W.R. Grace & Co.-Conn.
Amicon Product Line
Combined Financial Statements
December 31, 1996
Report of Independent Accountants
To the Board of Directors of
W.R. Grace & Co.-Conn.
In our opinion, the accompanying combined balance sheet
and the related combined statements of operations and of
cash flows present fairly, in all material respects, the
financial position of the Amicon Product line ("the
Business") of W.R. Grace & Co.-Conn. ("Grace") and
subsidiaries at December 31, 1996, and the results of its
operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
These financial statements are the responsibility of the
management of W.R. Grace and the Business; our
responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of
these statements in accordance with generally accepted
auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating
the overall financial statement presentation. We believe
that our audit provides a reasonable basis for the opinion
expressed above.
The Business was a separate product line of Grace and, as
disclosed in Note 1 to the accompanying financial
statements, has engaged in various transactions and
relationships with other Grace entities. However, the
terms of these transactions may differ from those that
would result from transactions among unrelated parties.
Price Waterhouse LLP
Boston, Massachusetts
March 12, 1997
December 31,
1996
Assets
Cash $1,885
Accounts receivable , net of allowance for
returns and doubtful accounts of $540 12,689
Inventories 12,962
Other current assets 481
Total current assets 28,017
Properties and equipment 25,705
Accumulated depreciation (16,191)
9,514
Goodwill, net of accumulated amortization of
$6,985 20,377
Other noncurrent assets 740
Deferred taxes 30
Total assets $58,678
Liabilities and Parent Company Investment
Current portion of long term debt $ 19
Notes payable 3,738
Accounts payable 5,162
Accrued salaries and employee benefits 1,311
Other accrued liabilities 1,007
Intercompany accounts payable 1,090
Deferred taxes 372
Total current liabilities 12,699
Long-term debt 21
Other noncurrent liabilities 673
Total liabilities 13,393
Commitments and contingencies (Note 13)
Parent company investment 45,285
Total liabilities
and parent company investment $ 58,678
Year ended
December 31,
1996
Net sales $57,481
Cost of goods sold 25,491
Gross Profit 31,990
Selling expenses 15,352
General and administrative expenses 5,396
Research and development expenses 5,252
Total operating expenses 26,000
Income from operations 5,990
Other expense, net 5,990
Other expense, net 599
Interest expense, net 378
Foreign exchange loss 411
Income before income taxes 4,602
Provision for income taxes 1,868
Net income $2,734
Year ended
December 31,
1996
Operating Activities:
Net income $2,734
Reconciliation to cash provided by operating activities:
Depreciation and amortization 2,077
Deferred tax provision 701
Changes in operating assets and liabilities:
Accounts receivable (60)
Inventories (1,554)
Other current assets (173)
Other assets 124
Accounts payable, accrued salaries and employee
benefits and other accrued liabilities 213
Intercompany accounts payable 733
Net cash provided by operating activities 4,795
Investing Activities
Purchase of property and equipment, net (1,180)
Net cash used in investing activities (1,180)
Financing Activities
Repayment of debt, net (4,960)
Change in amount due to parent, net 764
Net cash used in finacing activities (4,196)
Net effect of exchange reate changes on cash (112)
Net decrease in cash (693)
Cash, beginning of year 2,578
Cash, end of year $1,885
1. Summary of Significant Accounting Policies
The Business
Effective December 31, 1996, Millipore Corporation and its
subsidiaries ("Millipore") purchased the Grace Amicon product
line (the "Business") of W.R. Grace & Co.-Conn. ("Grace") and
subsidiaries (the "Grace Group"), a wholly owned subsidiary of
W.R. Grace & Co. ("W.R. Grace"), by acquiring certain assets and
assuming certain liabilities of the Business worldwide from the
Grace Group as provided in the Amicon Worldwide Purchase and Sale
Agreement dated November 18, 1996, as amended December 31, 1996
(the "Agreement").
The Business develops, manufactures and distributes molecular
separation and purification products and systems to the life
science research, biotechnology and pharmaceutical industries in
both foreign and domestic markets. The Business has
manufacturing facilities in Danvers, Massachusetts; Stonehouse,
England; Limerick, Ireland; and Lyon, France. The Business also
maintains thirteen sales offices in Europe, the United States and
the Far East, of which seven offices are shared sales and
administrative facilities with the Grace Group.
Basis of Presentation
Under the terms of the Agreement, Millipore acquired from the
Grace Group (1) the capital stock of Prochrom S.A., a French
corporation; the capital stock of Amicon Limited, a United
Kingdom corporation; the capital stock of Amicon G.m.b.H., a
German corporation; and the capital stock of Amicon Canada
Limited, a Canadian corporation (collectively the
"Subsidiaries"); and (2) other worldwide operating assets and
liabilities of the Business in the following countries:
United States Japan
Ireland The Netherlands
France Sweden
Italy Switzerland
These financial statements present the historical financial
position, results of operations, and cash flows of the
Business previously included in the W.R. Grace's
consolidated financial statements. The Securities and
Exchange Commission, in Staff Accounting Bulletin Number 55,
requires that historical financial statements of a
subsidiary, division, or lesser business component of
another entity include certain expenses incurred by the
parent on its behalf. Accordingly, included in the
accompanying financial statements are costs allocated to the
Business by the Grace Group (See Note 11).
All transactions between the Business' locations included in
these financial statements are referred to herein as
"intracompany" transactions whereas transactions between the
Business and the Grace Group are referred to herein as
"intercompany" transactions. Account balances of the
Business with Grace or the Grace Group have been reported as
part of parent company
investment, except those related to the sale of product
which have been included in intercompany accounts payable,
as well as the payable from the German sales office to the
Grace Group.
Basis of Combination
These combined statements have been prepared by combining
the assets and liabilities of the Business. All
intracompany balances and intracompany profit relating to
the Business have been eliminated in preparing the financial
statements, except as noted above.
Financial Instruments
At December 31, 1996, the carrying value of financial
instruments, such as trade accounts receivable, accounts
payable and accrued liabilities, approximate fair value,
based on the short term maturities of these instruments. At
December 31, 1996, the fair value of notes payable and long-
term debt also approximated book value as such indebtedness
is based on current interest rates.
Cash and Cash Equivalents
The Business considers all highly liquid investments
purchased with an original maturity of three months or less
to be cash equivalents.
Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially expose the Business
to concentrations of credit risk consist primarily of trade
accounts receivable. Ongoing credit evaluations of
customers' financial condition are performed, and collateral
is not required. The Business maintains allowances for
potential credit losses and such losses, in the aggregate,
have not exceeded management's expectations.
Revenue Recognition
The Business generally recognizes revenue upon shipment of
product. The Business offers limited duration warranties
for certain of its products and, at the time of sale,
provides liabilities for all estimated warranty costs.
The Business also recognizes revenue utilizing the
percentage of completion method for sales of certain
products which meet specific sales criteria. Earned revenue
is based on the percentage that incurred costs to date bear
to total estimated costs after giving effect to the most
recent estimates of total costs. Revisions in total
estimated costs and anticipated losses are charged to income
when identified.
Inventories
Finished goods and work-in-process inventories are valued at
the lower of full absorption cost or market. Cost flow is
based on the first-in, first-out (FIFO) method. Raw
materials are valued at the lower of FIFO cost or realizable
value.
Properties and Equipment
Properties and equipment are stated at cost. Major renewals
and improvements that extend the lives of the respective
assets are capitalized. Maintenance, repairs and renewals
that do not extend the lives of the respective assets are
charged to income as incurred. Fully depreciated assets are
retained in properties and equipment and related accumulated
depreciation accounts until they are removed from service.
For financial reporting purposes, depreciation is computed
using the straight-line method over the estimated useful
lives of the assets.
Intangible Assets
Included in other noncurrent assets are intangible assets
(primarily drawings, patents and trademarks) of $150, net of
accumulated amortization of $2,213. These intangible assets
are being amortized on a straight-line basis over 1 to
15 years.
Demonstration Equipment
Included in other noncurrent assets is demonstration
equipment of $586, net of accumulated amortization of
$1,131. Demonstration equipment represents equipment which
is used by sales employees to demonstrate product during
sales presentations to potential customers. Demonstration
equipment is being amortized on a straight line basis over
two years. Gains and losses on sales of demonstration
equipment is included in gross profit.
Goodwill
Goodwill represents the excess of the purchase price over
the fair value of the net assets of businesses acquired,
which is being amortized on a straight line basis over forty
years. Goodwill amounted to $20,377, net of accumulated
amortization of $6,985.
Impairment
The Business has adopted statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." In accordance with SFAS 121, the Business
reviews long-lived assets and related goodwill for
impairment whenever events or changes in circumstances
indicate that the carrying amounts of such assets may not be
fully recoverable. The adoption of SFAS 121 did not have a
material effect on the Business financial position or result
of operations.
Income Taxes
Historically, the results of certain of the Business'
operations have been included in either the consolidated
income tax returns of W.R. Grace or the income tax returns
of other members of the Grace Group. As such, W.R. Grace or
the Grace Group paid income taxes attributable to the
Business; this has been reflected in parent company
investment. The income tax expense and other tax related
information included in these financial statements have been
calculated as if the operations of the Business were not
eligible to be included in the consolidated tax returns of
W.R. Grace or other members of the Grace Group but rather
were stand-alone taxpayers.
The provisions of Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes"
("SFAS 109"), have been retroactively applied to these
financial statements. SFAS 109 is an asset and liability
approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax
consequences of events that have been recognized in the
financial statements or tax returns. Deferred tax expense
(benefit), represents the change in the net deferred tax
asset or liability balance. In estimating future tax
consequences, SFAS 109 generally considers all expected
future events other than anticipated changes in the tax law
or rates.
Foreign Currency Translation
Results of foreign operations are translated using average
exchange rates during the year, while assets and liabilities
are translated using exchange rates in effect at year end.
Exchange gains and losses resulting from foreign currency
transactions denominated in currencies other than the
respective functional currencies are recorded based on the
difference in exchange rates from the date the transaction
is initially recorded to the date it is settled, or the
exchange rate in effect at December 31, 1996, if it was not
settled.
Sale of Investment in Separex S.A.
During 1996, the Business sold its 12% equity interest in
Separex S.A., a research and development company, for
approximately $273. The resulting gain on the transaction
of $211 has been included in other income and expense in the
combined statement of operations.
Advertising Expense
The Business records advertising expense when incurred.
Advertising expense was $1,312 for the year and is included
in selling expenses.
Use of Estimates
The preparation of the financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses for the year then ended. Actual results could
differ from those estimates.
2. Accounts Receivable
Accounts receivable include:
Trade accounts receivable - gross $12,659
Allowance for returns and doubtful accounts (540)
Trade accounts receivable, net 12,119
Other accounts receivable 570
$12,689
3. Inventories
Inventories include:
Raw and packaging materials $ 6,456
Work-in-process 2,267
Finished goods 4,239
$12,962
4. Other Current Assets
Other current assets principally include prepaid expenses.
5. Properties and Equipment
Useful lives
(years)
Properties and equipment include:
Land and land improvements 10 $ 176
Buildings and building improvements 10 to 50 6,836
Machinery and equipment 3 to 12 12,812
Motor vehicles 5 30
Furniture and fixtures 5 to 12 2,643
Computer equipment 3 to 5 2,538
Construction in progress 3 to 12 670
25,705
Less: Accumulated depreciation (16,191)
$ 9,514
Commitments under construction in progress projects were not
significant. The Business' minimum future payments under
non-cancelable operating leases as of December 31, 1996 are
as follows:
1997 $ 598
1998 446
1999 174
2000 59
2001 42
Thereafter 148
$1,467
6. Other Accrued Liabilities
Other accrued liabilities include:
Warranty $ 328
Customer deposits 264
Professional fees 81
Sales and related taxes 80
Other 254
$1,007
7. Borrowings
Borrowings consist of the following:
Revolving credit loan $ 3,738
Term loan 40
Total borrowings $ 3,778
In October 1996, the Business French subsidiary entered into
a FF 35,000 ($6,700 at December 31, 1996) annual revolving
credit facility agreement with a bank. Advances on the
revolving credit facility bear interest at the Paris
Interbank rate plus .25% (3.44% at December 31, 1996). Cash
overdrafts funded by the revolving facility bear interest at
4.33%. The revolving credit facility is payable on demand
and is guaranteed by Grace Group.
The term loan represents amounts borrowed under a long-term
note with a bank. The note requires monthly principal
payments of FF 8 ($1.5 at December 31, 1996) through 1999
and bears interest at a variable rate (10.9% at December 31,
1996).
8. Income Taxes
The components of the provision for income taxes consist of:
Income before income taxes
Domestic $ 2,209
Foreign 2,393
Total $ 4,602
Current provision
Federal 481
State 85
Foreign 601
Total current provision 1,167
Deferred provision
Federal 478
State 82
Foreign 141
Total deferred provision 701
Total provision for income taxes $ 1,868
Deferred tax assets (liabilities) of the Subsidiaries are
comprised of the following:
Net operating losses $ 1,511
Credit carryforwards 208
Inventories 115
Other 30
1,864
Valuation allowance (1,382)
Total deferred tax assets 482
Properties and equipment (350)
Other (474)
Total deferred tax liabilities (824)
Net deferred tax liability $ (342)
Deferred tax assets (liabilities) which are included in
parent company investment are comprised of the following:
Research and development 2,547
Inventories 1,336
Net operating losses 253
Other 331
4,467
Valuation allowance (253)
Total deferred tax assets 4,214
Other (170)
Properties and equipment (91)
Total deferred tax liabilities (261)
Net deferred tax assets $ 3,953
The U.S. federal corporate tax rate reconciles to the total
provision for income taxes as follows:
Taxes computed at federal statutory rate $ 1,611
State income tax, net of federal benefit 167
Non-deductible goodwill 157
Foreign rates lower than federal statutory rates (1,094)
Valuation allowance 1,004
Meals and entertainment 23
Total provision for income taxes $ 1,868
U.S. and foreign taxes have not been provided on foreign
undistributed earnings of approximately $19,702, as such
earnings are being retained indefinitely for reinvestment.
The distribution of these earnings would result in
additional foreign withholding taxes and additional U.S.
federal income taxes to the extent they are not offset by
foreign tax credits, but it is not practicable to estimate
the total tax liability that would be incurred upon such a
distribution.
At December 31, 1996, the Business has foreign net operating
loss carryforwards of $1,900 which expire in various amounts
through the year 2002, and foreign net operating loss
carryforwards of approximately $1,700 which do not expire.
A full evaluation allowance has been provided on all foreign
net operating losses and credit carryforwards.
9. Pension Plans
The Grace Group maintains defined benefit pension plans
covering employees of certain units including the Business,
who meet age and service requirements. Benefits are
generally based on final average salary and years of
service. The Grace Group funds its pension plans in
accordance with statutory laws and regulations. Plan assets
are invested primarily in common stock and fixed income
securities.
For purposes of these financial statements, all employees,
except those of the subsidiary in Germany, are considered to
have participated in a multiemployer pension plan as defined
in Statement of Financial Accounting Standards No. 87,
"Employers Accounting for Pensions," ("SFAS 87"). For
multiemployer plans, employers are required to recognize as
net pension expense total contributions for the period.
With respect to these plans, the Business recorded expense
of $606 in 1996. No contributions are due or unpaid at
December 31, 1996.
10. Parent Company Investment
As the majority of the Business' operations are conducted as
divisions of Grace Group, not as distinct legal entities,
there are no customary equity and capital accounts.
Instead, parent company investment (i.e., of the Grace
Group) is maintained by the Business and the Grace Group to
account for intercompany transactions and the net assets of
the Business, as more fully described in Note 11. No
interest has been charged on the parent company investment.
A summary of changes in parent company investment is as
follows:
Parent company investment at December 31, 1995 $ 41,791
Net income 2,734
Net change in amount due to parent 764
Parent company investment at December 31, 1996 $ 45,289
11. Related Party Transactions
Intercompany Purchases
The Business purchases silica media from the Grace Group
under agreed upon pricing structure agreements.
Corporate and Divisional Services
The Grace Group allocates or charges a portion of its
domestic and foreign corporate expenses to respective
Business units. These include Grace executive management
and corporate overhead; postretirement benefit and pension
costs; benefit administration; risk management/insurance
administration; tax and treasury/cash management services;
environmental services including costs of remediation;
litigation administration services; and other support and
executive functions.
All of the allocations and charges described above, are
included in general and administrative expenses in the
combined statement of operations. Such allocations and
charges are based on either a direct cost pass through or a
percentage of total costs for the services provided based on
factors such as net sales, management time or headcount.
Such allocations and charges totaled $711 for 1996.
Domestically, the Business was charged, based on the
Business' experience, for its share of workers'
compensation, employee life, medical and dental, and other
general business liability insurance premiums and claims
handled on a corporate-wide basis. These charges are based
upon a combination of experience and payroll dollars and
totaled $746 in 1996, and are included in either cost of
goods sold, selling expenses or general and administrative
expenses, depending upon the nature of the function.
Domestic corporate research and development expenses and
overheads directly related to the Business of $55 have been
charged or allocated to the Business and are included in
research and development expenses.
Foreign
Sales operations of the Business which are operated within
wholly owned subsidiaries of Grace are allocated central
administrative service costs from the Grace Group related to
personnel, information systems, space and warehousing,
employee benefits, general liability insurance, engineering,
financial reporting, general management and other staff
services. In addition, the Business' European and
Asia/Pacific operations were allocated or charged similar
costs by the Grace Group's regional headquarters in
Lausanne, Switzerland and Hong Kong. Such amounts totaled
$651, all of which is included in selling or general and
administrative expenses.
Management believes that the bases used for allocating
corporate and divisional services and common sales
facilities costs are reasonable. However, the terms of
these transactions may differ from those that would result
from transactions among unrelated parties.
12. Geographic Segment and Major Customer Information
The Business operates solely in the market segment described
in Note 1, within the following geographic segments:
North Asia/
America Europe Pacific Eliminating Total
Sales:
Unaffiliated customers $28,290 $18,571 $6,154 $ $ 53,015
Unaffiliated export 3,481 985 4,466
Intercompany 7,335 19,195 (26,530)
Net sales 39,106 38,751 6,154 (26,530) 57,481
Income (loss) before
income taxes 2,561 1,363 (33) 711 4,602
Identifiable assets 27,509 29,586 3,070 (1,487) 58,678
13. Commitments and Contingencies
The Business is subject to certain lawsuits and claims
arising out of the conduct of its business. Management
believes that these matters are without merit or will not
have a material impact on the financial position or results
of operations of the Business.
14. Sale of Business
Effective December 31, 1996, the Grace Group sold the
Business to Millipore for $125,000, subject to further
adjustment pursuant to the terms of the Agreement.