The accompanying notes are an integral part of the consolidated financial statements. Management's Discussion and Analysis Acquisitions On January 22, 1997, the Company announced the successful completion of its tender offer for all of the outstanding common shares of Tylan General, Inc. (Tylan) for $16.00 per share. Tylan became a wholly owned subsidiary of the Company on January 27, 1997. The purchase price was $133.0 million, plus the assumption of Tylan's outstanding debt, net of cash, totaling $23.6 million. This acquisition was accounted for as a purchase and resulted in a write-off for purchased research and development of $114.1 million in the first quarter of 1997. On December 31, 1996, the Company acquired the Amicon Separation Science Business of W.R. Grace & Co. (Amicon) for a price of $129.3 million in cash, including transaction costs. This transaction was accounted for as a purchase and resulted in a write-off for purchased research and development of $68.3 million in the fourth quarter of 1996. As this transaction was completed on the last business day of 1996, the accompanying 1996 consolidated statement of income excludes all 1996 business activity conducted by Amicon. However, the assets acquired and liabilities assumed are included in the Company's consolidated balance sheet at December 31, 1996. Results of Operations The Company's results of operations in 1997 were significantly impacted by the acquisitions of Amicon and Tylan. The following discussion of the results of operations should be read in connection with the Business Outlook and Uncertainties section below. Net Sales Consolidated net sales, measured in U.S. dollars, increased 23 percent in 1997, compared to an increase of 4 percent in 1996 and an increase of 20 percent in 1995. The higher sales growth rate in 1997 compared to 1996 was primarily attributable to the acquisitions of Amicon and Tylan. Without these acquisitions, sales in 1997 declined by 1 percent from sales in 1996. Sales growth in 1997 was adversely impacted by a cyclical downturn in the microelectronics industry as well as unfavorable foreign currency exchange rate comparisons and certain other factors discussed below. Sales growth by geography and market, measured in local currencies and U.S. dollars, is summarized in the table below: In Local Currencies In U.S. Dollars With Withou With Withou Acquis t Acquis t itions Acquis itions Acquis itions itions 1997 1997 1996 1995 1997 1997 199 199 6 5 Americas 49% 7% 8% 15% 48% 6% 7% 13% Europe 26% 8% 6% 10% 15% (3%) 4% 20% Asia/Pacific 13% 2% 14% 18% 3% (8%) 2% 27% 30% 6% 10% 15% 23% (1%) 4% 20% Consolidated Microelectro 56% 2% 8% 43% 50% (4%) 0% 50% nics BioPharmaceu 22% 6% 14% 9% 15% (1%) 10% 14% tical Analytical 17% 8% 8% 3% 9% 0% 3% 8% Laboratory 30% 6% 10% 15% 23% (1%) 4% 20% Consolidated Excluding the impact of the acquisition of Tylan, sales to microelectronics customers measured in local currencies increased 2 percent in 1997 compared to 8 percent in 1996 and 43 percent in 1995. A cyclical downturn in the microelectronics market, which began to negatively impact the Company's sales growth during the middle of 1996, continued throughout 1997. The downturn particularly impacted growth in the Asia/Pacific region. Total sales into the microelectronics market, with the addition of Tylan, increased to 35 percent of total consolidated sales in 1997 as compared to 28 percent of total sales in 1996 and 29 percent in 1995. Excluding the impact of the acquisition of Amicon, sales to the biopharmaceutical market grew 6 percent in 1997 in local currencies compared to growth of 14 percent in 1996 and 9 percent in 1995. Sales of large protein processing systems in 1997 to biotechnology customers were level with those in 1996. In addition, sales to a beer-manufacturing customer in Japan were lower in 1997 as compared to 1996. These two factors, which were significant in boosting the 1996 overall biopharmaceutical growth rate, combined to depress the overall sales growth rate in the biopharmaceutical market in 1997. Total sales into the biopharmaceutical market, including Amicon (1997 only), represented 28 percent of total sales in 1997, down from 31 percent in 1996 and 29 percent in 1995. Excluding the impact of the acquisition of Amicon, sales to the analytical laboratory market measured in local currencies grew 8 percent in 1997, the same growth rate that was achieved in 1996. New product introductions in the past two years, particularly for laboratory water and applied microbiology products, and a new distribution alliances launched late in 1996 in the United States have enhanced sales growth in this market. Sales growth in 1997 was strongest in Europe and the Asia/Pacific region. Sales to analytical laboratory customers, with the addition of Amicon (1997 only), comprised 37 percent of total sales in 1997 compared to 41 percent in 1996 and 42 percent in 1995. The strengthening of the U.S. dollar against most European and Asian currencies reduced reported sales growth by 7 percentage points in 1997 compared to a reduction of 6 percentage points in 1996 and an increase of 5 percentage points in 1995. On average, the U.S. dollar was 11 percent stronger against most European currencies in 1997 as compared to 1996. The U.S. dollar was also approximately 5 percent stronger against the Japanese yen in 1997 compared to 1996; which follows a 15 percent strengthening of the U.S. dollar against the yen in 1996 as compared to 1995. The U.S. dollar has strengthened significantly against the yen since 1995, when the dollar was at historic post-war lows against the yen. As a general matter, a weaker dollar will benefit, and a stronger dollar will adversely affect future reported sales growth of the Company. However, the Company is unable to predict future currency fluctuations and to quantify their effect on net income. Price changes and inflation have not significantly affected the comparability of sales during the past three years. Gross Margins Gross Margins were 54.9 percent in 1997, 59.7 percent in 1996, and 59.0 percent in 1995. The lower gross margin percentage in 1997 includes the impact of low margin sales related to the acquired businesses; as the inventory acquired in each acquisition was written up to net realizable value as part of the acquisition accounting and consequently, very low margins were generated when this inventory was sold. Without this impact, gross margins would have been 55.6 percent in 1997. These margin percentages are significantly lower than those achieved in 1996 and 1995 as the acquired businesses, particularly Tylan, have lower gross margin percentages than those of the Company's pre-existing business. The significant volume of business transacted in foreign currencies, as discussed above, exposes the Company to risks associated with currency rate fluctuations, which impact the Company's sales and net income. To partially mitigate this risk, the Company has entered into foreign currency transactions, forward and option contracts to sell yen, on a continuing basis in amounts and timing consistent with underlying currency exposure on inventory purchases so that the gains or losses on these transactions partially offset gains or losses on the underlying exposure. Realized gains of $4.4 million in 1997, $2.7 million in 1996 and realized losses of $2.3 million in 1995 relating to these contracts were recognized. These gains and losses were reflected in cost of sales each year, partially offsetting the impact of foreign exchange fluctuations. At December 31, 1997, the Company has only option contracts to sell yen aggregating $40.5 million. In the event of a significant strengthening of the U.S. dollar against the yen, the exercise of these options will partially mitigate losses which would be incurred by the Company on the underlying currency exposure. The open options had an unrealized gain of $2.4 million at December 31, 1997 based on exchange rates in effect on that date. All open options mature within 15 months. The Company does not engage in speculative trading activity. Operating Expenses Selling, General and Administrative (S,G&A) Expenses, excluding the effects of foreign exchange, grew 28 percent in 1997, 8 percent in 1996, and 17 percent in 1995. The increase in 1997 is mainly due to incremental expenses in support of the acquired businesses. The Company continued to invest in selling and marketing resources to support both new product launches and future sales growth initiatives, particularly in the microelectronics and analytical laboratory markets. Research and Development Expenses, excluding the effects of foreign exchange, increased by 49 percent in 1997, 5 percent in 1996 and 6 percent in 1995. The significant increase in 1997 was due mainly to the acquired businesses, as well as increased investment in research and development programs to support the pre-existing businesses. Other Income/Expense Gain on Sale of Equity Securities in 1997 reflects the sale of a portion of the Company's holdings in PerSeptive Biosystems common shares. Gain on Sale of Equity Securities in 1996 reflects the sale of a significant portion of the Company's stock holdings in a Japanese Company. The Company sold these securities in the third and fourth quarters of 1996 to fund a new headquarters and research and development facility in Japan. The cost of moving to this new facility was $2.0 million and was recorded in S,G&A expense. Net Interest Expense Net Interest Expense in 1997 was significantly higher than net interest expense in 1996 due to increased borrowings, which were used to acquire both Amicon and Tylan. Interest on borrowings required to complete the Tylan acquisition, as well as Tylan's assumed debt, are included in the Company's statement of income from January 22, 1997. Net interest expense in 1996 was comparable with net interest expense in 1995, as the impact of slightly higher net borrowings during 1996 was offset by lower short-term interest rates. Provision For Income Taxes The Company's effective income tax rate in 1997, excluding the non-tax deductible write-off of purchased research and development associated with the Tylan acquisition, was 21.0 percent compared to 23.5 percent in 1996 and 22.5 percent in 1995. The effective tax rate was lower in 1997 as compared to 1996, reflecting a higher proportion of income generated by low tax rate manufacturing sites. In 1996, the overall increase in profitability as compared to 1995 slightly diminished the relative benefit derived from these low tax jurisdictions. Earnings Per Share Earnings per share in the past two years includes significant write-offs of purchased research and development associated with the Company's acquisitions of Amicon and Tylan. Basic earnings per share adjusted for purchase accounting charges are summarized as follows: 1997 1996 1995 As reported $(0.89) $1.00 $1.90 Purchase accounting charges 2.73 1.20 - Pro forma without purchase accounting charges $ 1.84 $ 2.20 $ 1.90 Additionally, earnings per share in 1997 as compared to 1996 were negatively impacted by losses of $0.26 per share incurred by the acquired companies and unfavorable foreign exchange comparisons amounting to $0.25 per share. Legal Proceedings As reported in the Company's Form 10-Q Report for the quarter ended March 31, 1997, the Company's wholly-owned subsidiary, Millipore Cidra, Inc. has been served with an Administrative Order by the Environmental Quality Board of Puerto Rico with respect to filter membrane scrap produced by Millipore Cidra's manufacturing operations, which proposed penalties in the amount of $96.5 million. The Company believes that it has meritorious arguments, intends to vigorously contest this Administrative Order and believes that it should prevail. Depending on the ultimate outcome of these proceedings (or if there are interim material adverse developments), the Company could be in violation of certain provisions contained in its $350.0 million Revolving Credit Facility, which, in turn, would cause the Company to be in violation of the cross default provisions of the $100.0 million 6.88 percent notes due in 2004, $100.0 million 7.23 percent notes due in 2002 and $100.0 million 7.60 percent notes due in 2007. Violation of these provisions would allow the lenders to require repayment on demand (or, in the case of the Revolving Credit Facility, restrict borrowings or re-borrowings). In any such event, the Company believes that it would be able to renegotiate the terms of its existing debt, although potentially on less favorable terms. The Company and Waters Corporation have previously been engaged in litigation with respect to the amount of assets required to be transferred by the Company's Retirement Plan in connection with the Company's divestiture of its former Chromatography Division in 1994. While the Company has prevailed in this litigation, in the second quarter of 1996, Waters also filed a Complaint in the Federal District Court of Massachusetts alleging that the Company's operation of the Retirement Plan violates ERISA and certain sections of the Internal Revenue Code. A judgement in the Company's favor in this action was handed down by the Federal District Court in July 1997. Waters has appealed the federal court judgement. Although there can be no assurance of the outcome of this appeal, or that federal agencies with jurisdiction over pension benefit transfers might not review this transaction independently, the Company believes that it will prevail in the appeal and in any such review that may be undertaken. Capital Resources and Liquidity In 1997, the Company generated approximately $54.0 million of cash from operating activities, compared to $102.2 million of cash generated in 1996 and $99.1 million generated in 1995. Cash flow from operating activities in 1997 was reduced by outflows of $23.3 million related to employee severance and integration costs associated with the acquisitions of Amicon and Tylan. Excluding acquisition related expenditures, cash generated from operating activities in 1997 was $77.3 million. The Company generated less cash from operations in 1997 compared to 1996, as overall earnings were significantly lower, reflecting the losses incurred by the acquired businesses and lower foreign currency values. In 1997, cash generated from operating activities, along with increased borrowings, was used for the acquisition of Tylan, the purchase of certain assets and technology of FAStar Ltd. and FAS Holding Company, and capital expenditures. The Company continued to invest in capacity expansions and the upgrade of manufacturing facilities and in information technology systems and equipment. The Company expects capital expenditures and depreciation expense in 1998 to be slightly higher than capital spending and depreciation expense in 1997. Late in 1997, the Company announced that it was moving the headquarters and manufacturing operations of the acquired Tylan business to Allen, Texas. Although the facility in Allen will be leased, the Company expects to spend in excess of $10.0 million in capital to ready the facility for its intended use. The Company had no other significant commitments for capital expenditures at December 31, 1997. The Company expects to spend an additional $25.0 million in cash to complete the integration of Amicon and Tylan during 1998. In 1996 and 1995, the Company used cash generated from its operations and, in 1995 cash generated from the sale of its Waters Chromatography and BioScience divisions, to purchase shares of its outstanding common stock. The Company spent, net of stock option exercise amounts, $46.9 million in 1996 and $64.0 million in 1995 to repurchase shares of its outstanding common stock. At December 31, 1996, the Company had $9.0 million remaining to spend on a $50.0 million share repurchase program announced in the first quarter of 1996. Share repurchases were stopped at the end of the third quarter of 1996 to maintain financial flexibility in light of the pending acquisitions of Amicon and Tylan. The Company did not purchase additional shares of its outstanding common stock in 1997. The net cash outflow of $3.5 million in 1997 for operations discontinued in 1994 were in line with the Company's expectations. At December 31, 1997, the Company had no significant remaining obligations related to these discontinued operations. The use of debt to finance the acquisitions of Amicon and Tylan has substantially increased the Company's debt to equity ratio. In the first quarter of 1997, the Company successfully completed a public debt offering. Proceeds from the offering of $197.9 million were used to repay borrowings outstanding under the Company's $350.0 million Revolving Credit Facility. At December 31, 1997, the Company had additional borrowing capacity of $184.0 million under its Revolving Credit Facility. Although the Company's financial position remains strong and the Company believes it has flexibility in financing future requirements, such flexibility is more limited than it had been prior to the acquisitions of Amicon and Tylan. At December 31, 1997 the Company held 2.2 million shares of PerSeptive Biosystems common stock and 1,000 shares of PerSeptive Biosystems preferred stock. On January 22, 1998, PerSeptive merged with Perkin-Elmer Corporation. Pursuant to the merger, all of the Company's shares held in PerSeptive were converted into 587,000 shares of Perkin-Elmer common stock. In the first quarter of 1998, the Company sold all of its shares of The Perkin-Elmer stock for approximately $35.7 million in cash. Dividends The quarterly dividend was increased in the second quarter of 1997 from $0.09 to $0.10 per share. Dividends paid in 1997 were $16.6 million. Business Outlook and Uncertainties The following statements are based on current expectations. These statements are forward looking, are subject to the comments under "Forward Looking Statements" below and actual results may differ materially. Integration of Tylan: The Company intends to reduce the number of major manufacturing sites of the acquired Tylan business from three to one in 1998. The Company announced plans to close all three existing sites and open a new facility in Allen, Texas. The Company expects to commence manufacturing at the Allen site late in the third quarter of 1998. The process of consolidating these manufacturing activities may involve unforeseen difficulties and there can be no assurance that the potential benefits of such consolidation will be realized on the schedule expected by the Company. Moreover, such consolidation may require a disproportionate amount of time and attention of the Company's management and the Company's financial and other resources. Any delays or unexpected costs in connection with such consolidations could have a material adverse effect on the Company's results of operations. Sales: As previously noted, sales to the microelectronics market in 1997 represented 35 percent of consolidated 1997 sales as the acquisition of Tylan increased the Company's presence in this market. In 1995 and the first six months of 1996, the microelectronics market was the fastest growing market in which the Company participated. However, sales into this market declined 7 percent in the last six months of 1996 and increased only 2 percent in 1997. Market research data for the microelectronics market in which the Company participates is forecasting 1998 industry sales growth rates ranging from flat to moderately positive. Sales growth in this market in the past has been volatile, due to general cyclicality, which historically has been exhibited by this market. In addition, a significant portion of the Company's Asia/Pacific business is in the microelectronics market. As this market has become a more significant component of the Company's consolidated sales, the effects of future industry volatility along with uncertainties caused by the recent Asian financial crisis could significantly impact the Company's 1998 consolidated sales growth. Approximately 58 percent of the Company's sales are transacted in currencies other than the U.S. dollar. Late in 1997, the U.S. dollar began to further strengthen against the Japanese yen while, in December, the Korean won devalued approximately 50 percent against the U.S. dollar. If foreign exchange rates remain at February 1, 1998 levels, the effect of foreign exchange will reduce first quarter 1998 and full-year 1998 reported sales growth by 4 to 5 percentage points and 2 to 4 percentage points, respectively compared to 1997. Any change in foreign exchange rates will be reflected in the results of operations. Gross Margins: The Company expects gross margin percentages in 1998 to be comparable with those of 1997, as improved margins resulting from increased volume in the Company's manufacturing plants to support anticipated sales growth is expected to offset a higher level of sales of acquired business products, which have lower margins than those of the Company's pre-existing business. The continuing strength of the US dollar will also constrain margin improvement in 1998. Operating Expenses: The Company expects operating expenses as a percentage of sales in 1998 will be consistent with the percentage achieved in previous years. Interest Expense: The Company expects net interest expense in 1998 will be slightly lower than in 1997 as cash generated from operating activities and the sale of Perkin-Elmer stock will be used to reduce outstanding borrowings. Provision for Income Taxes: The effective tax rate in 1998 is projected to be in the range of 21 percent; consistent with the effective rate reported in 1997. The tax rate estimate is based on the Company's current expectations for 1998 income and current tax law and, therefore, is subject to change. At December 31, 1997, the Company had a net deferred tax asset of $88.8 million. Although realization of the asset is not assured, the Company believes it is more likely than not that this net deferred tax asset will be realized. The amount of the deferred tax considered realizable, however, could be reduced if the near term estimates of future taxable income are reduced, which could result in the Company's 1998 effective tax rate increasing above the expected range of 21 percent. Capital Spending: The Company expects to spend more for fixed asset additions in 1998 than it spent in 1997. The Company does not believe it needs to significantly expand or add manufacturing capacity in 1998 to handle its anticipated 1998 sales growth. The Company will continue to invest in tooling within its manufacturing plants and in information technology, particularly in Japan. Accordingly, the Company also expects that 1998 depreciation expense will be higher than 1997 depreciation expense. Year 2000 Issues: The Company utilizes a common worldwide software system for its financial and business reporting. The Company believes that its system is Year 2000 ready and that future costs necessary to ensure successful Year 2000 compliance will not have a material effect on the Company's results of operations. Forward-Looking Statements The matters discussed herein, as well as in future oral and written statements by management of the Company, that are forward-looking statements, are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. When used herein or in such statements, the words "anticipate", "believe", "estimate", "expect", "may", "will", "should" or the negative thereof and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. In addition to the matters discussed herein, potential risks and uncertainties that could affect the Company's future operating results include, without limitation, foreign exchange rates; increased regulatory concerns on the part of the biopharmaceutical industry; further consolidation of drug manufacturers; competitive factors such as new membrane technology, and/or a new method of chip manufacture which relies less heavily on purified chemicals and gases; availability of component products on a timely basis; inventory risks due to shifts in market demand; change in product mix; conditions in the economy in general, including uncertainties in selected Asian economies, and in the microelectronics manufacturing market in particular; the difficulty in integrating acquired companies; potential environmental liabilities; the inability to utilize technology in current or planned products due to overriding rights by third parties, and the risk factors listed from time-to-time in the Company's filings with the SEC, which include the report on Form 10-Q for the period ended March 31, 1997 and the Company's Form 10-K Annual Report for the year ended December 31, 1997, and in particular the matters described under the heading "Business--Environmental Matters". Specific reference is also made to the risks and uncertainties described in the Registration Statement on Form S-3 (Registration 333-23025) filed by the Company in connection with its offering of $300 million of Debt Securities in May 1997, and, in particular, to those described under "Factors Which May Affect Future Results". See also "Legal Proceedings" and "Business Outlook and Uncertainties" above. Consolidated Statements of Income Millipore Corporation Year ended December 31 (In thousands except per 1997 1996 1995 share data) Net sales $ 758,919 $ 618,735 $ 594,466 Cost of sales 342,237 249,443 243,849 Gross profit 416,682 369,292 350,617 Selling, general and 245,585 202,140 195,026 administrative expenses Research and development 55,899 38,429 36,515 expenses Purchased research and 114,091 68,311 - development expense Operating income 1,107 60,412 119,076 Gain on sale of equity 8,330 5,329 - securities Interest income 2,937 2,780 1,682 Interest expense (30,484) (11,498) (10,623) (Loss)/Income before income (18,110) 57,023 110,135 taxes Provision for income taxes 20,674 13,401 24,781 Net (Loss)/Income $ (38,784) $ 43,622 $ 85,354 (Loss)/Income per share Basic $ (0.89) $ 1.00 $ 1.90 Diluted $ (0.89) $ 0.98 $ 1.86 Weighted average common shares outstanding Basic 43,527 43,602 44,985 Diluted 43,527 44,457 45,887 The accompanying notes are an integral part of the consolidated financial statements. Consolidated Balance Sheets Millipore Corporation December 31 (In thousands) 1997 1996 Assets Current assets: Cash $ 2,240 $ 4,010 Short-term investments 18,029 42,860 Accounts receivable (less allowance for doubtful accounts of $3,010 in 176,585 151,653 1997 and $2,490 in 1996) Inventories 127,192 106,410 Other current assets 28,362 6,979 Total current assets 352,408 311,912 Property, plant and equipment, net 220,094 203,017 Intangible assets (less accumulated amortization of $10,000 in 1997 and $3,084 in 1996) 77,394 58,866 Deferred income taxes 88,760 69,086 Other assets 27,588 40,011 Total assets $766,244 $682,892 Liabilities and Shareholders' Equity Current liabilities: Notes payable $165,576 $ 101,546 Accounts payable 46,088 34,404 Accrued expenses 74,856 60,615 Dividends payable 4,369 3,899 Accrued retirement plan contributions 7,088 4,705 Accrued income taxes payable 6,896 11,231 Total current liabilities 304,873 216,400 Long-term debt 286,844 224,359 Other liabilities 25,533 24,528 Commitments and contingent liabilities - - Shareholders' equity: Common stock, par value $1.00 per share, 120,000 shares authorized; 56,988 shares issued as of December 31, 1997 and 1996, respectively 56,988 56,988 Additional paid-in capital 10,927 8,800 Unrealized gain on securities available for sale 18,115 9,536 Retained earnings 490,289 548,598 Translation adjustments (39,835) (8,280) 536,484 615,642 Less: Treasury stock at cost, 13,291 and 13,666 shares as of December 31, 1997 and 1996, respectively (387,490) (398,037) Total shareholders' equity 148,994 217,605 Total liabilities and shareholders' equity $ 766,244 $ 682,892 The accompanying notes are an integral part of the consolidated financial statements. Consolidated Statements of Shareholders' Equity Millipore Corporation Year ended Dec. 31, 1995, 1996 and 1997 (In thousands, except per share data) Additional Common Common Paid-in Retained Stock Stock Shares Par Value Capital Earnings Balance at January 1, 1995 28,494 $ 28,494 $ 23,603 $ 458,579 Net income 85,354 Effect of two-for-one stock split 28,494 28,494 (23,603) (4,891) Cash dividends declared, $0.315 per share (14,071) Treasury stock acquired Stock options exercised (1,553) Employees' stock purchase (4) plan proceeds Savings and Participation 86 Plan proceeds Incentive plan awards 124 Stock awards 9 Translation adjustments Balance at December 31, 56,988 $ 56,988 $ - $ 523,633 1995 Net income 43,622 Cash dividends declared, $0.35 per share (15,261) Treasury stock acquired Stock options exercised (4,218) Employees' stock purchase 195 plan proceeds Savings and Participation 209 Plan proceeds Incentive plan awards 408 Stock awards 10 Unrealized gain on securities available for sale U.S. tax benefit from stock plan activity 8,800 Translation adjustments Balance at December 31, 56,988 $ 56,988 $ 8,800 $ 548,598 1996 Net loss (38,784) Cash dividends declared, $0.39 per share (17,028) Stock options exercised (3,335) Employees' stock purchase 305 plan proceeds Savings and Participation 306 Plan proceeds Incentive plan awards 209 Stock awards 18 Unrealized gain on securities available for sale U.S. tax benefit from 2,127 stock plan activity Translation adjustments Balance at December 31, 56,988 $ 56,988 $ 10,927 $ 490,289 1997 The accompanying notes are an integral part of the consolidated financial statements. Year ended Dec. 31, 1995, Unrealized 1996 and 1997 (In thousands, except per Gain on share data) Securities Total Available Translation Treasury Shareholders Stock for Sale Adjustments Shares Cost Equity Balance at January 1, $ - $ 5,147 (5,361) $(294,546) $ 221,277 1995 Net income 85,354 Effect of two-for-one - stock split (5,361) Cash dividends declared, $0.315 per share (14,071) Treasury stock acquired (2,962) (90,113) (90,113) Stock options exercised 895 28,366 26,813 Employees' stock purchase 33 905 901 plan proceeds Savings and Participation 14 456 542 Plan proceeds Incentive plan awards 13 354 478 Stock awards 2 57 66 Translation adjustments (4,772) (4,772) Balance at December 31, $ - $ 375 (12,727) $(354,521) $ 226,475 1995 Net income 43,622 Cash dividends declared, $0.35 per share (15,261) Treasury stock acquired (1,462) (58,362) (58,362) Stock options exercised 384 10,880 6,662 Employees' stock purchase 72 2,076 2,271 plan proceeds Savings and Participation 27 735 944 Plan proceeds Incentive plan awards 39 1,120 1,528 Stock awards 1 35 45 Unrealized gain on securities available for 9,536 9,536 sale U.S. tax benefit from stock plan activity 8,800 Translation adjustments (8,655) (8,655) Balance at December 31, $ 9,536 $ (8,280) (13,666) $ (398,037) $ 217,605 1996 Net loss (38,784) Cash dividends declared, $0.39 per share (17,028) Stock options exercised 284 7,937 4,602 Employees' stock purchase 33 955 1,260 plan proceeds Savings and Participation 27 788 1,094 Plan proceeds Incentive plan awards 30 836 1,045 Stock awards 1 31 49 Unrealized gain on 8,579 8,579 securities available for sale U.S. tax benefit from stock plan activity 2,127 Translation adjustments (31,555) (31,555) Balance at December 31, $ 18,115 $ (39,835) (13,291) $ (387,490) $148,994 1997 Consolidated Statements of Cash Flows Millipore Corporation Year ended December 31 (In thousands) 1997 1996 1995 Cash Flows from Operating Activities: Net (loss)/income $ (38,784) $ 43,622 $ 85,354 Adjustments to reconcile net (loss)/income to net cash provided by operating activities: Purchased research and 114,091 68,311 - development expense Write-off of acquired 5,000 - - inventory step-up Gain on sale of (8,330) (5,329) - securities Depreciation and 40,661 30,587 27,478 amortization Deferred income tax provision 5,835 (8,212) 1,372 Change in operating assets and liabilities, net of effect of acquisitions: (Increase) decrease in accounts receivable (24,468) 247 (10,548) (Increase) in inventories (13,361) (11,612) (7,218) (Increase) decrease in other current assets (6,937) 1,661 409 (Increase) in other assets (8,648) (8,747) (8,209) (Decrease) increase in accounts payable and accrued expenses (21,629) (11,087) 5,931 Increase (decrease) in accrued retirement plan contributions 2,557 (36) 543 Increase in accrued income taxes 1,050 1,723 6,475 Other 6,942 1,058 (2,438) Net cash provided by operating activities 53,979 102,186 99,149 Cash Flows from Investing Activities: Additions to property, plant and equipment (41,063) (30,427) (30,010) Additions to intangible assets (6,135) (1,760) (2,135) Acquisitions, net of cash acquired (159,158) (122,576) - Other investments (1,646) (4,010) - Net cash used by discontinued businesses (3,516) (7,939) (6,967) Proceeds from sale of securities 8,330 5,745 - Net cash used in investing activities (203,188) (160,967) (39,112) Cash Flows from Financing Activities: Treasury stock acquired - (58,362) (90,113) Issuance of treasury stock under stock plans 6,956 11,450 16,937 Cash paid to close out foreign currency swap - - (3,546) Net change in short-term debt 65,036 20,045 25,795 Proceeds from issuance of long-term debt 197,950 124,397 - Payments on long-term debt (126,018) - - Dividends paid (16,558) (14,899) (14,117) Net cash provided by (used by) financing activities 127,366 82,631 (65,044) Effect of foreign exchange rates on cash and short-term investments (4,758) (738) (1,471) Net (decrease) increase in cash and short-term investments (26,601) 23,112 (6,478) Cash and short-term investments on January 1 46,870 23,758 30,236 Cash and short-term investments on $ 20,269 $ 46,870 $ 23,758 December 31 Notes to Consolidated Financial Statements (In thousands except share and per share data) Note A - Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany balances and transactions have been eliminated. Translation of Foreign Currencies For all of the Company's foreign subsidiaries, assets and liabilities are translated at exchange rates prevailing on the balance sheet date, revenues and expenses are translated at average exchange rates prevailing during the period, and elements of shareholders' equity are translated at historical rates. Any resulting translation gains and losses are reported separately in shareholders' equity. The aggregate transaction gains and losses included in the consolidated statements of income are not material. Short-term Investments Short-term investments consisting primarily of time deposits, are classified as available for sale and are carried at cost plus accrued interest, which approximates market value. All short-term investments have original maturities of three months or less and are considered cash equivalents for purposes of the consolidated statements of cash flows. Inventories The Company values its inventories on a first-in, first-out (FIFO) basis. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Expenditures for maintenance and repairs are charged to expense while the costs of significant improvements which extend the life of the underlying asset are capitalized. Depreciation on assets acquired before January 1, 1989 generally is provided using accelerated methods over the estimated useful lives of the assets. Assets acquired after January 1, 1989 primarily are depreciated using straight-line methods. Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are eliminated and related gains or losses reflected in income. The estimated useful lives of the Company's depreciable assets are as follows: Leasehold Improvements Life of the Lease Buildings and Improvements 10-40 Years Production and Other Equipment 3-15 Years Intangible Assets Intangible assets consist primarily of acquired patented and unpatented technology, trade names, licenses and goodwill and are recorded at cost. Intangible assets are amortized on a straight line basis over periods ranging from 3 to 30 years. The carrying value of intangible assets is periodically reviewed by the Company and, if necessary, impairments of values are recognized. If there is a permanent impairment in the carrying value of intangible assets, the amount of such impairment is computed by comparing the discounted expected cash flows to the assets' carrying value. If an impairment exists, the carrying amount of the intangible asset is reduced by the estimated shortfall of cash flows. Marketable Securities The Company's investments in equity securities are categorized as available-for- sale as defined by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Equity securities are included in both Other current assets and Other assets in the accompanying consolidated balance sheets and are recorded at fair value. The cost of each investment is determined primarily on a specific identification method. Unrealized holding gains and losses are reflected, net of income tax, as a separate component of shareholders' equity. Income Taxes Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. With respect to the unremitted earnings of the Company's foreign and Puerto Rican subsidiaries, deferred taxes are provided only on amounts expected to be repatriated. Stock Options In 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective for the Company in 1996. SFAS 123 defines a fair-value method of accounting for employee stock options or similar equity instruments. However, SFAS 123 also allows companies to continue to use the intrinsic value method of accounting prescribed by APB Opinion 25 "Accounting for Stock Issued to Employees." The Company has elected to continue to account for stock options in accordance with APB 25 and has adopted the disclosure-only aspects of SFAS 123. Treasury Stock Treasury stock is recorded at its cost on the date acquired and is relieved at its weighted average cost upon reissuance. The excess of cost over the proceeds of reissued treasury stock is charged to retained earnings. Net Income/(Loss) Per Common Share In 1997, the Company adopted SFAS No. 128, "Earnings Per Share", which requires dual presentation of earnings per share. Basic net income (loss) per common share is calculated by dividing the net income (loss) for the period by the weighted average number of common shares outstanding for the period. Diluted net income per common share is calculated by considering the impact of common stock equivalents (outstanding stock options) as if they were converted into common stock at the beginning of the period. Common stock equivalents are not included in loss periods as they are anti-dilutive. Revenue Recognition Sales of products and services are recorded principally at the time of product shipment or performance of services. Certain contract revenue associated with the Company's process systems business is recorded principally on the percentage of completion method. The cumulative impact of any revisions in estimates of the percent complete is reflected in the period in which the changes become known. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash and short-term investments, accounts receivable and hedging instruments. The Company places its temporary cash and short-term investments with high credit qualified financial institutions, and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company's customer base, and their dispersion across different markets and geographies. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to these contracts are major financial institutions. The Company continually monitors its positions and the credit ratings of its counterparties and limits the amount of contracts it enters into with any one party. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income", which is effective for fiscal years beginning after December 15, 1997, including interim periods. SFAS 130 requires the presentation of comprehensive income and its components. Comprehensive income presents a measure of all changes in equity that result from recognized transactions and other economic events of the period other than transactions with owners. SFAS 130 requires restatement of all prior-period statements presented after the effective date. The Company will adopt SFAS 130 during the first quarter of 1998 and has not yet determined the impact of such adoption. In July 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which is effective for fiscal years beginning after December 15, 1997. The interim reporting disclosures are not required in the first year of adoption. SFAS 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. SFAS 131 changes current practice under SFAS 14 by establishing a new framework on which to base segment reporting. The "management" approach expands the required disclosures for each segment. The Company will adopt SFAS 131 in its fiscal year ended December 31, 1998 and has not yet determined the impact of such adoption on its segment reporting as currently presented. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to prior years' financial statements to conform with the 1997 presentation. Note B - Subsequent Event In partial consideration for the sale of its non-membrane bioscience instrument division in 1994, the Company received four thousand shares of preferred stock of PerSeptive Biosystems, Inc ("PerSeptive"). The preferred stock was redeemable in four equal annual installments of $10,000, commencing in August 1995, in the equivalent value as of each redemption date in common stock, $0.01 par value of PerSeptive. Effective January 22, 1998, PerSeptive completed a merger with Perkin-Elmer Corporation ("Perkin-Elmer") pursuant to which PerSeptive became a wholly-owned subsidiary of Perkin-Elmer. Pursuant to this merger all of the Company's remaining holdings in PerSeptive, which consisted of 2,213,357 shares of common stock and the one thousand shares of preferred stock were converted into 586,541 shares of Perkin-Elmer common stock. The Company sold all 586,541 shares of Perkin-Elmer common stock in the first quarter of 1998 and will record a gain on the sale of these securities of approximately $33,000 in the first quarter of 1998. The 2,213,375 shares of PerSeptive common stock held by the Company at December 31, 1997 were considered available for sale securities in accordance with SFAS No. 115 and were recorded at fair value on that date, net of income taxes, in Other current assets. Note C - Acquisitions On December 31, 1996, the Company acquired the net assets of the Amicon Separation Science Business of W.R. Grace & Co. (Amicon) for approximately $129,265 in cash, including transaction costs. Amicon manufactures protein purification tools for the research laboratory and for biotechnology manufacturing. The acquisition is accounted for as a purchase, and accordingly, the purchase price has been allocated to the identifiable tangible and intangible assets based on estimated fair market values of those assets. The Company has accrued approximately $27,000 for additional costs associated with the acquisition. These costs include severance payable to Amicon employees, abandonment of duplicate Amicon manufacturing and sales facilities, and termination of certain Amicon contractual obligations. The purchase included, at estimated fair value, current assets of $30,328, property, plant and equipment of $15,474, other assets of $596 and the assumption of liabilities of $9,197. Identifiable intangible assets were valued at $50,753 and included tradenames and patented and unpatented completed technology. These intangible assets will be amortized over their estimated useful lives ranging from 5 to 30 years. The value of in-process research and development for which technical feasibility has not been achieved was $68,311 and was charged to earnings in the fourth quarter of 1996. The purchase was financed through the Company's Revolving Credit Facility as discussed in Notes H and I. On January 22, 1997, the Company completed a cash tender offer for all of the outstanding common shares of Tylan General, Inc. (Tylan). Tylan, which became a wholly-owned subsidiary on January 27, 1997, supplies precision mass flow controllers, pressure and vacuum measurement and control equipment, and ultraclean gas panels to the microelectronics industry. The aggregate purchase price, including the assumption of Tylan debt and transaction costs, was $163,371. The acquisition was accounted for as a purchase, and accordingly, the purchase price has been preliminarily allocated to the identifiable tangible and intangible assets based on estimated fair market values of those assets. The Company has accrued approximately $31,000 for additional costs associated with the acquisition. These costs include severance costs, abandonment and consolidation of facilities, and termination of certain Tylan contractual obligations. The Company expects that the integration of Tylan's operations into those of the Company will be substantially complete by December 31, 1998, following the completion of the Company's new facility currently being constructed in Allen, Texas. The ultimate execution of the Company's plans may result in an adjustment to the amounts preliminarily allocated to assets and liabilities and to amounts accrued for additional costs associated with the acquisition. The purchase price included at estimated fair value, current assets of $45,044, property and equipment of $22,759, other assets of $16,477 and liabilities of $22,042. Identifiable intangible assets were valued at $18,042 and included tradenames and patented and unpatented completed technology. These intangible assets are being amortized over their estimated useful lives ranging from six to ten years. The value of in-process research and development for which technical feasibility has not been achieved was $114,091 and was charged to earnings in the first quarter of 1997. The purchase was financed through the Company's Revolving Credit Facility as discussed in Notes H and I. During 1997, the Company charged $14,801 of employee costs, $1,442 of facilities related costs, $1,284 of contract termination costs, and $5,815 of other integration expenses against the acquisition accruals. As of December 31, 1997, employment for 120 employees of the acquired companies, principally within general and administrative functions, had been terminated. As a result of the Company's plans to construct a new facility in Allen, Texas as noted above, the Company plans to exit its three existing Tylan manufacturing facilities in the United States; all of which are occupied under long-term lease agreements. Two of the facilities to be vacated are in California while the third facility is in the Allen, Texas area. The Company expects to pay severance and related costs for approximately 350 employees currently employed at the California sites. In addition, the Company expects to incur costs to settle its contractual obligations associated with the long-term lease agreements on the facilities from which it will be vacating. The Company believes that the remaining acquisition accruals at December 31, 1997 will be sufficient to satisfy its future obligations arising from the implementation of its integration plans. The following table reflects unaudited pro forma combined results for 1996 of the Company, Amicon and Tylan on the basis that both acquisitions had taken place on January 1, 1996. 1996 Revenues $ 824,555 Net Income $ 26,175 Net Income per common share -Basic $ 0.60 Shares used in computation 43,602 These pro forma results are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisitions had been effective at the beginning of 1996. Pro forma results for 1997 resulting from the acquisition of Tylan would not have been materially different from the results reported. Note D - Basic and Diluted Earnings per Share For 1997 basic and diluted earnings per share are the same as the Company was in a loss position. The effect of anti-dilutive securities in 1997 amounted to 788 shares. The following is a reconciliation for 1996 and 1995 of the numerators and denominators for basic and diluted earnings per share: Net Income Shares EPS 1996 Basic Earnings per share $ 43,622 43,602 $ 1.00 Effect of dilutive securities: Stock options 855 Diluted Earnings per share $ 43,622 44,457 $ 0.98 1995 Basic Earnings per share $ 85,354 44,985 $ 1.90 Effect of dilutive securities: Stock options 902 Diluted Earnings per share $ 85,354 45,887 $ 1.86 Note E - Stock Split and Increase In Authorized Common Shares On June 8, 1995, the Company's Board of Directors authorized a two-for-one stock split in the form of a 100 percent stock dividend, payable on July 21, 1995 to shareholders of record as of June 23, 1995. Par value per share remained at $1.00. The stock split resulted in the issuance of 28,494,000 additional shares of common stock from authorized but unissued shares. The issuance of additional shares resulted in the transfer of $23,603 from additional paid-in capital and $4,891 from retained earnings to common stock, representing the par value of the shares issued. Accordingly, all weighted average share and per share amounts, as well as stock plan data, have been restated to reflect the stock split. For purposes of presentation in the Consolidated Statements of Shareholders' Equity, the stock split has been accounted for as if it occurred on January 1, 1995. At the Company's Annual Meeting on April 18, 1996, shareholders voted to adopt an amendment to the Company's restated Articles of Incorporation, increasing the number of authorized common shares from 80,000,000 to 120,000,000. Note F - Inventories Inventories at December 31, stated at the lower of first-in, first-out (FIFO) cost or market, consisted of the following: 1997 1996 Raw materials $ 42,518 $ 27,502 Work in process 16,545 16,310 Finished goods 68,129 62,598 $ 127,192 $ 106,410 Note G - Property, Plant and Equipment Property, plant and equipment at December 31 consisted of the following: 1997 1996 Land $8,750 $9,002 Leasehold improvements 18,846 9,587 Buildings and improvements 118,923 123,256 Production and other equipment 223,720 240,612 Construction in progress 16,440 15,957 386,679 398,414 Less: accumulated depreciation and amortization 166,585 195,397 $220,094 $203,017 Depreciation expense for the years ended 1997, 1996, and 1995 was $32,797, $27,972, and $27,478 respectively. Note H - Notes Payable Short-term borrowings and related lines of credit at December 31 are summarized as follows: 1997 1996 Notes payable $165,576 $101,546 Unused lines of credit $214,424 $295,927 Average amount outstanding at month-end during the year $226,379 $115,461 Maximum amount outstanding at month-end during the year $392,817 $132,338 Weighted average interest rate during the year 6.0% 5.6% Weighted average interest rate at year-end 6.1% 5.7% On January 22, 1997, the Company entered into an unsecured revolving credit agreement ("the agreement") with a group of banks. The agreement allows for borrowings of up to $450,000 and expires on January 22, 2002. In July, 1997, the Company reduced the maximum funds available under the agreement from $450,000 to $350,000. Individual borrowings under the Revolving Credit Facility are made on terms not to exceed six months. At December 31, 1997 the Company had borrowings of $155,000 outstanding under this facility. Interest is payable on outstanding borrowings at a floating rate defined in the agreement as LIBOR plus a margin. The agreement also calls for a commitment fee at a rate ranging from .10 percent to .65 percent of the available facility. The exact amount of the margin and the commitment fee is dependent on the Company's debt rating. The agreement calls for the Company to maintain certain financial covenants in the areas of operating cash flow and interest coverage. At December 31, 1997 the Company also had $10,576 of other short-term borrowings. Note I - Long-term Debt Long-term debt at December 31 consisted of the following: 1997 1996 7.23% unsecured notes due in 2002 $100,000 $ - 7.60% unsecured notes due in 2007 100,000 - 6.88% notes payable due in 2004 100,000 100,000 Amounts outstanding under bridge - loan 124,397 Unrealized gain on revaluation of yen-denominated debt (13,156) (3,727) Other notes payable to banks - 3,689 Long-term debt $ 286,844 $ 224,359 In March, 1997, the Company sold $100,000 of 7.23 percent unsecured notes due in 2002 and $100,000 of 7.60 percent unsecured notes due in 2007, pursuant to a public offering. Net proceeds from the offering of $197,950 were used to repay borrowings outstanding under the Company's revolving credit agreement. Interest on the new notes is payable semi-annually in April and October. At December 31, 1997, these rates have a fair value of $100,527 and $100,711, respectively. The $100,000 of 6.88 percent notes payable are due in 2004. Interest on these notes is payable semi-annually in March and September. The agreement calls for the Company to maintain certain financial covenants in the areas of operating cash flow and interest coverage. As these notes are not publicly traded, a determination of their fair value is not readily determinable. However, the Company believes that the carrying values approximates fair value. As of January 1, 1994, the Company had partially hedged its foreign currency net asset exposure by entering into a currency swap which was to mature in 1995. Under the terms of the original swap, the Company exchanged $100,000 of dollar debt service obligations for foreign obligations of 9,936,000 Japanese yen and 33,193 German Deutche Marks (DM). In January, 1994, the Company closed out the yen-denominated swap and simultaneously exchanged $80,000 of dollar debt service obligations for a yen denominated obligation of 8,760,000 yen, which bears interest at a rate of 4.49 percent. This swap matures in 2004. In March, 1995, the Company paid $3,546 to close out the DM swap. This cash payment represented the cumulative effect of the foreign currency rate fluctuations over the life of the swap. In December, 1997, the Company entered into a currency swap maturing in 2003. Under the terms of this swap, the Company exchanged $30,000 of dollar debt service obligations for a yen-denominated obligation of 3,840,000 yen, which bears interest at a rate of 1.39 percent. The Company's foreign currency obligations had effective weighted average interest rates of 4.53 and 4.86 percent in 1997 and 1996, respectively. The effect of foreign currency exchange rate fluctuations resulting from the yen swap agreements open at December 31, 1997 are included in translation adjustments. Amounts outstanding under the bridge loan at December 31, 1996 represent borrowings on a 90 day $250,000 bridge loan which was made available to the Company as temporary financing pending finalization of the Revolving Credit Facility discussed in Note H. Other notes payable to banks represent borrowings outstanding at an Amicon subsidiary acquired by the Company on December 31, 1996. The Company capitalized interest costs associated with the construction of certain capital assets of $753 in 1997, $785 in 1996 and $929 in 1995. Interest paid on short-term and long-term debt during 1997, 1996, and 1995 amounted to $25,579, $12,171, and $11,481 respectively. Note J - Foreign Exchange A significant volume of the Company's business is transacted in currencies other than the U.S. dollar. This exposes the Company to risks associated with currency rate fluctuations which impact the Company's sales and net income. To partially mitigate this risk, the Company has entered into foreign currency transactions, forward and option contracts to sell yen, on a continuing basis in amounts and timing consistent with underlying currency exposure on inventory purchases so that the gains and losses on these transactions offset gains and losses on the underlying exposure. Realized gains of $4,374 in 1997, $2,687 in 1996, and a realized loss of $2,287 in 1995 relating to these contracts are included in cost of sales, partially offsetting the impact of foreign currency fluctuations. At December 31, 1997, the Company has open option contracts to sell yen aggregating $40,480. These open contracts have an unrealized gain of $2,470 at December 31, 1997. All open contracts mature within 15 months. Note K - Income Taxes Income taxes have been provided in accordance with the provisions of SFAS No. 109. The Company's provisions for income taxes are summarized as follows: 1997 1996 1995 Domestic and foreign income before income taxes: Domestic $(69,479) $195 $51,933 Foreign 51,369 56,828 58,202 Income before income taxes $(18,110) $57,023 $110,135 Domestic and foreign provisions for income taxes: Domestic $6,873 $(2,362) $9,039 Foreign 13,011 15,427 14,642 State 790 336 1,100 $20,674 $13,401 $24,781 Current and deferred provisions for income taxes: Current $14,839 $21,613 $23,409 Deferred 5,835 (8,212) 1,372 $20,674 $13,401 $24,781 A summary of the differences between the Company's consolidated effective tax rate and the United States statutory federal income tax rate is as follows: 1997 1996 1995 U.S. statutory income tax rate 35.0% 35.0% 35.0% Puerto Rico tax rate benefits (4.0) (6.4) (4.8) Ireland tax rate benefits (8.2) (11.0) (5.2) State income tax, net of federal .5 .4 .7 income tax benefit Foreign Sales Corporation income not taxed (2.3) (4.0) (2.0) Tax credits - - (1.2) Change in valuation allowance - 9.5 - Effective tax rate applicable to operations 21.0 23.5 22.5 Non-deductible charge for purchased research and development 93.2 - - Effective tax rate 114.2% 23.5% 22.5% Tax exemptions relating to Puerto Rico and Ireland operations are effective through 2004 and 2010, respectively. Income taxes paid (net of refunds) during 1997, 1996, and 1995 were $18,704, $24,228, and $9,999, respectively. The Company has not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. These earnings amounted to approximately $106,178 at December 31, 1997. If earnings of such foreign subsidiaries were not indefinitely reinvested, a deferred tax liability of approximately $26,544 would have been required. At December 31, 1997, the Company has foreign tax credit carryforwards of approximately $7,300 that expire in the years 1998 through 2002. General business credit carryforwards of approximately $7,300 expire in the years 2001 through 2010. Net operating loss carryforwards of $30,212 expire in the year 2012. In addition, the Company has alternative minimum tax credit carryforwards of approximately $17,016 which can be carried forward indefinitely. Significant components of the Company's net deferred tax assets are as follows: 1997 1996 Intercompany and inventory related $15,962 $12,734 transactions Postretirement benefits other than pensions 3,605 3,500 Tax credits (including foreign tax credits on unremitted earnings) 50,064 55,586 Net operating loss carryforwards - 10,750 Deferred gain on sale of securities 8,750 - Divestiture related costs - 5,109 Amortization of intangible assets 22,247 23,776 Depreciation (3,756) (3,381) Other, net 3,273 (6,103) 110,895 91,221 Valuation allowance (22,135) (22,135) Net deferred tax asset $88,760 $69,086 The valuation allowance is provided primarily against foreign tax credit carryforwards and foreign tax credits on unremitted earnings which can be utilized against future taxable income in the United States. Although realization is not assured, the Company believes it is more likely than not that the remainder of the deferred tax asset, net of the valuation allowance, will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. Note L - Legal Proceedings On May 2, 1997, the Environmental Quality Board (EQB) of Puerto Rico served an administrative order on Millipore Cidra, Inc., a wholly-owned subsidiary of the Company. The administrative order (EQB order) generally alleges: (I) that the nitrocellulose filter membrane scrap produced by Millipore Cidra's manufacturing operations is a hazardous waste as defined in EQB regulations; (II) that Millipore Cidra, Inc. failed to manage, transport and dispose of the nitrocellulose membrane scrap as a hazardous waste; and (III) that such failure violated EQB regulations. The EQB order proposes penalties in the amount of $96,500 and orders Millipore Cidra, Inc. to manage the nitrocellulose membrane scrap as a hazardous waste. The Company believes that it has meritorious arguments, intends to vigorously contest the EQB order and believes that it should prevail. Depending on the ultimate outcome of these proceedings (or if there are interim material adverse developments), the Company could be in violation of certain provisions contained in its $350,000 Revolving Credit Facility which, in turn would cause the Company to be in violation of the cross-default provisions of the $100,000 6.88 percent notes due in 2004, $100,000 7.23 percent notes due in 2002 and $100,000 7.60 percent notes due in 2007. Violation of these provisions would allow the lenders to require repayment on demand (or, in the case of the Revolving Credit Facility, restrict borrowings or re-borrowings). In any such event, the Company believes that it would be able to renegotiate the terms of its existing debt, although potentially on less favorable terms. The Company and Waters Corporation have engaged in an arbitration proceeding and a related litigation in the Superior Court, Middlesex, Massachusetts, both of which commenced in the second quarter of 1995 with respect to the amount of assets required to be transferred by the Company's Retirement Plan in connection with the Company's divestiture of its former Chromatography Division in 1994. In the second quarter of 1996, Waters filed a Complaint in the Federal District Court of Massachusetts alleging that the Company's operation of the Retirement Plan violates ERISA and certain sections of the Internal Revenue Code. Judgements in the Company's favor were handed down by both the Massachusetts Superior Court and the Federal District Court in May 1997 and July 1997, respectively. Waters has appealed the federal court judgement. Although there can be no assurances of the outcome of any judicial appeal of this decision, or that federal agencies with jurisdiction over pension benefit transfers might not review this transaction independently, the Company believes that it will prevail in any such appeal or review. The settlement to date of all environmental claims against all participants at hazardous waste ("Superfund") sites in which the Company was named a potentially responsible party by the Environmental Protection Agency has been significant. Prior to 1995, the Company had paid $14,000 to settle claims at sites in which the Company was named a potentially responsible party. Due to the fact that Superfund sites at which the Company was named a potentially responsible party are in the late stages of remedy and a significant portion of the remedy cost has already been funded, the Company believes that its probable future financial obligation at December 31, 1997 will not materially affect its future operating results and liquidity. Amounts paid by the Company in 1997 and 1996 with respect to the Superfund obligations were insignificant. The Company is also subject to a number of other claims and legal proceedings which, in the opinion of the Company's management, are incidental to the Company's normal business operations. In the opinion of the Company, although final settlement of these suits and claims may impact the Company's financial statements in a particular period, they will not, in the aggregate, have a material adverse effect on the Company's financial position. Note M - Leases Operating lease agreements cover sales offices, manufacturing and warehouse space, office equipment and automobiles. These leases have expiration dates through 2008. Certain land and building leases contain renewal options for periods ranging from one to ten years and purchase options at fair market value. Rental expense was $16,423 in 1997, $12,547 in 1996, and $11,397 in 1995. At December 31, 1997 future minimum rents payable under noncancelable leases with initial terms exceeding one year were as follows: 1998 $ 14,910 1999 11,292 2000 8,786 2001 5,497 2002 4,063 2003 - 2008 12,644 At December 31, 1997, the Company had long-term lease obligations at three Tylan manufacturing sites in the United States. As a result of the Company's announced plans to consolidate its Tylan U.S. operations into a single site in Allen, Texas, the Company plans to vacate these three Tylan facilities by December 31, 1998. Accordingly, future rents payable under these three leases are included in the table above for 1998 only. Costs expected to be incurred by the Company to vacate these premises prior to completion of each respective lease term are accrued as discussed in Note C. Note N - Stock Plans Stock Option Plans The Company has two fixed option plans which reserve shares of common stock for issuance to key employees and directors, respectively. The Company also has a stock purchase plan which allows employees to purchase shares of the Company's common stock as discussed below. The Company has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock - Based Compensation." Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's net income and basic earnings per share would have been reduced by $2,112 or $.05 per share in 1997, and $1,015 or $.02 per share in 1996, and would have been unchanged for 1995. The weighted average fair value of options granted under the stock option plan was $11.13 in 1997, $12.48 in 1996, and $10.91 in 1995. The weighted average fair value of shares issued under the employee stock purchase plan was $4.61 in 1997, $3.97 in 1996, and $3.75 in 1995. The pro forma expense amounts assume that the fair value assigned to the option grants was amortized over the vesting period of the options, which is four years, while the fair value assigned to grants under the stock purchase plan is recognized in full at the date of grant. The fair value of each option grant is estimated on the date of the grant using the Black - Scholes model with the following weighted average assumptions in 1997, 1996 and 1995: expected life of five years; expected volatility of 25% and an expected annual dividend increase of $.04 per year. The risk-free interest rate was 5.9 percent in 1997, 6.1 percent in 1996 and 5.5 percent in 1995. This rate approximated that of 5 year U.S. government interest bearing securities. During 1996, the Company adopted the "1995 Combined Stock Option Plan", which replaced the "1985 Combined Stock Option Plan". The terms of the 1995 Plan are substantially similar to those of the 1985 Plan. In conjunction with the adoption of the 1995 Plan, shares authorized for issuance under the Plan were increased from 8,100,000 to 9,131,000. The Plan provides that the option price per share may not be less than the fair market value of the stock at the time the option is granted and that options must expire not later than 10 years from the date of grant. Stock activity under the Plan is presented as follows: Weighted Option Option Average Shares Price Exercise Price Per Share Outstanding at 3,518,000 $9.72 - $23.69 $17.96 December 31, 1994 Granted 373,000 $37.63 -$37.63 $37.63 Exercised (885,000) $ 9.72 - $23.69 $16.70 Canceled (66,000) $16.88 - $23.69 $17.97 Outstanding at 2,940,000 $13.56 - $37.63 $20.82 December 31, 1995 Granted 461,000 $37.63 - $42.00 $41.30 Exercised (369,000) $13.56 - $37.63 $17.41 Canceled (62,000) $17.25 - $37.63 $25.06 Outstanding at 2,970,000 $14.50 - $42.00 $24.33 December 31, 1996 Granted 683,000 $36.94 - $44.13 $37.94 Exercised (302,000) $14.50 - $37.63 $18.26 Canceled (24,000) $17.44 - $42.00 $29.19 Outstanding at 3,327,000 $14.50 - $44.13 $27.64 December 31, 1997 At December 31, 1997, 1996 and 1995, 2,000,000, 1,850,000 and 1,747,000 options were exercisable, respectively, under the Plan. The following table summarizes information about stock options under the Plan outstanding at December 31, 1997: Options Outstanding Options Exercisable Weighted Average Weighted Options Remaining Average Weighted Range of Outstanding Contractual Exercise Exercisable Average Exercise at 12/31/97 Life Price at 12/31/97 Exercise Price Price $14.50- 1,848,000 6 years $18.62 1,725,000 $18.26 $23.69 $36.94- 1,479,000 9 years $38.90 275,000 $39.15 $44.13 $14.50- 3,327,000 2,000,000 $44.13 In 1995, as part of the Company's broad-based open market stock repurchase program, the Company repurchased at market prices, 759,000 shares of common stock which had been issued to current employees and former employees of the divested businesses under the Company's stock option plan. The difference between the market price of the shares repurchased and the stock option exercise price was recognized as compensation expense and is included in the Company's 1995 consolidated statement of income or charged against accrued divestiture reserves. Non-Employee Director Stock Option Plan In 1990, a stock option plan for non-employee directors was approved by the Company's shareholders. Under this plan, each eligible director receives an option to purchase 4,000 shares of Millipore common stock on the date of his or her first election, and thereafter automatically receives an additional option to purchase 2,000 shares at the first board of directors meeting following the Annual Meeting of Shareholders. The plan provides that the option price per share may not be less then the fair market value of the stock at the time the option is granted. At December 31, 1997, 134,000 options are both issued and outstanding. Employees' Stock Purchase Plan Under the Company's Employees' Stock Purchase Plan, all employees of the Company and its subsidiaries who have 90 days continuous service prior to the beginning of the plan year, May 1, may purchase shares of Millipore common stock by payroll deduction. The purchase price per share during the plan year is the lesser of the fair market value of the common stock at the time of purchase or on May 1. In 1997, 1996 and 1995, shares issued under the Plan were 33,000, 72,000, and 33,000, respectively. As of December 31, 1997, 262,000 shares of Millipore common stock were available for sale to employees under the Plan. Incentive Plan for Senior Management Under this plan, Millipore common stock is awarded to key members of senior management at no cost to them. The stock cannot be sold, assigned, transferred or pledged during a restriction period which is normally four years. Shares are subject to forfeiture should employment terminate during the restriction period. The stock issued under the plan is recorded at its fair market value on the award date; the related deferred compensation is amortized to selling, general and administrative expenses over the restriction period. At the end of 1997, 1996, and 1995, 116,000, 119,000, and 109,000 shares, respectively, were outstanding under the plan. Plan expense was $657 in 1997, $559 in 1996, and $450 in 1995. As of December 31, 1997, 65,000 shares of Millipore common stock were available for future awards under this plan. Note O - Employee Retirement Plans Participation and Savings Plan The Millipore Corporation Employees' Participation and Savings Plan (Participation and Savings Plan), maintained for the benefit of all U.S. employees, combines both a defined contribution plan (Participation Plan) and an employee savings plan (Savings Plan). Contributions to the Participation Plan are allocated among the U.S. employees of the Company who have completed at least two years of continuous service on the basis of the compensation they received during the year for which the contribution is made. The Savings Plan allows employees with one year of continuous service to make certain tax- deferred voluntary contributions which the Company matches with a 25 percent contribution (50 percent contribution for employees with 10 or more years of service). Total expense under the Participation and Savings Plan was $6,700 in 1997, $4,866 in 1996, and $4,512 in 1995. Retirement Plan The Company's Retirement Plan for Employees of Millipore Corporation (Retirement Plan) is a defined benefit plan for all U.S. employees which provides benefits to the extent that assets of the Participation Plan, described above, do not provide guaranteed retirement income levels. Guaranteed retirement income levels are determined based on years of service and salary level as integrated with Social Security benefits. Employees are eligible under the Retirement Plan after one year of continuous service and are vested after five years of service. For accounting purposes, the Company uses the projected unit credit method of actuarial valuation. The actuarial method for funding purposes is the entry age normal method. The Company contributes annually to the Retirement Plan, subject to Internal Revenue Service and ERISA funding limitations. No contributions were required for 1997, 1996 and 1995. The following table summarizes the funded status of the plan and amounts reflected in the Company's consolidated balance sheets at December 31. The projected benefit obligation was calculated using a discount rate of 7.0 percent in 1997 and 7.5 percent in 1996, and a salary progression rate of 5.0 percent in both years. The pension income was determined based on an expected long-term rate of return on assets of 8.0 percent in both years. Plan assets are invested primarily in mutual funds and money market funds. Plan data as of December 31, 1997 and 1996 includes assets and obligations pertaining to employees of the Company's former Waters Division, as the assets subject to these former employees have not yet been transferred to Waters Corporation. 1997 1996 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $(6,921) on $ (7,162) $ (6,195) December 31, 1997 and $(5,990) on December 31, 1996 Projected benefit obligation for service $ (7,824) $ (7,022) rendered to date Plan assets at fair value 8,794 7,657 Plan assets in excess of projected 970 635 benefit obligation Unrecognized net actuarial loss 2,542 3,268 Unrecognized prior service cost 100 111 Unrecognized net asset being amortized over 16.7 years (411) (495) Prepaid pension cost included in $ 3,201 $ 3,519 financial statements 1997 1996 1995 Net pension (expense)/income includes the following components Service cost $ (270) $ 29 $ 179 Interest cost (523) (499) (471) Return on plan assets 1,551 788 942 Amortization and deferral (1,076) (420) (630) Net pension (expense)/income $ (318) $ (102) $ 20 Postretirement Benefits Other Than Pensions The Company sponsors several unfunded defined benefit postretirement plans covering all U.S. employees. The plans provide medical and life insurance benefits and are, depending on the plan, either contributory or non- contributory. Net periodic postretirement benefit cost included the following components: 1997 1996 1995 Service cost-benefits attributed $ 317 $ 298 $ 357 to service during the year Interest cost on accumulated postretirement benefit obligation 418 453 548 Net amortization and deferral (93) (166) (205) Net periodic postretirement $ 569 $ 546 $ 812 benefit cost Summary information on the Company's plans as of December 31 is as follows: 1997 1996 Accumulated postretirement benefit obligation: Retirees and dependents $(3,164) $(4,029) Fully eligible active plan (203) (176) participants Other active plan participants (3,217) (2,604) Accrued postretirement benefit obligation (6,584) (6,809) Unrecognized gain from past experience different from that assumed and from changes in assumptions (3,587) (3,126) Accrued postretirement benefit $(10,171) $(9,935) cost The discount rate used in determining the accumulated postretirement benefit obligation was 7.0 percent as of December 31, 1997 and 7.5 percent as of December 31, 1996. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 7.0 percent in 1997, declining gradually to 5.0 percent over 3 years, remaining level thereafter. If the health care cost trend rate assumptions were increased by 1 percent, the accumulated postretirement benefit obligation as of December 31, 1997 would be increased by $834 while the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 would be increased by $118. Note P - Business Segment Information Industry Segments The Company operates in one industry segment. Using primarily membrane technology, the Company develops, manufactures and markets products used for analysis and purification. Geographical Segments The Company operates in the geographical segments indicated in the table below. Sales are reflected in the segment from which the sales are made. The Americas segment includes North and South America. The European region includes Western and Central Europe, Russia, the Middle East and Africa. The Asia/Pacific region includes Japan, Korea, Taiwan, Hong Kong, China, Southeast Asia and Australia. Transfers between geographic areas are generally made at a discount from local in-market price. Operating profits for each geographical segment exclude general corporate expenses. Identifiable assets consist of those assets utilized within each respective geographic segment and exclude cash and short-term investments, which are classified as corporate assets. Americas Europe Asia/Pacific Eliminations Total 1997 Sales: Unaffiliated $317,063 $222,452 $214,832 - $754,347 customers Unaffiliated export: Pacific customers 2,196 2,196 European customers 2,376 2,376 Total unaffiliated 321,635 222,452 214,832 - 758,919 Transfer between areas 127,216 102,883 9,973 (240,072) - Total sales $ 448,851 $325,335 $224,805 $(240,072) $758,919 Operating profits $50,299 $64,070 $10,846 $ - $125,215 General corporate expenses (10,017) Purchased research and (114,091) development expenses Gain on sale of equity securities 8,330 Interest expense, net (27,547) Loss before income taxes $(18,110) Identifiable assets $586,401 $228,110 $151,751 $(220,287) $745,975 Corporate assets 20,269 Total assets $766,244 1996 Sales: Unaffiliated $215,875 $192,838 $208,229 - $616,942 customers Unaffiliated export: Pacific 839 839 customers European 954 954 customers Total unaffiliated 217,668 192,838 208,229 - 618,735 Transfer between areas 112,474 68,535 10,880 (191,889) - Total sales $330,142 $261,373 $219,109 $(191,889) $618,735 Operating profits $75,843 $45,341 $13,994 $ - $135,178 General corporate expenses (6,455) Purchased research and (68,311) development expenses Gain on sale of equity securities 5,329 Interest expense, net (8,718) Income before income taxes $ 57,023 Identifiable assets $496,742 $212,132 $142,882 $ (215,734) $636,022 Corporate assets 46,870 Total assets $682,892 Americas Europe Asia/Pacific Eliminations Total 1995 Sales: Unaffiliated $202,717 $185,402 $204,895 $593,014 customers Unaffiliated export: Pacific 553 553 customers European 899 899 customers Total unaffiliated 204,169 185,402 204,895 594,466 Transfer between areas 95,267 46,602 14,267 (156,136) - Total sales $299,436 $232,004 $219,162 $(156,136) $594,466 Operating profits $ 75,663 $ 33,072 $ 20,973 $ - $129,708 General corporate expenses (10,632) Interest expense, net (8,941) Income before income taxes $110,135 Identifiable assets $409,750 $219,681 $174,468 $(301,308) $502,591 Corporate assets 28,354 Total assets $530,945 Report of Independent Accountants To the Shareholders and Directors of Millipore Corporation: We have audited the accompanying consolidated balance sheets of Millipore Corporation as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Millipore Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Boston, Massachusetts Coopers & Lybrand L.L.P. January 21, 1998, except for Note B, for which the date is February 6, 1998. Eleven-year Summary of Operations Millipore Corporation (In thousands, except per share 1997 1996 1995 1994 1993 data) Net sales $ 758,919 $618,735 $594,466 $497,252 $445,366 Cost of sales 342,237 249,443 243,849 212,675 193,575 Gross profit 416,682 369,292 350,617 284,577 251,791 Selling, general and 245,585 202,140 195,026 159,591 145,647 administrative expenses Research and development 55,899 38,429 36,515 34,327 34,952 expenses Purchased research & 114,091 68,311 - - - development expense Restructuring charge - - - - - Operating income 1,107 60,412 119,076 90,659 71,192 Gain on sale of equity 8,330 5,329 - - - securities Other income (expense), net - - - (10,800) - Interest income 2,937 2,780 1,682 4,091 4,069 Interest expense (30,484) (11,498) (10,623) (7,035) (12,038) (Loss)/Income from continuing operations before income taxes (18,110) 57,023 110,135 76,915 63,223 Provision for income taxes 20,674 13,401 24,781 17,306 14,225 (Loss)/Income from continuing operations before extraordinary (38,784) 43,622 85,354 59,609 48,998 item Earnings (loss) from - - - - (10,851) discontinued operations Loss on disposal of - - - (3,400) - discontinued operations (Loss)/Income before extraordinary item and (38,784) 43,622 85,354 56,209 38,147 cumulative effect of change in accounting principle Extraordinary item-loss on - - - - (3,544) early extinguishment of debt Cumulative effect of change in accounting for postretirement - - - - - benefits Net (Loss)/Income $ (38,784) $43,622 $ 85,354 $ 56,209 $ 34,603 Net income per common share- BASIC: Income from continuing $ (0.89) $ 1.00 $ 1.90 $ 1.09 $ 0.88 operations Net income per common $ (0.89) $ 1.00 $ 1.90 $ 1.03 $ 0.62 share Net income per common share- DILUTED: Income from continuing $ (0.89) $ 0.98 $ 1.86 $ 1.07 $ 0.87 operations Net income per common $ (0.89) $ 0.98 $ 1.86 $ 1.01 $ 0.62 share Cash dividends declared per $ 0.39 $ 0.35 $ 0.315 $ 0.295 $ 0.275 share Weighted average common shares outstanding: Basic 43,527 43,602 44,985 54,726 55,902 Diluted 43,527 44,457 45,887 55,644 56,049 Financial Data Working capital $ 47,535 $ 95,512 $ 90,337 $100,649 $232,865 Total assets 766,244 682,892 530,945 536,980 728,573 Long-term debt 286,844 224,359 105,272 109,327 110,067 Shareholders' equity $148,994 $217,605 $226,475 $221,277 $461,154 The Company adopted SFAS No. 109 "Accounting for Income Taxes" during 1992 and restated tax provisions in 1991 and 1990. Eleven-year Summary of Operations (continued) Millipore Corporation (In thousands except per 1992 1991 1990 1989 1988 1987 share data) Net sales $427,188 $415,075 $380,983 $365,825 $347,267 $298,728 Cost of sales 195,462 194,557 170,049 165,979 161,613 138,587 Gross profit 231,726 220,518 210,934 199,846 185,654 160,141 Selling, general and 142,701 129,593 117,214 115,951 116,636 98,730 administrative expenses Research and development 32,953 32,633 29,538 28,756 22,336 19,742 expenses Purchased research and - - - - - - development expense Restructuring charge - - 17,103 - - - Operating income 56,072 58,292 47,079 55,139 46,682 41,669 Gain on sale of equity - - - - - - securities Other income (expense), (2,415) - - 3,149 - - net Interest income 6,888 6,182 6,723 3,914 3,450 2,234 Interest expense (14,692) (13,984) (10,418) (8,543) (6,543) (3,432) (Loss)/Income from continuing operations 45,853 50,490 43,384 53,659 43,589 40,471 before income taxes Provision for income taxes 10,317 14,570 13,629 11,619 10,955 10,040 (Loss)/Income from continuing operations 35,536 35,920 29,755 42,040 32,634 30,431 before extraordinary item Earnings (loss) from 2,715 18,645 (6,678) 10,462 22,751 17,993 discontinued operations Loss on disposal of - - - - - - discontinued operations (Loss)/Income before extraordinary item and cumulative effect of 38,251 54,565 23,077 52,502 55,385 48,424 change in accounting principle Extraordinary item-loss on early extinguishment of - - - - - - debt Cumulative effect of change in accounting for postretirement (5,068) - - - - - benefits Net (Loss)/Income $33,183 $54,565 $23,077 $52,502 $55,385 $48,424 Net income per common share-BASIC: Income from $ 0.63 $ 0.64 $ 0.53 $ 0.74 $ 0.58 $ 0.54 continuing operations Net income per common $ 0.59 $ 0.97 $ 0.41 $ 0.93 $ 0.98 $ 0.86 share Net income per common share-DILUTED: Income from $ 0.63 $ 0.63 $ 0.52 $ 0.74 $ 0.57 $ 0.53 continuing operations Net income per common $ 0.58 $ 0.95 $ 0.40 $ 0.92 $ 0.97 $ 0.84 share Cash dividends declared $ 0.255 $ 0.235 $ 0.215 $ 0.195 $ 0.175 $ 0.155 per share Weighted average common shares and equivalents: Basic 56,484 56,588 56,614 56,646 56,658 56,688 Diluted 56,763 57,227 57,064 57,109 57,330 57,566 Financial Data Working capital $220,378 $247,399 $225,039 $249,777 $251,825 $168,594 Total assets 764,950 766,582 700,415 605,388 545,523 452,387 Long-term debt 103,332 107,759 102,961 94,788 103,472 6,378 Shareholders' equity $452,835 $464,496 $427,008 $403,827 $362,800 $327,604 Quarterly Results (Unaudited) The Company's unaudited quarterly results are summarized below. First Second Third Fourth (In thousands, except per Quarter Quarter Quarter Quarter Year share data) 1997 Net sales $ 178,839 $192,498 $ 184,544 $ 203,038 $ 758,919 Cost of sales 80,634 86,424 82,372 92,807 342,237 Gross profit 98,205 106,074 102,172 110,231 416,682 Selling, general and 59,777 63,273 58,965 63,570 245,585 administrative expenses Research and development 13,151 15,003 14,353 13,392 55,899 expenses Purchased research and 114,091 - - - 114,091 development expense Operating (88,814) 27,798 28,854 33,269 1,107 (loss)/income Gain on sale of equity 1,769 - 5,304 1,257 8,330 securities Interest income 761 636 708 832 2,937 Interest expense (6,024) (8,159) (8,026) (8,275) (30,484) (Loss) / income (92,308) 20,275 26,840 27,083 (18,110) before income taxes Provision for income taxes 5,454 3,894 5,637 5,689 20,674 Net (loss) / $ (97,762) $ 16,381 $ 21,203 $ 21,394 $ (38,784) income Per share information Net (loss) / income per share: Basic $ (2.25) $ 0.38 $ 0.49 $ 0.49 $ (0.89) Diluted $ (2.25) $ 0.37 $ 0.48 $ 0.48 $ (0.89) Weighted average common shares outstanding Basic 43,391 43,512 43,565 43,629 43,527 Diluted 43,391 44,274 44,428 44,344 43,527 1996 Net sales $ 156,476 $ 161,928 $ 148,913 $ 151,418 $ 618,735 Cost of sales 61,946 65,412 60,774 61,311 249,443 Gross profit 94,530 96,516 88,139 90,107 369,292 Selling, general and 50,140 52,059 50,226 49,715 202,140 administrative expenses Research and development 9,409 9,741 9,610 9,669 38,429 expenses Purchased research and - - - 68,311 68,311 development expense Operating 34,981 34,716 28,303 (37,588) 60,412 income/(loss) Gain on sale of equity - - 2,858 2,471 5,329 securities Interest income 713 661 660 746 2,780 Interest expense (2,710) (2,945) (2,995) (2,848) (11,498) Income / (loss) 32,984 32,432 28,826 (37,219) 57,023 before income taxes Provision (benefit) for 7,751 7,622 6,774 (8,746) 13,401 income taxes Net income / $ 25,233 $ 24,810 $ 22,052 $ (28,473) $ 43,622 (loss) Per share information Net income / (loss) per share: Basic $ 0.57 $ 0.57 $ 0.51 $ (0.66) $ 1.00 Diluted $ 0.56 $ 0.56 $ 0.50 $ (0.66) $ 0.98 Weighted average common shares outstanding Basic 44,163 43,642 43,335 43,284 43,602 Diluted 45,112 44,534 44,118 43,284 44,457 Investor Information Registrar and Transfer Agent Bank Boston, N.A. c/o Boston EquiServe P.O. Box 8040 Boston, Massachusetts 02266-8040 Annual Meeting The Annual Meeting of Shareholders of Millipore Corporation will be held at our Bedford, Massachusetts facility (80 Ashby Road) on Thursday, April 16, 1998 at 11 a.m. Dividend Reinvestment An automatic dividend reinvestment program is available to shareholders. A descriptive brochure and authorization card are available on request. Reports Quarterly results are available through facsimile, voice mail, and the Internet, or on request from the Company. Form 10-K is filed annually with the Securities and Exchange Commission and is available on the Internet and on request from the Company. To receive the latest quarterly results through facsimile, call (800) 758-5804 (PIN# 101371); through voice mail call (800) 605- 5249; through the Internet go to URL http://www.millipore.com. The 10-K is also available through that voice mail number and that Internet address. For other investor information, contact: Geoffrey E. Helliwell Director of Treasury Operations Millipore Corporation 80 Ashby Road Bedford, Massachusetts 01730-2271 (781) 533-2032 Common Stock Millipore's Common Stock is traded on the New York Stock Exchange. Our symbol is MIL. Stock price information is shown below. Millipore Stock Prices Stock price data from the New York Stock Exchange is based on high and low sales prices. There were approximately 3,318 shareholders of record as of December 31, 1997. Dividends Declared Range of Stock Prices Per Share 1997 1996 1997 1996 High Low High Low First Quarter $45.63 $38.88 $47.13 $36.00 $0.09 $0.08 Second Quarter 44.88 37.25 47.13 35.50 0.10 0.09 Third Quarter 51.88 41.06 43.13 33.88 0.10 0.09 Fourth Quarter 52.00 33.50 43.00 33.63 0.10 0.09