoption of the standard did not materially affect the Company's financial statements. < 14 > THERMO ELECTRON CORPORATION 8. Recent Accounting Pronouncements and Pro Forma Results (continued) In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Adoption of the standard is generally required in the fiscal year beginning after May 15, 2002. Under the standard, transactions currently classified by the Company as extraordinary items will no longer be treated as such but instead will be reported as other nonoperating income or expenses. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The standard affects the accounting for restructuring charges and related activities. The provisions of this statement are required to be adopted for exit or disposal activities that are initiated after December 31, 2002. The provisions of EITF 94-3 will continue to apply with regard to the Company's previously announced restructuring plans. 9. Note Receivable In July 2000, the Company completed the sale of its wholly owned Spectra Precision businesses to Trimble Navigation Limited for $208.1 million in net cash proceeds and $80.0 million in seller debt financing at an initial interest rate of 10%. The note from the buyer called for repayment in two equal, annual installments beginning in July 2001, but permitted extension of maturity under certain conditions. Trimble elected to defer the note payment due in July 2001, and in March 2002, the Company and Trimble negotiated a change in terms. Under the revised terms, Trimble paid $12 million of principal, together with $10 million of accrued interest. Maturity for the remaining balance was extended to July 2004, and the amended note carries an interest rate of 10.41% and has provisions that require earlier repayment under certain conditions. In addition, the Company obtained warrants to purchase up to 376,233 shares of Trimble at $15.11 per share, of which 200,000 shares are exercisable immediately through 2007 and the balance of which becomes exercisable for five-year terms at various times for as long as the note remains outstanding. Spectra Precision, formerly part of the Measurement and Control segment, was acquired as part of Spectra-Physics AB and provides the construction, surveying, and heavy-machine industries with precision-positioning equipment. 10. Derivative Instruments and Hedging The Company uses forward currency exchange contracts primarily to hedge certain operational (cash-flow hedges) and balance sheet (fair-value hedges) exposures resulting from changes in currency exchange rates. Such exposures result from sales that are denominated in currencies other than the functional currencies of the respective operations. The Company enters into these currency exchange contracts to hedge anticipated product sales and recorded accounts receivable made in the normal course of business, and accordingly, the hedges are not speculative in nature. As part of the Company's overall strategy to manage the level of exposure to the risk of currency exchange fluctuations, some operating units hedge a portion of their currency exposures anticipated over the ensuing 12-month period, using exchange contracts that have maturities of 12 months or less. The Company does not hold or engage in transactions involving derivative instruments for purposes other than risk management. The Company records its forward currency exchange contracts at fair value in its consolidated balance sheet as other current assets or other accrued expenses and, for cash-flow hedges, the related gains or losses on these contracts are deferred as a component of accumulated other comprehensive items in the accompanying balance sheet. These deferred gains and losses are recognized in income in the period in which the underlying anticipated transaction occurs. At June 29, 2002, the Company had deferred losses, net of income taxes, relating to forward currency exchange contracts of approximately $2.4 million, substantially all of which is expected to be recognized as expense over the next 12 months. Unrealized gains and losses resulting from the impact of currency exchange rate movements on fair-value hedges are recognized in earnings in the period in which the exchange rates change and offset the currency gains and losses on the underlying exposure being hedged. < 15 > THERMO ELECTRON CORPORATION 10. Derivative Instruments and Hedging (continued) During the first quarter of 2002, the Company entered into interest rate swap arrangements for its $128.7 million principal amount 7.625% senior notes, due in 2008, with the objective of minimizing interest costs. The arrangements provide that the Company will receive a fixed interest rate of 7.625% and will pay a variable rate of 90-day LIBOR plus 2.19% (4.09% as of June 29, 2002). The swaps have terms expiring at the maturity of the debt. The swaps are designated as fair-value hedges and as such, are carried at fair value. Changes in the fair value of these swaps and the changes in the fair value of the debt that result from changes in LIBOR are recorded in interest expense in the accompanying statement of operations. The swap arrangements are with different counterparties than the holders of the underlying debt. Management believes that any credit risk associated with the swaps is remote based on the creditworthiness of the financial institutions issuing the swaps. 11. Securities-Lending Agreements In connection with the March 2002 debt redemption discussed in Note 5, the Company entered into securities-lending agreements with third parties under which the Company may borrow funds for short-term needs. Borrowings are collateralized by available-for-sale investments. As of June 29, 2002, the Company had outstanding borrowings of $337.4 million under these arrangements with maturities between July and October 2002. The proceeds of the borrowings were used to partially fund the debt redemption discussed in Note 5. The borrowings carried a weighted average interest rate of 2.2% at June 29, 2002. The Company has pledged $354.3 million of available-for-sale securities in the accompanying 2002 balance sheet as collateral for such borrowings. 12. Purchase of Minority Interest in Spectra-Physics Following the completion of a cash tender offer in December 2001 for all of the shares of Spectra-Physics it did not previously own, the Company completed a short-form merger with Spectra-Physics in February 2002. After the merger, Spectra-Physics was no longer publicly traded and became a wholly owned subsidiary of the Company. The Company expended $22.0 million of cash to complete the purchase of the minority interest and recorded an increase in goodwill of $15.6 million. Options to purchase shares of Spectra-Physics were exchanged for options to purchase 2,241,598 shares of Thermo Electron common stock. The exchange of options was accounted for in accordance with the methodology set forth in FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" (Note 13). 13. Restructuring and Other Unusual Costs, Net In response to a downturn in telecommunications, semiconductor, and other markets served by the Company's businesses and in an effort to further integrate business units, the Company initiated restructuring actions in the second quarter of 2001 in a number of business units to reduce costs and shed unproductive assets. Further actions were initiated in the fourth quarter of 2001 and in the first half of 2002. The restructuring and related actions primarily consisted of headcount reductions, writedowns of telecommunication equipment and excess telecommunication inventories at Spectra-Physics, discontinuance of a number of mature or unprofitable product lines, and consolidation of facilities to streamline operations and reduce costs. The Company expects to incur an additional $3 million of restructuring costs in the third quarter of 2002 and thereafter for charges associated with these actions that cannot be recorded until incurred. The Company expects that the restructuring actions undertaken in 2001 and 2002 will be substantially completed by the end of 2002. < 16 > THERMO ELECTRON CORPORATION 13. Restructuring and Other Unusual Costs, Net (continued) During the second quarter of 2002, the Company recorded net restructuring and other charges by segment as follows:
Life and Laboratory Measurement Optical (In thousands) Sciences and Control Technologies Corporate Total - --------------------------------------------------------------------------------------------------------------------------------- Cost of Revenues $ 569 $ - $ 982 $ - $ 1,551 Restructuring and Other Unusual Costs, Net 3,027 1,115 10,445 900 15,487 ------- ------- ------- ------- ------- $ 3,596 $ 1,115 $11,427 $ 900 $17,038 ======= ======= ======= ======= ======= During the first six months of 2002, the Company recorded net restructuring and other charges by segment as follows: Life and Laboratory Measurement Optical (In thousands) Sciences and Control Technologies Corporate Total - --------------------------------------------------------------------------------------------------------------------------------- Cost of Revenues $ 569 $ - $ 982 $ - $ 1,551 Restructuring and Other Unusual Costs, Net 2,710 867 18,703 1,590 23,870 ------- ------- ------- ------- ------- $ 3,279 $ 867 $19,685 $ 1,590 $25,421 ======= ======= ======= ======= ======= The components of net restructuring and other charges by segment are as follows: Life and Laboratory Sciences The Life and Laboratory Sciences segment recorded $3.6 million of net restructuring and other charges in the second quarter of 2002. The segment recorded $0.6 million of charges to cost of revenues, which consisted of $0.4 million for a discontinued product line and $0.2 million for the sale of inventory revalued at the date of acquisition. The segment also recorded $3.0 million of restructuring and other unusual costs, including $2.4 million of cash costs principally associated with facility consolidations. The cash costs included $0.7 million of severance for 12 employees across all functions; $0.7 million of pension costs for terminated employees that was accrued as a pension liability; $0.4 million of employee-retention costs; $0.1 million of abandoned-facility lease costs; and $0.5 million of other cash costs, primarily relocation expenses. In addition, the segment sold two small operating units and a building for a net loss of $0.5 million and had other asset writedowns of $0.1 million. In the first quarter of 2002, this segment recorded $0.3 million of other unusual income, net. The unusual income included a gain on the sale of a product line of $1.5 million. This gain was offset by cash costs of $1.2 million associated with the restructuring actions initiated in 2001, including $0.6 million of employee-retention costs; $0.4 million of severance for eight employees, primarily in administrative and sales functions; and $0.2 million of other cash costs, primarily relocation costs. Measurement and Control The Measurement and Control segment recorded $1.1 million of net restructuring and other charges in the second quarter of 2002. These charges included $2.2 million of cash costs principally associated with facility consolidations, including $0.7 million of relocation costs; $0.7 million of employee-retention costs; $0.6 million of severance; and $0.2 million of abandoned-facility lease costs. These costs were offset in part by $1.1 million of net gains on the sale of a small business unit and a building. < 17 > THERMO ELECTRON CORPORATION 13. Restructuring and Other Unusual Costs, Net (continued) In the first quarter of 2002, this segment recorded $0.2 million of other unusual income, net. The unusual income included gains of $1.5 million from the favorable resolution of a dispute on a business sold in 2000 and the sale of a small business unit in 2002. These gains were offset by $1.1 million of cash costs associated with the restructuring actions initiated in 2001, including $0.5 million of severance; $0.1 million of employee-retention costs; and $0.5 million of other cash costs, primarily relocation and contract-termination costs. The charge also included $0.2 million of asset writedowns, primarily for asset impairment of a building held for sale. Optical Technologies The Optical Technologies segment recorded $11.4 million of net restructuring and other charges in the second quarter of 2002. The segment recorded $1.0 million of charges to cost of revenues, including $0.7 million for a discontinued product line and the balance for the sale of inventory revalued at the date of acquisition. The segment also recorded $10.4 million of restructuring and other unusual costs, including $5.5 million of asset writedowns and $4.9 million of cash costs. The cash costs included $3.2 million of severance for 117 employees across all functions; $1.0 million for abandoned-equipment leases; and $0.7 million for the settlement of litigation (Note 15). The asset writedowns included $5.3 million of abandoned telecommunications equipment and $0.2 million of goodwill on a small business held for sale. Following actions in the first and second quarter of 2002, the Company has suspended initiatives for products that address telecom markets based on the continuing economic downturn in these markets. In the first quarter of 2002, this segment recorded $8.3 million of restructuring and other charges. These charges included $6.8 million of cash costs at Spectra-Physics, including $4.5 million of lease costs, primarily for abandoned equipment; $2.1 million of severance for 76 employees across all functions; $0.1 million of employee-retention costs; and $0.1 million of other cash costs. The charges also included $0.7 million of asset writeoffs for abandoned manufacturing equipment and $0.8 million resulting from the exchange of options to purchase shares of Spectra-Physics for options to purchase shares of Thermo Electron following the acquisition of the minority interest in this business in February 2002 (Note 12). Corporate The Company recorded $0.9 million of restructuring and other charges at its corporate office in the second quarter of 2002, primarily for third-party advisory fees associated with the Company's reorganization plan. While the Company no longer has any public subsidiaries, it has numerous subsidiaries through which the formerly public subsidiaries conducted business. The third-party advisory fees are being incurred to simplify this legal structure. In the first quarter of 2002, the Company recorded $0.7 million of restructuring and other charges at its corporate office, all of which were cash costs. This amount included $0.6 million of third-party advisory fees associated with the Company's reorganization plan; and $0.1 million of severance for three employees. < 18 > THERMO ELECTRON CORPORATION 13. Restructuring and Other Unusual Costs, Net (continued) General The following table summarizes the Company's severance actions in 2001 and 2002.
Number of 2000 Restructuring Plans Employees - ------------------------------------------------------------------------------------------------------------------------------- Remaining Terminations at December 30, 2000 80 Additional Terminations Announced in 2001 16 Terminations Occurring in 2001 (91) Adjustment to Plan (1) ------ Remaining Terminations at December 29, 2001 4 Terminations Occurring in 2002 (4) ------ Remaining Terminations at June 29, 2002 - ====== 2001 Restructuring Plans - ------------------------------------------------------------------------------------------------------------------------------- Terminations Announced in 2001 1,714 Terminations Occurring in 2001 (1,001) ------ Remaining Terminations at December 29, 2001 713 Additional Terminations Announced in 2002 221 Terminations Occurring in 2002 (679) ------ Remaining Terminations at June 29, 2002 255 ====== < 19 > THERMO ELECTRON CORPORATION 13. Restructuring and Other Unusual Costs, Net (continued) The following table summarizes the cash components of the Company's restructuring plans. The noncash components and other amounts reported as restructuring and other unusual costs, net, in the accompanying 2002 statement of operations have been summarized in the notes to the table.
Abandonment Employee of Excess (In thousands) Severance Retention (a) Facilities Other Total - -------------------------------------------------------------------------------------------------------------------------------- 1998 Restructuring Plans Balance at December 29, 2001 $ - $ - $ - $ 506 $ 506 Transfer to accrued pension costs (b) - - - (534) (534) Currency translation - - - 28 28 -------- -------- -------- -------- -------- Balance at June 29, 2002 $ - $ - $ - $ - $ - ======== ======== ======== ======== ======== 1999 Restructuring Plans Balance at December 29, 2001 $ 571 $ - $ - $ - $ 571 Payments (157) - - - (157) -------- -------- -------- -------- -------- Balance at June 29, 2002 $ 414 $ - $ - $ - $ 414 ======== ======== ======== ======== ======== 2000 Restructuring Plans Balance at December 29, 2001 $ 1,588 $ 6,287 $ 1,866 $ 1,200 $ 10,941 Costs incurred in 2002 - - - 1,406 1,406 Payments (999) (6,015) (337) (2,409) (9,760) Currency translation 104 - 71 2 177 -------- -------- -------- -------- -------- Balance at June 29, 2002 $ 693 $ 272 $ 1,600 $ 199 $ 2,764 ======== ======== ======== ======== ======== 2001 Restructuring Plans Balance at December 29, 2001 $ 26,092 $ 143 $ 19,765 $ 2,667 $ 48,667 Costs incurred in 2002 (c) 8,158 1,780 4,895 3,093 17,926 Reserves reversed (489) (4) (102) (78) (673) Payments (19,291) (1,630) (3,162) (3,239) (27,322) Currency translation 1,406 28 423 65 1,922 -------- -------- -------- -------- -------- Balance at June 29, 2002 $ 15,876 $ 317 $ 21,819 $ 2,508 $ 40,520 ======== ======== ======== ======== ======== (a) Employee-retention costs are accrued ratably over the period through which employees must work to qualify for a payment. The 2000 awards were based on specified percentages of employees' salaries and were generally awarded to help ensure continued employment at least through completion of the Company's reorganization plan. (b) Balance of accrued restructuring costs from 1998 plans related to pension liability associated with employees terminated in 1998, which was transferred to accrued pension costs in 2002. (c) Excludes net gains of $0.9 million and $2.4 million in the Life and Laboratory Sciences and Measurement and Control segments, respectively; noncash charges of $7.0 million in the Optical Technologies segment; a cash charge of $0.7 million recorded in accrued pension costs in the Life and Laboratory Sciences segment; and loss on litigation of $0.7 million in the Optical Technologies segment. The Company expects to pay accrued restructuring costs as follows: severance, employee-retention obligations, and other costs, which primarily represent cancellation/termination fees, primarily in 2002; and abandoned-facility payments, over lease terms expiring through 2012. < 20 > THERMO ELECTRON CORPORATION 14. Discontinued Operations Net liabilities of discontinued operations in the accompanying 2002 balance sheet principally represents remaining obligations of the discontinued businesses, including severance, lease, litigation, and other obligations, offset by the net assets of two remaining operating units held for sale. These two businesses have aggregate annual revenues of approximately $90 million. During the second quarter and first six months of 2002, the Company's discontinued operations had revenues of $24.1 million and $44.4 million, respectively, and operating income, of $2.4 million and $4.2 million, respectively. During the second quarter and first six months of 2001, the Company's discontinued operations had revenues of $216.3 million and $438.1 million, respectively, and operating income of $24.6 million and $34.8 million, respectively. Thermo Cardiosystems The Company announced in January 2000 that Thermo Cardiosystems Inc. and all of the Company's noninstrument businesses other than Thermo Ecotek were to be sold or spun-off. These divestitures totaled approximately 40 businesses with revenues of $1.8 billion. (The Company later sold Thermo Ecotek as well). Accordingly, the Company treated the divestiture of these businesses together with Thermo Cardiosystems as discontinued operations in its financial statements. In February 2001, the Company sold Thermo Cardiosystems to Thoratec in exchange for 19.3 million shares of Thoratec common stock, a 34% interest, which had a market value of $11.56 per share on the date of the transaction. Certain restrictions limited the timing of the Company's ability to sell these shares, although the restrictions fully lapse in August 2002. The Company continued to account for the sale of Thermo Cardiosystems and the ownership of the Thoratec shares as discontinued operations. The Company recorded an after-tax charge of $66.0 million in the first quarter of 2001 for a decline in market value of Thoratec common stock as a loss on disposal of discontinued operations and thereafter carried the shares at a new cost basis of $6.50 per share. In February 2002, the Company sold 6.9 million shares of Thoratec for net proceeds of $105 million, and realized an after-tax gain of $38.4 million as a gain on disposal of discontinued operations. Following the sale of shares in 2002, the Company owned less than 20% of Thoratec's outstanding shares and, pursuant to SFAS No. 115, began accounting for its investment as an available-for-sale security in continuing operations in the first quarter of 2002. As such, the investment is recorded at quoted market value in current assets and unrealized gains or losses are recorded as a part of accumulated other comprehensive items in the accompanying 2002 balance sheet. As of June 29, 2002, the Company held 7.7 million shares of Thoratec with a market value of $69 million, substantially all of which were restricted from trading until August 2002. The SEC has announced that it is reviewing the 10-K filings of Fortune 500 and other large companies. In July 2002, as part of such a review, the Company received a "comment" letter from the staff of the SEC concerning the Company's 2001 Form 10-K. In its comment letter, the SEC staff inquired about the accounting for the investment in Thoratec, the related writedown of that investment recorded in March 2001 following a significant decline in its market value, and the treatment of Thermo Cardiosystems as a discontinued operation. The Company is in the process of responding to these questions from the SEC staff. The SEC staff has asked the Company to explain its treatment of Thermo Cardiosystems and the investment in Thoratec as a discontinued operation, given the receipt of a greater than 20% interest in Thoratec as consideration for the sale of Thermo Cardiosystems. Obtaining an equity interest of greater than 20% as consideration for the sale of a business raises a question as to the continuing involvement of the Company in the business. If continuing involvement were significant it would be appropriate to account for the investment in continuing operations. The Company retained Thermo Cardiosystems in discontinued operations because management believed the Company had no significant continuing involvement. This belief was based upon, among other things, the fact that it planned to dispose of the Thoratec shares as restrictions governing their resale lapsed. The Company did sell shares of Thoratec to a level below a 20% equity interest in February 2002, when it reduced its ownership to 14% of Thoratec's outstanding shares. The Company viewed the plan to sell the Thoratec shares as a continuation of the plan to divest of Thermo Cardiosystems and accounted for Thermo Cardiosystems and the investment in Thoratec in discontinued operations until the first quarter of 2002, when the Company's ownership level fell to below 20% of Thoratec's outstanding shares and it began accounting for these shares as an available-for-sale security in continuing operations. < 21 > THERMO ELECTRON CORPORATION 14. Discontinued Operations (continued) Exclusion of Thermo Cardiosystems from discontinued operations and re-inclusion of it into continuing operations effective in 1999 would have resulted in the Company recording a larger provision for loss on disposal of discontinued operations in 1999. In addition, under this treatment, the writedown of the Thoratec investment may not have been required in 2001 and gains from sale of Thoratec shares in 2001 and 2002 would have been reported in continuing operations instead of discontinued operations. The Company would also have recorded its proportional share of Thoratec income and losses under the equity method of accounting. The Company is continuing to discuss this matter with the SEC staff. While uncertainty exists concerning the ultimate outcome of this matter, had the Company treated Thermo Cardiosystems and the investment in Thoratec as continuing operations, the Company estimates the approximate effect through June 29, 2002, would have been as follows:
Six Months Ended 1999 2000 2001 June 29, 2002 ------------------- ------------------- ------------------- ------------------- As Estimated As Estimated As Estimated As Estimated (In millions except per share amounts) Reported Effect Reported Effect Reported Effect Reported Effect - ----------------------------------------------------------------------------------------------------------------------------------- Revenues $2,295 $2,374 $2,281 $2,364 $2,188 $2,194 $1,000 $1,000 Income from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle $ 37 $ 41 $ 62 $ 66 $ 50 $ 131 $ 114 $ 141 Net Income (Loss) $ (175) $ (291) $ (36) $ (32) $ (1) $ 118 $ 184 $ 173 Diluted Earnings per Share from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle $ .22 $ .24 $ .36 $ .38 $ .27 $ .71 $ .63 $ .77 Diluted Earnings (Loss) per Share $(1.12) $(1.86) $ (.22) $ (.20) $ - $ .64 $ .98 $ .93 The Company estimates the approximate cumulative effect on income from continuing operations and net income through June 29, 2002, aggregates an increase of $116 million and a decrease of $4 million, respectively. In addition, unrealized gains on available-for-sale investments of $55.9 million, net of tax, at June 29, 2002, would decrease to $42.8 million. The components of the approximate cumulative effect on net income through June 29, 2002, are as follows:
Six Months Ended June 29, (In millions) 1999 2000 2001 2002 Total - -------------------------------------------------------------------------------------------------------------------------------- Thermo Cardiosystems Operating Results (a) $ - $ 4 $ - $ - $ 4 Removal of Expected Thermo Cardiosystems Gain from Discontinued Operations (b) (116) - - - (116) Record Gain on Sale of Thermo Cardiosystems in Continuing Operations (c) - - 64 - 64 Record Gain on Sale of Thoratec Shares in Continuing Operations (d) - - 20 27 47 Removal of Gain on Sale of Thoratec Shares from Discontinued Operations (d) - - - (38) (38) Removal of Writedown of Thoratec Shares from Discontinued Operations (e) - - 66 - 66 Pro-rata Share of Thoratec Loss (f) - - (3) - (3) Revision to Estimated Proceeds from Discontinued Operations (g) - - (28) - (28) ----- ----- ----- ----- ----- Net Cumulative Effect on Net Income $(116) $ 4 $ 119 $ (11) $ (4) ===== ===== ===== ===== ===== < 22 > THERMO ELECTRON CORPORATION 14. Discontinued Operations (continued) (a) Assumes Thermo Cardiosystems' results are reported in continuing operations through the date of sale in February 2001. (b) Assumes expected gain on Thermo Cardiosystems is not recorded as an offset to expected losses from the sale of other businesses in discontinued operations. (c) Assumes gain on sale of Thermo Cardiosystems is recorded pursuant to EITF 01-2. (d) Assumes gains from sales of Thoratec shares are recorded in continuing operations. (e) Assumes writedown of Thoratec shares prescribed by APB No. 30 is not required under APB No. 18. (f) Assumes equity in earnings/losses of Thoratec is reported in continuing operations. (g) Assumes revision to estimated proceeds from the sale of other businesses in discontinued operations is not offset by gains from the sale of Thoratec shares. Power-Generation Business In March 2002, the Company sold the last remaining component of its former power-generation business and realized a gain from the disposition totaling $13.0 million, principally for previously unrecognized tax benefits that were realized upon the sale. Other As a result of new tax regulations concerning deductible losses from divested businesses, the Company revised its estimate of the tax consequences of business disposals in discontinued operations and recorded a tax benefit of $19.0 million in the second quarter of 2002. 15. Litigation Continuing Operations During the second quarter of 2002, the Company settled a patent-infringement matter that Rockwell International Corp. had brought against Spectra-Physics and its Opto Power subsidiary. Under the settlement, the Company paid Rockwell $4.0 million. The settlement was charged against a reserve established for this matter except for $0.7 million that was included in restructuring and other unusual costs in the second quarter of 2002 (Note 13). Discontinued Operations During the second quarter of 2002, the Company settled a patent-infringement matter that Fischer Imaging Corporation had brought against the Company's former Trex Medical subsidiary. The Company sold Trex Medical in 2000 but retained this obligation as a term of the sale. Under the settlement, the Company paid Fischer $25 million and agreed to pay an additional $7.2 million over eight years. The portion of the settlement that was paid was charged against a reserve established for this matter. The balance of the amount to be paid will also be charged against the reserve as paid. 16. Common Stock During the second quarter of 2002, the Company restored 22,000,000 shares of common stock to authorized but unissued status, which had been held in treasury stock. < 23 > THERMO ELECTRON CORPORATION 17. Subsequent Events Acquisition In July 2002, the Measurement and Control segment acquired the radiation-monitoring products business (RMP) of Saint-Gobain for $30 million in cash. RMP is a major supplier of radiation safety, security, and industrial equipment to the U.S. market, and the leader in personal radiation monitoring in the United Kingdom. Divestitures In July 2002, the Measurement and Control segment completed the sale of its Thermo Nobel and Thermo BLH subsidiaries for $18.5 million in cash. These businesses are engaged in the production and sale of weighing systems, instruments, and components and were deemed noncore businesses and placed for sale in 2001. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. While the Company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the Company's estimates change, and readers should not rely on those forward-looking statements as representing the Company's views as of any date subsequent to the date of the filing of this Quarterly Report. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Forward-looking Statements" in this report on Form 10-Q. Results of Operations During the first six months of 2002, the Company transferred management responsibility for several businesses as follows: (1) the spectroscopy businesses were moved to the renamed Life and Laboratory Sciences segment from the Measurement and Control segment; (2) the temperature-control businesses were moved to the Measurement and Control segment from the Optical Technologies segment; (3) the electrochemistry products business was moved to the Measurement and Control segment from the Life and Laboratory Sciences segment; and (4) the Company's Thermo Projects unit was moved from a separate segment (previously included as "Other") to the Life and Laboratory Sciences segment. Prior-period segment results have been restated to reflect these changes. Second Quarter 2002 Compared With Second Quarter 2001 Continuing Operations Sales in the second quarter of 2002 were $509.1 million, a decrease of $33.4 million from the second quarter of 2001. Excluding the effect of acquisitions, divestitures, and currency translation, revenues decreased $33.5 million, or 6%. Currency translation had a favorable effect on revenues as discussed below by segment, due to the weakening of the U.S. dollar relative to currencies in certain of the countries in which the Company operates. Operating income was $35.2 million in the second quarter of 2002, compared with $14.2 million in the second quarter of 2001. Segment operating income increased to $46.8 million in 2002 from $26.9 million in 2001. (Segment operating income is operating income excluding costs incurred at the Company's corporate office.) Operating and segment operating income in the second quarter of 2002 were affected by charges associated with a restructuring plan < 24 > THERMO ELECTRON CORPORATION Second Quarter 2002 Compared With Second Quarter 2001 (continued) - ----------------------------------------------------- initiated during the fourth quarter of 2001, other restructuring actions initiated in 2002, and certain other unusual income/costs, net (Note 13). Operating and segment operating income in the second quarter of 2001 were affected by charges associated with a restructuring plan initiated during the quarter and certain other unusual charges. The unusual items in both periods are discussed by segment below. Excluding these unusual costs, which totaled $16.1 million in 2002 and $33.6 million in 2001, segment operating income was $62.9 million in 2002 and $60.5 million in 2001. The 2001 period included $10.1 million of goodwill amortization. Amortization of goodwill ceased following the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," effective in 2002 (Note 8). Excluding goodwill amortization and unusual items, segment operating income totaled $70.6 million in 2001. Segment operating income excluding goodwill amortization and unusual items decreased due to lower revenues and profitability at certain businesses discussed below. The Company believes the following represent its critical accounting policies and estimates used in the preparation of its financial statements. a) The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to pay amounts due. If the financial condition of the Company's customers were to deteriorate, reducing their ability to make payments, additional allowances would be required. b) The Company writes down its inventories for estimated obsolescence for differences between the cost and estimated net realizable value based on recent usage and expected demand. If ultimate usage varies significantly from expected usage, additional writedowns may be required. c) The Company assesses the realizability of its notes receivable based on judgments concerning the borrower's ability to make the required payments and the value of collateral, if any. If the financial condition of the borrower or the value of the collateral were to deteriorate, charges to reduce the carrying value of notes receivable may be necessary. d) The Company periodically evaluates goodwill for impairment under the guidelines of SFAS No. 142. Should the fair value of the Company's goodwill decline because of reduced operating performance, market declines, or other indicators of impairment, charges for impairment of goodwill may be necessary. e) The Company periodically reviews other intangible assets for impairment based on estimated future cash flows associated with the assets. Should future cash flows decline significantly from estimated amounts, charges for impairment of other intangible assets may be necessary. f) At the time the Company recognizes revenue it provides for the estimated cost of product warranties based primarily on historical experience. Should product failure rates or the actual cost of correcting product failures vary from estimates, revisions to the estimated warranty liability would be necessary. g) The Company estimates the degree to which tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction and provides a valuation allowance for tax assets and loss carryforwards that it believes will more likely than not go unused. Should the Company's actual future taxable income by tax jurisdiction vary from estimates, additional allowances may be necessary. h) The Company estimates losses on contingencies and litigation and provides a reserve for these losses. Should the ultimate losses on contingencies and litigation vary from estimates, adjustments to those reserves may be required. i) The Company recorded restructuring charges for asset impairment in 2001 based on estimated future cash flows associated with the equipment and for the cost of vacating facilities based on expected sub-rental income. Should actual cash flows associated with impaired equipment and sub-rental income from vacated facilities vary from estimated amounts, additional charges may be required. j) The Company estimates the expected proceeds from the sale of its discontinued businesses and recorded losses in 1999-2001 to reduce the carrying value of these businesses to estimated realizable value. Should the actual proceeds vary from estimates, actual results could differ from expected amounts. Life and Laboratory Sciences Sales in the Life and Laboratory Sciences segment increased $4.3 million to $275.0 million in the second quarter of 2002. The favorable effects of currency translation resulted in an increase in revenues of $5.3 million in 2002. Sales increased $0.9 million due to an acquisition, net of divestitures. Excluding the effect of currency translation, divestitures, and an acquisition, revenues decreased $1.8 million, or 1%. Weakened demand for spectroscopy instruments and sample-preparation products was substantially offset by strong sales of mass spectrometry equipment as well as increased sales of histology and cytology products. < 25 > THERMO ELECTRON CORPORATION Second Quarter 2002 Compared With Second Quarter 2001 (continued) - ----------------------------------------------------- Operating income margin increased to 15.2% in the second quarter of 2002 from 9.0% in the second quarter of 2001. The segment's margin increased primarily due to ceasing goodwill amortization due to the adoption of SFAS No. 142 in 2002 and the inclusion of unusual costs in the 2001 period. Excluding restructuring and unusual costs, net, of $3.6 million in 2002 and $10.3 million in 2001, and goodwill amortization of $5.9 million in 2001, operating income margin was 16.5% in 2002 and 15.0% in 2001. Cost reduction and productivity measures undertaken in 2001 and 2002 contributed to the improved margin. In the second quarter of 2002, the segment recorded restructuring and unusual cash costs of $2.4 million, primarily for employee retention and severance at businesses being consolidated. In addition, the segment sold two small operating units and a building for a net loss of $0.5 million and had other asset writedowns of $0.1 million. Also in 2002, the segment recorded charges to cost of revenues of $0.6 million, principally for a discontinued product line (Note 13). Restructuring and unusual costs in 2001 represent cash costs of $4.7 million, primarily for severance and abandoned facilities; $3.4 million of charges to cost of revenues, principally for discontinued product lines; and $2.2 million of asset writedowns. Measurement and Control Sales in the Measurement and Control segment decreased $23.8 million to $147.7 million in the second quarter of 2002. Sales decreased $8.6 million due to divestitures. The favorable effects of currency translation resulted in an increase in revenues of $2.4 million in 2002. Excluding the effect of divestitures and currency translation, revenues decreased $17.5 million, or 11%. The decrease was due to a decline in revenues in each of the segment's principal businesses due to economic conditions facing customers, particularly in the semiconductor, energy, and steel industries. The Company expects that a continued downturn in markets served by the segment will unfavorably affect the segment's revenue comparisons with corresponding prior-year periods for at least the near-term. The principal divestitures by the segment referenced above included the August 2001 sale of its Pharos Marine unit, which manufactures and sells marine-navigation equipment and systems and the July 2001 sale of its ThermoMicroscopes unit, a manufacturer of scanning probe microscopes. Operating income margin increased to 9.6% in the second quarter of 2002 from 2.0% in the second quarter of 2001, primarily due to restructuring and unusual costs in 2001 and ceasing amortization of goodwill due to the adoption of SFAS No. 142 in 2002. Operating income margin, excluding restructuring and unusual costs, net, of $1.1 million in 2002 and $14.9 million in 2001, and goodwill amortization of $3.1 million in 2001, decreased to 10.4% in 2002 from 12.5% in 2001. The decrease in operating income margin resulted primarily from lower revenues, offset in part by the effects of cost reduction and productivity measures undertaken in 2001. In the second quarter of 2002, the segment recorded restructuring and unusual costs, net, of $1.1 million, including cash costs of $2.2 million, principally for severance, employee retention, relocation, and other costs of facility consolidations. These costs were offset in part by $1.1 million of net gains on the sale of a small business unit and a building (Note 13). Restructuring and unusual costs, net, in 2001 included cash costs of $8.0 million, primarily for severance and abandoned facilities; $3.3 million of charges to cost of revenues principally for discontinued product lines; $1.6 million as a revision to the estimated loss recorded in the first quarter of 2001 for the disposal of ThermoMicroscopes; $1.5 million of asset writedowns; and $0.5 million for a post-closing adjustment on two businesses sold in 2000. Optical Technologies Sales in the Optical Technologies segment decreased $15.3 million to $88.6 million in the second quarter of 2002. The unfavorable effects of currency translation resulted in a decrease in revenues of $0.4 million in 2002. Sales increased $0.6 million due to the acquisition of a product line, net of a divestiture. Excluding the effect of currency translation, an acquisition, and a divestiture, revenues decreased $15.5 million, or 15%. The decrease was due to the severe slowdown in the semiconductor and telecommunication industries that has adversely affected a number of the segment's businesses. These industries are highly cyclical and have experienced downturns that began in 2001. The < 26 > THERMO ELECTRON CORPORATION Second Quarter 2002 Compared With Second Quarter 2001 (continued) - ----------------------------------------------------- Company expects that the slowdowns in semiconductor and telecommunication markets will continue to result in unfavorable revenue and profitability comparisons with corresponding prior-year periods for at least the near-term. A prolonged downturn could adversely affect the realizability of the segment's inventories, which would result in charges for impairment. The segment's backlog decreased 8% during the first six months of 2002 to $143.0 million from year-end 2001. Having completed the acquisition of the minority interest in Spectra-Physics (Note 12), the Company expects in the third quarter of 2002 to conform Spectra-Physics' policy concerning the determination of backlog from its current and historical practice of including orders expected to ship within 12 months to the prevailing practice at the Company's other businesses of including in backlog orders expected to ship within six months. The Company expects that the conforming adjustment will reduce the segment's backlog by approximately $37-$42 million as of June 29, 2002, and by a comparable amount at December 29, 2001. Operating income margin was negative 10.5% in the second quarter of 2002, compared with negative 0.9% in the second quarter of 2001. Excluding restructuring and unusual costs, net, of $11.4 million in 2002 and $8.5 million in 2001, and goodwill amortization of $1.1 million in 2001, operating income margin was 2.4% in 2002 and 8.4% in 2001. The decrease in operating income margin was due to lower revenues at each of the segment's principal businesses. In the second quarter of 2002, the segment recorded restructuring and unusual charges of $11.4 million, including $4.9 million of cash costs principally for severance and abandoned-equipment leases as well as $0.7 million for the settlement of litigation (Note 15). In addition, this segment wrote off assets totaling $5.5 million, including $5.3 million of abandoned telecommunications equipment and $0.2 million of goodwill on a small business held for sale. The segment also recorded $1.0 million of charges to cost of revenues, principally for a discontinued product line (Note 13). Restructuring and unusual costs, net, in 2001 include $6.6 million of charges to cost of revenues for inventories; $2.2 million of cash costs for severance, abandoned facilities, and other exit costs; and income of $0.3 million from the sale of a facility. Other Income (Expense), Net The Company reported other income, net, of $38.3 million in the second quarter of 2002 and other expense, net, of $0.1 million in the second quarter of 2001 (Note 4). Other income (expense), net, includes interest income, interest expense, equity in earnings of unconsolidated subsidiaries in 2001, gain (loss) on investments, net, and other items, net. Interest income decreased to $12.6 million in 2002 from $15.8 million in 2001, primarily due to lower invested cash balances following the repurchase of Company securities and the acquisition of the minority interest in Spectra-Physics. The Company expects that a trend of lower market interest rates in 2002 will continue to adversely affect the yield it earns as maturing investments are reinvested at lower market rates. Interest expense decreased to $10.2 million in 2002 from $18.5 million in 2001, as a result of the redemption, maturity, and repurchase of debentures, offset in part by interest on borrowings under securities-lending arrangements (Note 11). During 2002 and 2001, the Company had gains on sale of investments, net, of $36.0 million and $1.3 million, respectively. The 2002 gain includes $31.6 million from the sale of 756,000 shares of FLIR Systems, Inc. Of the total gain from the sale of FLIR shares, $8.8 million represents a recovery of previous writedowns on the shares that were sold during the period. The Company recorded income from equity in earnings of unconsolidated subsidiaries of $1.1 million in 2001, which primarily relates to the investment in FLIR. Following a reduction in the Company's percentage ownership of FLIR to less than 20%, the Company no longer reports its pro-rata share of FLIR's earnings but instead accounts for its remaining investment as an available-for-sale security (Note 4). < 27 > THERMO ELECTRON CORPORATION Second Quarter 2002 Compared With Second Quarter 2001 (continued) - ----------------------------------------------------- Provision for Income Taxes The Company's effective tax rate was 32.6% and 38.6% in the second quarter of 2002 and 2001, respectively. Excluding restructuring and unusual costs or income, the effective tax rate was 31.8% and 38.6% in 2002 and 2001, respectively. The effective tax rate decreased in 2002, primarily due to the absence of nondeductible goodwill amortization following the adoption of SFAS No. 142 and, to a lesser extent, a reorganization in Europe that resulted in a more tax-efficient corporate structure. The effective tax rate exceeded the statutory federal income tax rate in 2001 due to the impact of state income taxes and nondeductible expenses, which included goodwill amortization. Excluding restructuring and unusual costs or income, and the amortization of goodwill, the effective tax rate was 33.5% in the second quarter of 2001. Minority Interest Income The Company recorded minority interest income of $0.8 million in the second quarter of 2001, representing minority shareholders' allocable share of a loss at Spectra-Physics. Following the acquisition of the minority interest in Spectra-Physics in February 2002 (Note 12), the Company has no minority interest income or expense. Income from Continuing Operations Income from continuing operations before extraordinary item was $49.5 million in the second quarter of 2002, compared with $9.4 million in the second quarter of 2001. Results in both periods were affected by unusual items, discussed above. Excluding the unusual items in both periods, income from continuing operations before extraordinary item increased to $40.2 million in 2002 from $31.4 million in 2001 due to the absence of goodwill amortization in 2002, offset in part by the reasons discussed above. Discontinued Operations As a result of new tax regulations concerning deductible losses from divested businesses, the Company revised its estimate of the tax consequences of business disposals in discontinued operations and recorded a tax benefit of $19.0 million in the second quarter of 2002. The Company sold a substantial portion of its discontinued power-generation business during the second quarter of 2001 for $238 million and realized a net of tax gain of $15.6 million on the disposition. First Six Months 2002 Compared With First Six Months 2001 Continuing Operations Sales in the first six months of 2002 were $1.000 billion, a decrease of $115.1 million from the first six months of 2001. Excluding the effect of acquisitions, divestitures, and currency translation, revenues decreased $83.1 million, or 8%. Currency translation had a net unfavorable effect on revenues in the six-month period as discussed below by segment, due to the strengthening of the U.S. dollar relative to other currencies of countries in which the Company operates. Operating income was $71.9 million in the first six months of 2002, compared with $54.0 million in the first six months of 2001. Segment operating income increased to $95.4 million in 2002 from $79.0 million in 2001. Operating and segment operating income in the first six months of 2002 were affected by charges associated with a restructuring plan initiated during the fourth quarter of 2001, other restructuring actions initiated in 2002, and certain other unusual income/costs, net (Note 13). Operating and segment operating income in the first six months of 2001 were affected by < 28 > THERMO ELECTRON CORPORATION First Six Months 2002 Compared With First Six Months 2001 (continued) - --------------------------------------------------------- charges associated with a restructuring plan initiated during the second quarter and certain other unusual charges, net. The unusual items in both periods are discussed by segment below. Excluding these unusual costs, which totaled $23.9 million in 2002 and $43.0 million in 2001, segment operating income was $119.2 million in 2002 and $122.0 million in 2001. The 2001 period included $20.1 million of goodwill amortization. Amortization of goodwill ceased following the adoption of SFAS No. 142, effective in 2002 (Note 8). Excluding goodwill amortization and unusual items, segment operating income totaled $142.1 million in 2001. Segment operating income excluding goodwill amortization and unusual items decreased in 2002 due to lower revenues and profitability at certain businesses discussed below. Life and Laboratory Sciences Sales in the Life and Laboratory Sciences segment decreased $2.4 million to $543.1 million in the first six months of 2002. The unfavorable effects of currency translation resulted in a decrease in revenues of $1.0 million in 2002. Sales decreased $0.2 million due to divestitures, net of acquisitions. Excluding the effect of currency translation, divestitures, and acquisitions, revenues decreased $1.3 million. Weakened demand for spectroscopy instruments and sample-preparation products was substantially offset by strong sales of mass spectrometry equipment as well as increased sales of histology and cytology products. Operating income margin increased to 15.8% in the first six months of 2002 from 10.8% in the first six months of 2001. The segment's margin increased primarily due to ceasing goodwill amortization due to the adoption of SFAS No. 142 in 2002 and the inclusion of unusual costs in the 2001 period. Excluding restructuring and unusual costs, net, of $3.3 million in 2002 and $13.1 million in 2001, and goodwill amortization of $11.8 million in 2001, operating income margin was 16.4% in 2002 and 15.4% in 2001. Cost reduction and productivity measures undertaken in 2001 and 2002 contributed to the improved margin. In the first six months of 2002, the segment recorded restructuring and unusual cash costs of $3.6 million, primarily for employee retention and severance at businesses being consolidated, and charges to cost of revenues of $0.6 million, principally for a discontinued product line. In addition, the segment wrote down $0.1 million of fixed assets and realized a net gain of $1.0 million on the sale of a product line, two small business units, and a building (Note 13). Restructuring and unusual costs, net, in 2001 included cash costs of $4.6 million, primarily for severance and abandoned facilities; $3.4 million of charges to cost of revenues, principally for discontinued product lines; a charge of $3.4 million for the writeoff of in-process research and development at an acquired business; $2.2 million of asset writedowns; and a $0.5 million gain on the sale of product line. Measurement and Control Sales in the Measurement and Control segment decreased $69.3 million to $293.4 million in the first six months of 2002. Sales decreased $30.1 million due to divestitures, net of an acquisition. The favorable effects of currency translation resulted in an increase in revenues of $0.2 million in 2002. Excluding the effect of divestitures, an acquisition, and currency translation, revenues decreased $39.5 million, or 12%. The decrease was due to a decline in revenues in each of the segment's principal businesses due to economic conditions facing customers, particularly in the semiconductor, energy, and steel industries. The principal divestitures referenced above included the businesses discussed in the results of the second quarter and the April 2001 sale of the CAC and Mid South businesses, which provide the oil and gas industry with wellhead safety and control products. Operating income margin increased to 9.8% in the first six months of 2002 from 3.6% in the first six months of 2001, primarily due to restructuring and unusual costs in 2001 and ceasing amortization of goodwill due to the adoption of SFAS No. 142 in 2002. Operating income margin, excluding restructuring and unusual costs, net, of $0.9 million in 2002 and $20.9 million in 2001, and goodwill amortization of $6.1 million in 2001, decreased to 10.1% in 2002 from 11.1% in 2001. The decrease in operating income margin resulted primarily from the decrease in revenues, < 29 > THERMO ELECTRON CORPORATION First Six Months 2002 Compared With First Six Months 2001 (continued) - --------------------------------------------------------- offset in part by the effects of cost reduction and productivity measures undertaken in 2001 and 2002. In the first six months of 2002, the segment recorded restructuring and unusual costs, net, of $0.9 million, including $3.3 million of cash costs associated with the restructuring actions initiated in 2001 and gains totaling $2.6 million from the favorable resolution of a dispute on a business sold in 2000 and the sale of two small business units and a building, offset in part by and a charge of $0.2 million, primarily for asset impairment of a building held for sale (Note 13). Restructuring and unusual costs, net, in 2001 include $8.2 million of cash costs, primarily for severance and abandoned facilities; charges of $6.4 million to reduce the carrying value of ThermoMicroscopes to disposal value; $3.3 million of charges to cost of revenues, principally for discontinued product lines; $1.5 million of asset writedowns; $1.0 million for impairment of a note receivable; and $0.5 million for a post-closing adjustment on two businesses sold in 2000. Optical Technologies Sales in the Optical Technologies segment decreased $45.1 million to $168.5 million in the first six months of 2002. The unfavorable effects of currency translation resulted in a decrease in revenues of $1.4 million in 2002. Sales increased $0.4 million due to the acquisition of a product line, net of a divestiture. Excluding the effect of currency translation, an acquisition, and a divestiture, revenues decreased $44.1 million, or 21%. The decrease was due to a severe slowdown in the semiconductor and telecommunication industries that has adversely affected a number of the segment's businesses. These industries are highly cyclical and have experienced downturns that began in 2001. Operating income margin was negative 11.5% in the first six months of 2002, compared with positive 3.3% in the first six months of 2001. Excluding restructuring and unusual costs, net, of $19.7 million in 2002 and $8.9 million in 2001, and goodwill amortization of $2.3 million in 2001, operating income margin was 0.1% in 2002 and 8.5% in 2001. The decrease in operating income margin was due to lower revenues at each of the segment's principal businesses and in particular at Spectra-Physics, where the decline in revenues led to operating losses. The Company initiated additional restructuring actions at Spectra-Physics in 2002, following those announced in the fourth quarter of 2001. These actions are discussed below and in Note 13. In the first six months of 2002, the segment recorded restructuring and unusual charges of $19.7 million, including $11.7 million of cash costs principally for abandoned-equipment leases and severance associated with suspended telecom initiatives (Note 13). The cash costs include $0.7 million for the settlement of litigation (Note 15). In addition, this segment wrote off assets totaling $6.2 million, including $6.0 million of abandoned fixed assets and $0.2 million of goodwill at a business held for sale. The segment also recorded a charge of $0.8 million resulting from the exchange of options to purchase shares of Spectra-Physics for options to purchase shares of Thermo Electron following the acquisition of the minority interest in this business in February 2002 (Note 12). During the first six months of 2002, the segment recorded $1.0 million of charges to cost of revenues, principally for discontinued product lines. Restructuring and unusual costs, net, in 2001 included $6.6 million of charges to cost of revenues for provisions for inventories; $2.2 million of cash costs for severance, abandoned facilities, and other exit costs; a $0.4 million charge to write off costs associated with a cancelled financing at Spectra-Physics, and $0.3 million of income from the sale of a facility. Other Income (Expense), Net The Company reported other income, net, of $99.3 million in the first six months of 2002 and other expense, net, of $3.9 million in the first six months of 2001 (Note 4). Interest income decreased to $27.0 million in 2002 from $33.5 million in 2001, primarily due to lower invested cash balances following the repurchase of Company securities and the acquisition of the minority interest in Spectra-Physics. Interest expense decreased to $23.7 million in 2002 from $38.0 million in 2001, as a result of the redemption, maturity, and repurchase of debentures as well as entering into an interest rate swap arrangement (Note 10), offset in part by interest on borrowings under securities-lending arrangements (Note 11). < 30 > THERMO ELECTRON CORPORATION First Six Months 2002 Compared With First Six Months 2001 (continued) - --------------------------------------------------------- During 2002, the Company had gains on sale of investments, net, of $94.0 million, compared with a loss on investments, net, of $0.8 million in 2001. The 2002 gain includes $87.9 million from the sale of 2,006,000 shares of FLIR. Of the total gain from the sale of FLIR shares, $23.2 million represents a recovery of previous writedowns on the shares that were sold during the period. Of the loss on investments recorded in 2001, $2.0 million arose as a result of impairment of an available-for-sale security that the Company deemed other than temporary. The security was a preacquisition asset of an acquired business. The Company recorded income from equity in earnings of unconsolidated subsidiaries of $2.2 million in 2002 and $1.3 million in 2001, which primarily related to the investment in FLIR through the first quarter of 2002. Provision for Income Taxes The Company's effective tax rate was 33.7% and 39.2% in the first six months of 2002 and 2001, respectively. Excluding restructuring and unusual costs or income, the effective tax rate was 32.4% and 39.0% in 2002 and 2001, respectively. The effective tax rate decreased in 2002, primarily due to the absence of nondeductible goodwill amortization following the adoption of SFAS No. 142 and, to a lesser extent, a reorganization in Europe that resulted in a more tax-efficient corporate structure. The effective tax rate exceeded the statutory federal income tax rate in 2001 due to the impact of state income taxes and nondeductible expenses, which included goodwill amortization. Excluding restructuring and unusual costs or income, and the amortization of goodwill, the effective tax rate was 34.0% in the first six months of 2001. Minority Interest Income The Company recorded minority interest income of $0.3 million and $0.8 million in the first six months of 2002 and 2001, respectively, representing minority shareholders' allocable share of losses at Spectra-Physics through the date on which the Company acquired the minority interest in this subsidiary in February 2002 (Note 12). Income from Continuing Operations Income from continuing operations before extraordinary item was $113.9 million in the first six months of 2002, compared with $31.2 million in the first six months of 2001. Results in both periods were affected by unusual items, discussed above. Excluding the unusual items in both periods, income from continuing operations before extraordinary item increased to $73.9 million in 2002 from $60.9 million in 2001 due to the absence of goodwill amortization in 2002, offset in part by the reasons discussed above. Extraordinary Item The Company repurchased and redeemed debentures during the first six months of 2002, resulting in an extraordinary charge of $0.7 million, net of tax (Note 5). Cumulative Effect of Change in Accounting Principle The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, in the first quarter of 2001 and recorded an after-tax charge of $1.0 million representing the cumulative effect of the change in accounting principle. < 31 > THERMO ELECTRON CORPORATION First Six Months 2002 Compared With First Six Months 2001 (continued) - --------------------------------------------------------- Discontinued Operations During the first quarter of 2002, the Company sold the last remaining component of its former power-generation business and realized a gain from the disposition totaling $13.0 million, principally for previously unrecognized tax benefits that were realized upon the sale. As a result of new tax regulations concerning deductible losses from divested businesses, the Company revised its estimate of the tax consequences of business disposals in discontinued operations and recorded a tax benefit of $19.0 million in the second quarter of 2002. In February 2001, the Company sold Thermo Cardiosystems Inc. to Thoratec Corporation in exchange for 19.3 million shares of Thoratec common stock. Certain restrictions limit the timing of the Company's ability to sell these shares, although the restrictions fully lapse in August 2002. The Company recorded an after-tax charge of $66.0 million in the first quarter of 2001 for a decline in market value of Thoratec common stock as a loss on disposal of discontinued operations. During the first quarter of 2002, the Company sold 6.9 million shares of Thoratec for net proceeds of $105 million, and realized an after-tax gain of $38.4 million as a gain on disposal of discontinued operations. Following the sale of shares in 2002, the Company owned less than 20% of Thoratec's outstanding shares and began accounting for its investment as an available-for-sale security in continuing operations in the first quarter of 2002 with unrealized gains or losses recorded as part of accumulated other comprehensive items in the accompanying 2002 balance sheet (Note 14). The Company sold a substantial portion of its discontinued power-generation business in June 2001 for $238 million and realized a net of tax gain of $15.6 million on the disposition. Liquidity and Capital Resources Consolidated working capital was $821.0 million at June 29, 2002, compared with $823.2 million at December 29, 2001. Included in working capital were cash, cash equivalents, and short-term available-for-sale investments of $976.4 million at June 29, 2002, compared with $1.042 billion at December 29, 2001. In addition, the Company had $9.4 million of long-term available-for-sale investments at December 29, 2001. Operating activities used cash of $49.1 million during the first six months of 2002. The use of $50.7 million of cash by discontinued operations was offset in part by cash of $1.6 million provided by continuing operations. A decrease in other current liabilities used $39.5 million of cash from continuing operations, including $17.0 million for restructuring actions, $11.9 million of accrued payroll and employee benefits due to timing of payments, and $8.1 million of accrued interest, principally due to the debt redemption discussed in Note 5. The Company's cash flow from continuing operations in the first six months of 2002 was reduced by income tax payments of approximately $34 million related to gains from the sale of investments. The principal cash outflows from discontinued operations were the payment of liabilities including the settlement of litigation (Note 15). In connection with certain restructuring actions undertaken by the Company's continuing operations, the Company had accrued $43.7 million for restructuring costs at June 29, 2002. The Company expects to pay approximately $20 million of this amount for severance, employee retention, lease obligations, and other costs primarily through 2002. The balance will be paid through the expiration of additional lease obligations through 2012. In addition, at June 29, 2002, the Company had accrued $7.8 million for acquisition expenses. Accrued acquisition expenses included $0.9 million of severance obligations, which the Company expects to pay primarily through 2002. The balance primarily represents abandoned-facility payments and will be paid over the remaining terms of the leases through 2014. < 32 > THERMO ELECTRON CORPORATION Liquidity and Capital Resources (continued) During the first six months of 2002, the primary investing activities of the Company's continuing operations, excluding available-for-sale investment activities, included the sale of other investments, acquisitions, the collection of notes receivable, the purchase of shares of a majority-owned subsidiary, and the purchase of property, plant, and equipment. The Company's continuing operations received proceeds of $65.2 million from the sale of other investments, principally shares of FLIR (Note 4). In addition, the Company's continuing operations expended $46.2 million for acquisitions (Note 2), $22.0 million to purchase the remaining minority-owned shares of its Spectra-Physics subsidiary (Note 12), and $19.9 million for purchases of property, plant, and equipment, net of dispositions. The Company's continuing operations collected $48.6 million from notes receivable, principally the repayment of Viasys Healthcare Inc.'s $33.4 million principal amount note in May 2002 and repayments from Trimble Navigation Limited in March 2002 (Note 9). In July 2002, the Company acquired the radiation-monitoring products business of Saint-Gobain for $30 million in cash and sold its Thermo BLH and Thermo Nobel businesses for $18.5 million in cash (Note 17). During the first six months of 2002, investing activities of the Company's discontinued operations provided $106.4 million of cash, primarily representing proceeds of $105 million from the sale of Thoratec common stock (Note 14). The Company's financing activities used $306.4 million of cash during the first six months of 2002, including $306.5 million for continuing operations. During the first six months of 2002, the Company's continuing operations expended $456.3 million to redeem all of its outstanding 4 1/4% and 4 5/8% subordinated convertible debentures due 2003. The redemption price was 100% of the principal amount of the debentures, plus accrued interest. The Company increased short-term notes payable by $345.9 million, primarily to partially fund the debt redemption (Note 11). The Company's continuing operations received net proceeds of $12.5 million from the exercise of employee stock options. During the first six months of 2002, the Company expended $208.5 million to repurchase its securities. As of June 29, 2002, the Company had approximately $80 million remaining under Board of Directors' authorizations to repurchase its own securities. The Company has no material commitments for purchases of property, plant, and equipment and expects that for all of 2002, such expenditures will approximate $50 - $60 million. As of June 29, 2002, the Company's net debt (debt, net of cash and available-for-sale investments) totaled $131 million. The Company's net debt/liquidity position in the future will be primarily affected by the level of cash flow from operations and the amount of cash expended on acquisitions and repurchases of the Company's securities. The Company believes that its existing resources together with cash it expects to generate from operations are sufficient to meet the working capital requirements of its existing businesses for the foreseeable future, including at least the next 24 months. Item 3 - Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to market risk from changes in interest rates, currency exchange rates, and equity prices has not changed materially from its exposure at year-end 2001, except that a 10% decrease in market interest rates at June 29, 2002, would result in a negative impact to the Company of $1 million on the net fair value of its interest-sensitive financial instruments; a 10% decrease in market equity prices at June 29, 2002, would result in a negative impact to the Company of $12 million on the net fair value of its price-sensitive equity financial instruments; and a 100-basis point increase in 90-day LIBOR at June 29, 2002, would increase the Company's annual pre-tax interest expense by $3 million. < 33 > THERMO ELECTRON CORPORATION Forward-looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Thermo Electron wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, Thermo Electron's actual results and could cause its actual results in 2002 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Thermo Electron. Thermo Electron must develop new products, adapt to rapid and significant technological change, and respond to introductions of new products in order to remain competitive. Thermo Electron's growth strategy includes significant investment in and expenditures for product development, including in the area of proteomics. Thermo Electron sells its products in several industries that are characterized by rapid and significant technological changes, frequent new product and service introductions, and enhancements and evolving industry standards. Without the timely introduction of new products, services, and enhancements, Thermo Electron's products and services will likely become technologically obsolete over time, in which case its revenue and operating results would suffer. Thermo Electron's customers use many of its products to develop, test, and manufacture their own products. As a result, Thermo Electron must anticipate industry trends and develop products in advance of the commercialization of its customers' products. If it fails to adequately predict its customers' needs and future activities, Thermo Electron may invest heavily in research and development of products and services that do not lead to significant revenue. Many of its products and products under development are technologically innovative and require significant planning, design, development, and testing at the technological, product, and manufacturing-process levels. These activities require Thermo Electron to make significant investments. Products in Thermo Electron's markets undergo rapid and significant technological change because of quickly changing industry standards and the introduction of new products and technologies that make existing products and technologies uncompetitive or obsolete. Thermo Electron's competitors may adapt more quickly to new technologies and changes in customers' requirements than Thermo Electron can. The products Thermo Electron is currently developing, or those it will develop in the future, may not be technologically feasible or accepted by the marketplace, and its products or technologies could become uncompetitive or obsolete. Thermo Electron sells its products and services to a number of companies that operate in cyclical industries, which could adversely affect its results of operations when those industries experience a downturn. The growth and profitability of certain of Thermo Electron's businesses depend in part on sales to industries that are subject to cyclical downturns and are experiencing slowing trends. For example, Thermo Electron's Optical Technologies segment depends in part on sales to the semiconductor industry and the growth and profitability of Thermo Electron's Measurement and Control segment depends in part on sales to the steel and cement industries. A prolonged slowdown in these industries would adversely affect sales by these segments, which in turn could adversely affect Thermo Electron's revenues and results of operations. Changes in governmental regulations may reduce demand for Thermo Electron's products or increase its expenses. Thermo Electron competes in many markets in which it and its customers must comply with federal, state, local, and international regulations, such as environmental, health and safety, and food and drug regulations. Thermo Electron develops, configures, and markets its products to meet customer needs created by those regulations. Any significant change in regulations could reduce demand for Thermo Electron's products. For example, many of Thermo Electron's instruments are marketed to the pharmaceutical industry for use in discovering and developing drugs. Changes in the U.S. Food and Drug Administration's regulation of the drug discovery and development process could have an adverse effect on the demand for these products. < 34 > THERMO ELECTRON CORPORATION Forward-looking Statements (continued) Demand for some of Thermo Electron's products depends on capital spending policies of its customers and on government funding policies. Thermo Electron's customers include manufacturers of semiconductors and products incorporating semiconductors, pharmaceutical and chemical companies, laboratories, universities, healthcare providers, government agencies, and public and private research institutions. Many factors, including public policy spending priorities, available resources, and economic cycles, have a significant effect on the capital spending policies of these entities. These policies in turn can have a significant effect on the demand for our products. For example, as a result of the continuing recession, a customer of Thermo Electron's Optical Technologies segment has reduced its capital expenditure budget and cancelled $1.0 million in laser orders. Thermo Electron faces a number of challenges in integrating its businesses. Thermo Electron has historically operated its businesses largely as autonomous, unaffiliated operations. As part of its reorganization, Thermo Electron has begun to manage these operations in a more coordinated manner. The following factors may make it difficult to successfully integrate and consolidate Thermo Electron's operations: - Thermo Electron's success in integrating these businesses depends on its ability to coordinate geographically separate organizations and integrate personnel with different business backgrounds and corporate cultures. - Thermo Electron's ability to combine these businesses requires coordination of previously autonomous administrative, sales and marketing, distribution, and accounting and finance functions, and expansion and integration of information and management systems. - The integration process could be disruptive to Thermo Electron's businesses. Moreover, Thermo Electron may not be able to realize all of the cost savings and other benefits that it expects to result from the integration process. It may be difficult for Thermo Electron to expand because some of the markets for its products are not growing. Some of the markets in which Thermo Electron competes have been flat or declining over the past several years. To address this issue, Thermo Electron is pursuing a number of strategies to improve its internal growth, including: - finding new markets for its products, including in the area of proteomics; - developing new applications for its technologies; - combining sales and marketing operations in appropriate markets to compete more effectively; - actively funding research and development; and - strengthening its presence in selected geographic markets. Thermo Electron may not be able to successfully implement these strategies, and these strategies may not result in growth of Thermo Electron's business. As a result of the spin-off of Kadant, Thermo Electron remains as the guarantor of indebtedness issued by Kadant even though Thermo Electron no longer controls Kadant's business or operations. Thermo Electron has guaranteed the payment of principal and interest on $153 million principal amount of debentures issued by Kadant, the outstanding principal balance of which was $88.3 million as of June 29, 2002. These debentures mature in July 2004. Thermo Electron remains liable as a guarantor for this obligation following the spin-off, although it no longer controls the business or operations of Kadant. < 35 > THERMO ELECTRON CORPORATION Forward-looking Statements (continued) Thermo Electron has significant international operations, which entail the risk that exchange rate fluctuations may negatively affect demand for its products and its profitability. International revenues account for a substantial portion of Thermo Electron's revenues, and Thermo Electron intends to continue expanding its presence in international markets. In 2001, Thermo Electron's international revenues from continuing operations, including export revenues from the United States, accounted for approximately 50% of its total revenues. International revenues are subject to the risk that changes in exchange rates may adversely affect product demand and the profitability in U.S. dollars of products and services provided by Thermo Electron in international markets, where payment for Thermo Electron's products and services is made in the local currency. For example, in fiscal 2001, the unfavorable effects of currency translation decreased revenues of Thermo Electron's continuing operations by $46.5 million. Thermo Electron has acquired several companies and businesses; as a result it has recorded significant goodwill on its balance sheet, which it must continually evaluate for potential impairment. Thermo Electron has acquired significant intangible assets, including approximately $1.4 billion of goodwill that it has recorded on its balance sheet as of June 29, 2002. Thermo Electron assesses the future useful life of the goodwill it has on its books whenever events or changes in circumstances indicate that the current useful life has diminished. These events or circumstances generally include operating losses or a significant decline in earnings associated with the acquired business or asset. Thermo Electron's ability to realize the value of the goodwill that it has recorded as a result of its acquisition of the minority interests in its formerly publicly-traded subsidiaries will depend on the future cash flows of these businesses. These cash flows in turn depend in part on how well Thermo Electron has integrated these businesses. Item 4 - Submission of Matters to a Vote of Security Holders On May 15, 2002, at the Annual Meeting of Stockholders, the stockholders elected three incumbent directors to a three-year term expiring in 2005. The directors elected at the meeting were: John L. LaMattina, Michael E. Porter, and Richard F. Syron. Dr. LaMattina received 147,400,870 shares voted in favor of his election and 1,987,215 shares were withheld. Dr. Porter received 147,414,420 shares voted in favor of his election and 1,973,665 shares were withheld. Mr. Syron received 147,398,847 shares voted in favor of his election and 1,989,238 shares were withheld. No abstentions or broker "non-votes" were recorded on the election of directors. PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on page immediately preceding exhibits. (b) Reports on Form 8-K On June 4, 2002, the Company filed a Current Report on Form 8-K with respect to the change in certifying accountant for the Company's 401(k) plan. On June 21, 2002, the Company filed a Current Report on Form 8-K with respect to the change in certifying accountant for the Company. < 36 > THERMO ELECTRON CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 13th day of August 2002. THERMO ELECTRON CORPORATION /s/ Theo Melas-Kyriazi --------------------------------------------------------- Theo Melas-Kyriazi Vice President and Chief Financial Officer /s/ Peter E. Hornstra --------------------------------------------------------- Peter E. Hornstra Corporate Controller and Chief Accounting Officer < 37 > THERMO ELECTRON CORPORATION EXHIBIT INDEX Exhibit Number Description - -------------------------------------------------------------------------------- 10.1 Master Securities Loan Agreement between Thermo Electron Corporation and JPMorgan Chase Bank. 10.2 Master Securities Loan Agreement between Thermo Electron Corporation and ABN AMRO Inc. 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
< 38 > EX-10.1 3 tmo2q02ex10-1.txt Exhibit 10.1 Master Securities Loan Agreement 2000 Version Dated as of: ______March 18, 2002_______________________________________________ Between:_________JP Morgan Chase Bank___________________________________________ And_____________Thermo Electron Corporation ___________________________________ 1. Applicability. From time to time the parties hereto may enter into transactions in which one party ("Lender") will lend to the other party ("Borrower") certain Securities (as defined herein) against a transfer of Collateral (as defined herein). Each such transaction shall be referred to herein as a "Loan" and, unless otherwise agreed in writing, shall be governed by this Agreement, including any supplemental terms or conditions contained in an Annex or Schedule hereto and in any other annexes identified herein or therein as applicable hereunder. Capitalized terms not otherwise defined herein shall have the meanings provided in Section 25. 2. Loans of Securities. 2.1 Subject to the terms and conditions of this Agreement, Borrower or Lender may, from time to time, seek to initiate a transaction in which Lender will lend Securities to Borrower. Borrower and Lender shall agree on the terms of each Loan (which terms may be amended during the Loan), including the issuer of the Securities, the amount of Securities to be lent, the basis of compensation, the amount of Collateral to be transferred by Borrower, and any additional terms. Such agreement shall be confirmed (a) by a schedule and receipt listing the Loaned Securities provided by Borrower to Lender in accordance with Section 3.2, (b) through any system that compares Loans and in which Borrower and Lender are participants, or (c) in such other manner as may be agreed by Borrower and Lender in writing. Such confirmation (the "Confirmation"), together with the Agreement, shall constitute conclusive evidence of the terms agreed between Borrower and Lender with respect to the Loan to which the Confirmation relates, unless with respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any inconsistency between the terms of such Confirmation and this Agreement, this Agreement shall prevail unless each party has executed such Confirmation. 2.2 Notwithstanding any other provision in this Agreement regarding when a Loan commences, unless otherwise agreed, a Loan hereunder shall not occur until the Loaned Securities and the Collateral therefor have been transferred in accordance with Section 15. 3. Transfer of Loaned Securities. 3.1 Unless otherwise agreed, Lender shall transfer Loaned Securities to Borrower hereunder on or before the Cutoff Time on the date agreed to by Borrower and Lender for the commencement of the Loan. 3.2 Unless otherwise agreed, Borrower shall provide Lender, for each Loan in which Lender is a Customer, with a schedule and receipt listing the Loaned Securities. Such schedule and receipt may consist of (a) a schedule provided to Borrower by Lender and executed and returned by Borrower when the Loaned Securities are received, (b) in the case of Securities transferred through a Clearing Organization which provides transferors with a notice evidencing such transfer, such notice, or (c) a confirmation or other document provided to Lender by Borrower. 3.3 Notwithstanding any other provision in this Agreement, the parties hereto agree that they intend the Loans hereunder to be loans of Securities. If, however, any Loan is deemed to be a loan of money by Borrower to Lender, then Borrower shall have, and Lender shall be deemed to have granted, a security interest in the Loaned Securities and the proceeds thereof. 4. Collateral. 4.1 Unless otherwise agreed, Borrower shall, prior to or concurrently with the transfer of the Loaned Securities to Borrower, but in no case later than the Close of Business on the day of such transfer, transfer to Lender Collateral with a Market Value at least equal to the Margin Percentage of the Market Value of the Loaned Securities. 4.2 The Collateral transferred by Borrower to Lender, as adjusted pursuant to Section 9, shall be security for Borrower's obligations in respect of such Loan and for any other obligations of Borrower to Lender hereunder. Borrower hereby pledges with, assigns to, and grants Lender a continuing first priority security interest in, and a lien upon, the Collateral, which shall attach upon the transfer of the Loaned Securities by Lender to Borrower and which shall cease upon the transfer of the Loaned Securities by Borrower to Lender. In addition to the rights and remedies given to Lender hereunder, Lender shall have all the rights and remedies of a secured party under the UCC. It is understood that Lender may use or invest the Collateral, if such consists of cash, at its own risk, but that (unless Lender is a Broker-Dealer) Lender shall, during the term of any Loan hereunder, segregate Collateral from all securities or other assets in its possession. Lender may Retransfer Collateral only (a) if Lender is a Broker-Dealer or (b) in the event of a Default by Borrower. Segregation of Collateral may be accomplished by appropriate identification on the books and records of Lender if it is a "securities intermediary" within the meaning of the UCC. 4.3 Except as otherwise provided herein, upon transfer to Lender of the Loaned Securities on the day a Loan is terminated pursuant to Section 6, Lender shall be obligated to transfer the Collateral (as adjusted pursuant to Section 9) to Borrower no later than the Cutoff Time on such day or, if such day is not a day on which a transfer of such Collateral may be effected under Section 15, the next day on which such a transfer may be effected. 4.4 If Borrower transfers Collateral to Lender, as provided in Section 4.1, and Lender does not transfer the Loaned Securities to Borrower, Borrower shall have the absolute right to the return of the Collateral; and if Lender transfers Loaned Securities to Borrower and Borrower does not transfer Collateral to Lender as provided in Section 4. 1, Lender shall have the absolute right to the return of the Loaned Securities. 4.5 Borrower may, upon reasonable notice to Lender (taking into account all relevant factors, including industry practice, the type of Collateral to be substituted, and the applicable method of transfer), substitute Collateral for Collateral securing any Loan or Loans; provided, however, that such substituted Collateral shall (a) consist only of cash, securities or other property that Borrower and Lender agreed would be acceptable Collateral prior to the Loan or Loans and (b) have a Market Value such that the aggregate Market Value of such substituted Collateral, together with all other Collateral for Loans in which the party substituting such Collateral is acting as Borrower, shall equal or exceed the agreed upon Margin Percentage of the Market Value of the Loaned Securities. 2 4.6 Prior to the expiration of any letter of credit supporting Borrower's obligations hereunder, Borrower shall, no later than the Extension Deadline, (a) obtain an extension of the expiration of such letter of credit, (b) replace such letter of credit by providing Lender with a substitute letter of credit in an amount at least equal to the amount of the letter of credit for which it is substituted, or (c) transfer such other Collateral to Lender as may be acceptable to Lender. 5. Fees for Loan. 5.1 Unless otherwise agreed, (a) Borrower agrees to pay Lender a loan fee (a "Loan Fee"), computed daily on each Loan to the extent such Loan is secured by Collateral other than cash, based on the aggregate Market Value of the Loaned Securities on the day for which such Loan Fee is being computed, and (b) Lender agrees to pay Borrower a fee or rebate (a "Cash Collateral Fee") on Collateral consisting of cash, computed daily based on the amount of cash held by Lender as Collateral, in the case of each of the Loan Fee and the Cash Collateral Fee at such rates as Borrower and Lender may agree. Except as Borrower and Lender may otherwise agree (in the event that cash Collateral is transferred by clearing house funds or otherwise), Loan Fees shall accrue from and including the date on which the Loaned Securities are transferred to Borrower to, but excluding, the date on which such Loaned Securities are returned to Lender, and Cash Collateral Fees shall accrue from and including the date on which the cash Collateral is transferred to Lender to, but excluding, the date on which such cash Collateral is returned to Borrower. 5.2 Unless otherwise agreed, any Loan Fee or Cash Collateral Fee payable hereunder shall be payable: (a) in the case of any Loan of Securities other than Government Securities, upon the earlier of (i) the fifteenth day of the month following the calendar month in which such fee was incurred and (ii) the termination of all Loans hereunder (or, if a transfer of cash in accordance with Section 15 may not be effected on such fifteenth day or the day of such termination, as the case may be, the next day on which such a transfer may be effected); and (b) in the case of any Loan of Government Securities, upon the termination of such Loan and at such other times, if any, as may be customary in accordance with market practice. Notwithstanding the foregoing, all Loan Fees shall be payable by Borrower immediately in the event of a Default hereunder by Borrower and all Cash Collateral Fees shall be payable immediately by Lender in the event of a Default by Lender. 6. Termination of the Loan. 6.1 (a) Unless otherwise agreed, either party may terminate a Loan on a termination date established by notice given to the other party prior to the Close of Business on a Business Day. The termination date established by a termination notice shall be a date no earlier than the standard settlement date that would apply to a purchase or sale of the Loaned Securities (in the case of a notice given by Lender) or the non cash Collateral securing the Loan (in the case of a notice given by Borrower) entered into at the time of such notice, which date shall, unless Borrower and Lender agree to the contrary, be (i) in the case of Government Securities, the next Business Day following such notice and (ii) in the case of all other Securities, the third Business Day following such notice. (b) Notwithstanding paragraph (a) and unless otherwise agreed, Borrower may terminate a Loan on any Business Day by giving notice to Lender and transferring the Loaned Securities to Lender before the Cutoff Time on such Business Day if (i) the Collateral for such Loan consists of cash or Government Securities or (ii) Lender is not permitted, pursuant to Section 4.2, to Retransfer Collateral. 3 6.2 Unless otherwise agreed, Borrower shall, on or before the Cutoff Time on the termination date of a Loan, transfer the Loaned Securities to Lender; provided, however, that upon such transfer by Borrower, Lender shall transfer the Collateral (as adjusted pursuant to Section 9) to Borrower in accordance with Section 4.3. 4 7. Rights in Respect of Loaned Securities and Collateral. 7.1 Except as set forth in Sections 8.1 and 8.2 and as otherwise agreed by Borrower and Lender, until Loaned Securities are required to be redelivered to Lender upon termination of a Loan hereunder, Borrower shall have all of the incidents of ownership of the Loaned Securities, including the right to transfer the Loaned Securities to others. Lender hereby waives the right to vote, or to provide any consent or to take any similar action with respect to, the Loaned Securities in the event that the record date or deadline for such vote, consent or other action falls during the term of the Loan. 7.2 Except as set forth in Sections 8.3 and 8.4 and as otherwise agreed by Borrower and Lender, if Lender may, pursuant to Section 4.2, Retransfer Collateral, Borrower hereby waives the right to vote, or to provide any consent or take any similar action with respect to, any such Collateral in the event that the record date or deadline for such vote, consent or other action falls during the term of a Loan and such Collateral is not required to be returned to Borrower pursuant to Section 4.5 or Section 9. 8. Distributions. 8.1 Lender shall be entitled to receive all Distributions made on or in respect of the Loaned Securities which are not otherwise received by Lender, to the full extent it would be so entitled if the Loaned Securities had not been lent to Borrower. 8.2 Any cash Distributions made on or in respect of the Loaned Securities, which Lender is entitled to receive pursuant to Section 8.1, shall be paid by the transfer of cash to Lender by Borrower, on the date any such Distribution is paid, in an amount equal to such cash Distribution, so long as Lender is not in Default at the time of such payment. Non-cash Distributions that Lender is entitled to receive pursuant to Section 8.1 shall be added to the Loaned Securities on the date of distribution and shall be considered such for all purposes, except that if the Loan has terminated, Borrower shall forthwith transfer the same to Lender. 8.3 Borrower shall be entitled to receive all Distributions made on or in respect of non-cash Collateral which are not otherwise received by Borrower, to the full extent it would be so entitled if the Collateral had not been transferred to Lender. 8.4 Any cash Distributions made on or in respect of such Collateral, which Borrower is entitled to receive pursuant to Section 8.3, shall be paid by the transfer of cash to Borrower by Lender, on the date any such Distribution is paid, in an amount equal to such cash Distribution, so long as Borrower is not in Default at the time of such payment. Non-cash Distributions that Borrower is entitled to receive pursuant to Section 8.3 shall be added to the Collateral on the date of distribution and shall be considered such for all purposes, except that if each Loan secured by such Collateral has terminated, Lender shall forthwith transfer the same to Borrower. 8.5 Unless otherwise agreed by the parties: (a) If (i) Borrower is required to make a payment (a "Borrower Payment") with respect to cash Distributions on Loaned Securities under Sections 8. 1 and 8.2 ("Securities Distributions"), or (ii) Lender is required to make a payment (a "Lender Payment") with respect to cash Distributions on Collateral under Sections 8.3 and 8.4 ("Collateral Distributions"), and (iii) Borrower or Lender, as the case may be ("Payor"), shall be required by law to collect any withholding or other tax, duty, fee, levy or charge required to be deducted or withheld from such Borrower Payment or Lender Payment ("Tax"), then Payor shall (subject to subsections (b) and (c) below), pay such additional amounts as may be necessary in order that the net amount of the Borrower Payment or Lender Payment received by the Lender or Borrower, as the case may be ("Payee"), after payment of such Tax equals the net amount 5 of the Securities Distribution or Collateral Distribution that would have been received if such Securities Distribution or Collateral Distribution had been paid directly to the Payee. (b) No additional amounts shall be payable to a Payee under subsection (a) above to the extent that Tax would have been imposed on a Securities Distribution or Collateral Distribution paid directly to the Payee. (c) No additional amounts shall be payable to a Payee under subsection (a) above to the extent that such Payee is entitled to an exemption from, or reduction in the rate of, Tax on a Borrower Payment or Lender Payment subject to the provision of a certificate or other documentation, but has failed timely to provide such certificate or other documentation. (d) Each party hereto shall be deemed to represent that, as of the commencement of any Loan hereunder, no Tax would be imposed on any cash Distribution paid to it with respect to (i) Loaned Securities subject to a Loan in which it is acting as Lender or (ii) Collateral for any Loan in which it is acting as Borrower, unless such party has given notice to the contrary to the other party hereto (which notice shall specify the rate at which such Tax would be imposed). Each party agrees to notify the other of any change that occurs during the term of a Loan in the rate of any Tax that would be imposed on any such cash Distributions payable to it. 8.6 To the extent that, under the provisions of Sections 8.1 through 8.5, (a) a transfer of cash or other property by Borrower would give rise to a Margin Excess or (b) a transfer of cash or other property by Under would give rise to a Margin Deficit, Borrower or Lender (as the case may be) shall not be obligated to make such transfer of cash or other property in accordance with such Sections, but shall in lieu of such transfer immediately credit the amounts that would have been transferable under such Sections to the account of Lender or Borrower (as the case may be). 9. Mark to Market. 9.1 If Lender is a Customer, Borrower shall daily mark to market any Loan hereunder and in the event that at the Close of Trading on any Business Day the Market Value of the Collateral for any Loan to Borrower shall be less than 100% of the Market Value of all the outstanding Loaned Securities subject to such Loan, Borrower shall transfer additional Collateral no later than the Close of Business on the next Business Day so that the Market Value of such additional Collateral, when added to the Market Value of the other Collateral for such Loan, shall equal 100% of the Market Value of the Loaned Securities. 9.2 In addition to any rights of Lender under Section 9. 1, if at any time the aggregate Market Value of all Collateral for Loans by Lender shall be less than the Margin Percentage of the Market Value of all the outstanding Loaned Securities subject to such Loans (a "Margin Deficit"), Lender may, by notice to Borrower, demand that Borrower transfer to Lender additional Collateral so that the Market Value of such additional Collateral, when added to the Market Value of all other Collateral for such Loans, shall equal or exceed the Margin Percentage of the Market Value of the Loaned Securities. 9.3 Subject to Borrower's obligations under Section 9. 1, if at any time the Market Value of all Collateral for Loans to Borrower shall be greater than the Margin Percentage of the Market Value of all the outstanding Loaned Securities subject to such Loans (a "Margin Excess"), Borrower may, by notice to Lender, demand that Lender transfer to Borrower such amount of the Collateral selected by Borrower so that the Market Value of the Collateral for such Loans, after deduction of such amounts, shall thereupon not exceed the Margin Percentage of the Market Value of the Loaned Securities. 6 9.4 Borrower and Lender may agree, with respect to one or more Loans hereunder, to mark the values to market pursuant to Sections 9.2 and 9.3 by separately valuing the Loaned Securities lent and the Collateral given in respect thereof on a Loan-by-Loan basis. 9.5 Borrower and Lender may agree, with respect to any or all Loans hereunder, that the respective rights of Lender and Borrower under Sections 9.2 and 9.3 may be exercised only where a Margin Excess or Margin Deficit exceeds a specified dollar amount or a specified percentage of the Market Value of the Loaned Securities under such Loans (which amount or percentage shall be agreed to by Borrower and Lender prior to entering into any such Loans). 9.6 If any notice is given by Borrower or Lender under Sections 9.2 or 9.3 at or before the Margin Notice Deadline on any day on which a transfer of Collateral may be effected in accordance with Section 15, the party receiving such notice shall transfer Collateral as provided in such Section no later than the Close of Business on such day. If any such notice is given after the Margin Notice Deadline, the party receiving such notice shall transfer such Collateral no later than the Close of Business on the next Business Day following the day of such notice. 10. Representations. The parties to this Agreement hereby make the following representations and warranties, which shall continue during the term of any Loan hereunder: 10.1 Each party hereto represents and warrants that (a) it has the power to execute and deliver this Agreement, to enter into the Loans contemplated hereby and to perform its obligations hereunder, (b) it has taken all necessary action to authorize such execution, delivery and performance, and (c) this Agreement constitutes a legal, valid and binding obligation enforceable against it in accordance with its terms. 10.2 Each party hereto represents and warrants that it has not relied on the other for any tax or accounting advice concerning this Agreement and that it has made its own determination as to the tax and accounting treatment of any Loan and any dividends, remuneration or other funds received hereunder. 10.3 Each party hereto represents and warrants that it is acting for its own account unless it expressly specifies otherwise in writing and complies with Section 11.1(b). 10.4 Borrower represents and warrants that it has, or will have at the time of transfer of any Collateral, the right to grant a first priority security interest therein subject to the terms and conditions hereof. 10.5 (a) Borrower represents and warrants that it (or the person to whom it relends the Loaned Securities) is borrowing or will borrow Loaned Securities that are Equity Securities for the purpose of making delivery of such Loaned Securities in the case of short sales, failure to receive securities required to be delivered, or as otherwise permitted pursuant to Regulation T as in effect from time to time. (b) Borrower and Lender may agree, as provided in Section 24.2, that Borrower shall not be deemed to have made the representation or warranty in subsection (a) with respect to any Loan. By entering into any such agreement, Lender shall be deemed to have represented and warranted to Borrower (which representation and warranty shall be deemed to be repeated on each day during the term of the Loan) that Lender is either (i) an "exempted borrower" within the meaning of Regulation T or (ii) a member of a national securities exchange or a broker or dealer registered with the U.S. Securities and Exchange Commission that is entering into such Loan to finance its activities as a market maker or an underwriter. 7 10.5 Lender represents and warrants that it has, or will have at the time of transfer of any Loaned Securities, the right to transfer the Loaned Securities subject to the terms and conditions hereof. 11. Covenants. 11.1 Each party agrees either (a) to be liable as principal with respect to its obligations hereunder or (b) to execute and comply fully with the provisions of Annex I (the terms and conditions of which Annex are incorporated herein and made a part hereof). 11.2 Promptly upon (and in any event within seven (7) Business Days after) demand by Lender, Borrower shall furnish Lender with Borrower's most recent publicly-available financial statements and any other financial statements mutually agreed upon by Borrower and Lender. Unless otherwise agreed, if Borrower is subject to the requirements of Rule 17a-5(c) under the Exchange Act, it may satisfy the requirements of this Section by furnishing Lender with its most recent statement required to be furnished to customers pursuant to such Rule. 12. Events of Default. All Loans hereunder may, at the option of the non-defaulting party (which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency), be terminated immediately upon the occurrence of any one or more of the following events (individually, a "Default"): 12.1 if any Loaned Securities shall not be transferred to Lender upon termination of the Loan as required by Section 6; 12.2 if any Collateral shall not be transferred to Borrower upon termination of the Loan as required by Sections 4.3 and 6; 12.3 if either party shall fail to transfer Collateral as required by Section 9; 12.4 if either party (a) shall fail to transfer to the other party amounts in respect of Distributions required to be transferred by Section 8, (b) shall have been notified of such failure by the other party prior to the Close of Business on any day, and (c) shall not have cured such failure by the Cutoff Time on the next day after such Close of Business on which a transfer of cash may be effected in accordance with Section 15; 12.5 if an Act of Insolvency occurs with respect to either party; 12.6 if any representation made by either party in respect of this Agreement or any Loan or Loans hereunder shall be incorrect or untrue in any material respect during the term of any Loan hereunder; 12.7 if either party notifies the other of its inability to or its intention not to perform its obligations hereunder or otherwise disaffirms, rejects or repudiates any of its obligations hereunder; or 12.8 if either party (a) shall fail to perform any material obligation under this Agreement not specifically set forth in clauses 12.1 through 12.7, above, including but not limited to the payment of fees as required by Section 5, and the payment of transfer taxes as required by Section 14, (b) shall have been notified of such failure by the other party prior to the Close of Business on any day, and (c) shall not have cured such failure by the Cutoff Time on the next day after such Close of Business on which a transfer of cash may be effected in accordance with Section 15. 8 The non-defaulting party shall (except upon the occurrence of an Act of Insolvency) give notice as promptly as practicable to the defaulting party of the exercise of its option to terminate all Loans hereunder pursuant to this Section 12. 13. Remedies. 13.1 Upon the occurrence of a Default under Section 12 entitling Lender to terminate all Loans hereunder, Lender shall have the right, in addition to any other remedies provided herein, (a) to purchase a like amount of Loaned Securities ("Replacement Securities") in the principal market for such Loaned Securities in a commercially reasonable manner, (b) to sell any Collateral in the principal market for such Collateral in a commercially reasonable manner and (c) to apply and set off the Collateral and any proceeds thereof (including any amounts drawn under a letter of credit supporting any Loan) against the payment of the purchase price for such Replacement Securities and any amounts due to Lender under Sections 5, 8, 14 and 16. In the event that Lender shall exercise such rights, Borrower's obligation to return a like amount of the Loaned Securities shall terminate. Lender may similarly apply the Collateral and any proceeds thereof to any other obligation of Borrower under this Agreement, including Borrower's obligations with respect to Distributions paid to Borrower (and not forwarded to Lender) in respect of Loaned Securities. In the event that (i) the purchase price of Replacement Securities (plus all other amounts, if any, due to Lender hereunder) exceeds (ii) the amount of the Collateral, Borrower shall be liable to Lender for the amount of such excess together with interest thereon at a rate equal to (A) in the case of purchases of Foreign Securities, LIBOR, (B) in the case of purchases of any other Securities (or other amounts, if any, due to Lender hereunder), the Federal Funds Rate or (C) such other rate as may be specified in Schedule B, in each case as such rate fluctuates from day to day, from the date of such purchase until the date of payment of such excess. As security for Borrower's obligation to pay such excess, Lender shall have, and Borrower hereby grants, a security interest in any property of Borrower then held by or for Lender and a right of setoff with respect to such property and any other amount payable by Lender to Borrower. The purchase price of Replacement Securities purchased under this Section 13.1 shall include, and the proceeds of any sale of Collateral shall be determined after deduction of, broker's fees and commissions and all other reasonable costs, fees and expenses related to such purchase or sale (as the case may be). In the event Lender exercises its rights under this Section 13.1, Lender may elect in its sole discretion, in lieu of purchasing all or a portion of the Replacement Securities or selling all or a portion of the Collateral, to be deemed to have made, respectively, such purchase of Replacement Securities or sale of Collateral for an amount equal to the price therefor on the date of such exercise obtained from a generally recognized source or the last bid quotation from such a source at the most recent Close of Trading. Subject to Section 18, upon the satisfaction of all obligations hereunder, any remaining Collateral shall be returned to Borrower. 13.2 Upon the occurrence of a Default under Section 12 entitling Borrower to terminate all Loans hereunder, Borrower shall have the right, in addition to any other remedies provided herein, (a) to purchase a like amount of Collateral ("Replacement Collateral") in the principal market for such Collateral in a commercially reasonable manner, (b) to sell a like amount of the Loaned Securities in the principal market for such Loaned Securities in a commercially reasonable manner and (c) to apply and set off the Loaned Securities and any proceeds thereof against (i) the payment of the purchase price for such Replacement Collateral, (ii) Lender's obligation to return any cash or other Collateral, and (iii) any amounts due to Borrower under Sections 5, 8 and 16. In such event, Borrower may treat the Loaned Securities as its own and Lender's obligation to return a like amount of the Collateral shall terminate; provided, however, that Lender shall immediately return any letters of credit supporting any Loan upon the exercise or deemed exercise by Borrower of its termination rights under Section 12. Borrower may similarly apply the Loaned Securities and any proceeds thereof to any other obligation of Lender under this Agreement, including Lender's obligations with respect to Distributions paid to Lender (and not forwarded to Borrower) in respect of Collateral. In the event that (i) the sales price received from such Loaned Securities is less than (ii) the purchase price of Replacement Collateral (plus the amount of any cash or other Collateral not replaced by Borrower and all other amounts, if any, due 9 to Borrower hereunder), Lender shall be liable to Borrower for the amount of any such deficiency, together with interest on such amounts at a rate equal to (A) in the case of Collateral consisting of Foreign Securities, LIBOR, (B) in the case of Collateral consisting of any other Securities (or other amounts due, if any, to Borrower hereunder), the Federal Funds Rate or (C) such other rate as may be specified in Schedule B, in each case as such rate fluctuates from day to day, from the date of such sale until the date of payment of such deficiency. As security for Lender's obligation to pay such deficiency, Borrower shall have, and Lender hereby grants, a security interest in any property of Lender then held by or for Borrower and a right of setoff with respect to such property and any other amount payable by Borrower to Lender. The purchase price of any Replacement Collateral purchased under this Section 13.2 shall include, and the proceeds of any sale of Loaned Securities shall be determined after deduction of, broker's fees and commissions and all other reasonable costs, fees and expenses related to such purchase or sale (as the case may be). In the event Borrower exercises its rights under this Section 13.2, Borrower may elect in its sole discretion, in lieu of purchasing all or a portion of the Replacement Collateral or selling all or a portion of the Loaned Securities, to be deemed to have made, respectively, such purchase of Replacement Collateral or sale of Loaned Securities for an amount equal to the price therefor on the date of such exercise obtained from a generally recognized source or the last bid quotation from such a source at the most recent Close of Trading. Subject to Section 18, upon the satisfaction of all Lender's obligations hereunder, any remaining Loaned Securities (or remaining cash proceeds thereof) shall be returned to Lender. 13.3 Unless otherwise agreed, the parties acknowledge and agree that (a) the Loaned Securities and any Collateral consisting of Securities are of a type traded in a recognized market, (b) in the absence of a generally recognized source for prices or bid or offer quotations for any security, the non-defaulting party may establish the source therefor in its sole discretion, and (c) all prices and bid and offer quotations shall be increased to include accrued interest to the extent not already included therein (except to the extent contrary to market practice with respect to the relevant Securities). 13.4 In addition to its rights hereunder, the non-defaulting party shall have any rights otherwise available to it under any other agreement or applicable law. 14. Transfer Taxes. All transfer taxes with respect to the transfer of the Loaned Securities by Lender to Borrower and by Borrower to Lender upon termination of the Loan and with respect to the transfer of Collateral by Borrower to Lender and by Lender to Borrower upon termination of the Loan or pursuant to Section 4.5 or Section 9 shall be paid by Borrower. 15. Transfers. 15.1 All transfers by either Borrower or Lender of Loaned Securities or Collateral consisting of "financial assets" (within the meaning of the UCC) hereunder shall be by (a) in the case of certificated securities, physical delivery of certificates representing such securities together with duly executed stock and bond transfer powers, as the case may be, with signatures guaranteed by a bank or a member firm of the New York Stock Exchange, Inc., (b) registration of an uncertificated security in the transferee's name by the issuer of such uncertificated security, (c) the crediting by a Clearing Organization of such financial assets to the transferee's "securities account" (within the meaning of the UCC) maintained with such Clearing Organization, or (d) such other means as Borrower and Lender may agree. 15.2 All transfers of cash hereunder shall be by (a) wire transfer in immediately available, freely transferable funds or (b) such other means as Borrower and Lender may agree. 15.3 All transfers of letters of credit from Borrower to Lender shall be made by physical delivery to Lender of an irrevocable letter of credit 10 issued by a "bank" as defined in Section 3(a)(6)(A)-(C) of the Exchange Act. Transfers of letters of credit from Lender to Borrower shall be made by causing such letters of credit to be returned or by causing the amount of such letters of credit to be reduced to the amount required after such transfer. 15.4 A transfer of Securities, cash or letters of credit may be effected under this Section 15 on any day except (a) a day on which the transferee is closed for business at its address set forth in Schedule A hereto or (b) a day on which a Clearing Organization or wire transfer system is closed, if the facilities of such Clearing Organization or wire transfer system are required to effect such transfer. 15.5 For the avoidance of doubt, the parties agree and acknowledge that the term "securities," as used herein (except in this Section 15), shall include any "security entitlements" with respect to such securities (within the meaning of the UCC). In every transfer of "financial assets" (within the meaning of the UCC) hereunder, the transferor shall take all steps necessary (a) to effect a delivery to the transferee under Section 8-301 of the UCC, or to cause the creation of a security entitlement in favor of the transferee under Section 8-501 of the UCC, (b) to enable the transferee to obtain "control" (within the meaning of Section 8-106 of the UCC), and (c) to provide the transferee with comparable rights under any applicable foreign law or regulation. 16. Contractual Currency. 16.1 Borrower and Lender agree that (a) any payment in respect of a Distribution under Section 8 shall be made in the currency in which the underlying Distribution of cash was made, (b) any return of cash shall be made in the currency in which the underlying transfer of cash was made, and (c) any other payment of cash in connection with a Loan under this Agreement shall be in the currency agreed upon by Borrower and Lender in connection with such Loan (the currency established under clause (a), (b) or (c) hereinafter referred to as the "Contractual Currency"). Notwithstanding the foregoing, the payee of any such payment may, at its option, accept tender thereof in any other currency, provided, however, that, to the extent permitted by applicable law, the obligation of the payor to make such payment will be discharged only to the extent of the amount of Contractual Currency that such payee may, consistent with normal banking procedures, purchase with such other currency (after deduction of any premium and costs of exchange) on the banking day next succeeding its receipt of such currency. 16.2 If for any reason the amount in the Contractual Currency received under Section 16.1, including amounts received after conversion of any recovery under any judgment or order expressed in a currency other than the Contractual Currency, falls short of the amount in the Contractual Currency due in respect of this Agreement, the party required to make the payment will (unless a Default has occurred and such party is the non-defaulting party) as a separate and independent obligation and 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. 16.3 If for any reason the amount in the Contractual Currency received under Section 16.1 exceeds the amount in the Contractual Currency due in respect of this Agreement, then the party receiving the payment will (unless a Default has occurred and such party is the non-defaulting party) refund promptly the amount of such excess. 17. ERISA. Lender shall, if any of the Securities transferred to the Borrower hereunder for any Loan have been or shall be obtained, directly or indirectly, from or using the assets of any Plan, so notify Borrower in writing upon the execution of this Agreement or upon initiation of such Loan under Section 2. 1. If Lender so notifies Borrower, then Borrower and 11 Lender shall conduct the Loan in accordance with the terms and conditions of Department of Labor Prohibited Transaction Exemption 81-6 (46 Fed. Reg. 7527, Jan. 23, 1981; as amended, 52 Fed. Reg. 18754, May 19, 1987), or any successor thereto (unless Borrower and Lender have agreed prior to entering into a Loan that such Loan will be conducted in reliance on another exemption, or without relying on any exemption, from the prohibited transaction provisions of Section 406 of the Employee Retirement Income Security Act of 1974, as amended, and Section 4975 of the Internal Revenue Code of 1986, as amended). Without limiting the foregoing and notwithstanding any other provision of this Agreement, if the Loan will be conducted in accordance with Prohibited Transaction Exemption 81-6, then: 17.1 Borrower represents and warrants to Lender that it is either (a) a bank subject to federal or state supervision, (b) a broker-dealer registered under the Exchange Act or (c) exempt from registration under Section 15(a)(1) of the Exchange Act as a dealer in Government Securities. 17.2 Borrower represents and warrants that, during the term of any Loan hereunder, neither Borrower nor any affiliate of Borrower has any discretionary authority or control with respect to the investment of the assets of the Plan involved in the Loan or renders investment advice (within the meaning of 29 C.F.R. Section 2510.3-21(c)) with respect to the assets of the Plan involved in the Loan. Lender agrees that, prior to or at the commencement of any Loan hereunder, it will communicate to Borrower information regarding the Plan sufficient to identify to Borrower any person or persons that have discretionary authority or control with respect to the investment of the assets of the Plan involved in the Loan or that render investment advice (as defined in the preceding sentence) with respect to the assets of the Plan involved in the Loan. In the event Lender fails to communicate and keep current during the term of any Loan such information, Lender rather than Borrower shall be deemed to have made the representation and warranty in the first sentence of this Section 17.2. 17.3 Borrower shall mark to market daily each Loan hereunder pursuant to Section 9.1 as is required if Lender is a Customer. 17.4 Borrower and Lender agree that: (a) the term "Collateral" shall mean cash, securities issued or guaranteed by the United States government or its agencies or instrumentalities, or irrevocable bank letters of credit issued by a person other than Borrower or an affiliate thereof; (b) prior to the making of any Loans hereunder, Borrower shall provide Lender with (i) the most recent available audited statement of Borrower's financial condition and (ii) the most recent available unaudited statement of Borrower's financial condition (if more recent than the most recent audited statement), and each Loan made hereunder shall be deemed a representation by Borrower that there has been no material adverse change in Borrower's financial condition subsequent to the date of the latest financial statements or information furnished in accordance herewith; (c) the Loan may be terminated by Lender at any time, whereupon Borrower shall deliver the Loaned Securities to Lender within the lesser of (i) the customary delivery period for such Loaned Securities, (ii) five Business Days, and (iii) the time negotiated for such delivery between Borrower and Lender; provided, however, that Borrower and Lender may agree to a longer period only if permitted by Prohibited Transaction Exemption 81-6; and (d) the Collateral transferred shall be security only for obligations of Borrower to the Plan with respect to Loans, and shall not be security for any obligation of Borrower to any agent or affiliate of the Plan. 12 18. Single Agreement. Borrower and Lender acknowledge that, and have entered into this Agreement in reliance on the fact that, all Loans hereunder constitute a single business and contractual relationship and have been entered into in consideration of each other. Accordingly, Borrower and Lender hereby agree that payments, deliveries and other transfers made by either of them in respect of any Loan shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Loan hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. In addition, Borrower and Lender acknowledge that, and have entered into this Agreement in reliance on the fact that, all Loans hereunder have been entered into in consideration of each other. Accordingly, Borrower and Lender hereby agree that (a) each shall perform all of its obligations in respect of each Loan hereunder, and that a default in the performance of any such obligation by Borrower or by Lender (the "Defaulting Party") in any Loan hereunder shall constitute a default by the Defaulting Party under all such Loans hereunder, and (b) the non-defaulting party shall be entitled to set off claims and apply property held by it in respect of any Loan hereunder against obligations owing to it in respect of any other Loan with the Defaulting Party. 19. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 20. Waiver. The failure of a party to this Agreement to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. All waivers in respect of a Default must be in writing. 21. Survival of Remedies. All remedies hereunder and all obligations with respect to any Loan shall survive the termination of the relevant Loan, return of Loaned Securities or Collateral and termination of this Agreement. 22. Notices and Other Communications. Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by telephone, mail, facsimile, e-mail, electronic message, telegraph, messenger or otherwise to the individuals and at the facsimile numbers and addresses specified with respect to it in Schedule A hereto, or sent to such party at any other place specified in a notice of change of number or address hereafter received by the other party. Any notice, statement, demand or other communication hereunder will be deemed effective on the day and at the time on which it is received or, if not received, on the day and at the time on which its delivery was in good faith attempted; provided, however, that any notice by a party to the other party by telephone shall be deemed effective only if (a) such notice is followed by written confirmation thereof and (b) at least one of the other means of providing notice that are specifically listed above has previously been attempted in good faith by the notifying party. 23. SUBMISSION TO JURISDICTION; WAIVIER OF JURY TRIAL. 23.1 EACH PARTY HERETO IRREVOCABLY AND UNCONDITIONALLY (A) SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK 13 STATE COURT SITTING IN NEW YORK CITY, AND ANY APPELLATE COURT FROM ANY SUCH COURT, SOLELY FOR THE PURPOSE OF ANY SUIT, ACTION OR PROCEEDING BROUGHT TO ENFORCE ITS OBLIGATIONS HEREUNDER OR RELATING IN ANY WAY TO THIS AGREEMENT OR ANY LOAN HEREUNDER AND (B) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, ANY DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT AND ANY RIGHT OF JURISDICTION ON ACCOUNT OF ITS PLACE OF RESIDENCE OR DOMICILE. 23.2 EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY RIGHT THAT IT MAY HAVE TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 24. Miscellaneous. 24.1 Except as otherwise agreed by the parties, this Agreement supersedes any other agreement between the parties hereto concerning loans of Securities between Borrower and Lender. This Agreement shall not be assigned by either party without the prior written consent of the other party and any attempted assignment without such consent shall be null and void. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of Borrower and Lender and their respective heirs, representatives, successors and assigns. This Agreement may be terminated by either party upon notice to the other, subject only to fulfillment of any obligations then outstanding. This Agreement shall not be modified, except by an instrument in writing signed by the party against whom enforcement is sought. The parties hereto acknowledge and agree that, in connection with this Agreement and each Loan hereunder, time is of the essence. Each provision and agreement herein shall be treated as separate and independent from any other provision herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 24.2 Any agreement between Borrower and Lender pursuant to Section 10.5(b) or Section 25.37 shall be made (a) in writing, (b) orally, if confirmed promptly in writing or through any system that compares Loans and in which Borrower and Lender are participants, or (c) in such other manner as may be agreed by Borrower and Lender in writing. 25. Definitions. For the purposes hereof- 25.1 "Act of Insolvency" shall mean, with respect to any party, (a) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratorium, dissolution, delinquency or similar law, or such party's seeking the appointment or election of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (b) the commencement of any such case or proceeding against such party, or another seeking such an appointment or election, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (i) is consented to or not timely contested by such party, (ii) results in the entry of an order for relief, such an appointment or election, the issuance of such a protective decree or the entry of an order having a similar effect, or (iii) is not dismissed within 15 days, (c) the making by such party of a general assignment for the benefit of creditors, or (d) the admission in writing by such party of such party's inability to pay such party's debts as they become due. 25.2 "Bankruptcy Code" shall have the meaning assigned in Section 26.1 14 25.3 "Borrower" shall have the meaning assigned in Section 1. 25.4 "Borrower Payment" shall have the meaning assigned in Section 8.5(a). 25.5 "Broker-Dealer", shall mean any person that is a broker (including a municipal securities broker), dealer, municipal securities dealer, government securities broker or government securities dealer as defined in the Exchange Act, regardless of whether the activities of such person are conducted in the United States or otherwise require such person to register with the U.S. Securities and Exchange Commission or other regulatory body. 25.6 "Business Day" shall mean, with respect to any Loan hereunder, a day on which regular trading occurs in the principal market for the Loaned Securities subject to such Loan, provided, however, that for purposes of determining the Market Value of any Securities hereunder, such term shall mean a day on which regular trading occurs in the principal market for the Securities whose value is being determined. Notwithstanding the foregoing, (a) for purposes of Section 9, "Business Day" shall mean any day on which regular trading occurs in the principal market for any Loaned Securities or for any Collateral consisting of Securities under any outstanding Loan hereunder and "next Business Day" shall mean the next day on which a transfer of Collateral may be effected in accordance with Section 15, and (b) in no event shall a Saturday or Sunday be considered a Business Day. 25.7 "Cash Collateral Fee" shall have the meaning assigned in Section 5. 1. 25.8 "Clearing Organization" shall mean (a) The Depository Trust Company, or, if agreed to by Borrower and Lender, such other "securities intermediary" (within the meaning of the UCC) at which Borrower (or Borrower's agent) and Lender (or Lender's agent) maintain accounts, or (b) a Federal Reserve Bank, to the extent that it maintains a book-entry system. 25.9 "Close of Business" shall mean the time established by the parties in Schedule B or otherwise orally or in writing or, in the absence of any such agreement, as shall be determined in accordance with market practice. 25.10"Close of Trading" shall mean, with respect to any Security, the end of the primary trading session established by the principal market for such Security on a Business Day, unless otherwise agreed by the parties. 25.11"Collateral" shall mean, whether now owned or hereafter acquired and to the extent permitted by applicable law, (a) any property which Borrower and Lender agree prior to the Loan shall be acceptable collateral and which is transferred to Lender pursuant to Sections 4 or 9 (including as collateral, for definitional purposes, any letters of credit mutually acceptable to Lender and Borrower), (b) any property substituted therefor pursuant to Section 4.5, (c) all accounts in which such property is deposited and all securities and the like in which any cash collateral is invested or reinvested, and (d) any proceeds of any of the foregoing; provided, however, that if Lender is a Customer, "Collateral" shall (subject to Section 17.4(a), if applicable) be limited to cash, U.S. Treasury bills and notes, an irrevocable letter of credit issued by a "bank" (as defined in Section 3(a)(6)(A)-(C) of the Exchange Act), and any other property permitted to serve as collateral securing a loan of securities under Rule 15c3-3 under the Exchange Act or any comparable regulation of the Secretary of the Treasury under Section 15C of the Exchange Act (to the extent that Borrower is subject to such Rule or comparable regulation) pursuant to exemptive, interpretive or no-action relief or otherwise. If any new or different Security shall be exchanged for any Collateral by recapitalization, merger, consolidation or other corporate action, such new or different Security shall, effective upon such exchange, be deemed to become Collateral in substitution for the former Collateral 15 for which such exchange is made. For purposes of return of Collateral by Lender or purchase or sale of Securities pursuant to Section 13, such term shall include Securities of the same issuer, class and quantity as the Collateral initially transferred by Borrower to Lender, as adjusted pursuant to the preceding sentence. 25.12"Collateral Distributions" shall have the meaning assigned in Section 8.5(a). 25.13 "Confirmation" shall have the meaning assigned in Section 2. 1. 25.14"Contractual Currency" shall have the meaning assigned in Section 16.1. 25.15"Customer" shall mean any person that is a customer of Borrower under Rule 15c3-3 under the Exchange Act or any comparable regulation of the Secretary of the Treasury under Section 15C of the Exchange Act (to the extent that Borrower is subject to such Rule or comparable regulation). 25.16"Cutoff Time" shall mean a time on a Business Day by which a transfer of cash, securities or other property must be made by Borrower or Lender to the other, as shall be agreed by Borrower and Lender in Schedule B or otherwise orally or in writing or, in the absence of any such agreement, as shall be determined in accordance with market practice. 25.17 "Default" shall have the meaning assigned in Section 12. 25.18 "Defaulting Party" shall have the meaning assigned in Section 18. 25.19"Distribution" shall mean, with respect to any Security at any time, any distribution made on or in respect of such Security, including, but not limited to: (a) cash and all other property, (b) stock dividends, (c) Securities received as a result of split ups of such Security and distributions in respect thereof, (d) interest payments, (e) all rights to purchase additional Securities, and (f) any cash or other consideration paid or provided by the issuer of such Security in exchange for any vote, consent or the taking of any similar action in respect of such Security (regardless of whether the record date for such vote, consent or other action falls during the term of the Loan). In the event that the holder of a Security is entitled to elect the type of distribution to be received from two or more alternatives, such election shall be made by Lender, in the case of a Distribution in respect of the Loaned Securities, and by Borrower, in the case of a Distribution in respect of Collateral. 25.20"Equity Security" shall mean any security (as defined in the Exchange Act) other than a "nonequity security," as defined in Regulation T. 25.21"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 25.22"Extension Deadline" shall mean, with respect to a letter of credit, the Cutoff Time on the Business Day preceding the day on which the letter of credit expires. 25.23 "FDIA" shall have the meaning assigned in Section 26.4. 25.24 "FDICIA" shall have the meaning assigned in Section 26.5. 25.25"Federal Funds Rate" shall mean the rate of interest (expressed as an annual rate), as published in Federal Reserve Statistical Release H. 15(519) or any publication substituted therefor, charged for federal funds (dollars in immediately available funds borrowed by banks on an overnight unsecured basis) on that day or, if that day is not a banking day in New York City, on the next preceding banking day. 16 25.26"Foreign Securities" shall mean, unless otherwise agreed, Securities that are principally cleared and settled outside the United States. 25.27"Government Securities" shall mean government securities as defined in Section 3(a)(42)(A)-(C) of the Exchange Act. 25.28 "Lender" shall have the meaning assigned in Section 1. 25.29 "Lender Payment" shall have the meaning assigned in Section 8.5(a). 25.30"LIBOR" shall mean for any date, the offered rate for deposits in U.S. dollars for a period of three months which appears on the Reuters Screen LIBO page as of 11:00 a.m., London time, on such date (or, if at least two such rates appear, the arithmetic mean of such rates). 25.31 "Loan" shall have the meaning assigned in Section 1. 25.32 "Loan Fee" shall have the meaning assigned in Section 5.1. 25.33"Loaned Security" shall mean any Security transferred in a Loan hereunder until such Security (or an identical Security) is transferred back to Lender hereunder, except that, if any new or different Security shall be exchanged for any Loaned Security by recapitalization, merger, consolidation or other corporate action, such new or different Security shall, effective upon such exchange, be deemed to become a Loaned Security in substitution for the former Loaned Security for which such exchange is made. For purposes of return of Loaned Securities by Borrower or purchase or sale of Securities pursuant to Section 13, such term shall include Securities of the same issuer, class and quantity as the Loaned Securities, as adjusted pursuant to the preceding sentence. 25.34 "Margin Deficit" shall have the meaning assigned in Section 9.2. 25.35 "Margin Excess" shall have the meaning assigned in Section 9.3. 25.36"Margin Notice Deadline" shall mean the time agreed to by the parties in the relevant Confirmation, Schedule B hereto or otherwise as the deadline for giving notice requiring same-day satisfaction of mark-to-market obligations as provided in Section 9 hereof (or, in the absence of any such agreement, the deadline for such purposes established in accordance with market practice). 25.37"Margin Percentage" shall mean, with respect to any Loan as of any date, a percentage agreed by Borrower and Lender, which shall be not less than 100%, unless (a) Borrower and Lender agree otherwise, as provided in Section 24.2, and (b) Lender is not a Customer. Notwithstanding the previous sentence, in the event that the writing or other confirmation evidencing the agreement described in clause (a) does not set out such percentage with respect to any such Loan, the Margin Percentage shall not be a percentage less than the percentage obtained by dividing (i) the Market Value of the Collateral required to be transferred by Borrower to Lender with respect to such Loan at the commencement of the Loan by (ii) the Market Value of the Loaned Securities required to be transferred by Lender to Borrower at the commencement of the Loan. 25.38"Market Value" shall have the meaning set forth in Annex II or otherwise agreed to by Borrower and Lender in writing. Notwithstanding the previous sentence, in the event that the meaning of Market Value has not been set forth in Annex II or in any other writing, as described in the previous sentence, Market Value shall be determined in accordance with market practice for the Securities, based on the price for such Securities as of the most recent Close of Trading 17 obtained from a generally recognized source agreed to by the parties or the closing bid quotation at the most recent Close of Trading obtained from such source, plus accrued interest to the extent not included therein (other than any interest credited or transferred to, or applied to the obligations of, the other party pursuant to Section 8, unless market practice with respect to the valuation of such Securities in connection with securities loans is to the contrary). If the relevant quotation did not exist at such Close of Trading, then the Market Value shall be the relevant quotation on the next preceding Close of Trading at which there was such a quotation. The determinations of Market Value provided for in Annex II or in any other writing described in the first sentences of this Section 25.38 or, if applicable, in the preceding sentence shall apply for all purposes under this Agreement, except for purposes of Section 13. 25.39 "Payee" shall have the meaning assigned in Section 8.5(a). 25.40 "Payor" shall have the meaning assigned in Section 8.5(a). 25.41"Plan" shall mean: (a) any "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 which is subject to Part 4 of Subtitle B of Title I of such Act; (b) any "plan" as defined in Section 4975(e)(1) of the Internal Revenue Code of 1986; or (c) any entity the assets of which are deemed to be assets of any such "employee benefit plan" or "plan" by reason of the Department of Labor's plan asset regulation, 29 C.F.R. Section 2510.3-101. 25.42"Regulation T" shall mean Regulation T of the Board of Governors of the Federal Reserve System, as in effect from time to time. 25.43"Retransfer", shall mean, with respect to any Collateral, to pledge, repledge, hypothecate, rehypothecate, lend, relend, sell or otherwise transfer such Collateral, or to re-register any such Collateral evidenced by physical certificates in any name other than Borrower's. 25.44"Securities" shall mean securities or, if agreed by the parties in writing, other assets. 25.45"Securities Distributions" shall have the meaning assigned in Section 8.5(a). 25.46 "Tax" shall have the meaning assigned in Section 8.5(a). 25.47 "UCC" shall mean the New York Uniform Commercial Code. 26. Intent. 26.1 The parties recognize that each Loan hereunder is a "securities contract," as such term is defined in Section 741 of Title 11 of the United States Code (the "Bankruptcy Code"), as amended (except insofar as the type of assets subject to the Loan would render such definition inapplicable). 26.2 It is understood that each and every transfer of funds, securities and other property under this Agreement and each Loan hereunder is a "settlement payment" or a "margin payment," as such terms are used in Sections 362(b)(6) and 546(e) of the Bankruptcy Code. 26.3 It is understood that the rights given to Borrower and Lender hereunder upon a Default by the other constitute the right to cause the liquidation of a securities contract and the right to set off mutual debts and claims in connection with a securities contract, as such terms are used in Sections 555 and 362(b)(6) of the Bankruptcy Code. 18 26.4 The parties agree and acknowledge that if a party hereto is an "insured depository institution," as such term is defined in the Federal Deposit Insurance Act, as amended ("FDIA"), then each Loan hereunder is a "securities contract" and "qualified financial contract," as such terms are defined in the FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to the Loan would render such definitions inapplicable). 26.5 It is understood that this Agreement constitutes a "netting contract" as defined in and subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and each payment obligation under any Loan hereunder shall constitute a "covered contractual payment entitlement" or "covered contractual payment obligation," respectively, as defined in and subject to FDICIA (except insofar as one or both of the parties is not a "financial institution" as that term is defined in FDICIA). 26.6 Except to the extent required by applicable law or regulation or as otherwise agreed, Borrower and Lender agree that Loans hereunder shall in no event be "exchange contracts" for purposes of the rules of any securities exchange and that Loans hereunder shall not be governed by the buy-in or similar rules of any such exchange, registered national securities association or other self-regulatory organization. 27. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS. 27.1 WITHOUT WAIVING ANY RIGHTS GIVEN TO LENDER HEREUNDER, IT IS UNDERSTOOD AND AGREED THAT THE PROVISIONS OF THE SECURITIES INVESTOR PROTECTION ACT OF 1970 MAY NOT PROTECT LENDER WITH RESPECT TO LOANED SECURITIES HEREUNDER AND THAT, THEREFORE, THE COLLATERAL DELIVERED TO LENDER MAY CONSTITUTE THE ONLY SOURCE OF SATISFACTION OF BORROWERS OBLIGATIONS IN THE EVENT BORROWER FAILS TO RETURN THE LOANED SECURITIES. 27.2 LENDER ACKNOWLEDGES THAT, IN CONNECTION WITH LOANS OF GOVERNMENT SECURITIES AND AS OTHERWISE PERMITTED BY APPLICABLE LAW, SOME SECURITIES PROVIDED BY BORROWER AS COLLATERAL UNDER THIS AGREEMENT MAY NOT BE GUARANTEED BY THE UNITED STATES. JP MORGAN CHASE BANK By: /s/ Joseph Blanvlelt Title: Managing Director Date: March 18, 2002 THERMO ELECTRON CORPORATION By: /s/ Kenneth J. Apicerno Title: Treasurer Date: March 18, 2002 19 Annex II Market Value Unless otherwise agreed by Borrower and Lender: 1. If the principal market for the Securities to be valued is a national securities exchange in the United States, their Market Value shall be determined by their last sale price on such exchange at the most recent Close of Trading or, if there was no sale on the Business Day of the most recent Close of Trading, by the last sale price at the Close of Trading on the next preceding Business Day on which there was a sale on such exchange, all as quoted on the Consolidated Tape or, if not quoted on the Consolidated Tape, then as quoted by such exchange. 2. If the principal market for the Securities to be valued is the over-the-counter market, and the Securities are quoted on The Nasdaq Stock Market ("Nasdaq"), their Market Value shall be the last sale price on Nasdaq at the most recent Close of Trading or, if the Securities are issues for which last sale prices are not quoted on Nasdaq, the last bid price at such Close of Trading. If the relevant quotation did not exist at such Close of Trading, then the Market Value shall be the relevant quotation on the next preceding Close of Trading at which there was such a quotation. 3. Except as provided in Section 4 of this Annex, if the principal market for the Securities to be valued is the over-the-counter market, and the Securities are not quoted on Nasdaq, their Market Value shall be determined in accordance with market practice for such Securities, based on the price for such Securities as of the most recent Close of Trading obtained from a generally recognized source agreed to by the parties or the closing bid quotation at the most recent Close of Trading obtained from such a source. If the relevant quotation did not exist at such Close of Trading, then the Market Value shall be the relevant quotation on the next preceding Close of Trading at which there was such a quotation. 4. If the Securities to be valued are Foreign Securities, their Market Value shall be determined as of the most recent Close of Trading in accordance with market practice in the principal market for such Securities. 5. The Market Value of a letter of credit shall be the undrawn amount thereof. 6. All determinations of Market Value under Sections 1 through 4 of this Annex shall include, where applicable, accrued interest to the extent not already included therein (other than any interest credited or transferred to, or applied to the obligations of, the other party pursuant to Section 8 of the Agreement), unless market practice with respect to the valuation of such Securities in connection with securities loans is to the contrary. 7. The determinations of Market Value provided for in this Annex shall apply for all purposes under the Agreement, except for purposes of Section 13 of the Agreement. JP MORGAN CHASE BANK By: /s/ Joseph Blanvlelt Title: Managing Director Date: March 18, 2002 THERMO ELECTRON CORPORATION By: /s/ Kenneth J. Apicerno Title: Treasurer Date: March 18, 2002 20 Annex III Term Loans This Annex sets forth additional terms and conditions governing Loans designated as "Term Loans" in which Lender lends to Borrower a specific amount of Loaned Securities ("Term Loan Amount") against a pledge of cash Collateral by Borrower for an agreed upon Cash Collateral Fee until a scheduled termination date ("Termination Date"). Unless otherwise defined, capitalized terms used but not defined in this Annex shall have the meanings assigned in the Securities Loan Agreement of which it forms a part (such agreement, together with this Annex and any other annexes, schedules or exhibits, referred to as the "Agreement"). I . The terms of this Annex shall apply to Loans of Equity Securities only if they are designated as Term Loans in a Confirmation therefor provided pursuant to the Agreement and executed by each party, in a schedule to the Agreement or in this Annex. All Loans of Securities other than Equity Securities shall be "Term Loans" subject to this Annex, unless otherwise agreed in a Confirmation or other writing. 2. The Confirmation for a Term Loan shall set forth, in addition to any terms required to be set forth therein under the Agreement, the Term Loan Amount, the Cash Collateral Fee and the Termination Date. Lender and Borrower agree that, except as specifically provided in this Annex, each Term Loan shall be subject to all terms and conditions of the Agreement, including, without limitation, any provisions regarding the parties' respective rights to terminate a Loan. 3. In the event that either party exercises its right under the Agreement to terminate a Term Loan on a date (the "Early Termination Date") prior to the Termination Date, Lender and Borrower shall, unless otherwise agreed, use their best efforts to negotiate in good faith a new Term Loan (the "Replacement Loan") of comparable or other Securities, which shall be mutually agreed upon by the parties, with a Market Value equal to the Market Value of the Term Loan Amount under the terminated Term Loan (the "Terminated Loan") as of the Early Termination Date. Such agreement shall, in accordance with Section 2 of this Annex, be confirmed in a new Confirmation at the commencement of the Replacement Loan and be executed by each party. Each Replacement Loan shall be subject to the same terms as the corresponding Terminated Loan, other than with respect to the commencement date and the identity of the Loaned Securities. The Replacement Loan shall commence on the date on which the parties agree which Securities shall be the subject of the Replacement Loan and shall be scheduled to terminate on the scheduled Termination Date of the Terminated Loan. 4. Borrower and Lender agree that, except as provided in Section 5 of this Annex, if the parties enter into a Replacement Loan, the Collateral for the related Terminated Loan need not be returned to Borrower and shall instead serve as Collateral for such Replacement Loan. 5. If the parties are unable to negotiate and enter into a Replacement Loan for some or all of the Term Loan Amount on or before the Early Termination Date, (a) the party requesting termination of the Terminated Loan shall pay to the other party a Breakage Fee computed in accordance with Section 6 of this Annex with respect to that portion of the Term Loan Amount for which a Replacement Loan is not entered into and (b) upon the transfer by Borrower to Lender of the Loaned Securities subject to the Terminated Loan, Lender shall transfer to Borrower Collateral for the Terminated Loan in accordance with and to the extent required under the Agreement, provided that no Default has occurred with respect to Borrower. 21 6. For purposes of this Annex, the term "Breakage Fee" shall mean a fee agreed by Borrower and Lender in the Confirmation or otherwise orally or in writing. In the absence of any such agreement, the term "Breakage Fee" shall mean, with respect to Loans of Government Securities, a fee equal to the sum of (a) the cost to the non-terminating party (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of the termination of the Terminated Loan, and (b) any other loss, damage, cost or expense directly arising or resulting from the termination of the Terminated Loan that is incurred by the non-terminating party (other than consequential losses or costs for lost profits or lost opportunities), as determined by the non-terminating party in a commercially reasonable manner, and (c) any other amounts due and payable by the terminating party to the non-terminating party under the Agreement on the Early Termination Date. JP MORGAN CHASE BANK By: /s/ Joseph Blanvlelt Title: Managing Director Date: March 18, 2002 THERMO ELECTRON CORPORATION By: /s/ Kenneth J. Apicerno Title: Treasurer Date: March 18, 2002 22 Schedule A Names and Addresses for Communications JPMorgan Chase Bank Contacts: Names and Address for Communications JP Morgan Chase Bank 270 Park Avenue New York, New York 10017 Fixed Income Attn: Joseph P. Blauvelt Tel:(212) 834-4767 Fax:(212) 834-6530 / 6531 Equities Attn: Michael Cardaci Tel:(212) 622-2719 Fax:(212) 622-0076 High Yield Corporates Attn: Daniel Cullinan Tel: (212) 270-8780 Fax: (212) 270-5320 Confirmations: JP Morgan Chase Bank P&S Department Harborside Financial Center 34 Exchange Place, 4th floor Jersey City, New Jersey 07311 Client Contacts: Primary: Jeff Botte Phone: (781) 622-1271 Fax: (781) 622-1236 Email: jbotte@thermo.com Secondary: Kenneth J. Apicerno Phone: (781) 622-1294 Fax: (781) 622-1181 Email: kapicerno@thermo.com Confirmations: Thermo Electron Corporation 81 Wyman Street Waltham, MA 02454 Attn: Jeff Botte 23 Schedule B Defined Terms and Supplemental Provisions Fees for Loan. The following sentence shall be added at the end of Section 5.1: "If Borrower transfers Collateral to Lender the Business Day prior to the transfer of the Loaned Securities to Borrower, Lender agrees to pay Borrower a Cash Collateral Fee from and including the day of the transfer of Collateral to but excluding the day of the transfer of the Loaned Securities at a rate determined by Lender and Borrower at time of such Loan." Amendment to Section 6. Section 6 is hereby amended by deleting the period at end of sentence of Section 6.2 and replacing it with "; and provided further, that Lender is entitled to return of the Loaned Securities from Borrower only against delivery of the Collateral to Borrower." Additional Events of Default. In addition to the events enumerated in Section 12 of the Agreement: (a) The occurrence of any one or more of the following events shall constitute a Default under the Agreement and entitle the non-defaulting party to exercise the termination rights under Section 12 of the Agreement: (i) if either party shall have been suspended or expelled from membership or participation in any national securities exchange, registered national securities association or registered clearing agency of which it is a member or any other self-regulatory organization to whose rules it is subject or if it is suspended from dealing in securities by any federal or state government agency thereof; or (ii) if either party shall have its license, charter, or other authorization necessary to conduct a material portion of its business withdrawn, suspended or revoked by any applicable federal or sate government or agency thereof. (b) The occurrence of any one or more of the following events with respect to an individual Loan (if so agreed in a Confirmation for such Loan that is executed by each party) or with respect to a class of Loans (if so agreed by the parties in writing in this Schedule B or otherwise) shall constitute a Default under the Agreement and entitle the non-defaulting party to exercise the termination rights under Section 12 of the Agreement: (i) if Loaned Securities shall not, in accordance with Section 3.1 of the Agreement, be transferred to Borrower against the transfer of Collateral on or before the Cutoff Time on the date agreed to by Borrower and Lender for the commencement of such Loan or Loans; or (ii) if Collateral shall not, in accordance with Section 4.1 of the Agreement, be transferred to Lender against the transfer of Loaned Securities on or before the Cutoff Time on the date agreed to by Borrower and Lender for the commencement of such Loan or Loans. Unless otherwise agreed, all Loans of Loaned Securities consisting of Securities other than Equity Securities shall be subject to this paragraph (b). 24 Additional Remedies. In addition to any other remedies to which a non-defaulting party may be entitled under the Agreement, the defaulting party shall, with respect to an individual Loan (if so agreed in a Confirmation for such Loan that is executed by each party) or with respect to a class of Loans (if so agreed by the parties in writing in this Schedule B or otherwise), be liable to the non-defaulting party for (a) the amount of all reasonable legal or other expenses incurred by the non-defaulting party in connection with or as a result of a Default, (b) damages in an amount equal to the cost (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of a Default, and (c) any other loss, damages, cost or expense directly arising or resulting from the occurrence of a Default in respect of a Loan. Unless otherwise agreed, all Loans of Loaned Securities consisting of Securities other than Equity Securities shall be subject to this Section. Section 17 Shall Not Apply. Lender agrees that Section 17 is not applicable to the Loaned Securities under this Agreement. Standard Settlement Date for Foreign Securities. Notwithstanding Section 6.1(a)(ii) of the Agreement, Borrower and Lender agree that the standard settlement date that would apply to a purchase or sale of Foreign Securities for purposes of the termination provisions of Section 6 of the Agreement shall be the standard settlement date that would apply to a purchase or sale of such Foreign Securities entered into at the time of a termination notice in the principal market for such Foreign Securities. Margin Percentage. Notwithstanding the definition of "Margin Percentage" contained in Section 25.37, the Margin Percentage shall be 95% or as otherwise agreed to between Lender and Borrower at the commencement of a Loan. Trading Practices. Each party shall observe, and the Agreement and each Loan thereunder is subject to, including with regard to (a) the allocation of economic benefits in respect of Loaned Securities and Collateral and (b) buy-in procedures in the case of failures to receive Loaned Securities or Collateral, any uniform practices applicable to securities loans among members of The Bond Market Association and the Securities Industry Association (the "Associations"), as currently in effect, or successor provisions thereto (the "Uniform Practices"), regardless of whether each party is a member of one of the Associations, to the extent that such market practice (including the Uniform Practices) does not conflict with the terms of the Agreement. Notwithstanding the preceding sentence, a party shall not waive its right to exercise its option to terminate all Loans under Section 12 of the Agreement by observing the buy-in procedures described in clause (b) of the preceding sentence. No Reliance. In addition to the representations and warranties set forth in Section 10 of the Agreement, each party hereby makes the following representations and warranties in connection with the Agreement and each Loan thereunder, which shall continue during the term of any such Loan: (a) unless there is a written agreement with the other party to the contrary, it is not relying on any advice (whether written or oral) of the other party, other than the representations expressly set out in the Agreement; 25 (b) it has made and will make its own decisions regarding the entering into of any Loan based upon its own judgment and upon advice from such professional advisers as it has deemed it necessary to consult; and (c) it understands the terms, conditions and risks of each Loan and is willing to assume(financial and otherwise) those risks. Cutoff Times. For the purpose of the transfer of cash or securities hereunder, Borrower agrees that Lender shall be deemed a "dealer" for purposes of determining the relevant cutoff deadlines with any Clearing Organization, provided however, Lender is not required to accept a return for Loaned Securities from Borrower if the securities are not received within the time permitted for dealers to make such transfers. If Borrower refuses to accept a transfer for loaned Securities from Lender within the time permitted for dealers to make such transfer, Borrower shall not be entitled to receive a Cash Collateral held by Lender until Borrower accepts such transfer. Cross Default. Each party to any Loan under the Agreement (such party, "Party X") agrees that, upon an Act of Insolvency in respect of Party X or the default of Party X under any transaction (including, without limitation, any interest rate, currency or other swap transaction or any master agreement intended to document the same, whether or not there are any existing transactions thereunder) with the other party (such other party, and any of any affiliates of JPMorgan Chase Bank, the "Non-Defaulting Party"), the Non-Defaulting Party may, (a) reduce any amounts due and owing to Party X under any transaction between Party X and the Non-Defaulting Party by setting off against such amounts any amounts due and owing to the Non-Defaulting Party by Party X, and (b) treat any amounts or deliveries due and owing to Party X under any transactions between Party X and the Non-Defaulting Party, as security given by Party X to the Non-Defaulting Party for its obligations under all transactions between Party X and the Non-Defaulting Party. In furtherance of the preceding sentence, each party hereby grants to the other party a continuing first and senior security interest or entitlement, and fixed charge or lien on all such cash and securities. JP MORGAN CHASE BANK By: /s/ Joseph Blanvlelt Title: Managing Director Date: March 18, 2002 THERMO ELECTRON CORPORATION By: /s/ Kenneth J. Apicerno Title: Treasurer Date: March 18, 2002 26 EX-10.2 4 tmo2q02ex10-2.txt EXHIBIT 10.2 Master Securities Loan Agreement 2000 Version - -------------------------------------------------------------------------------- Dated as of: April 4, 2002 - -------------------------------------------------------------------------------- Between: ABN AMRO Inc. - -------------------------------------------------------------------------------- and Thermo Electron Corporation - -------------------------------------------------------------------------------- 1. Applicability. From time to time the parties hereto may enter into transactions in which one party ("Lender") will lend to the other party ("Borrower") certain Securities (as defined herein) against a transfer of Collateral (as defined herein). Each such transaction shall be referred to herein as a "Loan" and, unless otherwise agreed in writing, shall be governed by this Agreement, including any supplemental terms or conditions contained in an Annex or Schedule hereto and in any other annexes identified herein or therein as applicable hereunder. Capitalized terms not otherwise defined herein shall have the meanings provided in Section 25. 2. Loans of Securities. 2.1 Subject to the terms and conditions of this Agreement, Borrower or Lender may, from time to time, seek to initiate a transaction in which Lender will lend Securities to Borrower. Borrower and Lender shall agree on the terms of each Loan (which terms may be amended during the Loan), including the issuer of the Securities, the amount of Securities to be lent, the basis of compensation, the amount of Collateral to be transferred by Borrower, and any additional terms. Such agreement shall be confirmed (a) by a schedule and receipt listing the Loaned Securities provided by Borrower to Lender in accordance with Section 3.2, (b) through any system that compares Loans and in which Borrower and Lender are participants, or (c) in such other manner as may be agreed by Borrower and Lender in writing. Such confirmation (the "Confirmation"), together with the Agreement, shall constitute conclusive evidence of the terms agreed between Borrower and Lender with respect to the Loan to which the Confirmation relates, unless with respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any inconsistency between the terms of such Confirmation and this Agreement, this Agreement shall prevail unless each party has executed such Confirmation. 2.2 Notwithstanding any other provision in this Agreement regarding when a Loan commences, unless otherwise agreed, a Loan hereunder shall not occur until the Loaned Securities and the Collateral therefor have been transferred in accordance with Section 15. 3. Transfer of Loaned Securities. 3.1 Unless otherwise agreed, Lender shall transfer Loaned Securities to Borrower hereunder on or before the Cutoff Time on the date agreed to by Borrower and Lender for the commencement of the Loan. 3.2 Unless otherwise agreed, Borrower shall provide Lender, for each Loan in which Lender is a Customer, with a schedule and receipt listing the Loaned Securities. Such schedule and receipt may consist of (a) a schedule provided to Borrower by Lender and executed and returned by Borrower when the Loaned Securities are received, (b) in the case of Securities transferred through a Clearing Organization which provides transferors with a notice evidencing such transfer, such notice, or (c) a confirmation or other document provided to Lender by Borrower. 3.3 Notwithstanding any other provision in this Agreement, the parties hereto agree that they intend the Loans hereunder to be loans of Securities. If, however, any Loan is deemed to be a loan of money by Borrower to Lender, then Borrower shall have, and Lender shall be deemed to have granted, a security interest in the Loaned Securities and the proceeds thereof. 4. Collateral. 4.1 Unless otherwise agreed, Borrower shall, prior to or concurrently with the transfer of the Loaned Securities to Borrower, but in no case later than the Close of Business on the day of such transfer, transfer to Lender Collateral with a Market Value at least equal to the Margin Percentage of the Market Value of the Loaned Securities. 4.2 The Collateral transferred by Borrower to Lender, as adjusted pursuant to Section 9, shall be security for Borrower's obligations in respect of such Loan and for any other obligations of Borrower to Lender hereunder. Borrower hereby pledges with, assigns to, and grants Lender a continuing first priority security interest in, and a lien upon, the Collateral, which shall attach upon the transfer of the Loaned Securities by Lender to Borrower and which shall cease upon the transfer of the Loaned Securities by Borrower to Lender. In addition to the rights and remedies given to Lender hereunder, Lender shall have all the rights and remedies of a secured party under the UCC. It is understood that Lender may use or invest the Collateral, if such consists of cash, at its own risk, but that (unless Lender is a Broker-Dealer) Lender shall, during the term of any Loan hereunder, segregate Collateral from all securities or other assets in its possession. Lender may Retransfer Collateral only (a) if Lender is a Broker-Dealer or (b) in the event of a Default by Borrower. Segregation of Collateral may be accomplished by appropriate identification on the books and records of Lender if it is a "securities intermediary" within the meaning of the UCC. 4.3 Except as otherwise provided herein, upon transfer to Lender of the Loaned Securities on the day a Loan is terminated pursuant to Section 6, Lender shall be obligated to transfer the Collateral (as adjusted pursuant to Section 9) to Borrower no later than the Cutoff Time on such day or, if such day is not a day on which a transfer of such Collateral may be effected under Section 15, the next day on which such a transfer may be effected. 4.4 If Borrower transfers Collateral to Lender, as provided in Section 4.1, and Lender does not transfer the Loaned Securities to Borrower, Borrower shall have the absolute right to the return of the Collateral; and if Lender transfers Loaned Securities to Borrower and Borrower does not transfer Collateral to Lender as provided in Section 4.1, Lender shall have the absolute right to the return of the Loaned Securities. 4.5 Borrower may, upon reasonable notice to Lender (taking into account all relevant factors, including industry practice, the type of Collateral to be substituted, and the applicable method of transfer), substitute Collateral for Collateral securing any Loan or Loans; provided, however, that such substituted Collateral shall (a) consist only of cash, securities or other property that Borrower and Lender agreed would be acceptable Collateral prior to the Loan or Loans and (b) have a Market Value such that the aggregate Market Value of such substituted Collateral, together with all other Collateral for Loans in which the party substituting such Collateral is acting as Borrower, shall equal or exceed the agreed upon Margin Percentage of the Market Value of the Loaned Securities. 4.6 Prior to the expiration of any letter of credit supporting Borrower's obligations hereunder, Borrower shall, no later than the Extension Deadline, (a) obtain an extension of the expiration of such letter of credit, (b) replace such letter of credit by providing Lender with a substitute letter of credit in an amount at least equal to the amount of the letter of credit for which it is substituted, or (c) transfer such other Collateral to Lender as may be acceptable to Lender. 5. Fees for Loan. 5.1 Unless otherwise agreed, (a) Borrower agrees to pay Lender a loan fee (a "Loan Fee"), computed daily on each Loan to the extent such Loan is secured by Collateral other than cash, based on the aggregate Market Value of the Loaned Securities on the day for which such Loan Fee is being computed, and (b) Lender agrees to pay Borrower a fee or rebate (a "Cash Collateral Fee") on Collateral consisting of cash, computed daily based on the amount of cash held by Lender as Collateral, in the case of each of the Loan Fee and the Cash Collateral Fee at such rates as Borrower and Lender may agree. Except as Borrower and Lender may otherwise agree (in the event that cash Collateral is transferred by clearing house funds or otherwise), Loan Fees shall accrue from and including the date on which the Loaned Securities are transferred to Borrower to, but excluding, the date on which such Loaned Securities are returned to Lender, and Cash Collateral Fees shall accrue from and including the date on which the cash Collateral is transferred to Lender to, but excluding, the date on which such cash Collateral is returned to Borrower. 5.2 Unless otherwise agreed, any Loan Fee or Cash Collateral Fee payable hereunder shall be payable: (a) in the case of any Loan of Securities other than Government Securities, upon the earlier of (i) the fifteenth day of the month following the calendar month in which such fee was incurred and (ii) the termination of all Loans hereunder (or, if a transfer of cash in accordance with Section 15 may not be effected on such fifteenth day or the day of such termination, as the case may be, the next day on which such a transfer may be effected); and (b) in the case of any Loan of Government Securities, upon the termination of such Loan and at such other times, if any, as may be customary in accordance with market practice. Notwithstanding the foregoing, all Loan Fees shall be payable by Borrower immediately in the event of a Default hereunder by Borrower and all Cash Collateral Fees shall be payable immediately by Lender in the event of a Default by Lender. 6. Termination of the Loan. 6.1 a) Unless otherwise agreed, either party may terminate a Loan on a termination date established by notice given to the other party prior to the Close of Business on a Business Day. The termination date established by a termination notice shall be a date no earlier than the standard settlement date that would apply to a purchase or sale of the Loaned Securities (in the case of a notice given by Lender) or the noncash Collateral securing the Loan (in the case of a notice given by Borrower) entered into at the time of such notice, which date shall, unless Borrower and Lender agree to the contrary, be (i) in the case of Government Securities, the next Business Day following such notice and (ii) in the case of all other Securities, the third Business Day following such notice. (b) Notwithstanding paragraph (a) and unless otherwise agreed, Borrower may terminate a Loan on any Business Day by giving notice to Lender and transferring the Loaned Securities to Lender before the Cutoff Time on such Business Day if (i) the Collateral for such Loan consists of cash or Government Securities or (ii) Lender is not permitted, pursuant to Section 4.2, to Retransfer Collateral. 6.2 Unless otherwise agreed, Borrower shall, on or before the Cutoff Time on the termination date of a Loan, transfer the Loaned Securities to Lender; provided, however, that upon such transfer by Borrower, Lender shall transfer the Collateral (as adjusted pursuant to Section 9) to Borrower in accordance with Section 4.3. 7. Rights in Respect of Loaned Securities and Collateral. 7.1 Except as set forth in Sections 8.1 and 8.2 and as otherwise agreed by Borrower and Lender, until Loaned Securities are required to be redelivered to Lender upon termination of a Loan hereunder, Borrower shall have all of the incidents of ownership of the Loaned Securities, including the right to transfer the Loaned Securities to others. Lender hereby waives the right to vote, or to provide any consent or to take any similar action with respect to, the Loaned Securities in the event that the record date or deadline for such vote, consent or other action falls during the term of the Loan. 7.2 Except as set forth in Sections 8.3 and 8.4 and as otherwise agreed by Borrower and Lender, if Lender may, pursuant to Section 4.2, Retransfer Collateral, Borrower hereby waives the right to vote, or to provide any consent or take any similar action with respect to, any such Collateral in the event that the record date or deadline for such vote, consent or other action falls during the term of a Loan and such Collateral is not required to be returned to Borrower pursuant to Section 4.5 or Section 9. 8. Distributions. 8.1 Lender shall be entitled to receive all Distributions made on or in respect of the Loaned Securities which are not otherwise received by Lender, to the full extent it would be so entitled if the Loaned Securities had not been lent to Borrower. 8.2 Any cash Distributions made on or in respect of the Loaned Securities, which Lender is entitled to receive pursuant to Section 8.1, shall be paid by the transfer of cash to Lender by Borrower, on the date any such Distribution is paid, in an amount equal to such cash Distribution, so long as Lender is not in Default at the time of such payment. Non-cash Distributions that Lender is entitled to receive pursuant to Section 8.1 shall be added to the Loaned Securities on the date of distribution and shall be considered such for all purposes, except that if the Loan has terminated, Borrower shall forthwith transfer the same to Lender. 8.3 Borrower shall be entitled to receive all Distributions made on or in respect of non-cash Collateral which are not otherwise received by Borrower, to the full extent it would be so entitled if the Collateral had not been transferred to Lender. 8.4 Any cash Distributions made on or in respect of such Collateral, which Borrower is entitled to receive pursuant to Section 8.3, shall be paid by the transfer of cash to Borrower by Lender, on the date any such Distribution is paid, in an amount equal to such cash Distribution, so long as Borrower is not in Default at the time of such payment. Non-cash Distributions that Borrower is entitled to receive pursuant to Section 8.3 shall be added to the Collateral on the date of distribution and shall be considered such for all purposes, except that if each Loan secured by such Collateral has terminated, Lender shall forthwith transfer the same to Borrower. 8.5 Unless otherwise agreed by the parties: (a) If (i) Borrower is required to make a payment (a "Borrower Payment") with respect to cash Distributions on Loaned Securities under Sections 8.1 and 8.2 ("Securities Distributions"), or (ii) Lender is required to make a payment (a "Lender Payment") with respect to cash Distributions on Collateral under Sections 8.3 and 8.4 ("Collateral Distributions"), and (iii) Borrower or Lender, as the case may be ("Payor"), shall be required by law to collect any withholding or other tax, duty, fee, levy or charge required to be deducted or withheld from such Borrower Payment or Lender Payment ("Tax"), then Payor shall (subject to subsections (b) and (c) below), pay such additional amounts as may be necessary in order that the net amount of the Borrower Payment or Lender Payment received by the Lender or Borrower, as the case may be ("Payee"), after payment of such Tax equals the net amount of the Securities Distribution or Collateral Distribution that would have been received if such Securities Distribution or Collateral Distribution had been paid directly to the Payee. (b) No additional amounts shall be payable to a Payee under subsection (a) above to the extent that Tax would have been imposed on a Securities Distribution or Collateral Distribution paid directly to the Payee. (c) No additional amounts shall be payable to a Payee under subsection (a) above to the extent that such Payee is entitled to an exemption from, or reduction in the rate of, Tax on a Borrower Payment or Lender Payment subject to the provision of a certificate or other documentation, but has failed timely to provide such certificate or other documentation. (d) Each party hereto shall be deemed to represent that, as of the commencement of any Loan hereunder, no Tax would be imposed on any cash Distribution paid to it with respect to (i) Loaned Securities subject to a Loan in which it is acting as Lender or (ii) Collateral for any Loan in which it is acting as Borrower, unless such party has given notice to the contrary to the other party hereto (which notice shall specify the rate at which such Tax would be imposed). Each party agrees to notify the other of any change that occurs during the term of a Loan in the rate of any Tax that would be imposed on any such cash Distributions payable to it. 8.6 To the extent that, under the provisions of Sections 8.1 through 8.5, (a) a transfer of cash or other property by Borrower would give rise to a Margin Excess or (b) a transfer of cash or other property by Lender would give rise to a Margin Deficit, Borrower or Lender (as the case may be) shall not be obligated to make such transfer of cash or other property in accordance with such Sections, but shall in lieu of such transfer immediately credit the amounts that would have been transferable under such Sections to the account of Lender or Borrower (as the case may be). 9. Mark to Market. 9.1 If Lender is a Customer, Borrower shall daily mark to market any Loan hereunder and in the event that at the Close of Trading on any Business Day the Market Value of the Collateral for any Loan to Borrower shall be less than 100% of the Market Value of all the outstanding Loaned Securities subject to such Loan, Borrower shall transfer additional Collateral no later than the Close of Business on the next Business Day so that the Market Value of such additional Collateral, when added to the Market Value of the other Collateral for such Loan, shall equal 100% of the Market Value of the Loaned Securities. 9.2 In addition to any rights of Lender under Section 9.1, if at any time the aggregate Market Value of all Collateral for Loans by Lender shall be less than the Margin Percentage of the Market Value of all the outstanding Loaned Securities subject to such Loans (a "Margin Deficit"), Lender may, by notice to Borrower, demand that Borrower transfer to Lender additional Collateral so that the Market Value of such additional Collateral, when added to the Market Value of all other Collateral for such Loans, shall equal or exceed the Margin Percentage of the Market Value of the Loaned Securities. 9.3 Subject to Borrower's obligations under Section 9.1, if at any time the Market Value of all Collateral for Loans to Borrower shall be greater than the Margin Percentage of the Market Value of all the outstanding Loaned Securities subject to such Loans (a "Margin Excess"), Borrower may, by notice to Lender, demand that Lender transfer to Borrower such amount of the Collateral selected by Borrower so that the Market Value of the Collateral for such Loans, after deduction of such amounts, shall thereupon not exceed the Margin Percentage of the Market Value of the Loaned Securities. 9.4 Borrower and Lender may agree, with respect to one or more Loans hereunder, to mark the values to market pursuant to Sections 9.2 and 9.3 by separately valuing the Loaned Securities lent and the Collateral given in respect thereof on a Loan-by-Loan basis. 9.5 Borrower and Lender may agree, with respect to any or all Loans hereunder, that the respective rights of Lender and Borrower under Sections 9.2 and 9.3 may be exercised only where a Margin Excess or Margin Deficit exceeds a specified dollar amount or a specified percentage of the Market Value of the Loaned Securities under such Loans (which amount or percentage shall be agreed to by Borrower and Lender prior to entering into any such Loans). 9.6 If any notice is given by Borrower or Lender under Sections 9.2 or 9.3 at or before the Margin Notice Deadline on any day on which a transfer of Collateral may be effected in accordance with Section 15, the party receiving such notice shall transfer Collateral as provided in such Section no later than the Close of Business on such day. If any such notice is given after the Margin Notice Deadline, the party receiving such notice shall transfer such Collateral no later than the Close of Business on the next Business Day following the day of such notice. 10. Representations. The parties to this Agreement hereby make the following representations and warranties, which shall continue during the term of any Loan hereunder: 10.1 Each party hereto represents and warrants that (a) it has the power to execute and deliver this Agreement, to enter into the Loans contemplated hereby and to perform its obligations hereunder, (b) it has taken all necessary action to authorize such execution, delivery and performance, and (c) this Agreement constitutes a legal, valid and binding obligation enforceable against it in accordance with its terms. 10.2 Each party hereto represents and warrants that it has not relied on the other for any tax or accounting advice concerning this Agreement and that it has made its own determination as to the tax and accounting treatment of any Loan and any dividends, remuneration or other funds received hereunder. 10.3 Each party hereto represents and warrants that it is acting for its own account unless it expressly specifies otherwise in writing and complies with Section 11.1(b). 10.4 Borrower represents and warrants that it has, or will have at the time of transfer of any Collateral, the right to grant a first priority security interest therein subject to the terms and conditions hereof. 10.5 (a) Borrower represents and warrants that it (or the person to whom it relends the Loaned Securities) is borrowing or will borrow Loaned Securities that are Equity Securities for the purpose of making delivery of such Loaned Securities in the case of short sales, failure to receive securities required to be delivered, or as otherwise permitted pursuant to Regulation T as in effect from time to time. (b) Borrower and Lender may agree, as provided in Section 24.2, that Borrower shall not be deemed to have made the representation or warranty in subsection (a) with respect to any Loan. By entering into any such agreement, Lender shall be deemed to have represented and warranted to Borrower (which representation and warranty shall be deemed to be repeated on each day during the term of the Loan) that Lender is either (i) an "exempted borrower" within the meaning of Regulation T or (ii) a member of a national securities exchange or a broker or dealer registered with the U.S. Securities and Exchange Commission that is entering into such Loan to finance its activities as a market maker or an underwriter. 10.6 Lender represents and warrants that it has, or will have at the time of transfer of any Loaned Securities, the right to transfer the Loaned Securities subject to the terms and conditions hereof. 11. Covenants. 11.1 Each party agrees either (a) to be liable as principal with respect to its obligations hereunder or (b) to execute and comply fully with the provisions of Annex I (the terms and conditions of which Annex are incorporated herein and made a part hereof). 11.2 Promptly upon (and in any event within seven (7) Business Days after) demand by Lender, Borrower shall furnish Lender with Borrower's most recent publicly-available financial statements and any other financial statements mutually agreed upon by Borrower and Lender. Unless otherwise agreed, if Borrower is subject to the requirements of Rule 17a-5(c) under the Exchange Act, it may satisfy the requirements of this Section by furnishing Lender with its most recent statement required to be furnished to customers pursuant to such Rule. 12. Events of Default. All Loans hereunder may, at the option of the non-defaulting party (which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency), be terminated immediately upon the occurrence of any one or more of the following events (individually, a "Default"): 12.1 if any Loaned Securities shall not be transferred to Lender upon termination of the Loan as required by Section 6; 12.2 if any Collateral shall not be transferred to Borrower upon termination of the Loan as required by Sections 4.3 and 6; 12.3 if either party shall fail to transfer Collateral as required by Section 9; 12.4 if either party (a) shall fail to transfer to the other party amounts in respect of Distributions required to be transferred by Section 8, (b) shall have been notified of such failure by the other party prior to the Close of Business on any day, and (c) shall not have cured such failure by the Cutoff Time on the next day after such Close of Business on which a transfer of cash may be effected in accordance with Section 15; 12.5 if an Act of Insolvency occurs with respect to either party; 12.6 if any representation made by either party in respect of this Agreement or any Loan or Loans hereunder shall be incorrect or untrue in any material respect during the term of any Loan hereunder; 12.7 if either party notifies the other of its inability to or its intention not to perform its obligations hereunder or otherwise disaffirms, rejects or repudiates any of its obligations hereunder; or 12.8 if either party (a) shall fail to perform any material obligation under this Agreement not specifically set forth in clauses 12.1 through 12.7, above, including but not limited to the payment of fees as required by Section 5, and the payment of transfer taxes as required by Section 14, (b) shall have been notified of such failure by the other party prior to the Close of Business on any day, and (c) shall not have cured such failure by the Cutoff Time on the next day after such Close of Business on which a transfer of cash may be effected in accordance with Section 15. The non-defaulting party shall (except upon the occurrence of an Act of Insolvency) give notice as promptly as practicable to the defaulting party of the exercise of its option to terminate all Loans hereunder pursuant to this Section 12. 13. Remedies. 13.1 Upon the occurrence of a Default under Section 12 entitling Lender to terminate all Loans hereunder, Lender shall have the right, in addition to any other remedies provided herein, (a) to purchase a like amount of Loaned Securities ("Replacement Securities") in the principal market for such Loaned Securities in a commercially reasonable manner, (b) to sell any Collateral in the principal market for such Collateral in a commercially reasonable manner and (c) to apply and set off the Collateral and any proceeds thereof (including any amounts drawn under a letter of credit supporting any Loan) against the payment of the purchase price for such Replacement Securities and any amounts due to Lender under Sections 5, 8, 14 and 16. In the event that Lender shall exercise such rights, Borrower's obligation to return a like amount of the Loaned Securities shall terminate. Lender may similarly apply the Collateral and any proceeds thereof to any other obligation of Borrower under this Agreement, including Borrower's obligations with respect to Distributions paid to Borrower (and not forwarded to Lender) in respect of Loaned Securities. In the event that (i) the purchase price of Replacement Securities (plus all other amounts, if any, due to Lender hereunder) exceeds (ii) the amount of the Collateral, Borrower shall be liable to Lender for the amount of such excess together with interest thereon at a rate equal to (A) in the case of purchases of Foreign Securities, LIBOR, (B) in the case of purchases of any other Securities (or other amounts, if any, due to Lender hereunder), the Federal Funds Rate or (C) such other rate as may be specified in Schedule B, in each case as such rate fluctuates from day to day, from the date of such purchase until the date of payment of such excess. As security for Borrower's obligation to pay such excess, Lender shall have, and Borrower hereby grants, a security interest in any property of Borrower then held by or for Lender and a right of setoff with respect to such property and any other amount payable by Lender to Borrower. The purchase price of Replacement Securities purchased under this Section 13.1 shall include, and the proceeds of any sale of Collateral shall be determined after deduction of, broker's fees and commissions and all other reasonable costs, fees and expenses related to such purchase or sale (as the case may be). In the event Lender exercises its rights under this Section 13.1, Lender may elect in its sole discretion, in lieu of purchasing all or a portion of the Replacement Securities or selling all or a portion of the Collateral, to be deemed to have made, respectively, such purchase of Replacement Securities or sale of Collateral for an amount equal to the price therefor on the date of such exercise obtained from a generally recognized source or the last bid quotation from such a source at the most recent Close of Trading. Subject to Section 18, upon the satisfaction of all obligations hereunder, any remaining Collateral shall be returned to Borrower. 13.2 Upon the occurrence of a Default under Section 12 entitling Borrower to terminate all Loans hereunder, Borrower shall have the right, in addition to any other remedies provided herein, (a) to purchase a like amount of Collateral ("Replacement Collateral") in the principal market for such Collateral in a commercially reasonable manner, (b) to sell a like amount of the Loaned Securities in the principal market for such Loaned Securities in a commercially reasonable manner and (c) to apply and set off the Loaned Securities and any proceeds thereof against (i) the payment of the purchase price for such Replacement Collateral, (ii) Lender's obligation to return any cash or other Collateral, and (iii) any amounts due to Borrower under Sections 5, 8 and 16. In such event, Borrower may treat the Loaned Securities as its own and Lender's obligation to return a like amount of the Collateral shall terminate; provided, however, that Lender shall immediately return any letters of credit supporting any Loan upon the exercise or deemed exercise by Borrower of its termination rights under Section 12. Borrower may similarly apply the Loaned Securities and any proceeds thereof to any other obligation of Lender under this Agreement, including Lender's obligations with respect to Distributions paid to Lender (and not forwarded to Borrower) in respect of Collateral. In the event that (i) the sales price received from such Loaned Securities is less than (ii) the purchase price of Replacement Collateral (plus the amount of any cash or other Collateral not replaced by Borrower and all other amounts, if any, due to Borrower hereunder), Lender shall be liable to Borrower for the amount of any such deficiency, together with interest on such amounts at a rate equal to (A) in the case of Collateral consisting of Foreign Securities, LIBOR, (B) in the case of Collateral consisting of any other Securities (or other amounts due, if any, to Borrower hereunder), the Federal Funds Rate or (C) such other rate as may be specified in Schedule B, in each case as such rate fluctuates from day to day, from the date of such sale until the date of payment of such deficiency. As security for Lender's obligation to pay such deficiency, Borrower shall have, and Lender hereby grants, a security interest in any property of Lender then held by or for Borrower and a right of setoff with respect to such property and any other amount payable by Borrower to Lender. The purchase price of any Replacement Collateral purchased under this Section 13.2 shall include, and the proceeds of any sale of Loaned Securities shall be determined after deduction of, broker's fees and commissions and all other reasonable costs, fees and expenses related to such purchase or sale (as the case may be). In the event Borrower exercises its rights under this Section 13.2, Borrower may elect in its sole discretion, in lieu of purchasing all or a portion of the Replacement Collateral or selling all or a portion of the Loaned Securities, to be deemed to have made, respectively, such purchase of Replacement Collateral or sale of Loaned Securities for an amount equal to the price therefor on the date of such exercise obtained from a generally recognized source or the last bid quotation from such a source at the most recent Close of Trading. Subject to Section 18, upon the satisfaction of all Lender's obligations hereunder, any remaining Loaned Securities (or remaining cash proceeds thereof) shall be returned to Lender. 13.3 Unless otherwise agreed, the parties acknowledge and agree that (a) the Loaned Securities and any Collateral consisting of Securities are of a type traded in a recognized market, (b) in the absence of a generally recognized source for prices or bid or offer quotations for any security, the non-defaulting party may establish the source therefor in its sole discretion, and (c) all prices and bid and offer quotations shall be increased to include accrued interest to the extent not already included therein (except to the extent contrary to market practice with respect to the relevant Securities). 13.4 In addition to its rights hereunder, the non-defaulting party shall have any rights otherwise available to it under any other agreement or applicable law. 14. Transfer Taxes. All transfer taxes with respect to the transfer of the Loaned Securities by Lender to Borrower and by Borrower to Lender upon termination of the Loan and with respect to the transfer of Collateral by Borrower to Lender and by Lender to Borrower upon termination of the Loan or pursuant to Section 4.5 or Section 9 shall be paid by Borrower. 15. Transfers. 15.1 All transfers by either Borrower or Lender of Loaned Securities or Collateral consisting of "financial assets" (within the meaning of the UCC) hereunder shall be by (a) in the case of certificated securities, physical delivery of certificates representing such securities together with duly executed stock and bond transfer powers, as the case may be, with signatures guaranteed by a bank or a member firm of the New York Stock Exchange, Inc., (b) registration of an uncertificated security in the transferee's name by the issuer of such uncertificated security, (c) the crediting by a Clearing Organization of such financial assets to the transferee's "securities account" (within the meaning of the UCC) maintained with such Clearing Organization, or (d) such other means as Borrower and Lender may agree. 15.2 All transfers of cash hereunder shall be by (a) wire transfer in immediately available, freely transferable funds or (b) such other means as Borrower and Lender may agree. 15.3 All transfers of letters of credit from Borrower to Lender shall be made by physical delivery to Lender of an irrevocable letter of credit issued by a "bank" as defined in Section 3(a)(6)(A)-(C) of the Exchange Act. Transfers of letters of credit from Lender to Borrower shall be made by causing such letters of credit to be returned or by causing the amount of such letters of credit to be reduced to the amount required after such transfer. 15.4 A transfer of Securities, cash or letters of credit may be effected under this Section 15 on any day except (a) a day on which the transferee is closed for business at its address set forth in Schedule A hereto or (b) a day on which a Clearing Organization or wire transfer system is closed, if the facilities of such Clearing Organization or wire transfer system are required to effect such transfer. 15.5 For the avoidance of doubt, the parties agree and acknowledge that the term "securities," as used herein (except in this Section 15), shall include any "security entitlements" with respect to such securities (within the meaning of the UCC). In every transfer of "financial assets" (within the meaning of the UCC) hereunder, the transferor shall take all steps necessary (a) to effect a delivery to the transferee under Section 8-301 of the UCC, or to cause the creation of a security entitlement in favor of the transferee under Section 8-501 of the UCC, (b) to enable the transferee to obtain "control" (within the meaning of Section 8-106 of the UCC), and (c) to provide the transferee with comparable rights under any applicable foreign law or regulation. 16. Contractual Currency. 16.1 Borrower and Lender agree that (a) any payment in respect of a Distribution under Section 8 shall be made in the currency in which the underlying Distribution of cash was made, (b) any return of cash shall be made in the currency in which the underlying transfer of cash was made, and (c) any other payment of cash in connection with a Loan under this Agreement shall be in the currency agreed upon by Borrower and Lender in connection with such Loan (the currency established under clause (a), (b) or (c) hereinafter referred to as the "Contractual Currency"). Notwithstanding the foregoing, the payee of any such payment may, at its option, accept tender thereof in any other currency; provided, however, that, to the extent permitted by applicable law, the obligation of the payor to make such payment will be discharged only to the extent of the amount of Contractual Currency that such payee may, consistent with normal banking 12 procedures, purchase with such other currency (after deduction of any premium and costs of exchange) on the banking day next succeeding its receipt of such currency. 16.2 If for any reason the amount in the Contractual Currency received under Section 16.1, including amounts received after conversion of any recovery under any judgment or order expressed in a currency other than the Contractual Currency, falls short of the amount in the Contractual Currency due in respect of this Agreement, the party required to make the payment will (unless a Default has occurred and such party is the non-defaulting party) as a separate and independent obligation and 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. 16.3 If for any reason the amount in the Contractual Currency received under Section 16.1 exceeds the amount in the Contractual Currency due in respect of this Agreement, then the party receiving the payment will (unless a Default has occurred and such party is the non-defaulting party) refund promptly the amount of such excess. 17. ERISA. Lender shall, if any of the Securities transferred to the Borrower hereunder for any Loan have been or shall be obtained, directly or indirectly, from or using the assets of any Plan, so notify Borrower in writing upon the execution of this Agreement or upon initiation of such Loan under Section 2.1. If Lender so notifies Borrower, then Borrower and Lender shall conduct the Loan in accordance with the terms and conditions of Department of Labor Prohibited Transaction Exemption 81-6 (46 Fed. Reg. 7527, Jan. 23, 1981; as amended, 52 Fed. Reg. 18754, May 19, 1987), or any successor thereto (unless Borrower and Lender have agreed prior to entering into a Loan that such Loan will be conducted in reliance on another exemption, or without relying on any exemption, from the prohibited transaction provisions of Section 406 of the Employee Retirement Income Security Act of 1974, as amended, and Section 4975 of the Internal Revenue Code of 1986, as amended). Without limiting the foregoing and notwithstanding any other provision of this Agreement, if the Loan will be conducted in accordance with Prohibited Transaction Exemption 81-6, then: 17.1 Borrower represents and warrants to Lender that it is either (a) a bank subject to federal or state supervision, (b) a broker-dealer registered under the Exchange Act or (c) exempt from registration under Section 15(a)(1) of the Exchange Act as a dealer in Government Securities. 17.2 Borrower represents and warrants that, during the term of any Loan hereunder, neither Borrower nor any affiliate of Borrower has any discretionary authority or control with respect to the investment of the assets of the Plan involved in the Loan or renders investment advice (within the meaning of 29 C.F.R. Section 2510.3-21(c)) with respect to the assets of the Plan involved in the Loan. Lender agrees that, prior to or at the commencement of any Loan hereunder, it will communicate to Borrower information regarding the Plan sufficient to identify to Borrower any person or persons that have discretionary authority or control with respect to the investment of the assets of the Plan involved in the Loan or that render investment advice (as defined in the preceding sentence) with respect to the assets of the Plan involved in the Loan. In the event Lender fails to communicate and keep current during the term of any Loan such information, Lender rather than Borrower shall be deemed to have made the representation and warranty in the first sentence of this Section 17.2. 17.3 Borrower shall mark to market daily each Loan hereunder pursuant to Section 9.1 as is required if Lender is a Customer. 17.4 Borrower and Lender agree that: (a) the term "Collateral" shall mean cash, securities issued or guaranteed by the United States government or its agencies or instrumentalities, or irrevocable bank letters of credit issued by a person other than Borrower or an affiliate thereof; (b) prior to the making of any Loans hereunder, Borrower shall provide Lender with (i) the most recent available audited statement of Borrower's financial condition and (ii) the most recent available unaudited statement of Borrower's financial condition (if more recent than the most recent audited statement), and each Loan made hereunder shall be deemed a representation by Borrower that there has been no material adverse change in Borrower's financial condition subsequent to the date of the latest financial statements or information furnished in accordance herewith; (c) the Loan may be terminated by Lender at any time, whereupon Borrower shall deliver the Loaned Securities to Lender within the lesser of (i) the customary delivery period for such Loaned Securities, (ii) five Business Days, and (iii) the time negotiated for such delivery between Borrower and Lender; provided, however, that Borrower and Lender may agree to a longer period only if permitted by Prohibited Transaction Exemption 81-6; and (d) the Collateral transferred shall be security only for obligations of Borrower to the Plan with respect to Loans, and shall not be security for any obligation of Borrower to any agent or affiliate of the Plan. 18. Single Agreement. Borrower and Lender acknowledge that, and have entered into this Agreement in reliance on the fact that, all Loans hereunder constitute a single business and contractual relationship and have been entered into in consideration of each other. Accordingly, Borrower and Lender hereby agree that payments, deliveries and other transfers made by either of them in respect of any Loan shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Loan hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. In addition, Borrower and Lender acknowledge that, and have entered into this Agreement in reliance on the fact that, all Loans hereunder have been entered into in consideration of each other. Accordingly, Borrower and Lender hereby agree that (a) each shall perform all of its obligations in respect of each Loan hereunder, and that a default in the performance of any such obligation by Borrower or by Lender (the "Defaulting Party") in any Loan hereunder shall constitute a default by the Defaulting Party under all such Loans hereunder, and (b) the non-defaulting party shall be entitled to set off claims and apply property held by it in respect of any Loan hereunder against obligations owing to it in respect of any other Loan with the Defaulting Party. 19. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 20. Waiver. The failure of a party to this Agreement to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. All waivers in respect of a Default must be in writing. 21. Survival of Remedies. All remedies hereunder and all obligations with respect to any Loan shall survive the termination of the relevant Loan, return of Loaned Securities or Collateral and termination of this Agreement. 22. Notices and Other Communications. Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by telephone, mail, facsimile, e-mail, electronic message, telegraph, messenger or otherwise to the individuals and at the facsimile numbers and addresses specified with respect to it in Schedule A hereto, or sent to such party at any other place specified in a notice of change of number or address hereafter received by the other party. Any notice, statement, demand or other communication hereunder will be deemed effective on the day and at the time on which it is received or, if not received, on the day and at the time on which its delivery was in good faith attempted; provided, however, that any notice by a party to the other party by telephone shall be deemed effective only if (a) such notice is followed by written confirmation thereof and (b) at least one of the other means of providing notice that are specifically listed above has previously been attempted in good faith by the notifying party. 23. SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. 23.1 EACH PARTY HERETO IRREVOCABLY AND UNCONDITIONALLY (A) SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN NEW YORK CITY, AND ANY APPELLATE COURT FROM ANY SUCH COURT, SOLELY FOR THE PURPOSE OF ANY SUIT, ACTION OR PROCEEDING BROUGHT TO ENFORCE ITS OBLIGATIONS HEREUNDER OR RELATING IN ANY WAY TO THIS AGREEMENT OR ANY LOAN HEREUNDER AND (B) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, ANY DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT AND ANY RIGHT OF JURISDICTION ON ACCOUNT OF ITS PLACE OF RESIDENCE OR DOMICILE. 23.2 EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY RIGHT THAT IT MAY HAVE TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 24. Miscellaneous. 24.1 Except as otherwise agreed by the parties, this Agreement supersedes any other agreement between the parties hereto concerning loans of Securities between Borrower and Lender. This Agreement shall not be assigned by either party without the prior written consent of the other party and any attempted assignment without such consent shall be null and void. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of Borrower and Lender and their respective heirs, representatives, successors and assigns. This Agreement may be terminated by either party upon notice to the other, subject only to fulfillment of any obligations then outstanding. This Agreement shall not be modified, except by an instrument in writing signed by the party against whom enforcement is sought. The parties hereto acknowledge and agree that, in connection with this Agreement and each Loan hereunder, time is of the essence. Each provision and agreement herein shall be treated as separate and independent from any other provision herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 24.2 Any agreement between Borrower and Lender pursuant to Section 10.5(b) or Section 25.37 shall be made (a) in writing, (b) orally, if confirmed promptly in writing or through any system that compares Loans and in which Borrower and Lender are participants, or (c) in such other manner as may be agreed by Borrower and Lender in writing. 25. Definitions. For the purposes hereof: 25.1 "Act of Insolvency" shall mean, with respect to any party, (a) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratorium, dissolution, delinquency or similar law, or such party's seeking the appointment or election of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (b) the commencement of any such case or proceeding against such party, or another seeking such an appointment or election, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (i) is consented to or not timely contested by such party, (ii) results in the entry of an order for relief, such an appointment or election, the issuance of such a protective decree or the entry of an order having a similar effect, or (iii) is not dismissed within 15 days, (c) the making by such party of a general assignment for the benefit of creditors, or (d) the admission in writing by such party of such party's inability to pay such party's debts as they become due. 25.2 "Bankruptcy Code" shall have the meaning assigned in Section 26.1 25.3 "Borrower" shall have the meaning assigned in Section 1. 25.4 "Borrower Payment" shall have the meaning assigned in Section 8.5(a). 25.5 "Broker-Dealer" shall mean any person that is a broker (including a municipal securities broker), dealer, municipal securities dealer, government securities broker or government securities dealer as defined in the Exchange Act, regardless of whether the activities of such person are conducted in the United States or otherwise require such person to register with the U.S. Securities and Exchange Commission or other regulatory body. 25.6 "Business Day" shall mean, with respect to any Loan hereunder, a day on which regular trading occurs in the principal market for the Loaned Securities subject to such Loan, provided, however, that for purposes of determining the Market Value of any Securities hereunder, such term shall mean a day on which regular trading occurs in the principal market for the Securities whose value is being determined. Notwithstanding the foregoing, (a) for purposes of Section 9, "Business Day" shall mean any day on which regular trading occurs in the principal market for any Loaned Securities or for any Collateral consisting of Securities under any outstanding Loan hereunder and "next Business Day" shall mean the next day on which a transfer of Collateral may be effected in accordance with Section 15, and (b) in no event shall a Saturday or Sunday be considered a Business Day. 25.7 "Cash Collateral Fee" shall have the meaning assigned in Section 5.1. 25.8 "Clearing Organization" shall mean (a) The Depository Trust Company, or, if agreed to by Borrower and Lender, such other "securities intermediary" (within the meaning of the UCC) at which Borrower (or Borrower's agent) and Lender (or Lender's agent) maintain accounts, or (b) a Federal Reserve Bank, to the extent that it maintains a book-entry system. 25.9 "Close of Business" shall mean the time established by the parties in Schedule B or otherwise orally or in writing or, in the absence of any such agreement, as shall be determined in accordance with market practice. 25.10"Close of Trading" shall mean, with respect to any Security, the end of the primary trading session established by the principal market for such Security on a Business Day, unless otherwise agreed by the parties. 25.11"Collateral" shall mean, whether now owned or hereafter acquired and to the extent permitted by applicable law, (a) any property which Borrower and Lender agree prior to the Loan shall be acceptable collateral and which is transferred to Lender pursuant to Sections 4 or 9 (including as collateral, for definitional purposes, any letters of credit mutually acceptable to Lender and Borrower), (b) any property substituted therefor pursuant to Section 4.5, (c) all accounts in which such property is deposited and all securities and the like in which any cash collateral is invested or reinvested, and (d) any proceeds of any of the foregoing; provided, however, that if Lender is a Customer, "Collateral" shall (subject to Section 17.4(a), if applicable) be limited to cash, U.S. Treasury bills and notes, an irrevocable letter of credit issued by a "bank" (as defined in Section 3(a)(6)(A)-(C) of the Exchange Act), and any other property permitted to serve as collateral securing a loan of securities under Rule 15c3-3 under the Exchange Act or any comparable regulation of the Secretary of the Treasury under Section 15C of the Exchange Act (to the extent that Borrower is subject to such Rule or comparable regulation) pursuant to exemptive, interpretive or no-action relief or otherwise. If any new or different Security shall be exchanged for any Collateral by recapitalization, merger, consolidation or other corporate action, such new or different Security shall, effective upon such exchange, be deemed to become Collateral in substitution for the former Collateral for which such exchange is made. For purposes of return of Collateral by Lender or purchase or sale of Securities pursuant to Section 13, such term shall include Securities of the same issuer, class and quantity as the Collateral initially transferred by Borrower to Lender, as adjusted pursuant to the preceding sentence. 25.12"Collateral Distributions" shall have the meaning assigned in Section 8.5(a). 25.13 "Confirmation" shall have the meaning assigned in Section 2.1. 25.14 "Contractual Currency" shall have the meaning assigned in Section 16.1. 25.15"Customer" shall mean any person that is a customer of Borrower under Rule 15c3-3 under the Exchange Act or any comparable regulation of the Secretary of the Treasury under Section 15C of the Exchange Act (to the extent that Borrower is subject to such Rule or comparable regulation). 25.16"Cutoff Time" shall mean a time on a Business Day by which a transfer of cash, securities or other property must be made by Borrower or Lender to the other, as shall be agreed by Borrower and Lender in Schedule B or otherwise orally or in writing or, in the absence of any such agreement, as shall be determined in accordance with market practice. 25.17 "Default" shall have the meaning assigned in Section 12. 25.18 "Defaulting Party" shall have the meaning assigned in Section 18. 25.19"Distribution" shall mean, with respect to any Security at any time, any distribution made on or in respect of such Security, including, but not limited to: (a) cash and all other property, (b) stock dividends, (c) Securities received as a result of split ups of such Security and distributions in respect thereof, (d) interest payments, (e) all rights to purchase additional Securities, and (f) any cash or other consideration paid or provided by the issuer of such Security in exchange for any vote, consent or the taking of any similar action in respect of such Security (regardless of whether the record date for such vote, consent or other action falls during the term of the Loan). In the event that the holder of a Security is entitled to elect the type of distribution to be received from two or more alternatives, such election shall be made by Lender, in the case of a Distribution in respect of the Loaned Securities, and by Borrower, in the case of a Distribution in respect of Collateral. 25.20"Equity Security" shall mean any security (as defined in the Exchange Act) other than a "nonequity security," as defined in Regulation T. 25.21"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 25.22"Extension Deadline" shall mean, with respect to a letter of credit, the Cutoff Time on the Business Day preceding the day on which the letter of credit expires. 25.23 "FDIA" shall have the meaning assigned in Section 26.4. 25.24 "FDICIA" shall have the meaning assigned in Section 26.5. 25.25"Federal Funds Rate" shall mean the rate of interest (expressed as an annual rate), as published in Federal Reserve Statistical Release H.15(519) or any publication substituted therefor, charged for federal funds (dollars in immediately available funds borrowed by banks on an overnight unsecured basis) on that day or, if that day is not a banking day in New York City, on the next preceding banking day. 25.26"Foreign Securities" shall mean, unless otherwise agreed, Securities that are principally cleared and settled outside the United States. 25.27"Government Securities" shall mean government securities as defined in Section 3(a)(42)(A)-(C) of the Exchange Act. 25.28"Lender" shall have the meaning assigned in Section 1. 25.29 "Lender Payment" shall have the meaning assigned in Section 8.5(a). 25.30"LIBOR" shall mean for any date, the offered rate for deposits in U.S. dollars for a period of three months which appears on the Reuters Screen LIBO page as of 11:00 a.m., London time, on such date (or, if at least two such rates appear, the arithmetic mean of such rates). 25.31 "Loan" shall have the meaning assigned in Section 1. 25.32 "Loan Fee" shall have the meaning assigned in Section 5.1. 25.33"Loaned Security" shall mean any Security transferred in a Loan hereunder until such Security (or an identical Security) is transferred back to Lender hereunder, except that, if any new or different Security shall be exchanged for any Loaned Security by recapitalization, merger, consolidation or other corporate action, such new or different Security shall, effective upon such exchange, be deemed to become a Loaned Security in substitution for the former Loaned Security for which such exchange is made. For purposes of return of Loaned Securities by Borrower or purchase or sale of Securities pursuant to Section 13, such term shall include Securities of the same issuer, class and quantity as the Loaned Securities, as adjusted pursuant to the preceding sentence. 25.34 "Margin Deficit" shall have the meaning assigned in Section 9.2. 25.35 "Margin Excess" shall have the meaning assigned in Section 9.3. 25.36"Margin Notice Deadline" shall mean the time agreed to by the parties in the relevant Confirmation, Schedule B hereto or otherwise as the deadline for giving notice requiring same-day satisfaction of mark-to-market obligations as provided in Section 9 hereof (or, in the absence of any such agreement, the deadline for such purposes established in accordance with market practice). 25.37"Margin Percentage" shall mean, with respect to any Loan as of any date, a percentage agreed by Borrower and Lender, which shall be not less than 100%, unless (a) Borrower and Lender agree otherwise, as provided in Section 24.2, and (b) Lender is not a Customer. Notwithstanding the previous sentence, in the event that the writing or other confirmation evidencing the agreement described in clause (a) does not set out such percentage with respect to any such Loan, the Margin Percentage shall not be a percentage less than the percentage obtained by dividing (i) the Market Value of the Collateral required to be transferred by Borrower to Lender with respect to such Loan at the commencement of the Loan by (ii) the Market Value of the Loaned Securities required to be transferred by Lender to Borrower at the commencement of the Loan. 25.38"Market Value" shall have the meaning set forth in Annex II or otherwise agreed to by Borrower and Lender in writing. Notwithstanding the previous sentence, in the event that the meaning of Market Value has not been set forth in Annex II or in any other writing, as described in the previous sentence, Market Value shall be determined in accordance with market practice for the Securities, based on the price for such Securities as of the most recent Close of Trading obtained from a generally recognized source agreed to by the parties or the closing bid quotation at the most recent Close of Trading obtained from such source, plus accrued interest to the extent not included therein (other than any interest credited or transferred to, or applied to the obligations of, the other party pursuant to Section 8, unless market practice with respect to the valuation of such Securities in connection with securities loans is to the contrary). If the relevant quotation did not exist at such Close of Trading, then the Market Value shall be the relevant quotation on the next preceding Close of Trading at which there was such a quotation. The determinations of Market Value provided for in Annex II or in any other writing described in the first sentences of this Section 25.38 or, if applicable, in the preceding sentence shall apply for all purposes under this Agreement, except for purposes of Section 13. 25.39 "Payee" shall have the meaning assigned in Section 8.5(a). 25.40 "Payor" shall have the meaning assigned in Section 8.5(a). 25.41"Plan" shall mean: (a) any "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 which is subject to Part 4 of Subtitle B of Title I of such Act; (b) any "plan" as defined in Section 4975(e)(1) of the Internal Revenue Code of 1986; or (c) any entity the assets of which are deemed to be assets of any such "employee benefit plan" or "plan" by reason of the Department of Labor's plan asset regulation, 29 C.F.R. Section 2510.3-101. 25.42"Regulation T" shall mean Regulation T of the Board of Governors of the Federal Reserve System, as in effect from time to time. 25.43"Retransfer" shall mean, with respect to any Collateral, to pledge, repledge, hypothecate, rehypothecate, lend, relend, sell or otherwise transfer such Collateral, or to re-register any such Collateral evidenced by physical certificates in any name other than Borrower's. 25.44"Securities" shall mean securities or, if agreed by the parties in writing, other assets. 25.45"Securities Distributions" shall have the meaning assigned in Section 8.5(a). 25.46 "Tax" shall have the meaning assigned in Section 8.5(a). 25.47 "UCC" shall mean the New York Uniform Commercial Code. 26. Intent. 26.1 The parties recognize that each Loan hereunder is a "securities contract," as such term is defined in Section 741 of Title 11 of the United States Code (the "Bankruptcy Code"), as amended (except insofar as the type of assets subject to the Loan would render such definition inapplicable). 26.2 It is understood that each and every transfer of funds, securities and other property under this Agreement and each Loan hereunder is a "settlement payment" or a "margin payment," as such terms are used in Sections 362(b)(6) and 546(e) of the Bankruptcy Code. 26.3 It is understood that the rights given to Borrower and Lender hereunder upon a Default by the other constitute the right to cause the liquidation of a securities contract and the right to set off mutual debts and claims in connection with a securities contract, as such terms are used in Sections 555 and 362(b)(6) of the Bankruptcy Code. 26.4 The parties agree and acknowledge that if a party hereto is an "insured depository institution," as such term is defined in the Federal Deposit Insurance Act, as amended ("FDIA"), then each Loan hereunder is a "securities contract" and "qualified financial contract," as such terms are defined in the FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to the Loan would render such definitions inapplicable). 26.5 It is understood that this Agreement constitutes a "netting contract" as defined in and subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and each payment obligation under any Loan hereunder shall constitute a "covered contractual payment entitlement" or "covered contractual payment obligation," respectively, as defined in and subject to FDICIA (except insofar as one or both of the parties is not a "financial institution" as that term is defined in FDICIA). 26.6 Except to the extent required by applicable law or regulation or as otherwise agreed, Borrower and Lender agree that Loans hereunder shall in no event be "exchange contracts" for purposes of the rules of any securities exchange and that Loans hereunder shall not be governed by the buy-in or similar rules of any such exchange, registered national securities association or other self-regulatory organization. 27. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS. 27.1 WITHOUT WAIVING ANY RIGHTS GIVEN TO LENDER HEREUNDER, IT IS UNDERSTOOD AND AGREED THAT THE PROVISIONS OF THE SECURITIES INVESTOR PROTECTION ACT OF 1970 MAY NOT PROTECT LENDER WITH RESPECT TO LOANED SECURITIES HEREUNDER AND THAT, THEREFORE, THE COLLATERAL DELIVERED TO LENDER MAY CONSTITUTE THE ONLY SOURCE OF SATISFACTION OF BORROWER'S OBLIGATIONS IN THE EVENT BORROWER FAILS TO RETURN THE LOANED SECURITIES. 27.2 LENDER ACKNOWLEDGES THAT, IN CONNECTION WITH LOANS OF GOVERNMENT SECURITIES AND AS OTHERWISE PERMITTED BY APPLICABLE LAW, SOME SECURITIES PROVIDED BY BORROWER AS COLLATERAL UNDER THIS AGREEMENT MAY NOT BE GUARANTEED BY THE UNITED STATES. By: /s/ David M. Shimala Title: Assistant Vice President Date: April 4, 2002 By: /s/ Kenneth J. Apicerno Titlle: Treasurer Date: April 4, 2002 Annex I Party Acting as Agent This Annex sets forth the terms and conditions governing all transactions in which a party lending or borrowing Securities, as the case may be ("Agent"), in a Loan is acting as agent for one or more third parties (each, a "Principal"). Unless otherwise defined, capitalized terms used but not defined in this Annex shall have the meanings assigned in the Securities Loan Agreement of which it forms a part (such agreement, together with this Annex and any other annexes, schedules or exhibits, referred to as the "Agreement") and, unless otherwise specified, all section references herein are intended to refer to sections of such Securities Loan Agreement. 1. Additional Representations and Warranties. In addition to the representations and warranties set forth in the Agreement, Agent hereby makes the following representations and warranties, which shall continue during the term of any Loan: Principal has duly authorized Agent to execute and deliver the Agreement on its behalf, has the power to so authorize Agent and to enter into the Loans contemplated by the Agreement and to perform the obligations of Lender or Borrower, as the case may be, under such Loans, and has taken all necessary action to authorize such execution and delivery by Agent and such performance by it. 2. Identification of Principals. Agent agrees (a) to provide the other party, prior to any Loan under the Agreement, with a written list of Principals for which it intends to act as Agent (which list may be amended in writing from time to time with the consent of the other party), and (b) to provide the other party, before the Close of Business on the next Business Day after agreeing to enter into a Loan, with notice of the specific Principal or Principals for whom it is acting in connection with such Loan. If (i) Agent fails to identify such Principal or Principals prior to the Close of Business on such next Business Day or (ii) the other party shall determine in its sole discretion that any Principal or Principals identified by Agent are not acceptable to it, the other party may reject and rescind any Loan with such Principal or Principals, return to Agent any Collateral or Loaned Securities, as the case may be, previously transferred to the other party and refuse any further performance under such Loan, and Agent shall immediately return to the other party any portion of the Loaned Securities or Collateral, as the case may be, previously transferred to Agent in connection with such Loan; provided, however, that (A) the other party shall promptly (and in any event within one Business Day of notice of the specific Principal or Principals) notify Agent of its determination to reject and rescind such Loan and (B) to the extent that any performance was rendered by any party under any Loan rejected by the other party, such party shall remain entitled to any fees or other amounts that would have been payable to it with respect to such performance if such Loan had not been rejected. The other party acknowledges that Agent shall not have any obligation to provide it with confidential information regarding the financial status of its Principals; Agent agrees, however, that it will assist the other party in obtaining from Agent's Principals such information regarding the financial status of such Principals as the other party may reasonably request. 3. Limitation of Agent's Liability. The parties expressly acknowledge that if the representations and warranties of Agent under the Agreement, including this Annex, are true and correct in all material respects during the term of any Loan and Agent otherwise complies with the provisions of this Annex, then (a) Agent's obligations under the Agreement shall not include a guarantee of performance by its Principal or Principals and (b) the other party's remedies shall not include a right of setoff against obligations, if any, of Agent arising in other transactions in which Agent is acting as principal. 4. Multiple Principals. (a) In the event that Agent proposes to act for more than one Principal hereunder, Agent and the other party shall elect whether (i) to treat Loans under the Agreement as transactions entered into on behalf of separate Principals or (ii) to aggregate such Loans as if they were transactions by a single Principal. Failure to make such an election in writing shall be deemed an election to treat Loans under the Agreement as transactions on behalf of separate Principals. (b) In the event that Agent and the other party elect (or are deemed to elect) to treat Loans under the Agreement as transactions on behalf of separate Principals, the parties agree that (i) Agent will provide the other party, together with the notice described in Section 2(b) of this Annex, notice specifying the portion of each Loan allocable to the account of each of the Principals for which it is acting (to the extent that any such Loan is allocable to the account of more than one Principal), (ii) the portion of any individual Loan allocable to each Principal shall be deemed a separate Loan under the Agreement, (iii) the mark to market obligations of Borrower and Lender under the Agreement shall be determined on a Loan-by-Loan basis (unless the parties agree to determine such obligations on a Principal-by-Principal basis), and (iv) Borrower's and Lender's remedies under the Agreement upon the occurrence of a Default shall be determined as if Agent had entered into a separate Agreement with the other party on behalf of each of its Principals. (c) In the event that Agent and the other party elect to treat Loans under the Agreement as if they were transactions by a single Principal, the parties agree that (i) Agent's notice under Section 2(b) of this Annex need only identify the names of its Principals but not the portion of each Loan allocable to each Principal's account, (ii) the mark to market obligations of Borrower and Lender under the Agreement shall, subject to any greater requirement imposed by applicable law, be determined on an aggregate basis for all Loans entered into by Agent on behalf of any Principal, and (iii) Borrower's and Lender's remedies upon the occurrence of a Default shall be determined as if all Principals were a single Lender or Borrower, as the case may be. (d) Notwithstanding any other provision of the Agreement (including, without limitation, this Annex), the parties agree that any transactions by Agent on behalf of a Plan shall be treated as transactions on behalf of separate Principals in accordance with Section 4(b) of this Annex (and all mark to market obligations of the parties shall be determined on a Loan-by-Loan basis). 5. Interpretation of Terms. All references to "Lender" or "Borrower," as the case may be, in the Agreement shall, subject to the provisions of this Annex (including, among other provisions, the limitations on Agent's liability in Section 3 of this Annex), be construed to reflect that (i) each Principal shall have, in connection with any Loan or Loans entered into by Agent on its behalf, the rights, responsibilities, privileges and obligations of a "Lender" or "Borrower," as the case may be, directly entering into such Loan or Loans with the other party under the Agreement, and (ii) Agent's Principal or Principals have designated Agent as their sole agent for performance of Lender's obligations to Borrower or Borrower's obligations to Lender, as the case may be, and for receipt of performance by Borrower of its obligations to Lender or Lender of its obligations to Borrower, as the case may be, in connection with any Loan or Loans under the Agreement (including, among other things, as Agent for each Principal in connection with transfers of securities, cash or other property and as agent for giving and receiving all notices under the Agreement). Both Agent and its Principal or Principals shall be deemed "parties" to the Agreement and all references to a "party" or "either party" in the Agreement shall be deemed revised accordingly (and any Default by Agent under the Agreement shall be deemed a Default by Lender or Borrower, as the case may be). Annex II Market Value Unless otherwise agreed by Borrower and Lender: 1. If the principal market for the Securities to be valued is a national securities exchange in the United States, their Market Value shall be determined by their last sale price on such exchange at the most recent Close of Trading or, if there was no sale on the Business Day of the most recent Close of Trading, by the last sale price at the Close of Trading on the next preceding Business Day on which there was a sale on such exchange, all as quoted on the Consolidated Tape or, if not quoted on the Consolidated Tape, then as quoted by such exchange. 2. If the principal market for the Securities to be valued is the over-the-counter market, and the Securities are quoted on The Nasdaq Stock Market ("Nasdaq"), their Market Value shall be the last sale price on Nasdaq at the most recent Close of Trading or, if the Securities are issues for which last sale prices are not quoted on Nasdaq, the last bid price at such Close of Trading. If the relevant quotation did not exist at such Close of Trading, then the Market Value shall be the relevant quotation on the next preceding Close of Trading at which there was such a quotation. 3. Except as provided in Section 4 of this Annex, if the principal market for the Securities to be valued is the over-the-counter market, and the Securities are not quoted on Nasdaq, their Market Value shall be determined in accordance with market practice for such Securities, based on the price for such Securities as of the most recent Close of Trading obtained from a generally recognized source agreed to by the parties or the closing bid quotation at the most recent Close of Trading obtained from such a source. If the relevant quotation did not exist at such Close of Trading, then the Market Value shall be the relevant quotation on the next preceding Close of Trading at which there was such a quotation. 4. If the Securities to be valued are Foreign Securities, their Market Value shall be determined as of the most recent Close of Trading in accordance with market practice in the principal market for such Securities. 5. The Market Value of a letter of credit shall be the undrawn amount thereof. 6. All determinations of Market Value under Sections 1 through 4 of this Annex shall include, where applicable, accrued interest to the extent not already included therein (other than any interest credited or transferred to, or applied to the obligations of, the other party pursuant to Section 8 of the Agreement), unless market practice with respect to the valuation of such Securities in connection with securities loans is to the contrary. 7. The determinations of Market Value provided for in this Annex shall apply for all purposes under the Agreement, except for purposes of Section 13 of the Agreement. By: /s/ David M. Shimala Title: Assistant Vice President Date: April 4, 2002 By: /s/ Kenneth J. Apicerno Titlle: Treasurer Date: April 4, 2002 Annex III Term Loans This Annex sets forth additional terms and conditions governing Loans designated as "Term Loans" in which Lender lends to Borrower a specific amount of Loaned Securities ("Term Loan Amount") against a pledge of cash Collateral by Borrower for an agreed upon Cash Collateral Fee until a scheduled termination date ("Termination Date"). Unless otherwise defined, capitalized terms used but not defined in this Annex shall have the meanings assigned in the Securities Loan Agreement of which it forms a part (such agreement, together with this Annex and any other annexes, schedules or exhibits, referred to as the "Agreement"). 1. The terms of this Annex shall apply to Loans of Equity Securities only if they are designated as Term Loans in a Confirmation therefor provided pursuant to the Agreement and executed by each party, in a schedule to the Agreement or in this Annex. All Loans of Securities other than Equity Securities shall be "Term Loans" subject to this Annex, unless otherwise agreed in a Confirmation or other writing. 2. The Confirmation for a Term Loan shall set forth, in addition to any terms required to be set forth therein under the Agreement, the Term Loan Amount, the Cash Collateral Fee and the Termination Date. Lender and Borrower agree that, except as specifically provided in this Annex, each Term Loan shall be subject to all terms and conditions of the Agreement, including, without limitation, any provisions regarding the parties' respective rights to terminate a Loan. 3. In the event that either party exercises its right under the Agreement to terminate a Term Loan on a date (the "Early Termination Date") prior to the Termination Date, Lender and Borrower shall, unless otherwise agreed, use their best efforts to negotiate in good faith a new Term Loan (the "Replacement Loan") of comparable or other Securities, which shall be mutually agreed upon by the parties, with a Market Value equal to the Market Value of the Term Loan Amount under the terminated Term Loan (the "Terminated Loan") as of the Early Termination Date. Such agreement shall, in accordance with Section 2 of this Annex, be confirmed in a new Confirmation at the commencement of the Replacement Loan and be executed by each party. Each Replacement Loan shall be subject to the same terms as the corresponding Terminated Loan, other than with respect to the commencement date and the identity of the Loaned Securities. The Replacement Loan shall commence on the date on which the parties agree which Securities shall be the subject of the Replacement Loan and shall be scheduled to terminate on the scheduled Termination Date of the Terminated Loan. 4. Borrower and Lender agree that, except as provided in Section 5 of this Annex, if the parties enter into a Replacement Loan, the Collateral for the related Terminated Loan need not be returned to Borrower and shall instead serve as Collateral for such Replacement Loan. 5. If the parties are unable to negotiate and enter into a Replacement Loan for some or all of the Term Loan Amount on or before the Early Termination Date, (a) the party requesting termination of the Terminated Loan shall pay to the other party a Breakage Fee computed in accordance with Section 6 of this Annex with respect to that portion of the Term Loan Amount for which a Replacement Loan is not entered into and (b) upon the transfer by Borrower to Lender of the Loaned Securities subject to the Terminated Loan, Lender shall transfer to Borrower Collateral for the Terminated Loan in accordance with and to the extent required under the Agreement, provided that no Default has occurred with respect to Borrower. 6. For purposes of this Annex, the term "Breakage Fee" shall mean a fee agreed by Borrower and Lender in the Confirmation or otherwise orally or in writing. In the absence of any such agreement, the term "Breakage Fee" shall mean, with respect to Loans of Government Securities, a fee equal to the sum of (a) the cost to the non-terminating party (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of the termination of the Terminated Loan, and (b) any other loss, damage, cost or expense directly arising or resulting from the termination of the Terminated Loan that is incurred by the non-terminating party (other than consequential losses or costs for lost profits or lost opportunities), as determined by the non-terminating party in a commercially reasonable manner, and (c) any other amounts due and payable by the terminating party to the non-terminating party under the Agreement on the Early Termination Date. By: /s/ David M. Shimala Title: Assistant Vice President Date: April 4, 2002 By: /s/ Kenneth J. Apicerno Titlle: Treasurer Date: April 4, 2002 Schedule A Names and Addresses for Communications Thermo Electron Corporation: Confirmations: Thermo Electron Corporation 81 Wyman Street Waltham, MA 02454 Attn: Jeff Botte Primary Contact: Jeff Botte (781) 622-1271 Fax: (781) 622-1236 Email: jbotte@thermo.com Secondary Contact: Kenneth J. Apicerno (781) 622-1294 Fax: (781) 622-1181 Eamil: kapicerno@thermo.com SCHEDULE B SUPPLEMENTAL TERMS AND CONDITIONS This Annex I forms a part of the Master Securities Loan Agreement, dated as of March 18, 2002, between ABN AMRO Incorporated ("Party A") and Thermo Electron Corporation ("Party B"). Capitalized terms used but not defined in this Schedule B shall have the meanings ascribed to them in this Agreement. 1. Consent to Recording. Each party consents to the recording of the telephone conversations of relevant personnel of the parties and their respective affiliates in connection with this Agreement or any Loan or potential Loan and agrees to such recordings being used as evidence in court proceedings or arbitration. 2. Obligations Regarding Collateral. The last three sentences of Section 4.2 of the Agreement are hereby deleted in their entirety and the following substituted in their place: "It is understood that Lender may use or invest the Collateral at its own risk. In this regard, Lender may pledge, repledge, hypothecate, rehypothecate, lend, relend, sell or otherwise transfer the Collateral, or re-register Collateral evidenced by physical certificates in any name other than Borrower's. These rights shall not affect Lender's obligation to return Collateral to Borrower under Section 4.3." 3. Waiver of Jury Trial. Each party irrevocably waives any and all right to trial by jury in any legal proceeding instituted in connection with this Agreement or any Loan to the fullest extent permitted by law. As to any matter for which a jury trial cannot be waived, each party agrees not to assert any such matter as a cross claim or counterclaim in, nor move to consolidate the same with, any legal proceeding in which a jury trial is waived. 4. Information Sharing. Party B understands and agrees that Party A may, from time to time, obtain from or provide to one or more affiliates credit or other non-public information concerning Party B. 5. Parties to Rely on Their Own Expertise. Each party shall enter into each Loan governed by this Agreement in reliance only upon its own judgment. Neither party holds itself out as advising, nor as any of its employees or agents having the authority to advise, the other party as to whether or not it should enter into any such Loan or as to any subsequent actions relating thereto or on any other commercial matters concerned with any Loan governed by this Agreement, and neither party shall have any responsibility or liability whatsoever in respect of any advice of this nature given, or view expressed, by it or any such persons to the other party, whether or not such advice is given or such views are expressed at the request of the other party. 6. Miscellaneous. For purposes of the Agreement, the parties agree that the terms set forth below shall have the following meanings: A. Cutoff Time 3:15 p.m. (New York time) B. Close of Business 3:00 p.m. (New York time) C. Margin Notice Deadline 10:00 a.m.(New York time) 7. Representations. Subsection (c) of Section 10.1 is hereby revised to read as follows: (c) this Agreement constitutes a legal, valid and binding obligation enforceable against it in accordance with its terms (subject to applicable bankruptcy, reorganization, 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)). 8. Margin Percentage. Notwithstanding the definition of "Margin Percentage" contained in section 25.37, the Margin Percentage shall be 95% or as otherwise agreed to between Lender and Borrower at the commencement of the a loan. ABN AMRO INCORPORATED THERMO ELECTRON CORPORATION By: /s/ David M. Shimala By: /s/ Kenneth J. Apicerno - ---------------------------- ----------------------------------- Name: David M. Shimala Name: Kenneth J. Apicerno Title: Assistant Vice President Title: Treasurer EX-99.1 5 tmo2q02ex99-1.txt Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Thermo Electron Corporation (the "Company") for the period ended June 29, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Richard F. Syron, Chief Executive Officer of the Company, and Theo Melas-Kyriazi, Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 13, 2002 /s/ Richard F. Syron --------------------------------- Richard F. Syron Chief Executive Officer Dated: August 13, 2002 /s/ Theo Melas-Kyriazi --------------------------------- Theo Melas-Kyriazi Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----