-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sj9v/bcpV7eShatefxhUzUx6FnlBDFZ8VHdwaVNPxsRtgdl7bTE/WfJUNlKJCZ5G c8bYlZ5rsuZMt58f2eRDhg== 0000940180-96-000515.txt : 19961028 0000940180-96-000515.hdr.sgml : 19961028 ACCESSION NUMBER: 0000940180-96-000515 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19961024 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WATERS CORP /DE/ CENTRAL INDEX KEY: 0001000697 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 133668640 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-14793 FILM NUMBER: 96647539 BUSINESS ADDRESS: STREET 1: 34 MAPLE ST CITY: MILFORD STATE: MA ZIP: 01757 BUSINESS PHONE: 5084782000 MAIL ADDRESS: STREET 1: 34 MAPLE STREET CITY: MILFORD STATE: MA ZIP: 01757 FORMER COMPANY: FORMER CONFORMED NAME: WCD INVESTORS INC /DE/ DATE OF NAME CHANGE: 19960605 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 24, 1996 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- WATERS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3668640 3826 (I.R.S. (PRIMARY STANDARD (STATE OR OTHER EMPLOYERIDENTIFICATION INDUSTRIAL JURISDICTION OF NO.) CLASSIFICATION CODE INCORPORATION OR NUMBER) ORGANIZATION) 34 MAPLE STREET MILFORD, MASSACHUSETTS 01757 TELEPHONE: 508-478-2000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) PHILIP S. TAYMOR WATERS CORPORATION 34 MAPLE STREET MILFORD, MASSACHUSETTS 01757 TELEPHONE: 508-478-2000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: LANCE C. BALK, ESQ. VALERIE FORD JACOB, ESQ. KIRKLAND & ELLIS FRIED, FRANK, HARRIS, SHRIVER & JACOBSON 153 EAST 53RD STREET ONE NEW YORK PLAZA NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10004 TELEPHONE: 212-446-4800 TELEPHONE: 212-859-8000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X] --------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE - ------------------------------------------------------------------------------------------------- Common Stock, par value $0.01 per share..................... 2,031,904 $32.19 $65,401,910 $19,819
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c), using the average of the high and low prices reported on the New York Stock Exchange on October 23, 1996. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED OCTOBER 24, 1996 P R O S P E C T U S 2,031,904 SHARES WATERS CORPORATION COMMON STOCK ------------ All of the 2,031,904 shares of common stock (the "Common Stock") of Waters Corporation ("Waters" or the "Company") offered hereby (the "Offering") will be sold by certain stockholders (the "Selling Stockholders") of the Company. See "Principal and Selling Stockholders." The Company is not selling shares of Common Stock in this offering and will not receive any of the proceeds from the sale of shares of Common Stock offered hereby. The Common Stock is listed on the New York Stock Exchange under the symbol "WAT." On October 24, 1996, the last reported sale price of the Common Stock on the New York Stock Exchange was $32 1/8 per share. See "Price Range of Common Stock and Dividend Policy." SEE "RISK FACTORS," BEGINNING ON PAGE 11, FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------ The Underwriter has agreed to purchase from the Selling Stockholders the shares of Common Stock offered hereby for a purchase price of $ per share. The proceeds to the Selling Stockholders from the sale of the shares of Common Stock will be $ , and expenses payable by the Company are estimated to be $400,000. The Common Stock offered hereby may be offered by the Underwriter from time to time to purchasers directly or through agents, or through brokers in brokerage transactions on the New York Stock Exchange, or to dealers in negotiated transactions or in a combination of such methods of sale, at a fixed price or prices, which may be changed, or at market prices prevailing at the time of sale, at prices related to such prevailing market prices, or at negotiated prices. See "Underwriting." The Company and the Selling Stockholders have agreed to indemnify the Underwriter against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." ------------ The shares of Common Stock are offered by the Underwriter, subject to prior sale, when, as and if issued to and accepted by it, subject to approval of certain legal matters by counsel for the Underwriter and certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about , 1996. ------------ MERRILL LYNCH & CO. ------------ The date of this Prospectus is , 1996. [INCLUDE B/W PICTURES FROM PREVIOUS PROSPECTUS] IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Market data used throughout this Prospectus were obtained from internal company surveys and industry publications primarily based upon 1994 data which is the most recent data currently available. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. Waters has not independently verified this market data. Similarly, internal company surveys, while believed by Waters to be reliable, have not been verified by any independent sources. THE COMPANY GENERAL Waters is the world's largest manufacturer, distributor and provider of high performance liquid chromatography ("HPLC") instruments, chromatography columns and other consumables, and related service. In 1994, the Company's market share was approximately 21% of the estimated $1.5 billion global HPLC market, which the Company believes was two and one-half times greater than its next leading competitor. Waters serves a worldwide customer base with 65% of its 1995 net sales to customers outside of the U.S. HPLC is the largest product segment of the analytical instrument market. HPLC is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. Customers include manufacturers of pharmaceuticals (ethical, generic and over-the-counter), industrial chemicals and polymers, food, beverages, and consumer products, as well as biotechnology companies, environmental testing companies, universities, hospitals and government agencies. HPLC is used for research and development, methods development, manufacturing and quality control due to its ability to identify approximately 80% of all known compounds and to operate in an automated manner, increasing productivity at a low cost to the user. Examples of HPLC applications include identification of new drug compounds, nutritional content analysis for food and beverage labeling, environmental testing of waste water and hazardous materials and quality control for a wide range of consumer and industrial products. MARKET LEADERSHIP The Company has the largest HPLC market share in the United States, Europe and non-Japan Asia and has a leading position in Japan. The Company attributes its worldwide market leadership to its global brand and reputation, technological innovation, comprehensive high quality product range, extensive sales and service and to having the largest installed base of HPLC instruments. Global Brand and Reputation. HPLC is critical to the research and development and quality control efforts of customers and can have a significant impact on their overall productivity. As a result, customers, principally scientists who run research laboratories, value proven performance. Reputation and demonstrated results are critical to end-user decisions to select an equipment supplier. In many cases, once a manufacturer's equipment is adopted in the laboratory, the costs and/or risks of switching to a different manufacturer's instruments can be high. Today the Company believes it has the largest HPLC installed base in the industry and outsells its closest competitor by two and one-half times. The "Waters" name has been associated with the HPLC market since the early 1970s when the Company pioneered the commercial adoption of HPLC technology with the introduction of the first practical, reliable high pressure solvent delivery system. The Company also introduced the first bonded reverse phase HPLC column in 1973. An independent industry survey, based on responses from 3 approximately 8,800 U.S. customers, conducted from April 1992 through November 1995, cites Waters as the HPLC vendor they are most likely to consider when they make their next HPLC purchase. Technological Innovation. In the HPLC industry, technological innovation is a key component of market growth. The Company believes that it is the leader in HPLC technological innovation based upon its product introductions over the past several years and that it spends significantly more on research and development than its competitors. Since 1990, Waters has introduced a number of new products and has redesigned each of the core components within its HPLC product line including the Millennium(R) data collection software, the 717 Autosampler and the 996 Photo Diode Array detector, all of which have achieved rapid market acceptance. Products introduced by Waters within the past four years accounted for approximately 37% of the Company's net sales for 1995. The Company has recently introduced and plans to introduce within the next 12 to 16 months several new product offerings, including new products based upon mass spectrometry detection, a redesigned approach to solvent delivery for HPLC systems and new products in its Symmetry(R) consumables line. Comprehensive, High Quality Product Range. Waters manufactures a comprehensive range of systems and components (solvent delivery systems, sample injectors, detectors and data management and system control software) and consumables (chromatography columns and sample preparation devices), and offers related services. With over 100 instrument models and nearly 1,500 types of chromatography columns and consumables, Waters offers the most comprehensive range of HPLC products in the industry. This diverse product range enables Waters to provide solutions for virtually any liquid chromatography application. The Company is committed to maintaining the highest quality manufacturing standards and believes that by controlling these processes, it produces among the highest quality HPLC products available. Waters is more vertically integrated in those manufacturing areas critical to product quality and performance than most of its competitors, especially in the areas of precision machining and chemical synthesis. The Company's manufacturing facilities employ advanced techniques that meet the strict International Standards Organization ("ISO") 9002 quality manufacturing standards and FDA mandated Good Manufacturing Practices and the Taunton and Milford facilities are approved by the FDA to produce Class 1 medical devices. Waters' broad array of high quality products enables it to leverage its core technologies across a broad range of applications. Extensive Sales and Service. To meet the needs of its worldwide customer base, the Company maintains 66 offices in 29 countries and has the world's largest direct sales, service and technical support organization focused on HPLC. Its more than 550 highly-trained and educated representatives worldwide have average experience of over seven years with Waters and over ten years in the industry. Waters believes it is one of the few HPLC industry participants that both sells directly to end-users in each of its markets and provides local technical service and aftermarket support to customers in virtually every industrialized market in the world. This global presence enables Waters to provide timely, responsive support and service to its customers, many of whom operate internationally, and enables it to capitalize on growth opportunities in emerging markets. By focusing dedicated resources on HPLC, Waters is able to develop specialized service in HPLC and believes it can deliver higher quality service than its competitors who focus on a broad range of instruments. Largest Installed Base of HPLC Instruments. The Company believes that, based on its estimated 40% share of the U.S. installed base, it has the largest installed base of the estimated 150,000 HPLC systems in the world. This installed base provides a strong source of ongoing revenue to the Company, with approximately 39% of 1995 net sales generated by service of its HPLC equipment and the sale of consumables. The Company believes it has a competitive advantage as the market leader with respect to repeat purchases since customers are more likely to buy new systems and consumables from manufacturers whose products are compatible with their existing instruments and with whom they have past experience with respect to quality, equipment support and service. Close relationships and continual contact with its large customer base provide the Company with sales opportunities and innovative product and application ideas. 4 GROWTH STRATEGY The Company has implemented a growth strategy comprised of four major parts. The strategy focuses on accelerating new product introductions, better capitalizing on potential market opportunities, pursuing selective acquisitions and reengineering its operations to support its stand-alone HPLC business. New Product Introductions. The Company believes it is the HPLC technology leader based upon its product introductions over the past several years and is committed to introducing technologically advanced products. Since the beginning of 1991, the Company has invested approximately $105 million in HPLC research and development, which has resulted in its current pipeline of high value-added products. Major new product introductions launched in 1995 and 1996 and planned for the remainder of 1996 include: . Alliance(TM). In March 1996, the Company introduced its Alliance(TM) product which uses a new design for the fluidics element (solvent and sample management) of the HPLC system. Alliance(TM) brings new performance benefits to the HPLC marketplace, including improved accuracy, reproducibility, ease of use, serviceability, reduced space consumption at the laboratory bench and cost effectiveness. The new technology minimizes solvent consumption and facilitates system calibration. The Company believes this new product is improving its competitive position in the core markets for HPLC. . Integrity(TM) System. In October 1995, the Company shipped the first units of its Integrity(TM) system, the first product in a family of new HPLC-mass spectrometry ("HPLC-MS") benchtop products. Integrity(TM) is a system that integrates the automated separation, quantitation and detection capabilities of HPLC with the identification and characterization capabilities of mass spectrometry ("MS"). The Company's HPLC-MS benchtop equipment provides more complete data than HPLC or MS alone, is smaller, easier to use and substantially less expensive than traditional MS products and is suited for use by chemists and laboratories trained in HPLC methods, equipment and data analysis. The Company believes that Integrity(TM) will generate growth opportunities because of its lower cost (as compared with traditional MS) together with its integration of MS and HPLC. Waters' Integrity(TM) system is the first fully integrated benchtop HPLC-MS system. . Symmetry(R). In May 1994, the Company introduced the first products in its Symmetry(R) line of consumables products, which the Company believes outperforms existing products in the marketplace due to its applicability over a wide range of compounds and its ability to deliver more accurate, reproducible results. Symmetry(R) is the result of a proprietary redesigned manufacturing process for silica media. Waters anticipates that the Symmetry(R) line of products will encompass a wide variety of columns and other sample preparation devices. The Company introduced new Symmetry(R) products during the first nine months of 1996 and plans to introduce more Symmetry(R) products during the remainder of 1996. These products are expected to contribute to the growth of the Company's consumables business. . Beyond 1996. Waters is working to develop new products to build upon the HPLC-MS and Symmetry(R) technologies. Additionally, upgrades to its Millennium(R) software are expected to expand network capabilities and connectivity to other analytical systems. The Company has research and development efforts underway to develop new capillary scale liquid chromatography and capillary electrophoresis products. Such developments, if successful, could reduce solvent consumption and allow for detection of minute sample sizes which would be particularly useful in the life sciences industry where samples are expensive and quantities are limited. The separating capabilities of these techniques could expand the applicability of HPLC into new areas. For example, capillary technologies enable separation and analysis of extremely small amounts of various compounds which historically could not be analyzed using traditional HPLC systems. Capitalizing on Market Opportunities. Waters believes that it is well positioned to take advantage of potential growth opportunities, including: (i) industry innovations and new product introductions such as HPLC-MS and capillary scale separations; (ii) growth in principal end-use markets such as pharmaceuticals, industrial 5 chemicals and polymers, food and beverage, consumer products and environmental testing; (iii) increased spending by the pharmaceutical and biotech industries to develop new drugs, generic versions of existing drugs and over-the-counter drugs; (iv) increased customer emphasis on productivity and devices which accelerate time-to-market; (v) increased worldwide environmental regulation generating additional need for HPLC data collection systems, detection systems and validation procedures; (vi) continued expansion of government-mandated labeling and testing of drugs, foods and vitamins both in the U.S. and abroad; and (vii) increased instrument purchases to replace an aging installed base. The Company is targeting emerging markets with easy-to-use systems (including its new Tiger(TM) product line) and plans to leverage its global presence to take advantage of specific growth opportunities in Eastern Europe, Latin America and the Pacific Rim. Selective Acquisitions. In addition to internally generated growth, Waters intends to expand sales and profitability through the acquisition of closely related businesses and product lines. In particular, Waters believes that acquisitions in the highly fragmented HPLC chromatography columns and other consumables market would provide opportunities to gain niche technologies, leverage the Company's assets and expand its customer base. In July 1995, Waters began implementing this strategy with the acquisition of Phase Separations Limited, a company with a strong proprietary position in chromatography consumables, which had revenues of approximately $8.4 million in 1994. Waters also plans to selectively invest in ancillary, high value added analytical laboratory instrument technologies that complement its existing HPLC technologies and provide application solutions to existing and new customers. On May 1, 1996, the Company acquired all of the capital stock of TA Instruments, Inc. ("TAI"), the global leader in thermal analysis (the "TAI Acquisition"). The TAI Acquisition will provide the Company with a stronger presence in its non-pharmaceutical industrial markets. The Company has no other agreements or understandings regarding any material acquisitions or joint ventures at this time. Reengineering Operations. As part of establishing the Company as a stand- alone entity following the Acquisition (as defined below) in 1994, the Company reengineered its operations in a manner appropriate to its independent HPLC business. The Company (i) consolidated its manufacturing facilities from five to two (one of which is dedicated to instruments and one of which is dedicated to consumables), (ii) restructured its European distribution system, creating a central distribution center in Holland and eliminating distribution facilities in 13 European countries, (iii) streamlined administration (including the elimination of a major administrative site) and (iv) reengineered its production processes to reduce cycle times. During this period, the Company reduced its overall workforce by approximately 120 employees. Although the implementation of all operational changes is not yet complete, the Company has already reduced annual expenses and substantially improved profitability. Excluding 1994 and 1995 nonrecurring charges related to the purchase of Phase Separations Limited in July 1995, the acquisition of the Predecessor (as defined below) in August 1994 and the Company's initial public offering completed in November 1995, operating income was $56.3 million for the year ended December 31, 1995 and represented a 72% increase over the prior year primarily as a result of these actions. Waters continues to review its operations in order to improve productivity and to reduce costs. Based upon the reengineering of its operations, the Company believes it can leverage its infrastructure to support additional sales without a corresponding increase in costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RECENT DEVELOPMENTS The IPO and the Redemption. In November 1995, the Company consummated an initial public offering (the "IPO") of its Common Stock which included the sale by the Company of 6,250,000 shares at an initial public offering price of $15.00 per share. In connection with the IPO, certain stockholders of the Company sold an additional 4,812,500 shares of Common Stock. Proceeds from the sale of Common Stock received by the Company were used (i) to repay a portion of the indebtedness incurred under the Company's then existing credit facility and (ii) to redeem (the "Redemption") $25.0 million in aggregate principal amount of the Company's 12 3/4% Senior Subordinated Notes due 2004 (the "Senior Subordinated Notes"). 6 Tender Offer. On March 7, 1996, the Company commenced a tender offer (the "Tender Offer") pursuant to which the remaining $75 million in aggregate principal amount of Senior Subordinated Notes which were not redeemed as a part of the Redemption were purchased on April 4, 1996. The aggregate purchase price paid by the Company in connection with the Tender Offer was $91.2 million. The TA Instruments Acquisition. On May 1, 1996 the Company acquired all of the capital stock of TAI for $84 million in cash, subject to certain adjustments, which was financed through drawings on the revolving credit facility under the Bank Credit Agreement. TAI develops, manufactures, sells and services thermal analysis instrumentation which is used for the physical characterization of polymers and related materials. The thermal analysis and rheology products offered by TAI employ the most prevalent techniques used in the analysis of polymers and other organic/inorganic materials. TAI is the global market leader in the field of thermal analysis. Net sales for TAI were approximately $47 million in 1995. The Company has completed this strategic acquisition in order to provide more comprehensive solutions to its polymer characterization customers in the industrial marketplace. The Company views the TAI Acquisition as a significant step toward the creation of a focused business unit geared toward the non- pharmaceutical industrial customer which would combine the thermal analysis and rheology businesses of TAI with Waters' current gel permeation chromatography (a form of HPLC) product line. There is a strong relationship between the information obtained through gel permeation chromatography and the types of information obtained from thermal analysis and rheology. Waters believes that bringing these related analytical technologies together on a common information management system platform will bring significant value to industrial customers working primarily with polymeric materials. The Secondary Offering. In June 1996, certain stockholders sold 11,500,000 shares of the Company's Common Stock in a secondary offering at a price of $26.50 per share. The Company did not receive any of the proceeds from the sale of such shares. BACKGROUND On August 18, 1994, the Company purchased the assets (the "Acquisition") of the Waters Chromatography Division (the "Predecessor") of Millipore Corporation ("Millipore"). References herein to the "Company" and "Waters" refer to the Company, the Predecessor and their direct and indirect subsidiaries. THE OFFERING Common Stock offered by the Selling Stockholders........ 2,031,904 shares Common Stock to be Outstanding After the Offering(a)................. 28,897,821 shares Use of Proceeds.............. The Company is not selling shares in the Offering and will not receive any of the proceeds from the sale of the shares offered hereby. New York Stock Exchange Symbol...................... "WAT"
- -------- (a) Excludes 4,939,221 shares that may be issued upon the exercise of options granted pursuant to the Company's performance incentive plans, 1,000,000 shares which may be issued pursuant to the 1996 Long-Term Performance Incentive Plan (as defined below), 250,000 shares which may be issued pursuant to the 1996 Employee Stock Purchase Plan (as defined below), and 50,000 shares which may be issued pursuant to the Non-employee Director Stock Option Plan (as defined below). See "Management." 7 SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA (A) (IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
PREDECESSOR COMPANY ---------------------------------------- ------------------------------------------------ FULL YEAR 1994 ----------------------- JANUARY 1 AUGUST 19 YEAR NINE MONTHS ENDED YEAR ENDED DECEMBER 31, TO TO ENDED SEPTEMBER 30, ---------------------------- AUGUST 18, DECEMBER 31, DECEMBER 31, -------------------- 1991 1992 1993 1994 1994 1995 1995 1996 -------- -------- -------- ---------- ------------ ------------ -------- -------- STATEMENT OF OPERATIONS DATA: Net sales.............. $300,647 $309,287 $304,927 $176,097 $131,057 $332,972 $242,516 $279,692 Cost of sales.......... 125,160 123,342 124,387 73,446 49,740 126,216 92,318 103,944 Revaluation of acquired -- -- -- -- 38,424(b) 925(b) 371(b) 6,100(b) inventory............. -------- -------- -------- -------- -------- -------- -------- -------- Gross profit........... 175,487 185,945 180,540 102,651 42,893 205,831 149,827 169,648 S,G&A expenses (c)..... 130,600 138,318 132,452 85,216 44,522 132,746 94,957 107,752 R&D expenses........... 18,505 19,142 18,525 13,399 6,790 17,681 12,860 15,286 Goodwill and purchased technology amortization.......... -- -- -- -- 1,227(b) 3,629 2,718 3,977 Expensed in-process R&D................... -- -- -- -- 53,918(b) -- -- 19,300(b) Management fee (d)..... -- -- -- -- 552 5,393 1,159 -- Restructuring -- -- 13,000 -- 3,500 -- -- -- charge(e)............. -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss)................ 26,382 28,485 16,563 4,036 (67,616) 46,382 38,133 23,333 Interest expense, net(f)................ 2,185 2,107 2,072 828 12,011 30,315 23,688 11,140 Unrealized (gains) losses on future cash flow hedges(g)........ -- -- -- -- (923) 1,142 (872) -- Realized (gains) losses on cash flow -- -- -- -- -- (2,317) 550 -- hedges(g)............ -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from con- tinuing operations before income taxes... 24,197 26,378 14,491 3,208 (78,704) 17,242 14,767 12,193 Provision for income 6,423 6,180 4,169 916 1,487 3,129 2,670 7,476 taxes(h).............. -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from con- tinuing operations.... 17,774 20,198 10,322 2,292 (80,191) 14,113 12,097 4,717 (Loss) income from dis- continued operations, net of tax(i)......... (59) 108 (9) (448) 787 -- -- -- Estimated (loss) on disposal of discontin- -- -- -- -- (8,000) -- -- -- ued operations(i)..... -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item.... 17,715 20,306 10,313 1,844 (87,404) 14,113 12,097 4,717 Extraordinary item-- (loss) on early re- -- -- -- -- -- (12,112) -- (22,264) tirement of debt...... -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle............. 17,715 20,306 10,313 1,844 (87,404) 2,001 12,097 (17,547) Cumulative effect of change in accounting -- (2,228) -- -- -- -- -- -- principle(j).......... -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)...... 17,715 18,078 10,313 1,844 (87,404) 2,001 12,097 (17,547) Less: accretion of and dividend on preferred -- -- -- -- 330 902 676 689 stock(k).............. -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) available to common $ 17,715 $ 18,078 $ 10,313 $ 1,844 $(87,734) $ 1,099 $ 11,421 $(18,236) stockholders.......... ======== ======== ======== ======== ======== ======== ======== ======== Income (loss) per com- mon share: (Loss) income per com- mon share from continuing operations. $ (3.38) $ 0.54 $ 0.48 $ 0.13 (Loss) per common share from discontinued operations............ (0.30) -- -- -- Extraordinary (loss) -- (0.49) -- (0.71) per common share...... -------- -------- -------- -------- Net (loss) income per $ (3.68) $ 0.05 $ 0.48 $ (0.58) common share.......... ======== ======== ======== ======== Weighted average number of common shares...... 23,852 24,582 23,852 31,527
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, PRO FORMA 1995 1996 -------------- --------- PRO FORMA STATEMENT OF CONTINUING OPERATIONS DATA(L): Net sales...................................... $379,569 $ 293,887 Operating income............................... 58,921 49,719 Interest expense, net.......................... 20,279 11,727 Income from continuing operations.............. 32,962 30,187 Accretion of and dividend on preferred stock(k)...................................... 902 689 Income per common share from continuing operations(m)................................. 1.06 0.94
8
PREDECESSOR COMPANY ------------------------------------- ------------------------------------------------------- FULL YEAR 1994 ------------------------- JANUARY 1 AUGUST 19 YEAR NINE MONTHS NINE MONTHS YEAR ENDED DECEMBER 31, TO TO ENDED ENDED ENDED ------------------------- AUGUST 18, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1991 1992 1993 1994 1994 1995 1995 1996 ------- ------- ------- ---------- ------------ ------------ ------------- ------------- OTHER DATA: Depreciation and amortization.......... $ 7,482 $ 8,857 $ 9,265 $6,323 $ 4,394 $13,774 $10,494 $ 12,060 Capital expenditures... 7,896 10,739 8,439 5,935 2,191 9,878 7,572 9,237 Adjusted operating income(n)............. 26,382 28,485 29,563 4,036(o) 28,778(o) 56,267 39,663 48,733 Adjusted operating income as a percentage of net sales(n)....... 8.8% 9.2% 9.7% 2.3%(o) 22.0%(o) 16.9% 16.4% 17.4% SEPTEMBER 30, 1996 ------------- BALANCE SHEET DATA: Working capital................................................................................... $ 59,088 Total assets...................................................................................... 363,780 Total debt........................................................................................ 227,552 Redeemable preferred stock(k)..................................................................... 6,922 Stockholders' equity.............................................................................. 40,741
- ------- (a) The periods beginning August 19, 1994 reflect data of the Company and its subsidiaries. The periods prior to and including August 18, 1994 reflect data of the Predecessor, substantially all of the assets of which were acquired by Waters Corporation on August 18, 1994 from Millipore. Because of the revaluation of the assets and liabilities acquired and related impact to the statement of operations, the financial statements of the Predecessor for the periods prior to August 19, 1994 are not strictly comparable to those of the Company subsequent to that date. See "The Company--Background." (b) Results for the period from August 19, 1994 to December 31, 1994 included several charges related to the Acquisition. The Company recorded charges resulting from the revaluation of acquired inventory and for expensed in- process R&D. During this period, the Company also began recording amortization expense related to acquired goodwill and purchased technology. Results for the year ended December 31, 1995 included a charge resulting from the revaluation of acquired inventory arising from the acquisition of Phase Separations Limited. Results for the nine months ended September 30, 1996 included charges resulting from the revaluation of acquired inventory and for expensed in-process research and development arising from the TAI Acquisition. (c) For the year ended December 31, 1995, selling, general and administrative expenses included a $3,567 fourth quarter nonrecurring charge for the one- time acceleration of vesting of compensatory stock options. (d) Management fees were incurred in connection with the Management Services Agreement (as defined below) which services were terminated upon consummation of the IPO in November 1995. See "Certain Relationships and Related Transactions--Management Services Agreement." (e) In the fourth quarter of 1994, the Company recorded a $3,500 restructuring charge for the cost of actions taken in Japan and Europe to restructure sales and administrative functions and to reduce the size of its workforce. In the first quarter of 1993, the Predecessor recorded a restructuring charge of $13,000 to cover costs associated with reorganizing into market- focused business units, reducing the size of its workforce and closing certain facilities. (f) Predecessor interest expense was an allocation of Millipore's worldwide net interest expense based upon the ratio of the Predecessor's net assets to Millipore's net assets. No debt obligations of Millipore were reflected on the Predecessor's balance sheets. (g) The Company has periodically entered into forward exchange contracts to hedge the U.S. dollar value of a portion of its anticipated future international cash flows. The contract maturities were chosen to correspond to the expected (footnotes continued on next page) 9 realization of the underlying cash flows. Generally accepted accounting principles require that any contracts outstanding at period end be valued at current market value even though they hedge anticipated future cash flows. Resulting unrealized gains (losses) on future cash flow hedges are reported separately from realized gains (losses) on cash flow hedges which are recorded when contracts mature. In December 1995, the Company ceased to hedge anticipated future international cash flows and therefore liquidated those particular forward foreign currency contracts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (h) The Predecessor provision for income taxes was computed as if the Predecessor operated on a stand-alone basis. (i) On December 31, 1994, the Company announced a plan to sell its process mass spectrometry business and recorded an $8,000 estimated loss on the expected sale of this discontinued operation. In July 1995, the Company sold a substantial portion of this business and the remainder of the business was sold in January 1996. (j) In 1992, the Predecessor recorded an after tax charge to income of $2,228 for the adoption of the provisions of Statement of Financial Accounting Standards ("SFAS") No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions." (k) Redeemable preferred stock represents the estimated fair market value of stock issued to Millipore in connection with the Acquisition increased by periodic accretion to liquidation value and accumulated but unpaid dividends. The preferred stock must be redeemed by the Company in 2006. (l) The summary unaudited pro forma statement of continuing operations data has been prepared to give effect to the TAI Acquisition, the Tender Offer, the IPO and the application of the net proceeds therefrom, together with borrowings under the Bank Credit Agreement (as defined below), to repay all outstanding indebtedness under the Prior Bank Credit Agreement (as defined below) and to make the Redemption as if these events occurred on January 1, 1995. (m) There were 30,178 and 31,527 weighted average shares of common stock and common stock equivalents outstanding for the year ended December 31, 1995 (on a pro forma basis) and for the nine months ended September 30, 1996, respectively. (n) Adjusted operating income and adjusted operating income as a percentage of net sales exclude the following non-recurring charges: revaluation of acquired inventory, expensed in-process R&D, the management fee paid in connection with the Management Services Agreement, the one-time acceleration of vesting of compensatory stock options and restructuring charges. (o) Based on historical shipment patterns within a quarter, the Company typically generates losses in the first half of a quarter and income in the second half. As a result, adjusted operating income for the period January 1 to August 18, 1994 was adversely affected by the timing of the Acquisition in the middle of a quarter and, conversely, adjusted operating income for the period August 19, 1994 to December 31, 1994 was favorably affected. 10 RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should carefully consider the following risk factors before making an investment in the Common Stock offered hereby. This Prospectus includes forward looking statements. These statements are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION; HPLC MARKET The HPLC market is highly competitive, and the Company encounters competition from several international instrument manufacturers and other companies in both domestic and foreign markets. Certain competitors are divisions of significantly larger companies which have greater financial and other resources than the Company. There can be no assurances that the Company's competitors will not introduce more effective and less costly products than those of the Company, or that the Company will be able to increase its sales and profitability from new product introductions, including Alliance(TM). See "Competition." The HPLC industry, from 1992 to 1994, experienced low sales growth. Approximately 43% of Waters' net sales in 1995 were to the worldwide pharmaceutical industry, which experienced slowed purchases of HPLC products prior to 1995 due to unfavorable industry conditions and consolidations. Unfavorable HPLC industry conditions could have a material adverse effect on the Company's results of operations. CONCENTRATED MANUFACTURING OPERATIONS INCREASE RISK OF DISRUPTION The Company manufactures its HPLC instruments at its facility in Milford, Massachusetts and its separation columns at its facility in Taunton, Massachusetts. TAI manufactures all of its thermal analysis products at its facility in Newcastle, Delaware. Any prolonged disruption to the operations at these facilities, whether due to labor difficulties, destruction of or damage to either facility or other reasons, could have a material adverse effect on the Company's results of operations and financial condition. FOREIGN EXCHANGE RATES CAN ADVERSELY AFFECT RESULTS OF OPERATIONS Approximately 65% of Waters' 1995 net sales were outside of the United States and were primarily denominated in foreign currencies. As a result, a significant portion of the Company's sales and operations are subject to certain risks, including adverse developments in the foreign political and economic environment, tariffs and other trade barriers, difficulties in staffing and managing foreign operations and potentially adverse tax consequences. Additionally, the U.S. dollar value of the Company's net sales varies with currency exchange rate fluctuations. Significant increases in the value of the U.S. dollar relative to certain foreign currencies could have a material adverse effect on Waters' results of operations. In 1995, each 1% average strengthening of the dollar would have decreased reported net sales by approximately $2.2 million but the impact on net income and cash flow would have been significantly less as a result of offsetting effects of local currency expenditures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUBSTANTIAL INDEBTEDNESS The Company has substantial indebtedness. Subject to the terms and conditions of the Bank Credit Agreement, Waters may incur additional indebtedness from time to time to finance acquisitions or capital expenditures or for other purposes. The level of the Company's indebtedness could have important consequences to holders of the Common Stock, given that: (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) the Company's ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions may be limited; and (iii) the Company's level of indebtedness could limit its flexibility in reacting to changes in the industry and economic conditions. Certain of the Company's competitors currently operate on a less leveraged basis and, as a result, have significantly greater financing flexibility than the Company. The Bank Credit Agreement imposes operating and financial restrictions on the Company. The Bank Credit Agreement contains covenants which limit (subject to certain exceptions): (i) the incurrence of additional indebtedness; (ii) the payment of dividends; (iii) transactions with affiliates; (iv) asset sales, acquisitions, mergers 11 and consolidations; (v) prepayments of other indebtedness; (vi) the creation of liens and encumbrances; and (vii) other matters customarily restricted in such agreements. In addition, substantially all of the Company's assets, including the stock of its subsidiaries, are pledged to secure indebtedness under the Bank Credit Agreement. There can be no assurance that the Company's existing cash balances and cash flow from operations together with borrowings under the Bank Credit Agreement will be sufficient to meet all of its debt service requirements and to fund its capital expenditure requirements for the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." FORWARD LOOKING STATEMENTS Certain of the statements in this Prospectus are forward-looking statements, including statements regarding, among other items, (i) the impact of the Company's new products including Alliance(TM), (ii) the Company's growth strategies, including its intention to make acquisitions and introduce new products, (iii) anticipated trends in the Company's business and (iv) the Company's ability to continue to control costs and maintain quality. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including (i) changes in the HPLC industry as a result of economic or regulatory influences, (ii) changes in the competitive marketplace, including new products and pricing changes by the Company's competitors and (iii) the ability of the Company to generate increased sales and profitability from new product introductions. In light of these risks and uncertainties, there can be no assurance that the forward- looking information contained in this Prospectus will transpire. RELIANCE ON KEY MANAGEMENT The operation of the Company requires managerial and operational expertise. None of the key management employees has an employment contract with the Company, and there can be no assurance that such individuals will remain with the Company. If, for any reason, such key personnel do not continue to be active in management, the Company's operations could be adversely affected. As of September 30, 1996, the Company's executive officers, including key management employees, owned 1,277,391 shares of Common Stock and held options to purchase approximately 2,095,235 additional shares of Common Stock, representing on a fully diluted basis an approximately 10.9% aggregate ownership interest. See "Management" and "Principal and Selling Stockholders." POSSIBLE ADVERSE EFFECT ON MARKET PRICE DUE TO SHARES ELIGIBLE FOR FUTURE SALE In addition to the shares of Common Stock sold in the Offering, the 22,562,500 shares of Common Stock sold in the IPO and secondary offering are freely tradeable without restriction or further registration under the Securities Act of 1933 (the "Securities Act") unless held by an "affiliate" of the Company, as that term is defined under Rule 144 of the Securities Act, which shares will be subject to the resale limitations of Rule 144. In connection with the Offering, each of the Selling Stockholders and the Company's executive officers have agreed not to dispose of shares for a period of 90 days from the date of this Prospectus, with the exception of 160,000 shares, or to make any demand for or exercise any right with respect to the registration of the shares; and the Company has agreed not to dispose of any shares (other than issuances by the Company of certain employee stock options and shares covered thereby) for a period of 90 days from the date of this Prospectus, in each case without the prior written consent of the Underwriter. Certain existing stockholders have also waived all rights to register securities owned by them in connection with the Offering. Upon expiration of the lock-up periods, the shares of Common Stock subject to the lock-ups will be eligible for sale subject to certain volume and other resale limitations of Rule 144 and Rule 144A under the Securities Act. No prediction can be made as to the effect, if any, that market sales of shares of Common Stock or the availability of shares of Common Stock for sale will have on the market price of the Common Stock from time to time. The sale of a substantial number of shares held by the existing stockholders, whether pursuant to a 12 subsequent public offering or otherwise, or the perception that such sales could occur, could adversely affect the market price of the Common Stock and could materially impair the Company's future ability to raise capital through an offering of equity securities. See "Shares Eligible For Future Sale" and "Underwriting." RESTRICTION ON PAYMENT OF DIVIDENDS ON COMMON STOCK The Company does not expect to pay dividends for the foreseeable future. The Bank Credit Agreement restricts the ability of the Company to pay dividends on the Common Stock. See "Price Range of Common Stock and Dividend Policy" and "Description of Certain Indebtedness." ANTITAKEOVER PROVISIONS The Company's Amended and Restated Certificate of Incorporation and Bylaws contain certain provisions that could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise. These provisions include advance notice procedures for stockholders to nominate candidates for election as directors of the Company and for stockholders to submit proposals for consideration at stockholders' meetings. In addition, the Company is subject to Section 203 of the Delaware General Corporation Law, which limits transactions between a publicly held company and "interested stockholders" (generally, those stockholders who, together with their affiliates and associates, own 15% or more of the company's outstanding capital stock). This provision of Delaware law also may have the effect of deterring certain potential acquisitions of the Company. See "Description of Capital Stock." 13 THE COMPANY GENERAL Waters is the world's largest manufacturer, distributor and provider of HPLC instruments, chromatographic columns and other consumables, and related service. In 1994, the Company's market share was approximately 21% of the estimated $1.5 billion global HPLC market, which the Company believes was two and one-half times greater than its next leading competitor. Waters serves a worldwide client base with 65% of its 1995 net sales to customers outside of the U.S. HPLC is the largest product segment of the analytical instrument market. HPLC is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. Customers include manufacturers of pharmaceuticals (ethical, generic and over-the-counter), industrial chemicals and polymers, food, beverages, and consumer products, as well as biotechnology companies, environmental testing companies, universities, hospitals and government agencies. HPLC is used for research and development, methods development, manufacturing and quality control due to its ability to identify approximately 80% of all known compounds and to operate in an automated manner, increasing productivity at a low cost to the user. Examples of HPLC applications include identification of new drug compounds, nutritional content analysis for food and beverage labeling, environmental testing of waste water and hazardous materials and quality control for a wide range of consumer and industrial products. The principal executive offices of the Company are located at 34 Maple Street, Milford, Massachusetts 01757 and its telephone number is (508) 478- 2000. RECENT DEVELOPMENTS The IPO and the Redemption. In November 1995, the Company consummated an IPO of its Common Stock which included the sale by the Company of 6,250,000 shares at an initial public offering price of $15.00 per share. In connection with the IPO, certain stockholders of the Company sold an additional 4,812,500 shares of Common Stock. Proceeds from the sale of Common Stock received by the Company were used (i) to repay a portion of the indebtedness incurred under the Company's then existing credit facility and (ii) to finance the Redemption of $25.0 million in aggregate principal amount of the Company's Senior Subordinated Notes. Tender Offer. On March 7, 1996, the Company commenced the Tender Offer pursuant to which the remaining $75 million in aggregate principal amount of Senior Subordinated Notes which were not redeemed as a part of the Redemption were purchased on April 4, 1996. The aggregate purchase price paid by the Company in connection with the Tender Offer was $90.6 million. The TA Instruments Acquisition. On May 1, 1996, the Company acquired all of the capital stock of TAI for $84 million in cash, subject to certain adjustments, which was financed through drawings on the revolving credit facility under the Bank Credit Agreement. TAI develops, manufactures, sells and services thermal analysis instrumentation which is used for the physical characterization of polymers and related materials. The thermal analysis and rheology products offered by TAI are among the most prevalent techniques employed in the analysis of polymers and other organic/inorganic materials. TAI is the global market leader in the field of thermal analysis. Net sales for TAI were approximately $47 million in 1995. The Company has completed this strategic acquisition in order to provide more comprehensive solutions to its polymer characterization customers in the industrial marketplace. The Company views the TAI Acquisition as a significant step toward the creation of a focused business unit geared toward the non- pharmaceutical industrial customer which would combine the thermal analysis and rheology businesses of TAI with Waters' current gel permeation chromatography product line. There is a strong relationship between the information obtained through gel permeation chromatography and the types of information obtained from thermal analysis. Waters believes that bringing these related analytical technologies together on a common information management system will bring significant value to industrial customers working primarily with polymeric materials. 14 The Secondary Offering. In June 1996, certain stockholders sold 11,500,000 shares of the Company's Common Stock in a secondary offering at a price of $26.50 per share. The Company did not receive any of the proceeds from the sale of such shares. BACKGROUND On August 18, 1994, the Company consummated the Acquisition of the Predecessor from Millipore. USE OF PROCEEDS The Company is not selling shares of Common Stock in the Offering and will not receive any of the proceeds from the sale of the shares of Common Stock offered hereby. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock is traded on the New York Stock Exchange under the symbol "WAT." The following table sets forth on a per share basis, for the periods indicated, the high and low sales prices of the Common Stock as reported by the New York Stock Exchange. The Common Stock was not publicly traded prior to the IPO.
PRICE RANGE --------------- --- HIGH LOW FISCAL 1995: ------- ------- Fourth Quarter (from November 17, 1995)............. $18 1/4 $13 1/4 FISCAL 1996: First Quarter....................................... 24 5/8 16 3/4 Second Quarter...................................... 33 24 3/8 Third Quarter....................................... 33 25 1/4 Fourth Quarter (as of October 23, 1996)............. 33 5/8 31 3/8
A recent closing price as reported on the New York Stock Exchange is set forth on the cover page of this Prospectus. Since the Acquisition, except as described below, the Company has not declared or paid any cash or other dividends on its Common Stock and does not expect to pay dividends for the foreseeable future. The Company anticipates that for the foreseeable future, earnings will be reinvested in the business. The Company's Bank Credit Agreement restricts the Company's ability to pay dividends or make other distributions on its Common Stock. The Bank Credit Agreement provides that, among other limited exceptions, the Company may pay dividends to holders of its Common Stock in an aggregate amount of $2 million, plus the lesser of $2 million and the Cumulative Income Amount (as defined, which definition includes approximately one quarter of net income less expenditures for certain capital expenditures and dividends). The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors of the Company (the "Board"). Any future determination to pay dividends will depend on the Company's results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the Board. On September 12, 1995, the Company declared and paid a special distribution of approximately $16.2 million (the "Special Distribution") to holders of the Company's Common Stock and warrants to acquire its Common Stock. 15 CAPITALIZATION The following table sets forth the historical capitalization of the Company at September 30, 1996. This table should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. See "Selected Consolidated Financial Data."
SEPTEMBER 30, 1996 ------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) Short-term debt.................................................. $ 1,300 ======== Long-term debt: Loans under Bank Credit Agreement (a).......................... $226,252 Redeemable preferred stock (b)................................... 6,922 Stockholders' equity: Common Stock, par value $0.01 per share, 50,000,000 shares authorized, 28,897,821 shares issued and outstanding (c).................. 289 Additional paid-in capital..................................... 145,735 Deferred stock option compensation............................. (889) Accumulated deficit............................................ (102,950) Translation adjustments........................................ (1,040) Minimum pension liability adjustment........................... (404) -------- Total stockholders' equity................................... 40,741 -------- Total capitalization......................................... $273,915 ========
- -------- (a) The Company has approximately $72,400 of remaining availability under the Bank Credit Agreement. (b) Redeemable preferred stock represents the estimated fair value of the stock issued to Millipore in connection with the Acquisition increased by periodic accretion to liquidation value and accumulated but unpaid dividends. The preferred stock has a liquidation value of $10,000 and accrues cumulative dividends of 6% per annum based upon the liquidation value thereof, for each year in which the Company does not pay cash dividends. The preferred stock must be redeemed by the Company in 2006. (c) Does not include shares that may be issued upon exercise of options granted pursuant to the Company's stock option plan. 16 UNAUDITED PRO FORMA FINANCIAL DATA The following unaudited pro forma consolidated statements of continuing operations for the year ended December 31, 1995 give effect to (i) the TAI Acquisition, (ii) the Tender Offer, (iii) the Redemption and (iv) the IPO and the application of the net proceeds therefrom, together with borrowings under the Bank Credit Agreement, to repay all outstanding indebtedness under the Prior Bank Credit Agreement as if each of such events had occurred on January 1, 1995. The unaudited pro forma statements of continuing operations for the nine month period ended September 30, 1996 give effect to the TAI Acquisition and the Tender Offer as if each of such events had occurred on January 1, 1995. The unaudited pro forma financial data are based on the historical consolidated financial statements for the Company and TAI and the assumptions and adjustments described in the accompanying notes. The unaudited pro forma statements of continuing operations do not (i) purport to represent what the Company's results of operations actually would have been if the events described above had occurred as of the dates indicated or what such results will be for any future periods or (ii) give effect to certain non-recurring charges which resulted from these events. The unaudited pro forma financial data are based upon assumptions that the Company believes are reasonable and should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Prospectus. 17 WATERS CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF CONTINUING OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
WATERS CORPORATION TA INSTRUMENTS, INC. HISTORICAL IPO AND HISTORICAL TA INSTRUMENTS, INC. YEAR ENDED TENDER OFFER YEAR ENDED ACQUISITION PRO DECEMBER 31,1995 ADJUSTMENTS(A) DECEMBER 31,1995 ADJUSTMENTS FORMA ------------------ -------------- -------------------- -------------------- -------- Net sales............... $332,972 $46,597 $379,569 Cost of sales........... 126,216 17,533 $ 20 (e) 143,769 Revaluation of acquired inventory.............. 925 -- 925 -------- ------- ------- -------- Gross profit........... 205,831 29,064 (20) 234,875 Selling, general and administrative expenses............... 132,746 16,719 80 (e) 149,545 Research and development expenses............... 17,681 2,072 15 (e) 19,768 Goodwill and purchased technology, net........ 3,629 1,962 1,050 (e) 6,641 Management fee.......... 5,393 $(5,393)(b) -- -- -------- ------- ------- ------- -------- Operating income....... 46,382 5,393 8,311 (1,165) 58,921 Interest expense, net... 30,315 (15,996)(c) 4,278 1,682 (f) 20,279 Unrealized losses on future cash flow hedges................. 1,142 -- 1,142 Realized (gains) on cash flow hedges............ (2,317) -- (2,317) Other (income), net..... -- (434) (434) -------- ------- ------- ------- -------- Income from continuing operations before income taxes.......... 17,242 21,389 4,467 (2,847) 40,251 Provision (benefit) for income taxes........... 3,129 3,850(d) (345) 655 (d) 7,289 -------- ------- ------- ------- -------- Income from continuing operations............ 14,113 17,539 4,812 (3,502) 32,962 -------- ------- ------- ------- -------- Less: accretion of and dividend on preferred stock.................. 902 1,014 (1,014)(g) 902 -------- ------- ------- ------- -------- Income from continuing operations available to common stockholders.......... $ 13,211 $17,539 $ 3,798 $(2,488) $ 32,060 ======== ======= ======= ======= ======== Income per common share from continuing operations............ $ .54 $ 1.06 ======== ======== Weighted average number of common shares....... 24,582 30,178(h)
See Notes to Unaudited Pro Forma Consolidated Statements of Continuing Operations. 18 WATERS CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF CONTINUING OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
WATERS CORPORATION TA INSTRUMENTS, INC. HISTORICAL IPO AND HISTORICAL TA INSTRUMENTS, INC. PERIOD ENDED TENDER OFFER PERIOD ENDED ACQUISITION PRO SEPTEMBER 30, 1996 ADJUSTMENTS(A) APRIL 30, 1996 ADJUSTMENTS FORMA ------------------ -------------- -------------------- -------------------- -------- Net sales............... $279,692 $14,195 $293,887 Cost of sales........... 103,944 5,507 $ 7 (e) 109,458 Revaluation of acquired inventory.............. 6,100 (6,100)(k) 0 -------- ------- ------- -------- Gross profit........... 169,648 8,688 6,093 184,429 Selling, general and administrative expenses............... 107,752 5,449 27 (e) 113,228 Research and development expenses............... 15,286 1,315 4 (e) 16,605 Goodwill and purchased technology, net.................... 3,977 549 351 (e) 4,877 Expensed in-process research and development............ 19,300 (19,300)(k) 0 -------- ------- ------- -------- Operating income....... 23,333 1,375 25,011 49,719 Interest expense, net... 11,140 ($1,216)(i) 1,268 535 (j) 11,727 Other expense, net...... 0 259 259 -------- ------- ------- ------- -------- Income (loss) from continuing operations before income taxes... 12,193 1,216 (152) 24,476 37,733 Provision (benefit) for income taxes .......... 7,476 243(d) (11) (162) (d) 7,546 -------- ------- ------- ------- -------- Income (loss) from continuing operations. 4,717 973 (141) 24,638 30,187 Less: accretion of and dividend on preferred stock.................. 689 364 (364)(g) 689 -------- ------- ------- ------- -------- Income (loss) from continuing operations available to common stockholders.......... $ 4,028 $ 973 $ (505) $25,002 $ 29,498 ======== ======= ======= ======= ======== Income per common share from continuing $ 0.13 $ 0.94 operations............. ======== ======== Weighted average number of common shares....... 31,527 31,527
See Notes to Unaudited Pro Forma Consolidated Statements of Continuing Operations. 19 WATERS CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF CONTINUING OPERATIONS (DOLLARS IN THOUSANDS) (a) The Unaudited Pro Forma Consolidated Statements of Continuing Operations exclude the $22,264 extraordinary loss related to the write-off of unamortized debt issuance costs and redemption premium for the early extinguishment of $75,000 principal amount of such indebtedness in the second quarter of 1996. The Unaudited Pro Forma Statement of Continuing Operations for the year ended December 31, 1995 also excludes the extraordinary loss of $12,112 recorded in the fourth quarter of 1995 from the early extinguishment of $25,000 principal amount of Senior Subordinated Notes and the repayment of all indebtedness under the Prior Bank Credit Agreement. (b) Reflects the elimination of the AEA and Bain management fee which was discontinued upon the consummation of the Company's IPO. (c) Adjustment of $12,750 to reflect the elimination in interest expense on $100,000 of repurchased and redeemed Senior Subordinated Notes (which bore interest of 12.75% per annum), an adjustment of $2,216 to reflect the reduction of deferred financing costs associated with such indebtedness and the Prior Bank Credit Agreement and an adjustment of $1,030 to reflect the reduction in interest expense related to pro forma borrowings under the Bank Credit Agreement (assuming an interest rate of 7.05% per annum). (d) Adjustment to income tax expense to reflect the estimated income tax effects of certain pro forma adjustments. The Company's pro forma effective income tax rate is lower than the U.S. federal statutory rate due to net operating loss carryforwards offset by the effect of nondeductible acquisition related amortization. (e) Reflects amortization of the depreciable write-up to property, plant and equipment over the estimate of its composite useful life (7 years) and the amortization of goodwill arising from the TAI Acquisition over a 40 year period. Amortization of the depreciable property, plant and equipment write-up has been allocated among costs of sales, selling, general and administrative expenses and research and development expenses. (f) Represents the elimination of TAI historical interest expense amounting to $4,278 incurred as a stand alone company and incremental interest expense of $5,960 resulting from borrowings under the Bank Credit Agreement totaling $84,500 to fund the TAI Acquisition (assuming an interest rate of 7.05% per annum). (g) Represents the elimination of dividends on TAI historical preferred stock. (h) Pro forma income per share from continuing operations for the year ended December 31, 1995 have been computed using the weighted average number of common shares and common share equivalents outstanding adjusted for the Company's IPO. Common share equivalents result from outstanding options and warrants to purchase Common Stock. The warrants were exercised in October 1995. (i) Adjustment of $2,392 to reflect the elimination in interest expense on $75,000 of repurchased Senior Subordinated Notes (which bore interest of 12.75% per annum), an adjustment of $212 to reflect the reduction in deferred financing costs associated with such indebtedness and an adjustment of $1,388 to reflect an increase in interest expense related to pro forma borrowings under the Bank Credit Agreement (assuming an interest rate of 6.44% per annum). (j) Represents the elimination of TAI historical interest expense amounting to $1,268 incurred as a stand alone Company and incremental interest expense of $1,803 resulting from borrowings under the Bank Credit Agreement totaling $84,500 to fund the TAI Acquisition (assuming an interest rate of 6.44% per annum). (k) Reflects the elimination of non-recurring charges related to the TAI Acquisition for the revaluation of acquired inventory and expensed in- process research and development. 20 SELECTED CONSOLIDATED FINANCIAL DATA (a) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Set forth below are selected historical financial data of the Predecessor and the Company as of the dates and for the periods shown. The selected historical financial data as of December 31, 1992 and 1993, for the years ended December 31, 1991, 1992 and 1993, and for the periods from January 1, 1994 through August 18, 1994 were derived from the historical financial statements of the Predecessor for such periods that were audited by Coopers & Lybrand L.L.P., independent auditors. The selected historical financial data of the Predecessor as of December 31, 1991 were derived from unaudited historical financial statements of the Predecessor for such period. The selected historical financial data as of December 31, 1994 and 1995 and for the period from August 19, 1994 through December 31, 1994 and the year ended December 31, 1995 were derived from the historical financial statements of the Company that were audited by Coopers & Lybrand L.L.P., whose report appears elsewhere in this Prospectus. The selected historical data of the Company for the nine month periods ended September 30, 1995 and 1996 are unaudited, however in the opinion of management such unaudited data include all adjustments (consisting of normal recurring adjustments) necessary for a fair representation of the information included therein. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year or any other interim period. Because of the revaluation of the assets and liabilities and related impact to the statement of operations, the financial statements of the Predecessor for the periods prior to August 19, 1994 are not strictly comparable to those of the Company subsequent to that date. The selected historical financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and accompanying notes thereto included elsewhere in this Prospectus.
PREDECESSOR COMPANY ------------------------------------------ ------------------------------------------------ NINE MONTHS ENDED YEAR ENDED DECEMBER 31, FULL YEAR 1994 SEPTEMBER 30, ---------------------------- ------------------------- -------------------- JANUARY 1 TO AUGUST 19 TO YEAR ENDED AUGUST 18, DECEMBER 31, DECEMBER 31, 1991 1992 1993 1994 1994 1995 1995 1996 -------- -------- -------- ------------ ------------ ------------ -------- -------- STATEMENTS OF OPERATIONS DATA: Net sales............... $300,647 $309,287 $304,927 $176,097 $131,057 $332,972 $242,516 $279,692 Cost of sales........... 125,160 123,342 124,387 73,446 49,740 126,216 92,318 103,944 Revaluation of acquired inventory.............. -- -- -- -- 38,424(b) 925(b) 371(b) 6,100 (b) -------- -------- -------- -------- -------- -------- -------- -------- Gross profit........... 175,487 185,945 180,540 102,651 42,893 205,831 149,827 169,648 S,G&A expenses (c)...... 130,600 138,318 132,452 85,216 44,522 132,746 94,957 107,752 R&D expenses............ 18,505 19,142 18,525 13,399 6,790 17,681 12,860 15,286 Goodwill and purchased technology amortization -- -- -- -- 1,227(b) 3,629 2,718 3,977 Expensed in-process R&D -- -- -- -- 53,918(b) -- -- 19,300 (b) Management fee (d)...... -- -- -- -- 552 5,393 1,159 -- Restructuring charge (e).................... -- -- 13,000 -- 3,500 -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss)................ 26,382 28,485 16,563 4,036 (67,616) 46,382 38,133 23,333 Interest expense, net (f).................... 2,185 2,107 2,072 828 12,011 30,315 23,688 11,140 Unrealized (gains) losses on future cash flow hedges (g)........ -- -- -- -- (923) 1,142 (872) -- Realized (gains) losses on cash flow hedges(g). -- -- -- -- -- (2,317) 550 -- -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes... 24,197 26,378 14,491 3,208 (78,704) 17,242 14,767 12,193 Provision for income taxes(h)............... 6,423 6,180 4,169 916 1,487 3,129 2,670 7,476 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations. 17,774 20,198 10,322 2,292 (80,191) 14,113 12,097 4,717 (Loss) income from discontinued operations, net of tax (i)......... (59) 108 (9) (448) 787 -- -- -- Estimated (loss) on disposal of discontinued operations (i)......... -- -- -- -- (8,000) -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item.... 17,715 20,306 10,313 1,844 (87,404) 14,113 12,097 4,717 Extraordinary item-- (loss) on early retirement of debt................ -- -- -- -- -- (12,112) -- (22,264) -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle............. 17,715 20,306 10,313 1,844 (87,404) 2,001 12,097 (17,547) Cumulative effect of change in accounting principle (j).......... -- (2,228) -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)...... 17,715 18,078 10,313 1,844 (87,404) 2,001 12,097 (17,547) Less: accretion of and dividend on preferred -- -- -- -- 330 902 676 689 stock (k).............. -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) available to common $ 17,715 $ 18,078 $ 10,313 $ 1,844 $(87,734) $ 1,099 $ 11,421 $(18,236) stockholders.......... ======== ======== ======== ======== ======== ======== ======== ========
21
PREDECESSOR COMPANY ------------------------------------------ ------------------------------------------------- FULL YEAR 1994 -------------------------- NINE MONTHS YEAR ENDED DECEMBER 31, JANUARY 1 TO AUGUST 19 TO YEAR ENDED ENDED SEPTEMBER 30, ---------------------------- AUGUST 18, DECEMBER 31, DECEMBER 31, -------------------- 1991 1992 1993 1994 1994 1995 1995 1996 -------- -------- -------- ------------ ------------ ------------ -------- ---------- Income (loss) per common share: (Loss) income per common share from continuing operations............. $ (3.38) $ 0.54 $ 0.48 $ 0.13 (Loss) per common share from discontinued operations............. (0.30) -- -- -- Extraordinary (loss) per -- (0.49) -- (0.71) common share........... ---------- ---------- -------- ---------- Net (loss) income per $ (3.68) $ 0.05 $ 0.48 $ (0.58) common share........... ========== ========== ======== ========== Weighted average number of common shares........ 23,852 24,582 23,852 31,527 OTHER DATA: Depreciation and amortization........... $ 7,482 $ 8,857 $ 9,265 $6,323 $ 4,394 $ 13,774 $ 10,494 $ 12,060 Capital expenditures.... 7,896 10,739 8,439 5,935 2,191 9,878 7,572 9,237 Adjusted operating income (l)............. 26,382 28,485 29,563 4,036(m) 28,778(m) 56,267 39,663 48,733 Adjusted operating income as a percentage of net sales (l).................... 8.8% 9.2% 9.7% 2.3%(m) 22.0%(m) 16.9% 16.4% 17.4% BALANCE SHEET DATA (AT PERIOD END): Working capital......... $106,743 $112,905 $100,528 $ 87,357 $ 57,033 $ 59,088 Total assets............ 195,730 199,513 189,592 331,598 299,816 363,780 Total debt.............. -- -- -- 276,017 160,433 227,552 Redeemable preferred stock (k).............. -- -- -- 5,330 6,232 6,922 Stockholders' (deficit) equity................. 161,736 163,157 149,095 (22,670) 58,118 40,741
- -------- (a) The periods beginning August 19, 1994 reflect data of the Company and its subsidiaries. The periods prior to and including August 18, 1994 reflect data of the Predecessor, substantially all of the assets of which were acquired by Waters Corporation on August 18, 1994. (b) Results for the period from August 19, 1994 to December 31, 1994 included several charges related to the Acquisition. The Company recorded charges resulting from the revaluation of acquired inventory and for expensed in- process R&D. During this period, the Company also began recording amortization expense related to acquired goodwill and purchased technology. Results for the year ended December 31, 1995 included a charge resulting from the revaluation of acquired inventory arising from the acquisition of Phase Separations Limited. Results for the nine months ended September 30, 1996 include charges resulting from the revaluation of acquired inventory and for expensed in-process research and development arising from the TAI Acquisition. (c) For the year ended December 31, 1995, selling, general and administrative expenses included a $3,567 fourth quarter non-recurring charge for the one-time acceleration of vesting of compensatory stock options. (d) Management fees were incurred in connection with the Management Services Agreement (as defined below) which services were terminated upon consummation of the IPO in November 1995. See "Certain Relationships and Related Transactions--Management Services Agreement." (e) In the fourth quarter of 1994, the Company recorded a $3,500 restructuring charge for the cost of actions taken in Japan and Europe to restructure sales and administrative functions and to reduce the size of its workforce. In the first quarter of 1993, the Predecessor recorded a restructuring charge of $13,000 to cover costs associated with reorganizing into market-focused business units, reducing the size of its workforce and closing certain facilities. (f) The Predecessor's interest expense was an allocation of Millipore's worldwide net interest expense based upon the ratio of the Predecessor's net assets to Millipore's net assets. No debt obligations of Millipore were reflected on the Predecessor's balance sheets. (footnotes continued on next page) 22 (g) The Company has periodically entered into forward exchange contracts to hedge the U.S. dollar value of a portion of its anticipated future international cash flows. The contract maturities were chosen to correspond to the expected realization of the underlying cash flows. Generally accepted accounting principles require that any contracts outstanding at period end be valued at current market value even though they hedge anticipated future cash flows. Resulting unrealized gains (losses) on future cash flow hedges are reported separately from realized gains (losses) on cash flow hedges which are recorded when contracts mature. In December 1995, the Company ceased to hedge anticipated future international cash flows and therefore liquidated those particular forward foreign currency contracts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (h) The Predecessor's provision for income taxes was computed as if the Predecessor operated on a stand-alone basis. (i) On December 31, 1994, the Company announced a plan to sell its process mass spectrometry business and recorded an $8,000 estimated loss on the expected sale of this discontinued operation. In July 1995, the Company sold a substantial portion of this business and the remainder of the business was sold in January 1996. (j) In 1992, the Predecessor recorded an after tax charge to income of $2,228 for the adoption of the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." (k) Redeemable preferred stock represents the fair market value of stock issued to Millipore in connection with the Acquisition increased by periodic accretion to liquidation value and accumulated but unpaid dividends. The preferred stock has a liquidation value of $10,000 and accrues cumulative dividends of 6% per annum based upon the liquidation value thereof, for each year in which the Company does not pay cash dividends. The preferred stock must be redeemed by the Company in 2006 and may be redeemed at the option of the Company at any time prior thereto at a redemption price equal to the liquidation value thereof plus accrued and unpaid dividends thereon. (l) Adjusted operating income and adjusted operating income as a percentage of net sales exclude the following non-recurring charges: revaluation of acquired inventory, expensed in-process research and development, the management fee paid in connection with the Management Services Agreement, the one time acceleration of vesting of compensatory stock options and restructuring charges. (m) Based on historical shipment patterns within a quarter, the Company typically generates losses in the first half of a quarter and income in the second half. As a result, adjusted operating income for the period January 1 to August 18, 1994 was adversely affected by the timing of the Acquisition in the middle of a quarter and, conversely, adjusted operating income for the period August 19, 1994 to December 31, 1994 was favorably affected. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's revenues are principally comprised of sales of high performance liquid chromatography (HPLC) instruments and related consumables and service. After compound annual sales growth in excess of 14% from 1980 to 1990, the Company's compound annual sales growth slowed to approximately 1% per year from 1990 through 1994. The Company believes that this slower net sales growth was primarily due to depressed worldwide economic conditions and a corresponding slowdown in the growth of the analytical instrument marketplace. Beginning in late 1992, reduced spending by pharmaceutical companies due to their concern over U.S. healthcare reform further affected net sales growth. In 1994, net sales grew by only 1%. However, combined full year 1994 results were depressed by an aberrant 8% first quarter sales decline primarily due to circumstances surrounding the Acquisition. Specifically, the Company's first quarter 1994 sales force reorganization, implemented to prepare it to operate as a stand alone business, affected the closing of customer orders during that period. Subsequent to this disruption, combined net sales for the nine month period ended December 31, 1994 represented 4% growth over prior year levels. Sales for the year ended December 31, 1995 represented 8% growth over the comparable prior year period. Sales for the nine month period ended September 30, 1996 represented 15% growth over the comparable prior year period. Sales growth has increased recently as a result of the introduction of new products, the improvement in the HPLC market and the TAI Acquisition. While some product prices have increased and others have decreased over the past three years, overall pricing has remained generally stable. The following table presents summary net sales data by quarter for 1993, 1994, 1995 and the first nine months of 1996 (dollars in thousands):
NET SALES ---------------------------------------------------------------------- 1993 COMBINED 1994 1995 1996 -------- ------------ ------------ ----------- % CHANGE TO % CHANGE TO % CHANGE TO COMPARABLE COMPARABLE COMPARABLE AMOUNT AMOUNT PERIOD AMOUNT PERIOD AMOUNT PERIOD -------- -------- ----------- -------- ----------- ------- ----------- Q1...................... $ 77,061 $ 71,130 (8)% $ 77,554 9% $85,313 10% Q2...................... 74,867 78,236 5 84,328 8 95,965 14 Q3...................... 71,194 74,987 5 80,634 8 98,414 22 Q4 ..................... 81,805 82,801 1 90,456 9 -------- -------- -------- FY...................... $304,927 $307,154 1 $332,972 8 ======== ======== ========
Waters improved its operating income in the face of the slow growth of the early 1990s, principally through cost reduction. Although the compound annual growth rate of sales was approximately 1% from 1990 through 1994, the compound annual growth rate of operating income, excluding nonrecurring charges, was more than 5% over this period. Waters further improved operating income levels in 1995 on the strength of 8% sales growth, substantial additional cost reductions and operating leverage. As a result of measures taken in conjunction with the Acquisition and restructuring actions completed in late 1994, the Company reduced annual operating spending by over $20 million. These savings, which were in effect for all of 1995, reduced cost of sales; selling, general and administrative expenses; and to a lesser extent, research and development spending. The savings primarily consisted of (i) $12 million of reduced salary and fringe benefit expense associated with headcount reductions and benefit plan modifications, (ii) $3 million of reduced promotional and research and development materials spending, (iii) $2 million of savings from eliminating unnecessary space, (iv) $2 million from reduced corporate overhead spending relative to levels previously allocated by the Predecessor's parent and (v) other various items which aggregated over $1 million. Excluding 1995 and 1994 nonrecurring charges related to the purchase of Phase Separations Limited in July 1995, the Acquisition and the IPO, operating income was $56.3 million for the year ended December 31, 1995 and represented a 72% increase over the prior year primarily as a result of these actions. Excluded 1995 nonrecurring charges were as follows: $0.9 million of revaluation of acquired inventory, $5.4 million of management fees under a management services agreement terminated in 24 conjunction with the IPO and $3.6 million of expense included in selling, general and administrative expenses for the one-time acceleration of vesting of certain compensatory stock options in the fourth quarter. Excluded 1994 nonrecurring charges were as follows: $38.4 million of revaluation of inventory, $53.9 million of expensed in-process research and development, $0.6 million of management fees and $3.5 million of restructuring charges associated with the Acquisition. Based upon the reengineering of its operations, the Company believes it can leverage its infrastructure to support additional sales without a corresponding increase in costs. During 1995, approximately 65% of the Company's combined net sales were derived from operations outside the United States. The Company believes that the geographic diversity of its sales reduces its dependence on any particular region. The U.S. dollar value of these revenues varies with currency exchange fluctuations, and such fluctuations can affect the Company's results from period to period. For example, worldwide sales as measured in U.S. dollars grew 8% in 1995, but grew 5% as measured in local currencies. The following table presents the Company sales by geographic region for the year ended December 31, 1995:
1995 ----------------------- SALES PERCENT ----------- ---------- (DOLLARS IN THOUSANDS) United States..................................... $ 116,065 34.9% Europe............................................ 103,144 30.9 Asia (including Japan)............................ 75,192 22.6 Rest of World..................................... 38,571 11.6 ----------- ---------- Total........................................... $ 332,972 100.0% =========== ==========
In 1995, each 1% average strengthening of the U.S. dollar would have decreased reported net sales by approximately $2.2 million while each 1% weakening of the dollar would have increased reported net sales by $2.2 million. The impact on net income and cash flow would have been significantly less as a result of local currency expenditures. Prior to the fourth quarter of 1995, the Company periodically entered into forward exchange contracts (which had initial maturities of 24 months or less) to economically hedge a significant portion of the U.S. dollar value of its anticipated future international cash flows. Generally accepted accounting principles required that those contracts outstanding at period end be valued at current market value with the resulting unrealized gain or loss reflected in the statements of operations even though they economically hedged anticipated future cash flows. In the fourth quarter of 1995, the Company ceased to economically hedge anticipated future international cash flows and therefore liquidated those particular forward currency contracts. As of December 31, 1995, the Company's outstanding forward currency contracts amounted to $3.4 million and hedged the dollar value equivalent of specified customer commitments. Future unrealized gains and losses on these contracts will not be reflected in the consolidated statements of operations but will be recorded in translation adjustments to stockholders' equity on the balance sheet. The Company does not speculate in foreign currencies. EFFECT OF ACQUISITION, TAI ACQUISITION AND TENDER OFFER ON RESULTS OF OPERATIONS Acquisition. The consummation of the Acquisition affected the Company's results of operations following the Acquisition in certain significant respects. The Acquisition was structured as an asset purchase which created certain tax benefits from the revaluation of inventory, property, plant and equipment and intangible assets. The Company adjusted upward the historical book value of certain assets in accordance with generally accepted accounting principles. Consequently, depreciation and amortization expense related to goodwill and other intangibles increased subsequent to the Acquisition as did interest expense related to debt used to finance the Acquisition. TAI Acquisition. On May 1, 1996 the Company acquired all of the capital stock of TAI for $84 million in cash, which was financed by the revolving credit facility under the Bank Credit Agreement. As a result the Company recorded non-recurring charges for the revaluation of acquired inventory of $6.1 million and expensed in-process research and development of $19.3 million during the second and third quarters of 1996. TAI had net sales of $47 million in 1995. 25 Tender Offer. On March 7, 1996, the Company commenced the Tender Offer pursuant to which the remaining $75 million in aggregate principal amount of Senior Subordinated Notes which were not redeemed as a part of the Redemption were purchased on April 4, 1996. As a result, the Company recorded a $22.3 million extraordinary loss due to the early extinguishment of its Senior Subordinated Notes during the second and third quarters of 1996. The aggregate purchase price paid by the Company in connection with the Tender Offer was $90.6 million. OPERATING INCOME DATA Waters was established to acquire the Predecessor on August 18, 1994. Because of the revaluation of the assets and liabilities of the Predecessor and the related impact on cost of sales and expenses, the financial statements of the Predecessor for periods prior to August 19, 1994 are not strictly comparable to those of subsequent periods. However, the following table combines 1994 data for the Predecessor and Company in order to facilitate management's discussion of financial results. OPERATING INCOME DATA (DOLLARS IN THOUSANDS)
PREDECESSOR COMBINED COMPANY ------------ ------------ ------------------------------- NINE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------ 1993 1994 1995 1995 1996 ------------ ------------ ------------ -------- -------- Net sales............... $304,927 $307,154 $332,972 $242,516 $279,692 Cost of sales........... 124,387 123,186 126,216 92,318 103,944 Revaluation of acquired -- 38,424 925 371 6,100 inventory(a)........... -------- -------- -------- -------- -------- Gross profit............ 180,540 145,544 205,831 149,827 169,648 SG&A expenses(b)........ 132,452 129,738 132,746 94,957 107,752 R&D expenses............ 18,525 20,189 17,681 12,860 15,286 Goodwill and purchased technology amortization(c)........ -- 1,227 3,629 2,718 3,977 Expensed in-process R&D(a)................. -- 53,918 -- -- 19,300 Management fee(a)....... -- 552 5,393 1,159 -- Restructuring charge(a). 13,000 3,500 -- -- -- -------- -------- -------- -------- -------- Operating income $ 16,563 $(63,580) $46,382 $38,133 $23,333 (loss)............... ======== ======== ======== ======== ======== OPERATING RESULTS AS A PERCENTAGE OF NET SALES: Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales........... 40.8 40.1 37.9 38.1 37.2 Revaluation of acquired -- 12.5 0.3 0.1 2.2 inventory(a)........... -------- -------- -------- -------- -------- Gross profit............ 59.2 47.4 61.8 61.8 60.6 SG&A expenses(b)........ 43.4 42.2 39.9 39.2 38.5 R&D expenses............ 6.1 6.6 5.3 5.3 5.5 Expensed in-process R&D(a)................. -- 17.6 -- -- 6.9 Goodwill and purchased technology amortization(c)........ -- 0.4 1.0 1.1 1.4 Management fee(a)....... -- 0.2 1.6 .5 -- Restructuring charge(a). 4.3 1.1 -- -- -- -------- -------- -------- -------- -------- Operating income 5.4% (20.7)% 14.0% 15.7% 8.3% (loss) .............. ======== ======== ======== ======== ========
- -------- (a) Non-recurring charges. (b) The year ended December 31, 1995, includes a $3,567 non-recurring fourth quarter charge for one-time acceleration of vesting of compensatory stock options. (c) For the 1994 period, amount reflects amortization only for the period August 19, 1994 to December 31, 1994. 26 RECENT EVENTS In July 1995, the Company advanced its strategy of expanding sales and profitability through the acquisition of closely related businesses and product lines when it acquired Phase Separations Limited, an HPLC consumables business based in the United Kingdom with a strong proprietary position in chromatographic column chemistries. The Company paid approximately $7.5 million for this business which had revenues of $8.4 million in 1994. Also, in July 1995, the Company completed the divestiture of a substantial portion of its discontinued process mass spectrometry business. The Company sold the net assets of its Pittsburgh, Pennsylvania based operation, excluding land and building, net of associated costs, for approximately $6.5 million. In January 1996, the Company completed the sale of the Pittsburgh land and building and a smaller operation located in Madison, Wisconsin, net of associated costs, for approximately $4.4 million. In November 1995, the Company successfully completed the IPO by selling 6,250,000 shares of Common Stock for net proceeds of $86.2 million. In connection with the IPO, certain stockholders of the Company sold an additional 4,812,500 shares of Common Stock. At the same time, the Company repaid all borrowings outstanding under the senior credit facility dated August 18, 1994 (the "Prior Bank Credit Agreement") with the net proceeds of the IPO and borrowings under the Bank Credit Agreement. The Company, in connection with the IPO, completed the Redemption of $25 million in aggregate principal amount of its Senior Subordinated Notes. Accordingly, the Company recorded an extraordinary loss of $12.1 million resulting from the early retirement of debt in the fourth quarter of 1995. See "Liquidity and Capital Resources." On March 6, 1996, the Company increased the maximum availability under the Bank Credit Agreement by $125 million in order to simplify its capital structure and provide additional financial flexibility. On March 7, 1996, the Company commenced the Tender Offer pursuant to which the remaining $75 million in aggregate principal amount of Senior Subordinated Notes which were not redeemed as a part of the Redemption were purchased on April 4, 1996. As a result, the Company recorded a $22.3 million extraordinary loss for the second quarter of 1996 due to the early extinguishment of its Senior Subordinated Notes. See "Liquidity and Capital Resources." On May 1, 1996, the Company acquired all of the capital stock of TAI for $84 million in cash, subject to certain adjustments, which was financed through drawings on the revolving credit facility under the Bank Credit Agreement. As a result, the Company recorded non-recurring charges for the revaluation of acquired inventory of $6.1 million and expensed in-process research and development of $19.3 million during the second and third quarters of 1996. TAI develops, manufactures, sells and services thermal analysis instrumentation which is used for the physical characterization of polymers and related materials. The thermal analysis and rheology products offered by TAI are among the most prevalent techniques employed in the analysis of polymers and other organic/inorganic materials. TAI is the global market leader in the field of thermal analysis. Net sales for TAI were approximately $47 million in 1995. NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995 Net Sales. Net sales for the nine month period ended September 30, 1996 (the "1996 Period") were $279.7 million, compared to $242.5 million for the nine month period ended September 30, 1995 (the "1995 Period"), representing an increase of 15%. Excluding the adverse effects of a stronger U.S. dollar, net sales increased by 19% for the 1996 Period. TAI, for which results are included after its May 1, 1996 acquisition, accounted for 9% points of growth while the Company's traditional HPLC business grew by 10% excluding currency effects. HPLC growth was broadbased. The Company's international business performed strongly as it did in 1995 and the U.S. business, which had been flat for the past several years, grew by 8% with the impact of new product introductions and sales of other products. In March 1996, Waters introduced its new family of Alliance(TM) HPLC systems which provide customers more accurate and consistent results and increased sample handling capacity, and are more compact and easier to maintain than conventional component systems. Gross Profit. Gross profit increased to $169.6 million in the 1996 Period from $149.8 million in the 1995 Period. Excluding nonrecurring charges for revaluation of acquired inventory, related to purchase accounting for acquisitions ($6.1 million related to TAI in 1996 and $0.4 million related to Phase Separations Limited in 1995), 27 gross profit increased by 17%. Gross profit as a percentage of sales excluding revaluation charges increased to 62.8% in 1996 from 61.9% in 1995 with improved manufacturing productivity. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $107.8 million for the 1996 Period from $95.0 million for the 1995 Period, representing an increase of 13%. Selling, general and administrative expenses, which increased with the acquisition of TAI, improved as a percentage of net sales to 38.5% for the current period from 39.2% in 1995, reflecting general expense controls. Research and Development Expenses. Research and development expenses increased to $15.3 million for the 1996 Period from $12.9 million for the 1995 Period representing an increase of $2.4 million or 19%. Current year spending increased with both the acquisition of TAI and new development programs. In March 1996, Waters introduced its new Alliance(TM) systems. Alliance(TM) systems are modular and allow scientists the flexibility to create tailored systems, which deliver more consistent results and are more compact and easier to maintain than conventional component systems. Goodwill and Purchased Technology Amortization. Goodwill and purchased technology amortization increased to $4.0 million for the 1996 Period from $2.7 million for the 1995 Period due to the acquisition of TAI. Expensed In-Process Research and Development. In 1996, the Company wrote off $19.3 million of the acquisition price for TAI related to in-process research and development acquired. Generally accepted accounting principles prohibit capitalization of research and development expenditures. Management Fee. Until November 1995, the Company paid AEA Investors Inc. ("AEA") and Bain Capital, Inc. ("Bain") an annual fee of $1.5 million plus out of pocket expenses for general management, financial and other corporate advisory services. The agreement was terminated in conjunction with the IPO. Operating Income. Operating income of $23.3 million for the 1996 Period was $14.8 million lower than the comparable prior year period because of $25.4 million of nonrecurring charges related to the TAI acquisition ($6.1 million of revaluation of acquired inventory and $19.3 million of expensed in-process research and development). Excluding revaluation of acquired inventory charges in 1996 and 1995, the expensed in-process research and development charge in 1996, and 1995 management fees under the terminated Management Services Agreement, operating income of $48.7 million for the 1996 Period was $9.0 million, or 23%, greater than that of the 1995 Period. Interest Expense. Contemporaneously with the IPO, the Company retired $25 million of Senior Subordinated Notes, and retired all outstanding indebtedness under the prior Bank Credit Agreement with proceeds from the IPO and the Bank Credit Agreement. In April 1996, the Company completed the successful tender for its then remaining $75 million of Senior Subordinated Notes, financing the repurchase with borrowings under the Bank Credit Agreement. Reduced debt levels and more favorable interest rates under the new bank credit agreement resulted in a 53% year-to-year decrease in interest expense for the first nine months. Unrealized Losses on Future Cash Flow Hedges. During 1995, the Company periodically entered into forward exchange contracts to economically hedge a significant portion of the U.S. dollar value of its anticipated future international cash flows. Generally accepted accounting principles require that those contracts outstanding at period end be valued at current market value with the resulting unrealized gain or loss reflected in the statements of operations even though they economically hedged anticipated future cash flows. In the fourth quarter of 1995, the Company ceased to hedge anticipated future international cash flows and therefore liquidated those particular forward currency contracts. During the 1995 Period, the Company reported a $0.9 million unrealized gain on future cash flow hedges. Provision for Income Taxes. The Company's tax rate for the 1996 Period was 20% after excluding revaluation of acquired inventory and expensed in-process research and development charges related to the TAI Acquisition, which are not tax deductible. The Company's 1996 tax rate is comparable to the 18.3% tax rate for the first nine months of 1995. The Company's 1996 U.S. taxable income will be offset by net operating loss carryforwards. 28 Income from Continuing Operations. After nonrecurring charges for revaluation of acquired inventory and expensed in-process research and development, the Company generated $4.7 million of income for the 1996 Period compared to $12.1 million for the 1995 Period. Before nonrecurring charges, the Company generated income of $30.1 million for the 1996 Period. The improvement over the prior year was a result of net sales growth, continued focus on cost reductions in all operating areas and interest expense reduction. Income per share of $0.13 ($0.96 before nonrecurring charges) for the 1996 Period compared to $0.48 for the 1995 Period. Early Extinguishment of Debt. In the second quarter of 1996, the Company recorded an extraordinary loss of $22.3 million related to the early extinguishment of debt in connection with the tender for its $75 million of Senior Subordinated Notes. COMPANY YEAR ENDED DECEMBER 31, 1995 COMPARED TO COMBINED PREDECESSOR AND COMPANY YEAR ENDED DECEMBER 31, 1994 Net Sales. Net sales for 1995 were $333.0 million, compared with $307.2 million for the year ended December 31, 1994, an increase of 8%. The Company's international business benefited from improved market conditions and weakening of the U.S. dollar. International sales increased by 14% and growth was geographically broad-based. The U.S. business was flat compared with the prior year. On a worldwide basis, pharmaceutical customer demand, which accounts for over 40% of the Company's business, grew strongly in 1995. Company revenues reflected increased demand for new products introduced in 1994. In particular, the Company experienced strong demand for its consumable Symmetry(R) column products, which provide more accurate and reproducible chromatography results. Sales growth was also generated by the Company's new Integrity(TM) product, which combines the separation, quantitation and detection capabilities of HPLC with the identification and characterization capabilities of benchtop MS detection. Excluding the benefits of a weaker U.S. dollar, consolidated net sales for 1995 increased by 5% compared to the prior year period. Gross Profit. Gross profit for 1995 was $205.8 million, versus $145.5 million for 1994, an increase of $60.3 million or 41% over the comparable period of the prior year, due to significantly lower charges for revaluation of acquired inventory, higher sales volumes and productivity improvements. In the year ended December 31, 1994, the Company charged $38.4 million to cost of sales related to the revaluation of inventory acquired as part of the Acquisition. In the year ended December 31, 1995, the Company charged $0.9 million to cost of sales related to the revaluation of inventory acquired in conjunction with the July 1995 purchase of Phase Separations Limited. Moreover, the Company took various measures to reduce costs in conjunction with the Acquisition and as part of a restructuring in late 1994, including consolidating manufacturing plants and reducing the number of employees. Excluding revaluation of acquired inventory charges, gross profit for 1995 was $206.8 million, versus $184.0 million for 1994, an increase of 12% over the comparable period of the prior year, and gross profit margins of 62.1% for 1995 exceeded 59.9% margins for 1994. Selling, General and Administrative Expenses. Selling, general and administrative expenses for 1995 were $132.7 million, compared to $129.7 million for the comparable 1994 period. As a percentage of net sales, selling, general and administrative expenses decreased to 39.9% for 1995 from 42.2% for the comparable period in 1994. This decrease was primarily the result of reengineering measures adopted in connection with the Acquisition and fourth quarter restructuring in 1994. The Company eliminated excess facilities, consolidated administrative operations, reduced staffing and replaced corporate overhead with a less costly stand-alone infrastructure. Cost reduction impacts were partly offset by the increased translated dollar value of international expenses due to the weak U.S. dollar and a $4.6 million charge for compensatory stock option expense, including a one-time charge of $3.6 million for the accelerated vesting of certain of these options. Research and Development Expenses. Research and development expenses for 1995 were $17.7 million, $2.5 million below prior year levels due to three factors. First, 1994 results included particularly high spending levels related to the Company's Integrity(TM) HPLC-MS system. Research and development spending levels for 1994 were 9% higher than those of 1993. HPLC- MS spending has been reduced to levels typical after the completion of initial development. Second, the Company eliminated certain administrative and supervisory 29 redundancies within its research and development organization by consolidating two research and development organizations into one after the Acquisition. Third, the Company modified its product development approach in 1995 and funded slightly fewer programs with more spending per program in order to shorten time to market and improve productivity. The Company continues to invest in those programs important to its future, including benchtop mass spectrometry detection capabilities, a new solvent delivery module, network data products and new column chemistries. The Company believes its current HPLC research and development spending levels are significantly greater than those of its nearest competitor. Expensed In-Process Research and Development. In 1994, the Company wrote off $53.9 million of the Acquisition purchase price related to in-process research and development acquired from the Predecessor. Generally accepted accounting principles prohibit capitalization of research and development expenditures. Goodwill and Purchased Technology Amortization. Goodwill and purchased technology amortization for 1995 was $3.6 million, an increase of $2.4 million from the prior period and primarily relates to the Acquisition. Management Fee. For the year ended December 31, 1995, the Company incurred $5.4 million of expense for financial advice and consulting and other services from AEA and Bain, an increase of $4.8 million from the prior period under the Professional Services Agreement dated August 18, 1994 among AEA, Bain and the Company (the "Management Services Agreement"). The increase was due primarily to a $4.0 million charge to terminate this agreement in connection with the IPO. Operating Income. Operating income for 1995 was $46.4 million, an increase of $110.0 million from the prior year loss. $92.3 million of this operating income increase resulted from nonrecurring Acquisition related charges. Excluding revaluation of acquired inventory charges in 1994 and 1995, the 1995 accelerated compensatory stock option vesting charge, 1994 and 1995 management fees under the terminated Management Services Agreement and the 1994 expensed in-process R&D and restructuring charges, operating income of $56.3 million for the year ended December 31, 1995 was $23.5 million greater than that of the comparable period in 1994, a 72% increase. Interest Expense, Net. Interest expense for 1995 was $30.3 million, an increase of $17.5 million as compared with $12.8 million for 1994. This increase was due to borrowings used to finance the Acquisition. Unrealized Losses (Gains) on Future Cash Flow Hedges. As discussed in the Overview above, until the fourth quarter of 1995, the Company periodically entered into forward exchange contracts to economically hedge the U.S. dollar value of a portion of its anticipated future international cash flows. The Company reported unrealized losses of $1.1 million in 1995 and unrealized gains of $0.9 million in 1994. Realized (Gains) Losses on Cash Flow Hedges. In the fourth quarter of 1995, the Company liquidated all outstanding forward exchange contracts which hedged future cash flows. For the year ended December 31, 1995, the Company realized a $2.3 million gain on cash flow hedges contracted in prior periods to hedge its currency exposure. Provision for Income Taxes. The Company's effective income tax rate for 1995 was 18.1%. The Predecessor's effective income tax rate for the period from January 1, 1994 to August 18, 1994 was 28.6%. The Company's 1995 tax rate was lower than the Predecessor's 1994 rate due to the benefit of net operating loss carryforwards from 1994 which substantially offset U.S. taxable income. The Company recorded a tax provision for the period from August 19 to December 31, 1994 while it reported operating losses because certain foreign subsidiaries generated taxable income. Income (loss) from Continuing Operations. Income from continuing operations for 1995 was $14.1 million, compared to a loss of $77.9 million in the prior year comparable period. Non-recurring charges related to the Acquisition depressed 1994 profit levels. In addition, 1995 improvements in operating profitability were offset by higher interest expense related to the Acquisition and nonrecurring charges primarily related to the IPO. 30 Early Extinguishment of Debt. In the fourth quarter of 1995, the Company recorded an extraordinary loss of $12.1 million related to the early extinguishment of debt. The Company utilized the net proceeds from the IPO, the Bank Credit Agreement and operating cash flow to retire $25.0 million of Senior Subordinated Notes and $81.4 million of principal outstanding under the Prior Bank Credit Agreement. COMBINED YEAR ENDED DECEMBER 31, 1994 COMPARED TO PREDECESSOR YEAR ENDED DECEMBER 31, 1993 Net Sales. Combined net sales for 1994 were $307.2 million, an increase of 1% from the prior year's net sales of $304.9 million. First quarter 1994 sales decreased by 8% from 1993 levels. The Company believes this first quarter sales decline was aberrant and primarily due to circumstances surrounding the divestiture of the Predecessor by Millipore. Sales for the remainder of 1994 were 4% higher than the previous year. Like the immediately preceding years, demand from pharmaceutical customers continued to be depressed, however, sales to generic pharmaceutical companies increased and became a more significant segment of the Company's business. Other industrial customer demand strengthened as the operations of these customers, in particular chemical manufacturers, continued to recover from cyclical lows. Excluding the favorable impact of the weaker U.S. dollar, net sales for 1994 as compared to 1993 decreased by 1%. Gross Profit. Combined gross profit for 1994 was $145.5 million as compared to $180.5 million in 1993, a decrease of $35.0 million or 19.4%. Excluding the $38.4 million nonrecurring charge related to inventory revalued in the Acquisition, 1994 gross profit actually increased by 2%. 1994 gross profit margins, excluding the impact of inventory revaluation, were 59.9%, up slightly from 59.2% in 1993. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $2.7 million or 2% to $129.7 million in 1994 from $132.5 million in 1993. As a percentage of net sales, selling, general and administrative expenses decreased from 43.4% in 1993 to 42.2% in 1994 primarily due to cost reductions implemented by the Company in the latter part of 1994. Research and Development Expenses. Research and development expenses were $20.2 million in 1994, and represented 6.6% of net sales, as compared to $18.5 million and 6.1% of net sales in 1993, as the Company continued to invest in new product development programs continued from 1993. Initial product development was substantially completed and new products were introduced in the areas of benchtop mass spectrometry detection, with the introduction of the Integrity(TM) system, and new silica chemistries, with the introduction of the Symmetry(R) product line. Goodwill and Purchased Technology Amortization. Goodwill and purchased technology amortization expense for 1994 was $1.2 million and relates to the Acquisition. 1994 Restructuring Charge. In the fourth quarter of 1994, the Company recorded a $3.5 million restructuring charge as it reduced selling, general and administrative employment levels. The restructuring plan was substantially completed by the end of 1994. Operating Income (Loss). The 1994 combined operating loss was $63.6 million compared to operating income of $16.6 million in 1993 and resulted primarily from non-recurring charges of $38.4 million resulting from the revaluation of acquired inventory, $53.9 million for expensed in-process research and development and a $3.5 million restructuring charge. Operating income before non-recurring charges was $32.3 million and represented a 9% increase compared to 1993 excluding a restructuring charge in that year. Interest Expense, Net. Interest expense increased to $12.8 million in 1994 from $2.1 million in 1993 due to borrowings under the Prior Bank Credit Agreement and the Senior Subordinated Notes. Unrealized Losses (Gains) on Future Cash Flow Hedges. The Company recorded unrealized gains of $0.9 million in 1994 related to forward exchange contracts entered into after the Acquisition to hedge anticipated future international cash flows. 31 Provision for Income Taxes. The Company recorded a tax provision in 1994 while it reported operating losses as certain of the Company's foreign subsidiaries generated taxable income in the period from August 19, 1994 to December 31, 1994. For the period from January 1, 1994 to August 18, 1994, the Predecessor's effective tax rate was 28.6% which was consistent with the 1993 rate of 28.8%. Income (Loss) From Continuing Operations. The combined 1994 loss from continuing operations of $77.9 million, as compared to income of $10.3 million in 1993, was due to nonrecurring charges related to the Acquisition and the fourth quarter 1994 restructuring, and increased interest expense associated with financing the Acquisition. Income (Loss) from Discontinued Operations and Estimated Loss on Disposal of Discontinued Operations. Effective December 31, 1994, the Board approved a plan to divest the Company's process mass spectrometry business. Waters acquired its process mass spectrometry business in early 1992 to access technology needed to develop benchtop mass spectrometry detection capabilities for use in conjunction with HPLC instrumentation. In 1994, the Company completed its development effort in this area and decided to sell this business. The historical results of the process mass spectrometry business have been reflected as discontinued operations, and the Company recorded an estimated loss of $8.0 million for the disposition of this business. LIQUIDITY AND CAPITAL RESOURCES Upon consummation of the Acquisition, liquidity requirements increased significantly due to debt service costs associated with borrowings. On April 4, 1996, the Company consummated the Tender Offer pursuant to which the remaining $75 million in aggregate principal amount of Senior Subordinated Notes which were not redeemed as a part of the Redemption were purchased. The aggregate purchase price paid by the Company in connection with the Tender Offer was $90.6 million. In the second quarter of 1996, the Company recorded an extraordinary loss of $22.3 million related to the early extinguishment of the Senior Subordinated Notes. The Bank Credit Agreement is a revolving credit facility with maximum availability of $300 million with the following principal terms. The loans under the Bank Credit Agreement bear interest for each calendar quarter at a per annum rate equal to, at the Company's option, (i) the Base Rate plus an amount which will vary between zero and 0.50%, based upon certain Company performance criteria for the previous four quarters, or (ii) a Eurodollar Rate (as defined) plus an amount which will vary between 0.50% and 1.50%, based upon certain Company performance criteria for the previous four quarters. The availability under the Bank Credit Agreement will decrease under certain circumstances such as in the event of asset sales and issuances of equity, will decrease by $45 million at November 22, 1998 and 1999, and will terminate in 2000. At December 31, 1995, the interest rate on the Bank Credit Agreement was approximately 6.7%. The Bank Credit Agreement imposes certain restrictions on the Company and certain of its subsidiaries, including restrictions on its ability to incur indebtedness, pay dividends, make acquisitions, make investments, grant liens, sell its assets and engage in certain other activities. Indebtedness under the Bank Credit Agreement is secured by substantially all of the assets of the Company, including the Company's real and personal property, inventory, accounts receivable, intellectual property and other intangibles and a pledge of the stock of certain of the Company's subsidiaries. The Company's existing availability under the Bank Credit Agreement was $72.4 million as of September 30, 1996. The Company was in compliance with all of its debt covenants under the Bank Credit Agreement as of September 30, 1996. See "Description of Certain Indebtedness--Description of the Bank Credit Facility." The Company generated $45.2 million in cash from operating activities during 1995. This cash flow was generated primarily by net income of $2.0 million, as increased by $13.8 million for depreciation and 32 amortization, $2.7 million for amortization of debt issuance costs, $4.6 million for non-cash compensatory stock option expense and $12.1 million of a non-cash extraordinary loss. Further, accounts receivable balances were reduced by $10.2 million during the year with improved worldwide collections and customary factoring in Japan. Inventories decreased by $5.6 million. Net cash used in investing activities during 1995 reflected (i) the receipt of $6.5 million of net proceeds from the sale of a substantial portion of the Company's discontinued process mass spectrometry business and (ii) the expenditure of $7.5 million to acquire Phase Separations Limited. Other expenditures consisted of $6.3 million for additions to property, plant and equipment and $3.6 million for development of product software. Net cash of $45.8 million used in financing activities during 1995 reflected the payment of the $16.2 million Special Distribution, repayment of $175.0 million owed under the Prior Bank Credit Agreement (including $164.8 million repaid in connection with the IPO) and $28.2 million paid to redeem Senior Subordinated Notes including a $3.2 million call premium. The Company also paid $2.2 million for debt issuance costs under the Bank Credit Agreement. The Company raised $86.2 million net proceeds from the sale of 6,250,000 shares of Common Stock in the IPO and borrowed $83.5 million under the Bank Credit Agreement. In 1995, the Company also received net payments of $3.2 million of notes receivable due from officers. The Company generated $36.7 million in operating cash flows during the 1996 Period primarily as a result of $30.1 million in income before extraordinary items and non-cash charges for revaluation of acquired inventory and expensed in-process research and development, increased by $12.1 million for depreciation and amortization of intangible assets. Net cash used for investing activities of $88.5 million during the 1996 Period primarily reflected $83.3 million used to acquire TAI. Net cash provided by financing activities of $49.6 million during the 1996 Period reflected borrowings to finance the acquisition of TAI net of other repayments of bank debt and $1.9 million used to obtain interest rate protection agreements which extend through 1999. The Company's capital expenditures in 1993, 1994 and 1995 were $5.9 million, $5.4 million and $6.3 million, respectively. The Company's capitalized software expenditures in 1993, 1994 and 1995 were $2.6 million, $2.7 million and $3.6 million, respectively. The Company expects capital expenditures and capitalized software expenditures in 1996 to be consistent with historical levels. In January 1996, the Company entered into a three-year debt swap agreement with the Bank of Boston. The Company swapped $22 million in notional amount of floating rate LIBOR borrowings for 2.3 billion yen notional amount of borrowings at a fixed interest rate of 1.525% per annum. At representative interest rates and current exchange rates in effect at January 23, 1996, the effective date of the agreement, the Company would lower its annual interest costs by approximately $0.9 million over the term of the swap. The Company could also incur higher or lower principal repayments over the term of the swap agreement. In March and April 1996, the Company entered into several interest rate protection agreements. These agreements provide payments to the Company if the three month LIBOR rate, as defined, exceeds 8% in 1996, 6% in 1997 and 6.5% in 1998 and 1999 on aggregate borrowings of $183.0 million in 1996 and 1997 and $70.0 million and $30.0 million in 1998 and 1999, respectively. In June 1996, the Company entered into an additional three-year debt swap agreement with Bankers Trust Company. The Company swapped $7.5 million in notional amount of floating rate LIBOR borrowings for $818 million yen notional amount of borrowings at a fixed rate of 2.02%. The Company believes that existing cash balances and cash flow from operating activities together with borrowings available under the Bank Credit Agreement will be sufficient to fund future working capital needs, capital spending requirements and debt service requirements of the Company in the foreseeable future. 33 SEASONALITY The Company experiences modest quarterly seasonal business swings. Third quarter sales levels are typically lower than other quarters and fourth quarter sales levels are typically higher. Third quarter sales levels decline primarily due to Europe's summer holiday season and, to a lesser extent, slower summer business activity in the U.S. Fourth quarter sales levels increase primarily due to accelerated European business after the holiday season ends and customer spending of remaining unallocated year-end budgets. INFLATION Inflation affects the cost of goods and services used by the Company. In recent years, inflation has been modest. The competitive environment somewhat limits the ability of the Company to recover higher costs by raising prices, although the Company does selectively increase prices for certain products. Overall product prices have been stable during the past four years and the Company continues to mitigate the adverse effects of inflation primarily through improved productivity and cost containment and improvement programs. ENVIRONMENTAL MATTERS The Company's facilities are subject to federal, state, local and foreign environmental requirements, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste and the cleanup of properties affected by hazardous substances. The Company does not currently anticipate any material adverse effect on its operations or financial condition as a result of its efforts to comply with, or its liabilities under, such requirements. The Company does not currently anticipate any material capital expenditures for environmental control facilities. Some risk of environmental liability is inherent in the Company's business, however, and there can be no assurance that material environmental costs will not arise in the future. In particular, the Company might incur capital and other costs to comply with increasingly stringent environmental laws and enforcement policies. Although it is difficult to predict future environmental costs, the Company does not anticipate any material adverse effect on its operations, financial condition or competitive position as a result of future costs of environmental compliance. In connection with the Acquisition, Millipore agreed to retain environmental liabilities resulting from pre-Acquisition operations of the Company's facilities. See "Business-- Environmental Matters." INCOME TAXES The Company's effective tax rate for 1995 was 18.1%, which was affected by the Company's utilization of federal and foreign net operating loss carryforwards. The Company expects to utilize net operating loss carryforwards to offset taxable income in 1996, 1997 and 1998 assuming that taxable profits are realized. Consequently, the Company expects these net operating loss carryforwards to reduce its statutory tax rate over the next three years. As of December 31, 1995, the Company had U.S. net operating loss carryforwards of approximately $41 million usable through 2009 and foreign net operating loss carryforwards of approximately $5 million. See Note 8 to the Company's Consolidated Financial Statements. RECENTLY ADOPTED ACCOUNTING STANDARDS Accounting for Stock-Based Compensation. In 1996, the Company will adopt the disclosure provisions of SFAS No. 123 which specifies a fair value based method of accounting for stock based compensation plans. FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, including statements regarding, among other items, (i) the impact of the Company's new products, including Alliance(TM), (ii) the Company's growth strategies, including its intention to make acquisitions and introduce new products, (iii) anticipated trends in the Company's 34 business and (iv) the Company's ability to continue to control costs and maintain quality. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from these forward-looking statements as a result of the factors described in "Risk Factors" including, among others, (i) changes in the HPLC industry as a result of economic or regulatory influences, (ii) changes in the competitive marketplace, including new products and pricing changes by the Company's competitors and (iii) the ability of the Company to generate increased sales and profitability from new product introductions. In light of these risks and uncertainties, there can be no assurance that the forward- looking information contained in this Prospectus will in fact transpire. PRO FORMA FINANCIAL RESULTS On a pro forma basis, adjusted to reflect the impact of the TAI Acquisition, the Tender Offer, the Redemption and the IPO and the application of the net proceeds therefrom together with borrowings under the Bank Credit Agreement to repay all outstanding indebtedness under the Prior Bank Credit Agreement, income from continuing operations was $33.0 million for the year ended December 31, 1995 and $30.2 million for the nine months ended September 30, 1996. Improved pro forma 1995 operating income primarily resulted from reduced interest expense associated with the IPO, the Redemption and the Tender Offer as well as increased income associated with the TAI Acquisition. On a pro forma basis, the ratio of the Company's (i) operating income plus depreciation and amortization to (ii) cash interest expense for the year ended December 31, 1995 was 3.9 times, which was greater than the 1995 actual coverage ratio. 35 BUSINESS GENERAL Waters is the world's largest manufacturer, distributor and provider of HPLC instruments, chromatography columns and other consumables, and related service. In 1994, the Company's market share was approximately 21% of the estimated $1.5 billion global HPLC market, which the Company believes was two and one-half times greater than its next leading competitor. Waters serves a worldwide customer base with 65% of its 1995 net sales to customers outside of the U.S. HPLC is the largest product segment of the analytical instrument market. HPLC is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. Customers include manufacturers of pharmaceuticals (ethical, generic and over-the-counter), industrial chemicals and polymers, food, beverages, and consumer products, as well as biotechnology companies, environmental testing companies, universities, hospitals and government agencies. HPLC is used for research and development, methods development, manufacturing and quality control due to its ability to identify approximately 80% of all known compounds and to operate in an automated manner, increasing productivity at a low cost to the user. Examples of HPLC applications include identification of new drug compounds, nutritional content analysis for food and beverage labeling, environmental testing of waste water and hazardous materials and quality control for a wide range of consumer and industrial products. MARKET LEADERSHIP The Company has the largest HPLC market share in the United States, Europe and non-Japan Asia and has a leading position in Japan. The Company attributes its worldwide market leadership to its global brand and reputation, technological innovation, comprehensive high quality product range, extensive sales and service and to having the largest installed base of HPLC instruments. Global Brand and Reputation. HPLC is critical to the research and development and quality control efforts of customers and can have a significant impact on their overall productivity. As a result, customers, principally scientists who run research laboratories, value proven performance. Reputation and demonstrated results are critical to end-user decisions to select an equipment supplier. In many cases, once a manufacturer's equipment is adopted in the laboratory, the costs and/or risks of switching to a different manufacturer's instruments can be high. Today the Company believes it has the largest HPLC installed base in the industry and outsells its closest competitor by two and one-half times. The "Waters" name has been associated with the HPLC market since the early 1970s when the Company pioneered the commercial adoption of HPLC technology with the introduction of the first practical, reliable high pressure solvent delivery system. The Company also introduced the first bonded reverse phase HPLC column in 1973. An independent industry survey, based on responses from approximately 8,800 U.S. customers, conducted from April 1992 through November 1995, cites Waters as the HPLC vendor they are most likely to consider when they make their next HPLC purchase. Technological Innovation. In the HPLC industry, technological innovation is a key component of market growth. The Company believes that it is the market leader in HPLC technological innovation based upon its product introductions over the past several years and that it spends significantly more on research and development than its competitors. Since 1990, Waters has introduced a number of new products and has redesigned each of the core components within its HPLC product line including the Millennium(R) data collection software, the 717 Autosampler and the 996 Photo Diode Array detector, all of which have achieved rapid market acceptance. Products introduced by Waters within the past four years accounted for approximately 37% of the Company's net sales for 1995. The Company has recently introduced and plans to introduce within the next 12 to 16 months several new product offerings including new products based upon mass spectrometry detection, a redesigned approach to solvent delivery for HPLC systems and new products in its Symmetry(R) consumables line. Comprehensive, High Quality Product Range. Waters manufactures a comprehensive range of systems and components (solvent delivery systems, sample injectors, detectors and data management and system control 36 management software) and consumables (chromatography columns and sample preparation devices), and offers related services. With over 100 instrument models and nearly 1,500 types of chromatography columns and consumables, Waters offers the most comprehensive range of HPLC products in the industry. This diverse product range enables Waters to provide solutions for virtually any liquid chromatography application. The Company is committed to maintaining the highest quality manufacturing standards and believes that by controlling these processes, it produces among the highest quality HPLC products available. Waters is more vertically integrated in those manufacturing areas critical to product quality and performance than most of its competitors, especially in the areas of precision machining and chemical synthesis. The Company's manufacturing facilities employ advanced techniques that meet the strict ISO 9002 quality manufacturing standards and FDA mandated Good Manufacturing Practices and the Taunton and Milford facilities are approved by the FDA to produce Class 1 medical devices. Waters' broad array of high quality products enables it to leverage its core technologies across a broad range of applications. Extensive Sales and Service. To meet the needs of its worldwide customer base, the Company maintains 66 offices in 29 countries and has the world's largest direct sales, service and technical support organization focused on HPLC. Its more than 550 highly-trained and educated representatives worldwide have average experience of over seven years with Waters and over ten years in the industry. Waters believes it is one of the few HPLC industry participants that both sells directly to end-users in each of its markets and provides local technical service and aftermarket support to customers in virtually every industrialized market in the world. This global presence enables Waters to provide timely, responsive support and service to its customers, many of whom operate internationally, and enables it to capitalize on growth opportunities in emerging markets. By focusing dedicated resources on HPLC, Waters is able to develop specialized service in HPLC and believes it can deliver higher quality service than its competitors who focus on a broad range of instruments. Largest Installed Base of HPLC Instruments. The Company believes that, based on its estimated 40% share of the U.S. installed base, it has the largest installed base of the estimated 150,000 HPLC systems in the world. This installed base provides a strong source of ongoing revenue to the Company, with approximately 39% of 1995 net sales generated by service of its HPLC equipment and the sale of consumables. The Company believes it has a competitive advantage as the market leader with respect to repeat purchases since customers are more likely to buy new systems and consumables from manufacturers whose products are compatible with their existing instruments and with whom they have past experience with respect to quality, equipment support and service. Close relationships and continual contact with its large customer base provide the Company with sales opportunities and innovative product and application ideas. GROWTH STRATEGY The Company has implemented a growth strategy comprised of four major parts. The strategy focuses on accelerating new product introductions, better capitalizing on potential market opportunities, pursuing selective acquisitions and reengineering its operations to support its stand-alone HPLC business. New Product Introductions. The Company believes it is the HPLC technology leader based upon its product introductions over the past several years and is committed to introducing technologically advanced products. Since the beginning of 1991, the Company has invested approximately $105 million in HPLC research and development, which has resulted in its current pipeline of high value-added products. Major new product introductions launched in 1995 and 1996 and planned for the remainder of 1996 include: . Alliance(TM). In March 1996, the Company introduced its Alliance(TM) product which uses a new design for the fluidics element (solvent and sample management) of the HPLC system. Alliance(TM) brings new performance benefits to the HPLC marketplace including improved accuracy, reproducibility, ease of use, serviceability, reduced space consumption at the laboratory bench and cost effectiveness. The new technology minimizes solvent consumption and facilitates system calibration. The Company believes this new product is improving its competitive position in the core markets for HPLC. 37 . Integrity(TM) System. In October 1995, the Company shipped the first units of its Integrity(TM) system, the first product in a family of new HPLC-MS benchtop products. Integrity(TM) is a system that integrates the automated separation, quantitation and detection capabilities of HPLC with the identification and characterization capabilities of MS. The Company's HPLC-MS benchtop equipment provides more complete data than HPLC or MS alone, is smaller, easier to use and substantially less expensive than traditional MS products and is suited for use by chemists and laboratories trained in HPLC methods, equipment and data analysis. The Company believes that Integrity(TM)will generate growth opportunities because of its lower cost (as compared with traditional MS) together with its integration of MS and HPLC. Waters' Integrity(TM)system is the first fully integrated benchtop HPLC-MS system. . Symmetry(R). In May 1994, the Company introduced the first products in its Symmetry(R) line of consumables products, which the Company believes outperforms existing products in the marketplace due to its applicability over a wide range of compounds and its ability to deliver more accurate, reproducible results. Symmetry(R) is the result of a proprietary redesigned manufacturing process for silica media. Waters anticipates that the Symmetry(R) line of products will encompass a wide variety of columns and other sample preparation devices. The Company introduced new Symmetry(R) products during the first nine months of 1996 and plans to introduce more during the remainder of 1996. These products are expected to contribute to the growth of the Company's consumables business. . Beyond 1996. Waters is working to develop new products to build upon the HPLC-MS and Symmetry(R) technologies. Additionally, upgrades to its Millennium(R) software are expected to expand network capabilities and connectivity to other analytical systems. The Company has research and development efforts underway to develop new capillary scale liquid chromatography and capillary electrophoresis products. Such developments, if successful, could reduce solvent consumption and allow for detection of minute sample sizes which would be particularly useful in the life sciences industry where samples are expensive and quantities are limited. The separating capabilities of these techniques could expand the applicability of HPLC into new areas. For example, capillary technologies enable separation and analysis of extremely small amounts of various compounds which historically could not be analyzed using traditional HPLC systems. Capitalizing on Market Opportunities. Waters believes that it is well positioned to take advantage of potential growth opportunities, including: (i) industry innovations and new product introductions such as HPLC-MS and capillary scale separations; (ii) growth in principal end-use markets such as pharmaceuticals, industrial chemicals and polymers, food and beverage, consumer products and environmental testing; (iii) increased spending by the pharmaceutical and biotech industries to develop new drugs, generic versions of existing drugs and over-the-counter drugs; (iv) increased customer emphasis on productivity and devices which accelerate time-to-market; (v) increased worldwide environmental regulation generating additional need for HPLC data collection systems, detection systems and validation procedures; (vi) continued expansion of government-mandated labeling and testing of drugs, foods and vitamins both in the U.S. and abroad; and (vii) increased instrument purchases to replace an aging installed base. The Company is targeting emerging markets with easy-to-use systems (including its new Tiger(TM) product line) and plans to leverage its global presence to take advantage of specific growth opportunities in Eastern Europe, Latin America and the Pacific Rim. Selective Acquisitions. In addition to internally generated growth, Waters intends to expand sales and profitability through the acquisition of closely related businesses and product lines. In particular, Waters believes that acquisitions in the highly fragmented HPLC chromatography columns and other consumables market would provide opportunities to gain niche technologies, leverage the Company's assets and expand its customer base. In July 1995, Waters began implementing this strategy with the acquisition of Phase Separations Limited, a company with a strong proprietary position in chromatography consumables, which had revenues of approximately $8.4 million in 1994. Waters also plans to selectively invest in ancillary, high value added analytical laboratory instrument technologies that complement its existing HPLC technologies and provide application solutions to existing and new customers. On May 1, 1996, the Company consummated the TAI Acquisition. The TAI Acquisition will provide the Company with a stronger presence in its non-pharmaceutical 38 industrial markets. The Company has no other agreements or understandings regarding any material acquisitions or joint ventures at this time. Reengineering Operations. As part of establishing the Company as a stand- alone entity following the Acquisition in 1994, the Company re-engineered its operations in a manner appropriate to its independent HPLC business. The Company (i) consolidated its manufacturing facilities from five to two (one of which is dedicated to instruments and one of which is dedicated to chemistries), (ii) restructured its European distribution system, creating a central distribution center in Holland and eliminating distribution facilities in 13 European countries, (iii) streamlined administration (including the elimination of a major administrative site) and (iv) reengineered its production processes to reduce cycle times. During this period, the Company reduced its overall workforce by approximately 120 employees. Although the implementation of all operational changes is not yet complete, the Company has already reduced annual expenses and substantially improved profitability. Excluding 1994 and 1995 nonrecurring charges related to the purchase of Phase Separations Limited in July 1995, the Acquisition and the IPO, operating income was $56.3 million for the year ended December 31, 1995, which represented a 72% increase over the prior year, primarily as a result of these actions. Waters plans to continue to review its operations in order to improve productivity and to reduce costs. Based upon the reengineering of its operations, the Company believes it can leverage its infrastructure to support additional sales without a corresponding increase in costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." INDUSTRY OVERVIEW Chromatography. Chromatography is a separation and detection technique used in the analysis and purification of materials and their constituent components. Chromatography commonly employs one of two primary techniques, liquid chromatography or gas chromatography. Liquid chromatography surpassed gas chromatography in the mid-1980s as the single largest analytical instrument segment because of its more universal applicability: approximately 80% of known compounds can be analyzed by liquid chromatography while approximately 20% can be separated by gas chromatography, which can analyze only volatile and semi-volatile organic compounds. Materials best separated through liquid chromatography include organic and inorganic compounds, complex polymers and high molecular-weight biomolecules. Most analytical chemistry problems involve complex mixtures which are made up of hundreds or thousands of different chemical compounds. The difficult task in a successful analysis is often not the specific determination of the final components but the separation steps in which the sample is broken down into its constituent parts. Liquid chromatography separates materials into their constituent components by passing a sample dissolved in a solvent through a column of chemically and physically interactive packing, which selectively slows the passage of the solution's constituents. The most common detection techniques are based upon ultraviolet light absorption and refraction while others are based on electrochemical conductivity and fluorescence characteristics. HPLC. HPLC sales comprise the largest segment of the approximately $8.5 billion analytical instrument market. The worldwide market for HPLC instruments and related products totaled approximately $1.5 billion in 1994 with an estimated installed base of 150,000 instruments. The United States, Europe and Japan represent the largest markets for HPLC products, with approximately 36%, 33% and 14% of worldwide 1994 sales, respectively. While they represent a smaller part of the current HPLC market, economies such as the Pacific Rim nations (excluding Japan), Latin America and Eastern Europe offer above average growth potential as these countries purchase HPLC products to support rapid industrial development. Instrument sales and service account for approximately 76% of the total 1994 HPLC market and consumables (principally columns) comprise the remaining 24%. Instrument sales comprise both sales of the initial systems (43%) and aftermarket sales of instrument components and service (33%). While representing only 43% of the total HPLC market, initial systems sales are critical to industry participants because purchasers are more likely to purchase components, consumables and service contracts from the manufacturers of their initial systems. Therefore, system sales represent a source of potential future revenues. 39 The pharmaceutical and biotechnology industry is the largest HPLC customer segment, representing 34% of total HPLC industry revenues in 1994 with the chemical industry, universities and governments, the environmental industry and all others representing 15%, 29%, 4% and 18% of the market, respectively. Examples of HPLC applications include identification of new drug compounds, nutritional content analysis for food and beverage labeling, environmental testing of waste water and hazardous byproducts and quality control for a wide range of consumer and industrial products. Instrument performance and reliability are critical to users of HPLC. Within the pharmaceutical industry, for example, many FDA drug applications and approvals employ HPLC testing and results. The cost of HPLC instruments is a small component of its customers' aggregate product and research and development expenditures, but is critical to development efforts and can have a significant impact on its customers' overall productivity. As a result, customers, principally scientists who run research laboratories, tend to value proven performance over price. Reputation, technical leadership, service and a long-term track record of proven application specific results are critical to end-user decisions to choose an equipment supplier. In many cases, once a manufacturer's equipment is adopted in the laboratory, the costs and/or risks of switching to a different manufacturer of instruments and validating new methods can be high. Column performance and reliability are also critical to users of HPLC. Once test methods are established using a particular column, customers are reluctant to switch. In the pharmaceutical industry, as part of the new drug approval process, the FDA and its international counterparts require that the separation column be specified. This column is typically used during the drug's patent life and later when the drug is manufactured in generic and over-the-counter forms. In the 1980s, HPLC enjoyed strong growth as many laboratories invested heavily in analytical instrumentation. In the early 1990s, however, the worldwide recession caused many customers, particularly chemical companies, to reduce their capital investments. The uncertainties of health care reform in the United States beginning in late 1992 also negatively impacted HPLC spending by U.S. pharmaceutical customers. As a result of these factors, HPLC annual market growth declined from in excess of 10% in the 1980s to the low single digits per year on average for the five years ending 1994. Recently, the pharmaceutical industry has increased HPLC related purchases, the European recession has subsided, chemical companies have experienced increased profitability and the threat of federally mandated health care reform has declined. Waters believes that it is well positioned to take advantage of potential growth opportunities, including: (i) industry innovations and new product introductions such as HPLC-MS and capillary scale separations; (ii) growth in principal end-use markets such as pharmaceuticals, industrial chemicals and polymers, food and beverage, consumer products and environmental testing; (iii) increased spending by the pharmaceutical and biotech industries to develop new drugs, generic versions of existing drugs and over-the-counter drugs; (iv) increased customer emphasis on productivity and devices which accelerate time-to-market; (v) increased worldwide environmental regulation generating additional need for HPLC data collection systems, detection systems and validation procedures; (vi) continued expansion of government-mandated labeling and testing of drugs, foods and vitamins in both the U.S. and abroad; and (vii) increased instrument purchases to replace an aging installed base. The Company is targeting emerging markets with easy-to-use systems and plans to leverage its global presence to take advantage of specific growth opportunities in Eastern Europe, Latin America and the Pacific Rim. Thermal Analysis. The TAI Acquisition expands the Company's product offerings to include thermal analysis and rheology products. Thermal analysis measures the physical characteristics of materials as a function of temperature. Changes in temperature affect several characteristics of materials such as their physical state, weight, dimension and mechanical and electrical properties, which may be measured by one or more thermal analysis techniques. Consequently, thermal analysis techniques are widely used in the development, production and characterization of materials in various industries such as plastics, chemicals, automobiles, pharmaceuticals and electronics. Rheology instruments complement thermal analyzers in characterizing materials. Rheology characterizes the flow properties of materials and measures their viscosity, elasticity and deformation under different types of loading. The information obtained provides insight with regard to a material's behavior during manufacture, transport, usage and storage. The Company believes the total global market demand for thermal 40 analysis instruments is approximately $185 million while that for rheology instruments is estimated to be approximately $50 million. PRODUCTS With over 100 instrument models, and nearly 1,500 types of chromatography columns and consumables, Waters offers the most comprehensive range of HPLC products in the industry. In 1995, the Company generated 61% of its net sales from its HPLC instrument and component sales and 39% of its net sales from its sale of consumables and service. Waters' product breadth enables the Company to provide solutions to a full range of its customers' analytical requirements. HPLC Systems. Most of the Company's components are sold in system configurations typically ranging in price from $25,000 to $50,000 and HPLC-MS systems typically range in price from $130,000 to $150,000. A complete HPLC system consists of five basic components: the solvent delivery system, the sample injector, the separation column, the detector and the data acquisition device. The solvent delivery system pumps the solvent through the HPLC system, while the sample injector injects the sample into the solvent flow. The separation column then separates the sample into its components for analysis in the detector, which detects the presence and measures the amount of the constituents. The data acquisition device then records the information from the detector. In addition, Waters has developed Millennium, a proprietary PC- based system control software package which manages the chromatographic process (including set up of the solvent delivery system, autosampler and detector); reports, stores and archives the results of multiple analyses; and rapidly sets up sophisticated routines for following methods protocols. During the last three years, the Company has redesigned the core components in each component category and has introduced a number of new products. The illustration and table below depict a typical configuration for an HPLC system, provide a description of the basic components and describe the primary Waters offering in each area: [INSERT PICTURE] 41 DESCRIPTION OF HPLC SYSTEM COMPONENTS COMPONENT WATERS' PRODUCTS - ------------------------------------- ------------------------------------- Waters offers a wide array of deliv- SOLVENT DELIVERY SYSTEM. The solvent ery systems capable of handling a delivery system typically relies on broad range of solvents and flow small, high pressure reciprocating rates. Waters produces five princi- pumps to deliver one or more sol- pal solvent delivery systems which vents to the injector where the sam- range in price from approximately ple is introduced. $5,000 to over $16,000. SAMPLE INJECTOR. The sample injector Waters offers a broad range of in- relies on valves, loops or syringes jector products including manual in- to insert the sample into the sol- jectors and autosamplers. The Com- vent flow. The use of automatic in- pany believes that its 717 jection systems, or autosamplers, Autosampler, which was introduced in allows unattended operation of HPLC 1992 and since has gained widespread systems. market acceptance, represents ad- vanced injector technology. Sample injectors range in price from ap- proximately $1,000 to $12,000. CHROMATOGRAPHIC COLUMN. The separa- tion column contains one of several types of packing, typically station- ary phase packing made from silica or polymers. As the sample flows through the column it is separated into its constituent components. Se- lection of the correct column is im- portant for achieving accurate, re- producible separations over extended periods. Waters is one of the few HPLC in- strument manufacturers that produces and distributes columns and manufac- tures the silica and polymers used as packing materials in the columns. Waters most successful columns in- clude Bondapak(R), introduced in 1973, Nova-Pak(R), introduced in 1983 and Symmetry(R), introduced in 1994. Separation columns cost an av- erage of approximately $300 each, and are replaced every three weeks to several months depending on us- age. DETECTOR. The detector measures the presence and amount of constituents in a compound. Ultraviolet/visible light detectors, which are used in approximately 75% of HPLC tests, measure the absorption of ultravio- let and visible light rays in order to provide quantitative analysis of the constituents of a compound. Photo diode array detection is be- coming increasingly popular as it allows more precise detection of certain compounds. The latest detec- tor technology uses mass spectrome- try to identify constituents through their molecular weight. Waters offers 15 detectors in its core product line that provide a full range of detection techniques. The Company introduced its 996 Photo Diode Array detector in 1992 and re- cently introduced its HPLC systems that include mass spectrometer de- tectors. Detectors (excluding those with mass spectrometry technology) range in price from approximately $8,000 for an ultraviolet detector to $14,000 for the photo diode array detector. MS detectors, today sold only in a system configuration, are sold for approximately $100,000. DATA MANAGEMENT AND SYSTEM CONTROL SOFTWARE. Data Acquisition Device. The data acquisition device calculates and records the results of the analysis completed in the detector. The re- sults of multiple analyses can be reported, stored and archived. The most basic data acquisition units convert detector signals to a con- tinuous trace on paper. Waters' data products range from the basic 746 Data Module integrator, which provides simple reports of the results of HPLC analysis, to the Millennium(R) Chromatography Manag- er, which is a comprehensive soft- ware package designed to run on an individual PC or in a client/server network. Software options allow Millennium(R) to be customized to meet specific laboratory, applica- tion, or regulatory requirements. Millennium(R)'s use of a relational database provides easy retrieval of stored results. Prices range from $4,000 for an integrator to $14,000 for a PC-based workstation. Client/server networks for lab-wide or corporate-wide information man- agement range from $50,000 to $500,000. System Control Software. Management of the chro- matographic process, including setup of the solvent delivery system, au- tomated sample injector, and detec- tor, can be provided by personal computer-based software. Method pro- tocols can be created, named and used to rapidly set up sophisticated routines. Software feature content, flexibility and ease-of-use can dif- ferentiate one manufacturer's HPLC system from another. 42 Consumables. Chromatography columns and other consumables sold by the Company include HPLC separation columns and sample preparation products which represented approximately 90% of Waters' total consumables net sales in 1995. Sample preparation products are used to condition a sample for more effective testing by an analytical technique. Consumables are required to be replaced at regular intervals. HPLC columns are metal tubes packed with silica and polymers that physically separate the sample into its components for analysis. Columns are generally designed to be interchangeable among different HPLC systems and manufacturers. Selection of the correct column is important for achieving accurate measurements, as different packings and column sizes are used for different compounds. Research and development customers often test a variety of columns with different compounds until they find the correct combination. For test results to be valuable, every column must provide accurate, reproducible separations over extended periods. As a result, once a particular manufacturer's column has been approved for a testing procedure, such as trials for FDA approval, it becomes costly and time consuming to switch. Replacement rates for HPLC columns range from once every three weeks to every several months depending on the frequency of usage and the application of the column. Waters offers nearly 1,300 types of chromatography columns. Service. Users of chromatography systems often require substantial technical support before and after the system sale to ensure the reliability and validation of HPLC instruments, the accuracy of HPLC tests and effective resolution of any problems found during analytical testing. As part of its support services, the Company's technical support staff provides individual assistance in solving chemical analysis problems, typically at no additional cost. The Company offers training courses and periodically sends its customers information on applications development. Chromatography systems sold by the Company generally include a one-year warranty, installation and certain user training, all at no additional cost. Service contracts may be purchased by customers to cover equipment no longer under warranty. Service work not performed under warranty or service contracts is performed on a time and materials basis. The Company believes that its experienced worldwide service organization provides a significant and increasingly important source of competitive advantage to its customers, particularly to customers with worldwide operations. Its service organization allows the Company to continuously monitor the needs of its customers over time, which provides leads for new product sales and ideas for new products. The Company has also recently started providing validation services, which provide assurance that instruments perform to users' specifications, to its pharmaceutical customers in response to regulatory requirements. Software. The Company has developed proprietary software applications to control performance of its HPLC instruments and collect, analyze and store data collected by its instruments. Software facilitates the use of HPLC systems and can be a differentiating factor for HPLC customers. Waters' Windows(R)-based Millennium(R) software provides complete data acquisition and system control from a single keyboard and offers the ability to process, analyze, view, sort, store, retrieve and report data in a single package. The instruments are designed to interface and be controlled by the Company's Millennium(R) software. Therefore, once a customer makes the decision to purchase Millennium(R), the customer is more likely to make its future HPLC systems purchases from Waters. The Company intends to introduce annual upgrades to its Millennium(R) software which will be an ongoing source of revenues. A software upgrade allows a customer to upgrade its HPLC system at a relatively low cost. Waters has also signed partnership agreements with more than a dozen third-party software vendors to create applications for Millenium as a way to add more overall value to the product. New Products. The Company believes it is the HPLC technology leader and has successfully developed and marketed a number of innovative products since its inception. Products introduced by Waters within the last four years accounted for approximately 37% of net sales in 1995. The Company's 996 Photo Diode Array detector, introduced in 1992, commands a leading position in the HPLC marketplace. The Company plans to continue its pattern of new product introductions, particularly in the areas of increasingly sensitive detection systems, improved column chemistries, increased automation, and enhanced data collection software. . Alliance(TM). In March 1996, the Company introduced its Alliance(TM) product which uses a new design for the fluidics element (solvent and sample management) of the HPLC system. Alliance(TM) brings new 43 performance benefits to the HPLC marketplace including improved accuracy, reproducibility, ease of use, serviceability, reduced space consumption at the laboratory bench and cost effectiveness. The new technology minimizes solvent consumption and facilitates system calibration. The Company believes this new product is improving its competitive position in the core markets for HPLC. . Integrity(TM) System. In October 1995, the Company shipped the first units of its Integrity(TM) system, the first product in a family of new HPLC-MS benchtop products. Integrity(TM) is a system that integrates the automated separation, quantitation and detection capabilities of HPLC with the identification and characterization capabilities of MS. The Company's HPLC-MS benchtop equipment provides more complete data than HPLC or MS alone, is smaller, easier to use and substantially less expensive than traditional MS products and is suited for use by chemists and laboratories trained in HPLC methods, equipment and data analysis. The Company believes that Integrity(TM) will generate growth opportunities because of its lower cost (as compared with traditional MS) together with its integration of MS and HPLC. Waters' Integrity(TM) system is the first fully integrated benchtop HPLC-MS system. . Symmetry(R). In May 1994, the Company introduced the first products in its Symmetry(R) line of consumables products, which the Company believes outperforms existing products in the marketplace due to its applicability over a wide range of compounds and its ability to deliver more accurate, reproducible results. Symmetry(R) is the result of a proprietary redesigned manufacturing process for silica media. Waters anticipates that the Symmetry line of products will encompass a wide variety of columns and other sample preparation devices. The Company introduced new Symmetry(R) products during the first nine months of 1996 and plans to introduce more during the remainder of 1996. These products are expected to contribute to the growth of the Company's consummables business. . Beyond 1996. Waters is working to develop new products to build upon the HPLC-MS and Symmetry(R) technologies. Additionally, upgrades to its Millennium(R) software are expected to expand network capabilities and connectivity to other analytical systems. The Company has research and development efforts underway to develop new capillary scale liquid chromatography and capillary electrophoresis products. Such developments, if successful, could reduce solvent consumption and allow for detection of minute sample sizes which would be particularly useful in the life sciences industry where samples are expensive and quantities are limited. The separating capabilities of these techniques could expand the applicability of HPLC into new areas. For example, capillary technologies enable separation and analysis of extremely small amounts of various compounds which historically could not be analyzed using traditional HPLC systems. CUSTOMERS Waters has a broad and diversified customer base. The pharmaceutical segment, which accounted for approximately 43% of the Company's 1995 net sales, represents the Company's largest category of customers and includes manufacturers of pharmaceuticals (ethical, generic and over-the-counter) and biotechnology companies and laboratories. The industrial customer segment, which accounted for approximately 36% of the Company's 1995 net sales, includes producers of industrial chemicals and polymers, food and beverage companies and environmental testing laboratories. Expanding into the industrial customer segment is the primary business objective behind the TAI Acquisition. The instrumentation used to make physical measurements (based on thermal analysis) is found in almost all customer settings that also utilize the Company's gel permeation chromatography. Furthermore, there is an important relationship between the information obtained from gel permeation chromatography analysis and the properties that can be measured by thermal analysis. The Company believes that its recognition and exploitation of these relationships will be highly valued by customers in the industrial marketplace. The Company also sells to universities, hospitals and government agencies. The purchase decision is typically made by scientists who run research laboratories, and Waters' technical support staff works closely with such customers to develop and implement HPLC applications that meet their analytical requirements. The 44 Company does not rely on any one customer for a material portion of its sales. During 1995, no customer accounted for more than 2% of the Company's net sales. RESEARCH AND DEVELOPMENT Waters maintains an active research and development program focused on developing and commercializing products which complement and update its existing product offerings. The Company believes it is the market leader in HPLC technical innovation, having spent approximately $105 million on HPLC research and development since the beginning of 1991, which the Company believes is significantly more than expenditures by its competitors. The Company's research and development expenditures for 1993, 1994 and 1995 were $18.5 million, $20.2 million and $17.7 million, respectively. The current core products of the Company have been developed at the Company's research and development center in Milford, Massachusetts with input and feedback from Waters' worldwide field organization. At September 30, 1996, there were approximately 160 employees involved in the Company's research and development efforts. SALES AND SERVICE To meet the needs of its worldwide customer base, the Company maintains 66 offices in 29 countries and has the world's largest direct sales, service and technical support organization focused exclusively on HPLC. In contrast, most of the Company's competitors' representatives distribute several analytical products only one of which is HPLC. The Company's more than 550 educated and highly-trained representatives, many of whom are former Waters customers, have average experience of over seven years with Waters and over ten years in the HPLC industry. Waters believes it is one of the few HPLC industry participants that both sells directly to end-users in each of its markets and provides local technical service and aftermarket support to customers in virtually every industrialized market in the world. This global presence enables Waters to provide timely, responsive support and service to its customers, many of whom operate internationally, and enables it to capitalize on growth opportunities in emerging markets. By focusing designated resources on HPLC, Waters is able to develop specialized service in HPLC and believes it can deliver higher quality service than its competitors who focus on a broad range of instruments. Waters also offers training sessions to customers at its in- house training centers with the initial purchase of HPLC instrument systems, and additional, more specialized training for a fee at the customer's request. TAI sells and services its own products. MANUFACTURING Waters manufactures its instruments at the Company's Milford, Massachusetts facility, where approximately 460 people are devoted to manufacturing. Waters' Milford plant is an advanced facility which maintains the highest performance and quality standards in the industry, meets the strict ISO 9002 quality standards and FDA mandated Good Manufacturing Practices and is approved by the FDA to produce Class 1 medical devices. The Company believes that its high degree of vertical integration between assembly and machining gives it a competitive advantage. The machine shop, which utilizes advanced programmable equipment with quick set up features, allows Waters to produce highly engineered narrow tolerance parts quickly. Furthermore, both assembly and machining operations are linked with research and development and engineering processes through the Company's CAD/CAM system, enabling seamless hand-offs of specifications and manufacturing procedures from the point of product concept through the product's manufacture. The Company outsources the supply of certain commodity items, such as computers, printed circuit boards and other items to outside vendors which meet the Company's quality requirements. Certain of the outsourced items are purchased from sole suppliers, and while all of the outsourced items could be purchased from alternative suppliers, some business interruption could result from discontinuation by a supplier. The Company's Taunton, Massachusetts facility is dedicated to manufacturing chromatography columns and chemicals and employs approximately 70 people. Proprietary chemical synthesis techniques are used to ensure superior consistency in the quality of Waters' chromatography chemical products. Consistent product 45 performance is essential to Waters' customers to produce accurate and reproducible results. The Taunton facility meets the same ISO and FDA standards met by the Milford facility. Because Waters controls each element of the manufacturing process, it is able to deliver high quality products to its customers. Based upon the reengineering of its operations, the Company believes it can leverage its infrastructure to support additional sales without a corresponding increase in costs. TAI manufactures its thermal analysis products at its New Castle, Delaware facility and its rheology products at its Leatherhead, England facility. COMPETITION The HPLC instrument market is highly competitive. Although the Company is the largest in the HPLC industry, it faces competition from several international instrument manufacturers in both domestic and foreign markets. Waters competes in this market primarily on the basis of performance, reliability, service and, to a lesser extent, price. Many competitors who are not focused on the HPLC market have instrument businesses that are much larger than the Company's business. Certain competitors are divisions of larger companies which have greater financial and other resources than the Company. Waters encounters competition in the highly fragmented consumables market from chemical companies that produce column chemicals and small specialized companies that pack and distribute columns. The Company believes that it is one of the few suppliers that processes silica, packs columns, and distributes its own product. Waters competes in this market on the basis of reproducibility, reputation, performance and, to a lesser extent, price. PATENTS, TRADEMARKS AND LICENSES The Company owns a number of United States and foreign patents, and has patent applications pending in the United States and abroad. Certain technology and software is licensed from third parties. The Company also owns a number of trademarks, the most significant registered trademarks of which are Bondapak(R), Nova-Pak(R), Symmetry(R) and Millennium(R). While the patents, licenses and trademarks are viewed as valuable assets, the Company's patent position is not of material importance to its operations. EMPLOYEES At September 30, 1996, Waters had approximately 1,880 employees. Approximately 160 employees in the U.S. have post-graduate degrees, including 39 with PhDs. Waters is committed to providing relevant training and educational assistance which is driven by the operating needs and enhances the skills of Waters employees. All sales personnel are trained in consultative selling skills and technical product knowledge. Engineers and scientists are kept abreast of technology advancements through company sponsored classes. Certain manufacturing employees receive over 60 hours training annually in such areas as electro/mechanical training, ISO 9000 and geometric tolerances. Waters also provides management training sessions on such subjects as project management, conflict resolution and leadership skills. Approximately 70% of the Company's employees are located within the United States. Labor relations are considered to be excellent, and no Waters' employees have union affiliations. At September 30, 1996, TAI had approximately 225 employees worldwide and their geographic distribution was similar to the Waters population. BACKLOG Historically, the Company has had a backlog of approximately three weeks. LEGAL PROCEEDINGS The Company asserted a claim against Millipore under arbitration procedures specified in the purchase and sale agreement for the Predecessor. Waters contends that Millipore has undervalued the amount of assets it is obligated to transfer from the Millipore Retirement Plan to the Waters successor plan. Millipore, in turn, has filed an action in Massachusetts state court arguing that the Company's dispute is not subject to arbitration. The Massachusetts court has preliminarily stayed the arbitration proceedings. Waters believes it has meritorious arguments regardless of the forum in which its dispute with Millipore is eventually heard although the outcome is not certain. From time to time the Company and its subsidiaries are involved in various other litigation matters arising in the ordinary course of its business. The Company believes that none of the above, either individually or in the aggregate, is material to the Company. 46 ENVIRONMENTAL MATTERS The Company's facilities are subject to federal, state, local and foreign environmental requirements, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste and the cleanup of properties affected by hazardous substances. Certain environmental laws, such as the Comprehensive Environmental Response, Compensation, and Liability Act, as amended ("CERCLA"), impose strict, retroactive, joint and several liability upon persons responsible for releases of hazardous substances. The Company believes that its operations have been and are in substantial compliance with environmental requirements, and that it has no liabilities arising under environmental requirements, other than liabilities that would not be expected to have a material adverse effect on the Company's operations, financial condition or competitive position. Some risk of environmental liability is inherent in the nature of the Company's business, however, and the Company might in the future incur material costs to meet current or more stringent compliance, cleanup or other obligations pursuant to environmental requirements. In connection with the Acquisition, Millipore agreed to retain environmental liabilities resulting from pre-Acquisition operations at the Company's facilities, including but not limited to any such liabilities arising under CERCLA and liabilities arising from pre-Acquisition releases of hazardous substances on the Company's property in Taunton, Massachusetts. The Company is aware that Millipore has been notified by U.S. Environmental Protection Agency and private parties that Millipore is or may be liable under CERCLA for certain costs resulting from the disposal of hazardous substances generated and disposed of before the Acquisition from facilities now operated by the Company. In each such instance, Millipore (and not the Company) (i) is one of many parties that have been notified of potential liability with respect to that site, (ii) has entered into a partial settlement of liability, (iii) has made settlement payments in proportion to the volume of waste it is alleged to have disposed of at that site and (iv) has received a partial release from further liability. It is possible, given the retroactive nature of CERCLA liability, that the Company will from time to time receive notices of potential liability relating to Millipore's pre-Acquisition activities or that government officials or private parties will seek to impose liability for such activities on the Company. The Company did not assume Millipore's pre-Acquisition CERCLA liability, however, and expects that no material costs will be incurred by it with respect to such matters. The Company could, of course, be liable under CERCLA for its own post-Acquisition activities. 47 FACILITIES Waters operates 16 United States facilities and 55 international facilities. The Company believes its facilities are adequate for its current production level and for reasonable growth over the next few years. The Company's primary facilities are summarized in the table below. PRIMARY FACILITY LOCATIONS
LOCATION FUNCTION (A) OWNED/LEASED SQUARE FEET -------- ------------ ------------ ----------- Milford, MA M, R, S Owned 408,000 Taunton, MA M Owned 32,000 St. Quentin, France S Leased 18,000 Singapore S Leased 5,000 Tokyo, Japan R, S Leased 12,000 New Castle, DE (b) M Leased 48,000 Leatherhead, England (b) M Leased 12,000
- -------- (a) M=Manufacturing; R=Research; S=Sales (b) TAI facilities Waters maintains eight field offices in the United States and 48 field offices abroad (excluding TAI offices). The Company's primary field office locations are listed below. FIELD OFFICE LOCATIONS
U.S. INTERNATIONAL - -------------- ----------------------------------------------------------------- Tustin, CA Australia Hong Kong Poland Wood Dale, IL Austria Hungary Puerto Rico Fairfax, VA Belgium Italy Russia Cary, NC Brazil Japan Singapore Morristown, NJ Canada Korea Spain Houston, TX Czech Republic Mexico Sweden Pleasanton, CA Denmark Netherlands Switzerland Ann Arbor, MI Finland Norway Taiwan France People's Republic of United Kingdom Germany China
48 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The executive officers and directors of the Company, and their ages as of September 30, 1996, are as follows:
NAME AGE POSITION ---- --- -------- Douglas A. Berthiaume 47 Chairman, President and Chief Executive Officer Arthur G. Caputo 46 Senior Vice President, Sales and Marketing Thomas W. Feller 56 Senior Vice President, Operations John R. Nelson 53 Senior Vice President, Research and Development Philip S. Taymor 40 Senior Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Assistant Secretary Brian K. Mazar 39 Vice President, Human Resources Devette W. Russo 43 Vice President, Chromatography Consumables Division Joshua Bekenstein 38 Director Charles L. Brown 75 Director Philip Caldwell 76 Director Edward Conard 39 Director Thomas P. Salice 35 Director Marc Wolpow 38 Director
Officers are elected annually and serve at the discretion of the Board of Directors. All directors serve until the next annual meeting of shareholders and until their successors have been duly elected and qualified. Douglas A. Berthiaume has served as Chairman of the Board of Directors of the Company since February 1996 and has served as President and Chief Executive Officer of the Company since August 1994. Mr. Berthiaume joined Millipore in 1980 as Corporate Controller. Prior to joining the Predecessor as President in 1990, he held a variety of positions including Senior Vice President and Chief Financial Officer of Millipore for five years. Before joining Millipore, Mr. Berthiaume worked at Helix Technology as Corporate Controller and at Arthur Andersen & Co. as a Manager in Public Accounting. Mr. Berthiaume is a Director of Genzyme Corporation. Arthur G. Caputo has been Senior Vice President, Sales and Marketing of the Company since August 1994. He joined the Predecessor in October 1977 and has held a number of positions in sales within the Predecessor and Millipore. Prior to his current position, he was Senior Vice President and General Manager of Millipore's North American Business Operations responsible for establishing the Millipore North American Sales Subsidiary and also served as the General Manager of Waters' North American field sales, support and marketing functions. Mr. Caputo worked at Whatman Inc. as Product Manager of Chromatography Products before joining the Predecessor. Thomas W. Feller has been Senior Vice President, Operations of the Company since August 1994. He joined Millipore in 1977 and moved to the Predecessor as Vice President of Operations in 1980. Mr. Feller returned to Millipore Operations in 1985 before becoming Senior Vice President of Manufacturing Operations for the Predecessor in January 1991. Since April 1993, Mr. Feller has been Senior Vice President and General Manager of the Waters Instrument Operations Division. Prior to joining Millipore, Mr. Feller held various production and manufacturing positions at Johnson and Johnson, Jensen Speaker and Baxter Travenol. John R. Nelson has been Senior Vice President, Research and Development of the Company since August 1994. He joined the Predecessor in August 1976 and has held a variety of positions in marketing as well as 49 research and development, including Vice President Waters Research Development and Engineering, Senior Vice President Worldwide Marketing Operations and Senior Vice President of Product Development. Prior to taking his present position, Mr. Nelson was responsible for all product development activities of Waters and the discontinued Extrel business in Pittsburgh, Pennsylvania and Madison, Wisconsin. Mr. Nelson is also responsible for the Company's TA Instruments, Inc. operations. Philip S. Taymor has been Senior Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Assistant Secretary of the Company since August 1994. He joined Millipore in May 1981 and held several positions in the Millipore organization, including Corporate Controller, Director of Finance of Millipore's Membrane Division and Manager of Corporate Accounting. Mr. Taymor joined the Predecessor in early 1992. His current responsibilities include business and financial planning, accounting and financial reporting, treasury operations, legal, tax and information systems. Mr. Taymor joined Millipore from Grant Thornton & Company, Certified Public Accountants. Brian K. Mazar has been Vice President, Human Resources of the Company since August 1994. He joined the Predecessor in 1991 as Director of Human Resources with responsibility for worldwide human resources functions. From 1986 to 1991, Mr. Mazar was Director of Human Resources of GeneTrak Systems. Prior thereto, Mr. Mazar worked at Exxon Corporation and Corning Glass Works. Devette W. Russo has been Vice President, Chromatography Consumables Division of the Company, since 1990. She joined the Predecessor in 1975 as a Marketing Communications Account Manager, and has held a variety of positions within the Predecessor and Millipore in marketing before assuming her current responsibilities as Vice President, Chromatography Consumables Division. Prior positions include Director of Corporate Communications for Millipore and Vice President of Marketing for the Chemistry Division. Ms. Russo held various marketing and application support roles before joining the Millipore organization. Joshua Bekenstein has served as a Director of the Company since August 1994. He has been a Managing Director of Bain since January 1993 and a General Partner of Bain Venture Capital since its inception in 1987. Mr. Bekenstein is a Director of Specialty Retailers, Inc. and Apparel Retailers, Inc. Charles L. Brown has served as a Director of the Company since August 1994. Mr. Brown retired as Chairman and Chief Executive Officer of American Telephone and Telegraph Company ("AT&T") in August 1986. He served as President of AT&T from 1977 to 1979, Vice Chairman of the Board and Chief Financial Officer of AT&T in 1976 and Executive Vice President of AT&T from 1974 to 1976. Previously, he was President of Illinois Bell Telephone Company and was a Director of E.I. du Pont de Nemours and Company, Chemical Bank and Delta Air Lines Inc. Mr. Brown is a Director of J.P. Morgan Florida, FSB. Philip Caldwell has served as a Director of the Company since August 1994. Mr. Caldwell has been Senior Managing Director of Lehman Brothers Inc. and its predecessor, Shearson Lehman Brothers Holdings Inc., since 1985. Mr. Caldwell spent 32 years at Ford Motor Company where he was Chairman of the Board of Directors and Chief Executive Officer from 1980 to 1985 and a Director from 1973 through 1990. Mr. Caldwell is a Director of Zurich Holding Company of America, Inc., Zurich Reinsurance Centre Holdings, Inc., American Guarantee & Liability Insurance Company (a Zurich affiliate), The Mexico Fund, CasTech Aluminum Group Inc. and Russell Reynolds Associates, Inc. He has served as a Director of the Chase Manhattan Bank Corporation, the Chase Manhattan Bank, N.A., Digital Equipment Corporation, Federated Department Stores Inc., the Kellogg Company, Shearson Lehman Brothers Holdings, Inc. and Specialty Codings International, Inc. Edward Conard has served as a Director of the Company since August 1994. He has been a Managing Director of Bain since March 1993. From 1990 to 1992, Mr. Conard was a Director of Wasserstein Perella & Company, an investment banking firm that specializes in mergers and acquisitions. Previously, he was a Vice President of Bain & Company, where he headed the firm's operations practice area. 50 Thomas P. Salice has served as a Director of the Company since July 1994. Mr. Salice is a Managing Director of AEA and has been associated with AEA since June 1989. Mr. Salice is also a Director of Dal-Tile International Inc., Mettler Toledo, Inc. and CasTech Aluminum Group Inc. Marc Wolpow has served as a Director of the Company since August 1994. He has been a Managing Director of Bain since January 1993 and was a Principal of Bain Venture Capital from April 1990 through December 1992. From 1988 to April 1990, Mr. Wolpow was a Vice President in the corporate finance department of Drexel Burnham Lambert, Incorporated. Mr. Wolpow is also a Director of FTD, Inc. and Williamhouse-Regency of Delaware, Inc. COMPENSATION OF EXECUTIVE OFFICERS Summary of Cash and Certain Other Compensation. The following table sets forth in summary form information concerning the compensation for all services rendered in all capacities to the Company and its subsidiaries for 1993, 1994 and 1995 for Mr. Berthiaume and the four other most highly compensated executive officers of Waters at the end of fiscal year 1995 (collectively, the "named executive officers"). SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM COMPENSATION COMPENSATION ----------------- --------------------- SECURITIES UNDERLYING RESTRICTED OPTIONS/ ALL OTHER STOCK SARS COMPEN- NAME AND PRINCIPAL FISCAL SALARY BONUS AWARDS (#) OF SATION POSITION YEAR ($) ($) ($)(A) SHARES ($) - ------------------ ------ ------- --------- ---------- ---------- --------- Douglas A. Berthiaume... 1995 275,002 548,414(b)(c) -- -- 26,916(d)(e)(f) Chairman, President, 1994 318,329 1,570,000(g) -- 1,325,241(h) 9,550(i)(j)(k) Chief Executive Officer 29,517(l) 34,548 1993 339,996 -- -- 21,000(m) Philip S. Taymor........ 1995 149,994 395,714(b)(c) -- -- 16,799(d)(e)(f) Senior Vice President, 1994 138,328 585,170(g) -- 491,412(h) 4,150(j)(k)(o) Finance and 16,100(l) 2,900(m) Administration and 1993 122,000 -- 47,425 12,221 Chief Financial Officer John R. Nelson.......... 1995 160,004 359,714(b)(c) -- -- 18,086(d)(e)(f) Senior Vice President, 1994 181,993 585,000(g) -- 491,412(h) 5,460(j)(k)(o) Research and 17,170(l) Development 1993 188,000 -- 50,813 4,100(m) 18,588 Thomas W. Feller........ 1995 155,012 352,714(b)(c) -- -- 18,966(d)(e)(f) Senior Vice President, 1994 175,668 585,000(g) -- 491,412(h) 5,270(i)(j)(k) Operations 16,637(1) 1993 178,000 -- 44,037 4,100(m) 17,538 Arthur G. Caputo........ 1995 149,994 345,714(b)(c) -- -- 15,687(d)(e)(f) Senior Vice President, 1994 170,000 585,000(g) -- 491,412(h) 5,100(k)(n)(o) Sales and Marketing 16,100(l) 1993 173,000 -- 47,425 4,600(m) 17,013
- -------- (a) Reflects the dollar value as of the date of grant of restricted stock awards granted by Millipore during 1993. Restrictions relating to such Millipore stock lapsed upon consummation of the Acquisition. 51 (b) Reflects bonus earned under the Company's Pay for Performance Plan in 1995 which was paid in 1996 as follows: Mr. Berthiaume $412,700, Mr. Caputo $210,000, Mr. Feller $217,000, Mr. Nelson $224,000 and Mr. Taymor $210,000. (c) Reflects one-time cash bonus earned in 1995 and paid in 1996 in connection with certain productivity programs implemented by senior management as follows: Mr. Berthiaume $135,714, Mr. Caputo $135,714, Mr. Feller $135,714, Mr. Nelson $135,714 and Mr. Taymor $185,714. (d) Includes amounts contributed for the benefit of the named executive under the Waters 401(k) Restoration Plan in 1995 as follows: Mr. Berthiaume $21,216, Mr. Caputo $8,504, Mr. Feller $10,422, Mr. Nelson $10,840 and Mr. Taymor $11,503. (e) Includes amounts contributed for the benefit of the named executive under the Waters Employee Investment Plan in 1995 as follows: Mr. Berthiaume $3,481, Mr. Caputo $6,367, Mr. Feller $4,809, Mr. Nelson $4,752 and Mr. Taymor $4,867. (f) Includes amounts contributed for the benefit of the named executive under Group Term Life Insurance in 1995 as follows: Mr. Berthiaume $2,219, Mr. Caputo $816, Mr. Feller $3,735, Mr. Nelson $2,494 and Mr. Taymor $429. (g) Reflects the aggregate amount of deferred compensation and cash paid by Millipore in connection with the divestiture of the Company. (h) Reflects grant of options to purchase shares of Common Stock. Certain of such options were granted at an exercise price equal to the estimated fair value of the Common Stock at the date of grant and the other options were granted at an exercise price in excess of such estimated fair value. All such options have a term of ten years. The Company amended the option agreements in the third fiscal quarter of 1995. After giving effect to such amendment, the named executive officers hold the following options: Mr. Berthiaume, 282,563 options at an exercise price of $4.07 per share, 282,562 options at an exercise price of $9.50 per share, and 760,116 options at an exercise price of $16.28 per share; and each of Messrs. Caputo, Feller, Nelson and Taymor, 110, 568 options at an exercise price of $4.07 per share; 110,568 options at an exercise price of $9.50 per share, and 270, 276 options at an exercise price of $16.28 per share. The Company also amended the option agreements in the fourth fiscal quarter of 1995 to vest an aggregate of 1,099,535 options at the $9.50 exercise price. (i) Includes amounts contributed by Millipore for the benefit of the named executive under the Millipore Supplemental Executive Retirement Plan as follows: Mr. Berthiaume $3,720; and Mr. Feller $640. (j) Includes amounts contributed by Millipore for the benefit of the named executive under the Millipore Savings Plan as follows: Mr. Berthiaume $3,080; Mr. Feller $3,080; Mr. Nelson $3,860; and Mr. Taymor $2,650. (k) Includes amounts contributed by the Company for the benefit of the named executive under the Waters 401(k) Restoration Plan as follows: Mr. Berthiaume $2,750; Mr. Caputo $750; Mr. Feller $1,550; Mr. Nelson $1,200; and Mr. Taymor $655. (l) Reflects bonus earned under the Company's Pay for Performance Plan in 1994 which was paid in 1995. (m) Reflects grant of options to purchase Millipore common stock. (n) Includes $3,600 contributed by Millipore for the benefit of Mr. Caputo under the Millipore Participation Plan. (o) Includes amounts contributed for the benefit of the named executive under the Waters Employee Investment Plan as follows: Mr. Caputo $750; Mr. Nelson $400; and Mr. Taymor $845. 52 Stock Options. There were no stock options granted during fiscal year 1995 to the Company's chief executive officer or any of the named executive officers. Option Exercises and Holdings. The following table shows information regarding the exercise of stock options during fiscal 1995 by the named executives and the number and value of any unexercised stock options held by them as of December 31, 1995:
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE- UNDERLYING UNEXERCISED MONEY OPTIONS/SARS AT OPTIONS/SARS AT FY-END (#) FY-END ($) EXERCISABLE/ NAME EXERCISABLE/UNEXERCISABLE UNEXERCISABLE(1) ---- -------------------------- ---------------------------- Douglas A. Berthiaume... 491,097/834,143 $3,573,242/$4,403,332 Arthur G. Caputo........ 186,735/304,675 1,387,512/ 1,680,227 Thomas W. Feller........ 186,735/304,675 1,387,512/ 1,680,227 John R. Nelson.......... 186,735/304,675 1,387,512/ 1,680,227 Philip S. Taymor........ 186,735/304,675 1,387,512/ 1,680,227
-------- (1) Based on the closing price of the Common Stock on December 31, 1995 of $18.25. WATERS CORPORATION RETIREMENT PLANS Substantially all full-time United States and Puerto Rico employees of Waters participate in the Waters Retirement Plan (the "Retirement Plan"), a defined benefit pension plan intended to qualify under Section 401(a) of the Internal Revenue Code (the "Code"). The Retirement Plan is a cash balance plan whereby each participant's benefit is determined based on annual pay credits and interest credits made to each participant's notional account. In general, a participant becomes vested under the Retirement Plan upon the completion of five years of service. Pay credits range from 4.0% to 9.5% of compensation, depending on the participant's amount of compensation and length of service with the Company. Compensation refers to pension eligible earnings of the participant under the Retirement Plan (up to $150,000 for 1995, as limited by the Code), including base pay, overtime, incentive bonuses, commissions and pre-tax deferrals, but excluding special items such as stock awards, moving expense reimbursements and employer contributions to retirement plans. Interest credits are based on the notional account balance on the last day of the prior plan year and the plan's interest credit rate. This interest credit rate equals the one-year constant maturity Treasury Bill rate on the last day of the preceding plan year plus 0.5%, subject to a 5.0% minimum and 10.0% maximum rate. No pay or interest credits are granted under the plan for periods of employment prior to January 1, 1994. However, service is calculated from date of hire for purposes of determining the level of pay credit for the plan year. The normal retirement age under the plan is age 65. Benefits are computed on a straight life basis. Certain participants under this plan may be entitled to a minimum benefit equal to the amount accrued under the prior plan formula as of August 18, 1994. In addition, the Company maintains a non-qualified, supplemental plan which provides benefits that would be paid by the Retirement Plan except for the limitations on pensionable pay and benefit amounts currently imposed by the Code. The aggregate estimated annual benefit payable from the Retirement Plan and supplemental plan to Messrs. Berthiaume, Caputo, Feller, Nelson and Taymor upon normal retirement is $77,000, $50,000, $19,000, $31,000 and $65,000, respectively. As of September 1, 1996, Messrs. Berthiaume, Caputo, Feller, Nelson and Taymor had approximately 15, 18, 20, 19 and 15 years of credited service, respectively, under the Retirement Plan. 53 EMPLOYEE STOCK-BASED COMPENSATION PLANS The Board and the Company's stockholders have approved the 1996 Long-Term Performance Incentive Plan (as amended by the Board on May 7, 1996, the "1996 Performance Incentive Plan"). Pursuant to this plan, the Compensation Committee may grant to employees and other key individuals who perform services for the Company and its subsidiaries stock options, stock appreciation rights, restricted stock, performance units, performance grants and other types of awards. Under the plan, no single participant may receive awards in excess of 100,000 shares of Common Stock in a single calendar year, and no more than 1,000,000 shares of Common Stock may be issued to all participants during the life of the plan. The plan terminates on May 7, 2006. On May 24, 1996 the Compensation Committee granted 347,600 stock options under the 1996 Performance Incentive Plan. The Board and the Company's stockholders have also approved the 1996 Employee Stock Purchase Plan. Under this plan, certain eligible employees of the Company may purchase through payroll deductions shares of Common Stock at the lesser of 90% of the fair market value of the shares on the first day of each plan period or 100% of the fair market value of the shares on the last day of each plan period. Up to 250,000 shares of Common Stock may be issued under the plan, which became effective on October 1, 1996. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to October 20, 1995, the Company's Compensation Committee was composed of Mr. Charles F. Baird, Jr., Mr. Charles L. Brown and Mr. Edward Conard. The Compensation Committee currently consists of Messrs. Brown and Conard and Mr. Thomas Salice. Prior to the Company's initial public offering, each of Mr. Conard and Mr. Salice also served as an officer of the Company. COMPENSATION OF BOARD OF DIRECTORS Directors who are full-time employees of the Company receive no additional compensation for serving on the Board or its committees. Prior to January 1, 1996, the Company paid certain of its directors an annual fee of $5,000, except for the Chairman who received an annual fee of $25,000, and $500 for each board or committee meeting attended. As of January 1, 1996, the Company's non-employee directors (the "Outside Directors") each receive a retainer of $15,000 per year (other than the Chairman who, if an Outside Director, will receive an annual fee of $30,000) and $750 for each board meeting and committee meeting that they attend. All directors are reimbursed for expenses incurred in connection with their attendance at meetings. In addition, the Board and the Company's stockholders have approved the 1996 Non-Employee Director Deferred Compensation Plan and the 1996 Non-Employee Director Stock Option Plan (as amended by the Board on May 7, 1996, the "Director Stock Option Plan"). Under the deferred compensation plan, Outside Directors may elect to defer their fees and credit such fees to either a cash account which earns interest at a market-based rate or to a common stock unit account, for which 100,000 shares of Common Stock have been reserved. Under the Director Stock Option Plan, each Outside Director will receive 1,000 options to acquire shares of Common Stock, and up to 50,000 shares of Common Stock may be issued under such plan. On May 24, 1996 the Compensation Committee granted 6,000 stock options under the Director Stock Option Plan. 54 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of Common Stock (i) immediately prior to the Offering and (ii) as adjusted to reflect the sale of the shares of Common Stock pursuant to the Offering, by (a) each person or entity known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock (based solely on a review of available public filings with the Securities and Exchange Commission), (b) each of the Company's directors, (c) each of the named executive officers, (d) all directors and executive officers of the Company as a group and (e) all other selling stockholders. Unless otherwise noted in the footnotes to the table, the persons named in the table have sole voting and investing power with respect to all shares of Common Stock indicated as being beneficially owned by them.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED AFTER PRIOR TO THE OFFERINGS THE OFFERINGS -------------------------------- ----------------------- NAME AND ADDRESS OF SHARES BENEFICIAL OWNER NUMBER (A) PERCENT OFFERED NUMBER PERCENT - ------------------- --------------- ------------- --------- ------------ ---------- 5% STOCKHOLDERS Bain Capital Entities (b) c/o Bain Capital, Inc. Two Copley Place Boston, Massachusetts 02116................ 1,962,818 6.8% 1,962,818 0 * Invesco PLC 11 Devonshire Square London EC2M 4YR England.............. 1,815,900 6.3% -- 1,815,900 6.3% DIRECTORS AND EXECUTIVE OFFICERS Douglas A. Berthiaume (c).................. 1,347,132 4.6% -- 1,347,132 4.6% Arthur G. Caputo...... 408,755 1.4% -- 408,755 1.4% Thomas W. Feller (d).. 373,374 1.3% -- 373,374 1.3% John R. Nelson........ 348,229(e) 1.2% 25,000 323,229 1.1% Philip S. Taymor (f).. 353,380 1.2% -- 353,380 1.2% Joshua Bekenstein (g). 1,962,818 6.8% 1,962,818 0 * Charles L. Brown...... 7,019 * -- 7,019 * Philip Caldwell(h).... 31,782 * -- 31,782 * Edward Conard (g)..... 1,962,818 6.8% 1,962,818 0 * Thomas P. Salice (i).. 102,257 * -- 102,257 * Marc Wolpow (g)....... 1,962,818 6.8% -- 0 * All Directors and Ex- ecutive Officers as a group (13 persons) (j)..... 5,444,720 17.6% 1,987,818 3,456,902 11.2% OTHER SELLING STOCKHOLD- ERS Randolph Street Part- ners, L.P............ 13,192 * 13,192 0 * Christopher R. Nel- son.................. 10,298 * 10,298 0 * Scott E. Nelson...... 10,298 * 10,298 0 * Michael D. Nelson.... 10,298 * 10,298 0 *
- -------- * represents less than 1% of the total. (a) Figures are based upon 28,897,821 shares of Common Stock outstanding as of September 30, 1996. The figures assume exercise by only the stockholder or group named in each row of all options for the purchase of Common Stock held by such stockholder or group which are exercisable within 60 days of September 30, 1996. (b) Amounts shown represent the aggregate number of shares held by Bain Capital Fund IV, L.P. ("Fund IV"), Bain Capital Fund IV-B, L.P. ("Fund IV- B"), BCIP Associates and BCIP Trust Associates, L.P. (collectively with Fund IV and Fund IV-B, the "Bain Capital Entities"). Messrs. Bekenstein, Conard and Wolpow, who serve as directors of the Company, are managing directors of Bain and limited partners of Bain Capital Partners IV, L.P., the general partner of Fund IV and Fund IV-B. In addition, Messrs. Bekenstein, Conard and Wolpow are general partners of BCIP Associates and of BCIP Trust Associates, L.P. 55 Accordingly, Messrs. Bekenstein, Conard and Wolpow may be deemed to share voting and dispositive power as to the shares held by the Bain Capital Entities. Messrs. Bekenstein, Conard and Wolpow disclaim beneficial ownership of such shares. (c) Excludes 6,313 shares owned by a family trust, for which shares Mr. Berthiaume disclaims beneficial ownership. (d) Excludes 19,917 shares owned by family members, for which shares Mr. Feller disclaims beneficial ownership. (e) Excludes 30,894 shares owned by family members, for which shares Mr. Nelson disclaims beneficial ownership. (f) Excludes 37,742 shares owned by family members and a family trust, for which shares Mr. Taymor disclaims beneficial ownership. (g) All of the shares shown are held by the Bain Capital Entities. See Note (b). The address of each such person is c/o Bain Capital, Inc., Two Copley Place, Boston, Massachusetts 02116. (h) Includes 31,782 shares held in trust for Mr. Caldwell's wife, Betsey C. Caldwell, and for which shares he disclaims beneficial ownership. (i) Excludes 12,671 shares owned by a family trust, for which shares Mr. Salice disclaims beneficial ownership. (j) Excludes 253,899 shares owned by directors' and executive officers' family members, for which shares the respective directors and executive officers disclaim beneficial ownership. 56 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS EMPLOYMENT AGREEMENTS None of the executive officers have employment agreements with the Company or any of its affiliates. None of them has any agreements entitling them to termination or severance payments upon a change of control of the Company or a change in the named executive's responsibilities following a change of control. However, each of the named executive officers are parties to one or more Management Subscription Agreements with the Company pursuant to which each of them has purchased shares of Common Stock in the Company and each of them is also the grantee of certain stock options from the Company under one or more Stock Option Agreements. Pursuant to the terms of such agreements the executive may be entitled to certain payments from the Company relating to the repurchase of the stock purchased under such agreements or available upon exercise of the options granted to him. The Management Subscription Agreements and the Stock Option Agreements also impose certain additional restrictions upon the executive, including confidentiality obligations, assignment of the benefit of inventions and patents to the Company, a requirement that he devote his exclusive business time to the Company, and noncompete restrictions which extend in certain cases, depending on the basis on which his employment is terminated, for a period of up to 24 months following his termination date. In addition, in connection with the Acquisition, the Company assumed Millipore's obligations to make certain payments to the named executive officers in accordance with the terms of certain deferred compensation agreements. LOANS TO EXECUTIVE OFFICERS The Company has made loans, in an aggregate principal amount of $2,342,303, to certain executive officers of the Company. These loans are full recourse loans and are secured by a pledge of the shares of Common Stock owned by such executive officers. The following executive officers' loans bear interest at 5.83% and have a maturity date of December 1, 2000: Douglas A. Berthiaume, Chairman, President and Chief Executive Officer, $650,919; Arthur G. Caputo, Senior Vice President, Sales and Marketing, $245,825; Thomas W. Feller, Senior Vice President, Operations, $245,825; Brian K. Mazar, Vice President, Human Resources and Investor Relations, $247,843; John R. Nelson, Senior Vice President, Research and Development, $204,854; Devette Russo, Vice President, Chromatography Chemistry Division, $211,190; and Philip S. Taymor, Senior Vice President, Finance and Administration and Chief Financial Officer, $245,825 (the foregoing amounts are as of December 1, 1995). The following executive officers' additional loans are as of January 8, 1996, bear interest at 5.65% and have a maturity date of January 8, 2001: Mr. Berthiaume $92,939, Mr. Caputo $34,629, Mr. Feller $34,617, Mr. Mazar $34,629, Mr. Nelson $28,858, Ms. Russo $29,750 and Mr. Taymor $34,629. MANAGEMENT SERVICES AGREEMENT Prior to the IPO, AEA, Bain, certain affiliates of Bain and the Company were party to the Management Services Agreement pursuant to which AEA and Bain provided management, consulting and financial services to the Company. In consideration for such services, AEA and Bain were entitled collectively to an annual fee in the amount of $1.5 million, plus reimbursement for out-of-pocket expenses and indemnification against certain liabilities. During 1995, the fees and expenses paid by the Company to AEA and Bain totaled $1.4 million. Upon consummation of the IPO, the Management Services Agreement was terminated and AEA and Bain were paid collectively a fee of $4 million in connection therewith. At the time of the Acquisition and in consideration of services rendered by AEA and Bain (and certain affiliates of Bain) in arranging, structuring and negotiating the terms of the Acquisition and the related financing transactions, the Company paid to AEA and an affiliate of Bain collectively a transaction fee of $8 million, and reimbursed AEA and Bain for certain related expenses. SPECIAL DISTRIBUTION TO SECURITYHOLDERS On September 12, 1995, the Company declared and paid the Special Distribution to the holders of its Class A common stock and warrants to purchase Class A common stock. Pursuant to the Special Distribution the 57 following cash payments were made as a return of capital to the Company's existing security holders as follows: (i) AEA, together with stockholders of AEA, received an aggregate amount of $6,992,958; (ii) Bain Capital Entities received an aggregate amount of $6,946,260; and (iii) certain members of Waters senior management received an aggregate amount of $1,424,275. REGISTRATION RIGHTS AGREEMENT The Company is party to a registration rights agreement (the "Registration Rights Agreement") among certain of the Company's existing stockholders (the "Agreement Stockholders"). Pursuant to the terms of the Registration Rights Agreement, each Agreement Stockholder has the right to require the Company, at the sole expense of the Company and subject to certain limitations, to register under the Securities Act of 1933 (the "Securities Act") all or part of the shares of Common Stock (the "Registrable Securities") held by them. Certain Agreement Stockholders (including affiliates of AEA and Bain) are entitled to unlimited demand registrations (but no more than one within any six month period), provided that the demand registration must be requested by the holders of at least 5% of the shares of Common Stock and generate proceeds of at least $30 million. All Agreement Stockholders are entitled to unlimited "piggyback" registrations. In connection with all registrations, the Company will agree to indemnify all holders of Registrable Securities against certain liabilities, including liabilities under the Securities Act. Registrations pursuant to the Registration Rights Agreement will be made on the appropriate registration form and may be underwritten registrations. The Offering is being commenced as a result of the exercise of certain demand rights pursuant to the Registration Rights Agreement. In accordance with the Registration Rights Agreement, no Agreement Stockholders can make additional demands for 180 days after the date of this Prospectus. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company has entered into agreements to provide indemnification for its directors and executive officers in addition to the indemnification provided for in the Company's Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws. DESCRIPTION OF CERTAIN INDEBTEDNESS DESCRIPTION OF THE BANK CREDIT AGREEMENT The Company has entered into the Bank Credit Agreement dated as of November 22, 1995, as amended, with Bankers Trust Company, as agent (the "Agent") and other institutions party thereto (the "Banks"), which provides for loans of up to $300 million. As of September 30, 1996, the Company owed $227.6 million under the Bank Credit Agreement. The following description is qualified in its entirety by reference to the Bank Credit Agreement, a copy of which has been filed as an exhibit to the registration statement of which this Prospectus is a part. Indebtedness of the Company under the Bank Credit Agreement is guaranteed by the domestic subsidiaries of the Company and is secured by (i) a first priority security interest in all of the receivables, contracts, contract rights, securities, equipment (other than certain equipment secured by purchase money security interests), intellectual property, inventory and real estate owned by the Company and its domestic subsidiaries, (ii) a first priority perfected pledge of all capital stock and intercompany notes of the Company's domestic subsidiaries owned directly by the Company or its domestic subsidiaries, and (iii) a first priority perfected pledge of 66 2/3% of the capital stock of certain foreign subsidiaries owned directly by the Company or its domestic subsidiaries. The loans under the Bank Credit Agreement bear interest for each fiscal quarter at a per annum rate equal to, at the Company's option, (i) the Base Rate plus an amount which will vary between zero and .50%, based upon certain performance criteria for the Company's previous four fiscal quarters, or (ii) the Eurodollar Rate (as defined in the Bank Credit Agreement) plus an amount which will vary between 0.50% and 1.50%, based upon certain performance criteria for the Company's previous four fiscal quarters. 58 The availability under the Bank Credit Agreement will decrease under certain circumstances, including upon certain asset sales, issuances of equity and incurrences of debt, will reduce by $45 million at November 22, 1998 and 1999, and will terminate at the earlier of the date on which a Change of Control Event (as defined in the Bank Credit Agreement) occurs and November 22, 2000. The Bank Credit Agreement requires the Company to meet certain financial tests, including minimum levels of EBITDA (as defined in the Bank Credit Agreement), minimum interest coverage, maximum amounts of capital expenditures and a maximum leverage ratio. The Bank Credit Agreement also contains covenants which, among other things, limit: (i) the incurrence of additional indebtedness, (ii) the payment of dividends, (iii) transactions with affiliates, (iv) asset sales, acquisitions, mergers and consolidations, (v) prepayments of other indebtedness, (vi) the creation of liens and encumbrances and (vii) other matters customarily restricted in such agreements. Pursuant to the Bank Credit Agreement, the Company must obtain the consent of its lenders in order to make acquisitions of more than $40 million and, in some cases, $25 million. The Bank Credit Agreement contains customary events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-default to certain other indebtedness, certain events of bankruptcy and insolvency, certain ERISA-related events, judgment defaults, failure of any guaranty or security agreement supporting the Bank Credit Agreement to be in full force and effect and a Change of Control Event (as defined in the Bank Credit Agreement) of the Company. DESCRIPTION OF CAPITAL STOCK GENERAL MATTERS The total amount of authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share (the "Preferred Stock"). As of September 30, 1996, 28,897,821 shares of Common Stock are issued and outstanding and 100 shares of Preferred Stock are issued and outstanding. The following summary of certain provisions of the Company's capital stock describes all material provisions of, but does not purport to be complete and is subject to, and qualified in its entirety by, the Amended and Restated Certificate of Incorporation and the Bylaws of the Company that are included as exhibits to the Registration Statement of which this Prospectus forms a part and by the provisions of applicable law. Certain provisions described herein may have the effect of impeding stockholder actions with respect to certain business combinations and the election of new members to the Board. As such, the provisions could have the effect of discouraging open market purchases of the Company's Common Stock because they may be considered disadvantageous by a stockholder who desires to participate in a business combination or elect a new director. COMMON STOCK Holders of the Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders, including the election of directors. Holders of Common Stock do not have cumulative voting rights, and therefore holders of a majority of the shares voting for the election of directors can elect all of the directors. In such event, the remaining shares will not be able to elect any directors. As of September 30, 1996, there were 28,897,821 shares of Common Stock outstanding held by 321 holders of record. The issued and outstanding shares of Common Stock are validly issued, fully paid and nonassessable. Subject to the prior rights of the holders of any Preferred Stock and restrictions contained in the Bank Credit Agreement, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board may from time to time determine. See "Price Range of Common Stock and Dividend Policy." 59 Upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive pro rata the assets of the Company which are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of Preferred Stock then outstanding. The Common Stock is traded on the New York Stock Exchange under the symbol "WAT." PREFERRED STOCK Millipore holds 100 shares of Series A Preferred Stock, par value $.01 per share (the "Preferred Stock"). The Liquidation Value of the shares when issued was $100,000 per share. Dividends on the Preferred Stock accrue at a rate of 6% per annum, and the Company may, at its option, elect to pay cumulated dividends in cash; provided, that if any portion of such dividend is not paid in cash, such portion shall be added to the Liquidation Value of the Preferred Stock. The dividend rights on the Preferred Stock are cumulative, and the Preferred Stock ranks prior to the Common Stock as to liquidation rights and redemption. The Preferred Stock has no voting rights. The Preferred Stock is redeemable by the Company at any time and must be redeemed on August 18, 2006. Pursuant to the Company's Amended and Restated Certificate of Incorporation, the Board may, without further action by the Company's stockholders, from time to time, direct the issuance of additional shares of Preferred Stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series. Satisfaction of any dividend preferences of outstanding shares of Preferred Stock would reduce the amount of funds available for the payment of dividends on shares of Common Stock. Holders of shares of Preferred Stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of shares of Common Stock. Under certain circumstances, the issuance of shares of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management. The Board, without stockholder approval, may issue shares of Preferred Stock with voting and conversion rights which could adversely affect the holders of shares of Common Stock. CERTAIN PROVISIONS OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS AND STATUTORY PROVISIONS The Amended and Restated Certificate of Incorporation and the Bylaws contain certain provisions that could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise. Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals. The Amended and Restated Certificate of Incorporation requires that any action required or permitted to be taken by the Company's stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by consent in writing. Additionally, the Amended and Restated Certificate of Incorporation requires that special meetings of the stockholders of the Company be called only by a majority of the Board or by certain officers. The Amended and Restated Bylaws provide that stockholders seeking to bring business before or to nominate directors at any annual meeting of stockholders must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Company not less than 60 days nor more than 90 days prior to such meeting or, if less than 70 days' notice was given for the meeting, within ten days following the date on which such notice was given. The Bylaws also specify certain requirements for a stockholder's notice to be in proper written form. These provisions restrict the ability of stockholders to bring matters before the stockholders or to make nominations for directors at meetings of stockholders. Section 203 of Delaware Law. The Company is subject to the "business combination" provisions of the Delaware General Corporation Law. In general, such provisions prohibit a publicly-held Delaware corporation from engaging in various "business combination" transactions with any "interested stockholder" for a period 60 of three years after the date of the transaction in which the person became an "interested stockholder," unless (i) the transaction is approved by the Board of Directors prior to the date the interested stockholder obtained such status, (ii) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the "interested stockholder" owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by (a) persons who are directors and also officers and (b) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or (iii) on or subsequent to such date the "business combination" is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the "interested stockholder." A "business combination" is defined to include mergers, asset sales and other transactions resulting in financial benefit to a stockholder. In general, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporation's voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts with respect to the Company and, accordingly, may discourage attempts to acquire the Company. Limitations on Liability and Indemnification of Officers and Directors. The Delaware Law provides that a corporation may limit the liability of each director to the corporation or its stockholders for monetary damages except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases and (iv) for any transaction from which the director derives an improper personal benefit. The Company's Amended & Restated Certificate of Incorporation provides that, to the fullest extent permitted by Delaware law, no director of the Company shall be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duties as a director. The effect of these provisions is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent conduct). This provision does not exonerate the directors from liability under federal securities laws nor does it limit the availability of non-monetary relief in any action or proceeding against a director. In addition, the Amended and Restated Certificate of Incorporation provides that the Company shall, to the fullest extent not prohibited by Delaware Law, indemnify its officers and directors against liabilities, cost and expenses as provided by Delaware Law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or others pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is The First National Bank of Boston. SHARES ELIGIBLE FOR FUTURE SALE There are 28,897,821 shares of Common Stock outstanding as of September 30, 1996. In addition to the 2,031,904 shares of Common Stock sold in the Offering, the 11,062,500 shares sold in the IPO and the 11,500,000 shares sold in the secondary offering will be freely tradeable without restriction or further registration under the Securities Act, unless held by an "affiliate" of the Company as that term is defined in the Securities Act, which shares will be subject to the resale limitations of Rule 144. All of the remaining shares are "restricted securities" under the Securities Act and only be sold if they are registered or pursuant to an exemption from registration, such as the exemptions provided by Rule 144 or Rule 144A under the Securities Act. In connection with the Offering, all Selling Stockholders and the Company's executive officers have agreed not to dispose of any shares for a period of 90 days from the date of this Prospectus, with the exception of 61 160,000 shares for sale by executive officers, or to make any demand for or exercise any right with respect to the registration of the shares; and the Company has agreed not to dispose of any shares (other than issuances by the Company of certain employee stock options and shares covered thereby) for a period of 90 days from the date of this Prospectus, in each case without the prior written consent of the Underwriter. Certain existing shareholders have also waived all rights to register securities owned by them in connection with the Offering. Upon expiration of the lock-up periods, the shares of Common Stock subject to the lock-ups will be eligible for sale subject to certain volume and other resale limitations of Rule 144 and Rule 144A under the Securities Act. In general, under Rule 144 as currently in effect, a stockholder (or stockholders whose shares are aggregated) who has beneficially owned shares constituting "restricted securities" (generally defined as securities acquired from the Company or an affiliate of the Company in a non-public transaction) for at least two years, is entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the outstanding Common Stock or the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale is filed pursuant to Rule 144. Sales under Rule 144 are also subject to certain provisions regarding the manner of sale, notice requirements and the availability of current public information about the Company. A stockholder (or stockholders whose shares are aggregated) who is not an affiliate of the Company for at least 90 days prior to a proposed transaction and who has beneficially owned "restricted securities" for at least three years is entitled to sell such shares under Rule 144 without regard to the limitations described above. The SEC has recently proposed amendments to Rule 144 to reduce the holding periods. If adopted such amendments could have a material effect on the timing of when certain shares are available for resale. Rule 144A provides a nonexclusive safe harbor exemption from the registration requirements of the Securities Act for specified resales of restricted securities to certain institutional investors. In general, Rule 144A allows unregistered resales of restricted securities to a "qualified institutional buyer," which generally includes an entity, acting for its own account or for the account of other qualified institutional buyers, that in the aggregate owns or invests at least $100 million in securities of unaffiliated issuers. Rule 144A does not extend an exemption to the offer or sale of securities that, when issued, were of the same class as securities listed on a national securities exchange or quoted on Nasdaq. The shares of Common Stock outstanding as of the date of this Prospectus would be eligible for resale under Rule 144A because such shares, when issued, were not of the same class as any listed or quoted securities. Certain shares issued prior to the initial public offering of the Company are eligible for sale to the public pursuant to Rule 701 under the Securities Act. In general, Rule 701 permits resale of shares issued pursuant to certain compensatory benefit plans and contracts commencing 90 days after the issuer becomes subject to the reporting requirements of the Exchange Act. Such shares may be sold to the public in reliance upon Rule 144, but without compliance with certain restrictions of Rule 144, including the holding period requirements. Certain of the Company's shareholders have demand and piggyback registration rights pursuant to the Registration Rights Agreement. Pursuant to the Registration Rights Agreement, these rights may not be exercised for 180 days following the date of this Prospectus. No prediction can be made as to the effect, if any, that market sales for shares of Common Stock or the availability of shares of Common Stock for sale will have on the market price of the Common Stock from time to time. The sale of a substantial number of shares held by existing stockholders, whether pursuant to a subsequent public offering or otherwise, or the perception that such sales would occur, could adversely affect the market price of the Common Stock and could materially impair the Company's future ability to raise capital through an offering of equity securities. CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS The following is a general discussion of certain United States federal income and estate tax consequences of the ownership and disposition of Common Stock applicable to Non-U.S. Holders. In general, a "Non-U.S. Holder" is any holder other than (i) a citizen or resident of the United States, (ii) a corporation or partnership 62 created or organized in the United States or under the laws of the United States or of any state, or (iii) an estate or trust, the income of which is includable in gross income for United States federal income tax purposes regardless of its source. This discussion is based on current law and is for general information only. This discussion does not address aspects of United States federal taxation other than income and estate taxation and does not address all aspects of income and estate taxation, nor does it consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder (including the tax position of certain U.S. expatriates). ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES INCOME AND OTHER TAX CONSEQUENCES OF HOLDING AND DISPOSING OF SHARES OF COMMON STOCK. An individual may, subject to certain exceptions, be deemed to be a resident alien (as opposed to a non-resident alien) by virtue of being present in the United States on at least 31 days in the calendar year and for an aggregate of at least 183 days during a three year period ending in the current calendar year (counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). Resident aliens are subject to U.S. federal tax as if they were U.S. citizens. DIVIDENDS In general, dividends paid to a Non-U.S. Holder will be subject to United States withholding tax at a 30% rate (or a lower rate prescribed by an applicable tax treaty) unless the dividends are either (i) effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States, or (ii) if certain income tax treaties apply, attributable to a permanent establishment in the United States maintained by the Non-U.S. Holder. Dividends effectively connected with such a United States trade or business or attributable to such a United States permanent establishment generally will not be subject to United States withholding tax (if the Non- U.S. Holder files certain forms, including Internal Revenue Service Form 4224, with the payor of the dividend) and generally will be subject to United States federal income tax on a net income basis, in the same manner as if the Non- U.S. Holder were a resident of the United States. A Non-U.S. Holder that is a corporation may be subject to an additional branch profits tax at a rate of 30% (or such lower rate as may be specified by an applicable treaty) on the repatriation from the United States of its "effectively connected earnings and profits," subject to certain adjustments. To determine the applicability of a tax treaty providing for a lower rate of withholding, dividends paid to an address in a foreign country are presumed under current Treasury Regulations to be paid to a resident of that country absent knowledge to the contrary. Treasury regulations proposed in 1984 that have not been finally adopted, however, would require Non-U.S. Holders to file certain forms to obtain the benefit of any applicable tax treaty providing for a lower rate of withholding tax on dividends. Such forms would contain the Non-U.S. Holders' name and address and an official statement by the competent authority (as designated in the applicable treaty) in the foreign country attesting to the Non-U.S. Holder's status as a resident thereof. A Non-U.S. Holder that is eligible for a reduced rate of U.S. withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the Internal Revenue Service. SALE OF COMMON STOCK In general, a Non-U.S. Holder will not be subject to United States federal income tax on any gain realized upon the disposition of such holder's shares of Common Stock unless (i) the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States or, alternatively, if certain tax treaties apply, attributable to a permanent establishment in the United States maintained by the Non-U.S. Holder (and in either such case, the United States branch profits tax may also apply upon repatriation of the gain if the Non-U.S. Holder is a corporation); (ii) in the case of Non-U.S. Holder who is a nonresident alien individual and holds shares of Common Stock as a capital asset, such individual is present in the United States for 183 days or more in the taxable year of disposition, and either (a) such individual has a "tax home" (as defined for United States federal income tax purposes) in the United States (unless the gain from the disposition is attributable to an 63 office or other fixed place of business maintained by such Non-U.S. Holder in a foreign country and such gain has been subject to a foreign income tax equal to at least 10% of the gain derived from such disposition), or (b) the gain is attributable to an office or other fixed place of business maintained by such individual in the United States; (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of United States tax law applicable to certain United States expatriates whose loss of United States citizenship had as one of its principal purposes the avoidance of United States taxes; or (iv) the Company is or has been a United States real property holding corporation (a "USRPHC") for United States federal income tax purposes (which the Company does not believe that it is or is likely to become) at any time within the shorter of the five year period preceding such disposition or such Non-U.S. Holder's holding period. If the Company were or were to become a USRPHC, gains realized upon a disposition of Common Stock by a Non-U.S. Holder which did not directly or indirectly own more than 5% of the Common Stock during the shorter of the periods described above generally would not be subject to United States federal income tax, provided that the Common Stock is "regularly traded" on an established securities market. ESTATE TAX Common Stock owned or treated as owned by an individual who is not a citizen or resident (as defined for United States federal estate tax purposes) of the United States at the time of death will be includable in the individual's gross estate for United States federal estate tax purposes (unless an applicable estate tax treaty provides otherwise), and therefore may be subject to United States federal estate tax. BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS The Company must report annually to the Internal Revenue Service and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, each Non-U.S. Holder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of this information also may be made available under the provisions of a specific treaty or agreement with the tax authorities in the country in which the Non-U.S. Holder resides or is established. United States backup withholding (which generally is imposed at the rate of 31% on certain payments to persons that fail to furnish the information required under the United States information reporting requirements) and information reporting generally will not apply to dividends paid on Common Stock to a Non-U.S. Holder at an address outside the United States. The payment of proceeds from the disposition of Common Stock to or through a United States office of a broker will be subject to information reporting and backup withholding unless the owner, under penalties of perjury, certifies, among other things, its status as a Non-U.S. Holder or otherwise establishes an exemption. The payment of proceeds from the disposition of Common Stock to or through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding and information reporting, except as noted below. In the case of proceeds from a disposition of Common Stock paid to or through a non-United States office of a broker that is (i) a United States person, (ii) a "controlled foreign corporation" for United States federal income tax purposes or (iii) a foreign person 50% or more of whose gross income from certain periods is effectively connected with a United States trade or business, (a) backup withholding will not apply unless such broker has actual knowledge that the owner is not a Non-U.S. Holder, and (b) information reporting will apply unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder (and the broker has no actual knowledge to the contrary). Backup withholding is not an individual tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be refunded or credited against the Non-U.S. Holder's United States federal income tax liability, if any, provided that the required information is furnished to the Internal Revenue Service. 64 UNDERWRITING Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), is acting as the sole underwriter (the "Underwriter"). Subject to the terms and conditions set forth in a purchase agreement (the "Purchase Agreement") among the Company, Waters Technologies Corporation, each of the Selling Stockholders and the Underwriter, the Selling Stockholders severally have agreed to sell to the Underwriter, and the Underwriter has agreed to purchase from the Selling Stockholders 2,031,904 shares of Common Stock. In the Purchase Agreement, the Underwriter has agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock being sold pursuant to such agreement if any of the shares of Common Stock being sold pursuant to such agreement are purchased. The distribution of the shares of Common Stock by the Underwriter may be effected from time to time to purchasers directly or through agents, or through brokers in brokerage transactions on the New York Stock Exchange, or to dealers in negotiated transactions or in a combination of such methods of sale, at a fixed price or prices, which may be changed, or at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. In connection with the sale of any shares of Common Stock hereby, the Underwriter may be deemed to have received compensation from the Selling Stockholders equal to the difference between the amount received by the Underwriter upon the sale of such Common Stock and the price at which the Underwriter purchased such Common Stock from the Selling Stockholders. In addition, if the Underwriter sells Common Stock to or through certain dealers, such dealers may receive compensation in the form of underwriting discounts, concessions or commissions from the Underwriter and/or any purchasers of Common Stock for whom they may act as agent. The Underwriter may also receive compensation from the purchasers of Common Stock for whom it may act as agent. The Company, each of the Selling Stockholders and the Company's executive officers have agreed, subject to certain exceptions, not to directly or indirectly sell, offer to sell, grant any option for the sale of or otherwise dispose of shares of Common Stock or securities or rights convertible into or exercisable or exchangeable for Common Stock, or make any demand for or exercise any right with respect to the registration of any Common Stock or other such securities, without the prior written consent of the Underwriter, for a period of 90 days after the date of this Prospectus, with the exception of 160,000 shares for sale by executive officers. See "Shares Eligible for Future Sale." The Company and the Selling Stockholders have agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act. 65 LEGAL MATTERS The validity of the Common Stock being offered hereby and certain other legal matters relating to the Offerings will be passed upon for the Company by Kirkland & Ellis (a partnership which includes professional corporations), New York, New York. Certain legal matters will be passed upon for the Underwriters by Fried, Frank, Harris, Shriver & Jacobson (a partnership which includes professional corporations), New York, New York. Certain attorneys at Kirkland & Ellis collectively hold 13,192 shares of Common Stock. EXPERTS The consolidated balance sheets as of December 31, 1994 and 1995 and the consolidated statements of operations, stockholders' equity and cash flows of the Company for the period August 19, 1994 through December 31, 1994 and the year ended December 31, 1995, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The consolidated statements of operations and cash flows of the Waters Chromatography Division of Millipore Corporation for the year ended December 31, 1993 and the period January 1, 1994 through August 18, 1994, have been included herein in reliance on the report, which includes an explanatory paragraph addressing certain costs and expenses presented in the financial statements which represent allocations and management's estimates of the costs of services provided by Millipore Corporation, of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The audited consolidated financial statements of TA Instruments, Inc. and Subsidiaries included in this prospectus and elsewhere in the registration statement to the extent and for the periods indicated in their report have been audited by Arthur Andersen LLP, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company can be inspected and copied at the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be obtained at prescribed rates. Such reports, proxy statements and other information filed by the Company can also be inspected at the offices of the New York Stock Exchange located at 20 Broad Street, New York, New York 10005. The Company has filed a Registration Statement on Form S-1 under the Securities Act of 1933, as amended with respect to the Common Stock being offered hereby with the Commission under the Securities Act. This Prospectus, which constitutes a part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain items of which are omitted in accordance with the rules and regulations of the Commission. Statements contained in this Prospectus concerning the provisions of documents filed with the Registration Statement as exhibits are necessarily summaries of such documents, and each such statement is qualified in its entirety by reference to the copy of the applicable document filed as an exhibit to the Registration Statement. The Registration Statement and the exhibits and schedules thereto filed by the Company with the Commission, as well as such reports and other information filed by the Company with the Commission, may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; at its Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and at its New York Regional Office, Seven World Trade Center, 13 Floor, New York, New York 10048. Copies of such material can be obtained from the public reference section of the Commission, 450 Fifth 66 Street, N.W., Washington, D.C. 20549, at prescribed rates. Copies of such material will be available for inspection at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. Such material may also be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. For further information pertaining to the Company and the Common Stock being offered hereby, reference is made to the Registration Statement, including the exhibits thereto and the financial statements, notes and schedules filed as a part thereof. The Company intends to furnish to its stockholders annual reports containing audited consolidated financial statements and a report thereon by the Company's independent accountants and quarterly reports containing unaudited consolidated financial data for the first three quarters of each fiscal year. 67 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- The Company Reports of Coopers and Lybrand L.L.P. ................................ F-2 Consolidated Balance Sheets for the Company at December 31, 1994 and 1995 and September 30, 1996 (unaudited).............................. F-4 Consolidated Statements of Operations for the Predecessor for the year ended December 31, 1993 and for the period January 1, 1994 to August 18, 1994; Consolidated Statements of Operations for the Company for the period August 19, 1994 to December 31, 1994, for the year ended December 31, 1995, and for the nine months ended September 30, 1995 and 1996 (unaudited)................................................. F-5 Consolidated Statements of Cash Flows for the Predecessor for the year ended December 31, 1993 and for the period January 1, 1994 to August 18, 1994; Consolidated Statements of Cash Flows for the Company for the period August 19, 1994 to December 31, 1994, for the year ended December 31, 1995, and for the nine months ended September 30, 1995 and 1996 (unaudited)................................................. F-6 Consolidated Statements of Stockholders' Equity of the Company for the period August 19, 1994 to December 31, 1994, for the year ended De- cember 31, 1995, and for the nine months ended September 30, 1996 (unaudited).......................................................... F-7 Notes to Consolidated Financial Statements............................ F-8 TA Instruments, Inc. and Subsidiaries ("TAI") Report of Arthur Andersen LLP......................................... F-28 Consolidated Statements of Operations for TAI for the years ended De- cember 31, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited)............................................ F-29 Consolidated Balance Sheets for TAI at December 31, 1994 and 1995 and March 31, 1996 (unaudited)........................................... F-30 Consolidated Statements of Cash Flows for TAI for the years ended De- cember 31, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited)............................................ F-31 Consolidated Statements of Stockholders' Equity (Deficit) for TAI for the years ended December 31, 1994 and 1995 and for the three months ended March 31, 1996 (unaudited)..................................... F-32 Notes to Consolidated Financial Statements............................ F-33
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Waters Corporation: We have audited the accompanying consolidated balance sheets of Waters Corporation and Subsidiaries as of December 31, 1994 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the period from August 19, 1994 to December 31, 1994 and the year ended December 31, 1995. These financial statements are the responsibility of Waters Corporation 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 Waters Corporation and Subsidiaries as of December 31, 1994 and 1995, and the results of its operations and its cash flows for the period from August 19, 1994 to December 31, 1994 and the year ended December 31, 1995 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Boston, Massachusetts January 23, 1996 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Millipore Corporation: We have audited the accompanying statements of operations and cash flows of the Waters Chromatography Division of Millipore Corporation (the "Predecessor") for the year ended December 31, 1993 and for the period from January 1, 1994 to August 18, 1994. These financial statements are the responsibility of Millipore Corporation'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. Certain costs and expenses presented in the financial statements represent allocations and management's estimates of the costs of services provided to the Waters Chromatography Division by Millipore Corporation. As a result, the financial statements presented may not be indicative of the financial position or results of operations that would have been achieved had the Waters Chromatography Division operated as a non-affiliated entity. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of the Waters Chromatography Division of Millipore Corporation for the year ended December 31, 1993 and for the period from January 1, 1994 to August 18, 1994 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Boston, Massachusetts February 10, 1995 F-3 WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 DECEMBER 31, 1995 SEPTEMBER 30, 1996 ----------------- ----------------- ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............. $ 16,739 $ 3,233 $ 2,111 Accounts receivable, less allowances for doubtful accounts of $1,798, $1,513 and $1,443 at December 31, 1994 and 1995 and September 30, 1996, respectively......... 83,383 76,087 83,178 Inventories............ 43,978 41,459 51,484 Other current assets... 1,768 2,847 3,677 Net current assets-- discontinued operations. 9,888 3,694 -- -------- -------- -------- Total current assets.. 155,756 127,320 140,450 Property, plant and equipment, net.......... 71,060 70,261 74,177 Other assets............ 36,404 29,024 34,910 Goodwill, less accumulated amortization of $573, $2,364 and $4,105 at December 31, 1994 and 1995 and September 30, 1996, respectively..... 67,049 72,491 114,243 Net long term assets-- discontinued operations. 1,329 720 -- -------- -------- -------- Total assets.......... $331,598 $299,816 $363,780 ======== ======== ======== LIABILITIES AND EQUITY (DEFICIT) Current liabilities: Notes payable and current portion of long term debt............... $ 6,067 $ 1,933 $ 1,300 Accounts payable....... 18,479 16,757 21,541 Deferred revenue....... 6,900 6,945 10,447 Accrued interest....... 3,961 2,527 2,109 Accrued retirement plan contributions........... 3,087 5,362 4,462 Other current liabilities............. 29,905 36,763 41,503 -------- -------- -------- Total current liabilities............. 68,399 70,287 81,362 Loans under Bank Credit Agreement............... 169,950 83,500 226,252 Senior Subordinated Notes................... 100,000 75,000 -- Redeemable preferred stock................... 5,330 6,232 6,922 Other liabilities....... 10,589 6,679 8,503 -------- -------- -------- Total liabilities..... 354,268 241,698 323,039 Commitments and contingent liabilities.. -- -- -- Equity (Deficit): Common stock, par value $0.01 per share 50,000 shares authorized, 21,482, 28,796 and 28,898 shares issued and outstanding at December 31, 1994 and 1995 and September 30, 1996, respectively......... 215 288 289 Additional paid-in capital................. 67,494 145,318 145,736 Deferred stock option compensation............ -- (1,076) (889) Warrants............... 3,200 -- -- Notes receivable....... (5,055) -- -- Accumulated deficit.... (87,404) (85,403) (102,950) Translation adjustments............. (1,120) (605) (1,041) Minimum pension liability adjustment.... -- (404) (404) -------- -------- -------- Total equity (deficit)............... (22,670) 58,118 40,741 -------- -------- -------- Total liabilities and equity (deficit)........ $331,598 $299,816 $363,780 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-4 WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
PREDECESSOR COMPANY ------------------------------------ ------------------------------------ YEAR ENDED JANUARY 1, 1994 TO AUGUST 19, 1994 TO YEAR ENDED DECEMBER 31, 1993 AUGUST 18, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 ----------------- ------------------ ------------------ ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales............... $304,927 $176,097 $131,057 $332,972 Cost of sales........... 124,387 73,446 49,740 126,216 Revaluation of acquired inventory............... -- -- 38,424 925 -------- -------- -------- -------- Gross profit........... 180,540 102,651 42,893 205,831 Selling, general and administrative expenses............... 132,452 85,216 44,522 132,746 Research and development expenses............... 18,525 13,399 6,790 17,681 Goodwill and purchased technology amortization........... -- -- 1,227 3,629 Expensed in-process research and development............ -- -- 53,918 -- Management fee.......... -- -- 552 5,393 Restructuring charge.... 13,000 -- 3,500 -- -------- -------- -------- -------- Operating income (loss).................. 16,563 4,036 (67,616) 46,382 Interest expense, net... 2,072 828 12,011 30,315 Unrealized (gains) losses on future cash flow hedges............ -- -- (923) 1,142 Realized (gains) losses on cash flow hedges.... -- -- -- (2,317) -------- -------- -------- -------- Income (loss) from continuing operations before income taxes... 14,491 3,208 (78,704) 17,242 Provision for income taxes.................. 4,169 916 1,487 3,129 -------- -------- -------- -------- Income (loss) from continuing operations. 10,322 2,292 (80,191) 14,113 (Loss) income from discontinued operations, net of tax effect...... (9) (448) 787 -- Estimated (loss) on disposal of discontinued operations............. -- -- (8,000) -- -------- -------- -------- -------- Income (loss) before extraordinary item.... 10,313 1,844 (87,404) 14,113 Extraordinary item (loss) on early retirement of debt..... -- -- -- (12,112) -------- -------- -------- -------- Net income (loss) ..... $ 10,313 $ 1,844 (87,404) 2,001 ======== ======== Less: accretion of and 6% dividend on 330 902 preferred stock........ -------- -------- Net (loss) income available to common stockholders.......... $(87,734) $ 1,099 ======== ======== Income (loss) per common share: (Loss) income per common share from continuing operations. $ (3.38) $ .54 (Loss) per common share from discontinued operations............ (.30) -- Extraordinary (loss) per common share...... -- (.49) -------- -------- Net (loss) income per common share.......... $ (3.68) $ .05 ======== ======== Weighted average number of common shares....... 23,852 24,582 COMPANY ----------------------- NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 1995 1996 ----------- ----------- (UNAUDITED) (UNAUDITED) Net sales............... $242,516 $279,692 Cost of sales........... 92,318 103,944 Revaluation of acquired inventory............... 371 6,100 ----------- ----------- Gross profit........... 149,827 169,648 Selling, general and administrative expenses............... 94,957 107,752 Research and development expenses............... 12,860 15,286 Goodwill and purchased technology amortization........... 2,718 3,977 Expensed in-process research and development............ -- 19,300 Management fee.......... 1,159 -- Restructuring charge.... -- -- ----------- ----------- Operating income (loss).................. 38,133 23,333 Interest expense, net... 23,688 11,140 Unrealized (gains) losses on future cash flow hedges............ (872) -- Realized (gains) losses on cash flow hedges.... 550 -- ----------- ----------- Income (loss) from continuing operations before income taxes... 14,767 12,193 Provision for income taxes.................. 2,670 7,476 ----------- ----------- Income (loss) from continuing operations. 12,097 4,717 (Loss) income from discontinued operations, net of tax effect...... -- -- Estimated (loss) on disposal of discontinued operations............. -- -- ----------- ----------- Income (loss) before extraordinary item.... 12,097 4,717 Extraordinary item (loss) on early retirement of debt..... -- (22,264) ----------- ----------- Net income (loss) ..... 12,097 (17,547) Less: accretion of and 6% dividend on 676 689 preferred stock........ ----------- ----------- Net (loss) income available to common stockholders.......... $ 11,421 $(18,236) =========== =========== Income (loss) per common share: (Loss) income per common share from continuing operations. $ 0.48 $ 0.13 (Loss) per common share from discontinued operations............ -- -- Extraordinary (loss) per common share...... -- (0.71) ----------- ----------- Net (loss) income per common share.......... $ 0.48 $ (0.58) =========== =========== Weighted average number of common shares....... 23,852 31,527
The accompanying notes are an integral part of the consolidated financial statements. F-5 WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSOR COMPANY ------------------------------------ ------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30, ----------------------- YEAR ENDED JANUARY 1, 1994 TO AUGUST 19, 1994 TO YEAR ENDED DECEMBER 31, 1993 AUGUST 18, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 1995 1996 ----------------- ------------------ ------------------ ----------------- ----------- ----------- (IN THOUSANDS) (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income (loss)...... $ 10,313 $ 1,844 $ (87,404) $ 2,001 $12,097 $ (17,547) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Net (income) loss from discontinued operations............ 9 448 (787) -- -- -- Unrealized losses (gains) on future cash flow hedges........... -- -- (923) 1,142 (872) -- Estimated loss on disposal of discontinued operations -- -- 8,000 -- -- -- Deferred income taxes.. (683) -- -- -- -- -- Depreciation and amortization.......... 7,450 5,197 2,501 7,709 5,986 6,677 Amortization of capitalized software and intangible assets. 1,815 1,126 1,893 6,065 4,508 5,383 Amortization of debt issuance costs........ -- -- 993 2,731 2,155 795 Compensatory stock option expense........ -- -- -- 4,565 941 187 Write-off of in-process research and development........... -- -- 53,918 -- -- 19,300 Extraordinary loss on early retirement of debt.................. -- -- -- 12,112 -- 22,264 Change in operating assets and liabilities: Decrease (increase) in accounts receivable... (3,679) 18,186 (38,127) 10,212 12,497 (3,841) Decrease (increase) in inventories........... 12,096 (2,492) 44,324 5,583 1,863 1,564 (Increase) decrease in other current assets.. 218 (2,248) 970 (1,073) (347) (344) (Increase) decrease in other assets.......... 285 453 (568) (1,277) (1,296) (474) (Decrease) increase in accounts payable and other current liabilities........... 4,082 1,583 16,397 (1,661) 3,627 2,050 (Decrease) increase in deferred revenue...... (444) 1,380 (317) (32) 1,444 2,522 Increase (decrease) in accrued retirement plan contributions.... (46) (809) 109 1,637 911 (3,647) (Decrease) increase in other liabilities..... 945 503 5,012 (4,511) (4,928) 1,850 -------- -------- --------- --------- ------- --------- Net cash provided by continuing operations. 32,361 25,171 5,991 45,203 38,586 36,739 Net cash provided by (used in) discontinued operations............ (1,330) 478 1,418 1,039 479 -- -------- -------- --------- --------- ------- --------- Net cash provided by operating activities.. 31,031 25,649 7,409 46,242 39,065 36,739 Cash flows from investing activities: Additions to property, plant and equipment... (5,874) (3,901) (1,524) (6,260) (4,800) (6,703) Software capitalization and other intangibles. (2,565) (2,034) (667) (3,618) (2,772) (2,534) Payment to acquire predecessor net assets................ -- -- (310,456) -- -- -- Payment to acquire net assets of Phase Separations, Ltd...... -- -- -- (7,469) (7,469) -- Payment to acquire net assets of TA Instruments........... -- -- -- -- -- (83,349) Loans to officers...... -- -- -- (2,062) -- (391) Realized loss on contracts hedging net asset value........... -- -- -- (1,457) (1,103) -- Proceeds from sale of discontinued operations............ -- -- -- 6,477 6,477 4,497 -------- -------- --------- --------- ------- --------- Net cash (used for) investing activities by continuing operations............ (8,439) (5,935) (312,647) (14,389) (9,667) (88,480) Net investing activities of discontinued operations............ (737) (508) (594) (154) (154) -- -------- -------- --------- --------- ------- --------- Net cash (used in) investing activities.. (9,176) (6,443) (313,241) (14,543) (9,821) (88,480) Cash flows from financing activities: Proceeds from borrowings............ -- -- 275,813 84,286 -- 179,990 Proceeds from issuance of common stock....... -- -- 66,628 86,152 -- -- Repayment (issuance) of notes and accrued interest.............. -- -- (5,055) 5,309 5,309 -- Net repayment of bank borrowings............ -- -- -- (175,000) (10,620) (37,960) Retirement of Senior Subordinated Notes.... -- -- -- (28,188) -- (91,219) Transactions with parent company........ (21,855) (18,739) -- -- -- -- Payments for debt issuance costs........ -- -- (15,111) (2,211) -- (366) Payments for interest rate protection agreements............ -- -- -- -- -- (1,917) Dividend paid.......... -- -- -- (16,195) (16,195) -- Stock options exercised............. -- -- -- -- -- 1,108 -------- -------- --------- --------- ------- --------- Net cash (used in) provided by financing activities............ (21,855) (18,739) 322,275 (45,847) (21,506) 49,636 Effect of exchange rate -- -- (171) 642 252 983 changes on cash......... -------- -------- --------- --------- ------- --------- Net change in cash and cash equivalents...... -- 467 16,272 (13,506) 7,990 (1,122) -------- -------- --------- --------- ------- --------- Cash and cash equivalents at beginning of period............... -- -- 467 16,739 16,739 3,233 Cash and cash equivalents at end of period................ $ -- $ 467 $ 16,739 $ 3,233 $24,729 $ 2,111 ======== ======== ========= ========= ======= ========= Supplemental cash flow information: Income taxes paid...... $ -- $ -- $ 217 $ 1,924 $ 1,593 $ 2,222 Interest paid.......... $ -- $ -- $ 7,247 $ 30,370 $17,186 $ 12,459
The accompanying notes are an integral part of the consolidated financial statements. F-6 WATERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MINIMUM ADDITIONAL DEFERRED CUMULATIVE PENSION COMMON PAID-IN STOCK OPTION NOTES TRANSLATION LIABILITY STOCK CAPITAL COMPENSATION WARRANTS RECEIVABLE ACCUMULATED DEFICIT ADJUSTMENTS ADJUSTMENT TOTAL ------ ---------- ------------ -------- ---------- ------------------- ------------ ---------- -------- (IN THOUSANDS) Initial capital contribution at August 19, 1994 (restated)....... $215 $ 67,824 $ -- $ 3,200 $ (4,925) $ -- $ -- $ -- $ 66,314 Net loss for the period August 19, 1994 to December 31, 1994......... -- -- -- -- -- (87,404) -- -- (87,404) Translation adjustment for the period August 19, 1994 to December 31, 1994............. -- -- -- -- -- -- (1,120) -- (1,120) Accretion of preferred stock... -- (108) -- -- -- -- -- -- (108) Interest income on notes receivable. -- -- -- -- (130) -- -- -- (130) Dividend payable on preferred stock............ -- (222) -- -- -- -- -- -- (222) ---- -------- ------- ------- -------- --------- ------- ----- -------- Balance December 31, 1994.......... 215 67,494 -- 3,200 (5,055) (87,404) (1,120) -- (22,670) Net income for the year ended December 31, 1995............. -- -- -- -- -- 2,001 -- -- 2,001 Translation adjustment for the year ended December 31, 1995............. -- -- -- -- -- -- 515 -- 515 Proceeds from stock offering.... 63 86,089 -- -- -- -- -- -- 86,152 Accretion of preferred stock... -- (301) -- -- -- -- -- -- (301) Interest income on notes receivable. -- -- -- -- (254) -- -- -- (254) Dividend payable on preferred stock............ -- (600) -- -- -- -- -- -- (600) Repayment of notes receivable........ -- -- -- -- 5,309 -- -- -- 5,309 Minimum pension liability adjustment....... -- -- -- -- -- -- -- (404) (404) Warrants exercised......... 10 3,190 -- (3,200) -- -- -- -- -- Compensatory stock options issued... -- 5,641 (5,641) -- -- -- -- -- -- Compensatory stock option expense... -- -- 4,565 -- -- -- -- -- 4,565 Dividend paid..... -- (16,195) -- -- -- -- -- -- (16,195) ---- -------- ------- ------- -------- --------- ------- ----- -------- Balance December 31, 1995.......... $288 $145,318 $(1,076) $ -- $ -- $(85,403) $ (605) $(404) $58,118 Net income for the nine months ended September 30, 1996............. -- -- -- -- -- (17,547) -- -- (17,547) Compensatory stock option expense... -- -- 187 -- -- -- -- -- 187 Accretion of preferred stock.. -- (239) -- -- -- -- -- -- (239) Dividend payable on preferred stock............ -- (450) -- -- -- -- -- -- (450) Stock Options Exercised........ 1 1,107 -- -- -- -- -- -- 1,108 Translation adjustment for the nine months ended September 30, 1996......... -- -- -- -- -- -- (436) -- (436) ---- -------- ------- ------- -------- --------- ------- ----- -------- Balance September 30, 1996 (unaudited).... $289 $145,736 $ (889) $ -- $ -- $(102,950) $(1,041) $(404) $ 40,741 ==== ======== ======= ======= ======== ========= ======= ===== ========
The accompanying notes are an integral part of the consolidated financial statements. F-7 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation Waters Corporation ("Waters" or the "Company") is a holding company which owns all and only the common stock of Waters Technologies Corporation. In November 1995, the Company completed its initial public offering (the "Offering"). Prior to this date, the Company was known as WCD Investors, Inc. and Waters Technologies Corporation was known as Waters Corporation. Waters acquired substantially all of the assets (the "Acquisition") of the Waters Chromatography Division (the "Predecessor") of Millipore Corporation ("Millipore") on August 18, 1994. Pursuant to the purchase method of accounting, acquired assets and liabilities were revalued to their fair market value. The excess of the purchase price over the fair market value of the net assets acquired was recorded as goodwill. Because of the revaluation of the assets and liabilities and its related impact on the statement of operations, the financial statements of the Predecessor for the periods prior to August 19, 1994 are not strictly comparable to those of the Company subsequent to that date. Therefore, Predecessor financial statements have been presented separately from Company financial statements. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All material intercompany balances and transactions have been eliminated. Cash and Cash Equivalents Cash equivalents primarily represent highly liquid investments, with original maturities of 90 days or less, in repurchase agreements and money market funds which are convertible to a known amount of cash and carry an insignificant risk of change in value. The Company has periodically maintained balances in various operating accounts in excess of federally insured limits. Inventory The Company values all of its inventories at the lower of cost or market on a first-in, first-out basis (FIFO). Translation of Foreign Currencies For most of the Company's foreign operations, assets and liabilities are translated at exchange rates prevailing on the balance sheet date while revenues and expenses are translated at average exchange rates prevailing during the period. Any resulting translation gains or losses are included in translation adjustments in the consolidated balance sheet. 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 are capitalized. On August 19, 1994, pursuant to the purchase method of accounting, property, plant and equipment was revalued to its fair market value. Depreciation is provided using straight line methods over the following estimated useful lives: leasehold improvements--lives of the related leases, buildings and improvements--33 years, and production and other equipment--5 to 10 years. Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are eliminated from the balance sheet and related gains or losses are reflected in income. F-8 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) Concentration of Credit Risk The Company sells its products to a significant number of large and small customers throughout the world, with approximately 43% of 1995 net sales to the pharmaceutical industry. None of the Company's individual customers account for more than two percent of annual Company sales. The Company performs continuing credit evaluation of its customers and generally does not require collateral, but, in certain circumstances may require letters of credit. Historically, the Company has not experienced significant bad debt losses. Reclassification Certain amounts in previous years' financial statements have been reclassified to conform to current presentation. Revenue Recognition Sales of products and services are recorded based on product shipment and performance of service, respectively. Proceeds received in advance of product shipment or performance of service are recorded as deferred revenue in the balance sheet. Software Development Costs The Company capitalizes software development costs in accordance with Statement of Financial Accounting Standard No. 86. Capitalized costs are amortized to cost of sales on a straight-line basis over the estimated useful lives of the related software products, generally three to five years. Capitalized software included in other assets was $7,409, $8,418 and $9,929 at December 31, 1994 and 1995 and September 30, 1996, respectively. Purchased Technology and Goodwill Purchased technology is recorded at its fair market value as of the acquisition date and is amortized over its estimated useful life, ranging from four to fifteen years for current purchased technology components. Goodwill, the excess of the acquired business purchase price over the underlying net assets, is amortized on a straight-line basis over its useful life, 40 years for current goodwill components. Impairment of purchased technology and goodwill is measured on the basis of whether anticipated future undiscounted operating cash flows expected from the acquired business will recover the recorded respective intangible asset balances over the remaining amortization period. At December 31, 1995 and September 30, 1996, no such impairment of assets was indicated. Purchased technology included in other assets was $10,527, $8,667 and $11,143 with accumulated amortization of $620, $2,482 and $4,478 at December 31, 1994 and 1995 and September 30, 1996, respectively. Field Service Expenses All expenses of the Company's field service organization are included in selling, general and administrative expenses. Product Warranty Costs The Company provides for estimated warranty costs at the point of sale. F-9 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) Debt Issuance Costs Debt issuance costs are amortized over the life of the related debt using the effective interest method. At December 31, 1994 and 1995 and September 30, 1996, debt issuance costs included in other assets amounted to $17,318, $7,874 and $3,811, net of accumulated amortization of $993, $912 and $675, respectively. Income Taxes The Company provides for income taxes in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes". Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the Acquisition, the Predecessor's operations were included in the consolidated tax returns of Millipore and all related income tax payments were made by Millipore. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the dates of the financial statements and (iii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Income (Loss) Per Share Income (loss) per common share is based on the weighted average number of common shares and common share equivalents outstanding during the periods presented. Common share equivalents result from outstanding options and warrants to purchase common stock. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, using the treasury stock method until shares are actually issued, all common share equivalents issued and options granted by the Company at a price less than the offering price during the twelve months preceding the initial public offering date have been included in computing income (loss) per common share. Accretion of and cumulative dividends on preferred stock have been included in computing income (loss) per share. Supplemental unaudited pro forma income (loss) per common share amounts, calculated as if the Offering had taken place at the beginning of the respective periods, were $(2.75) and $.35 for the period August 19, 1994 to December 31, 1994 and for the year ended December 31, 1995, respectively. These calculations, required by APB Opinion No. 15 "Earnings per Share", make supplemental pro forma adjustments to data as reported for the repayment of debt and common stock issued due to the Offering, and not for other nonrecurring items. The calculations are as follows:
1994 1995 (UNAUDITED) (UNAUDITED) ----------- ----------- Net (loss) income available to common stockholders, as reported............................................... $(87,734) $1,099 Pro forma adjustments for interest expense, assuming that the Offering occurred at the beginning of the period................................................ 4,820 9,407 -------- ------- Net (loss) income used for supplemental pro forma (loss) income per common share calculation............ $(82,914) $10,506 ======== ======= Weighted average number of common shares outstanding, as reported............................................ 23,852 24,582 Adjustment necessary assuming shares issued in the Offering were outstanding for the full period......... 6,250 5,529 -------- -------
F-10 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED)
1994 1995 (UNAUDITED) (UNAUDITED) ----------- ----------- Weighted average common shares in supplemental pro forma (loss) income per common share calculation... 30,102 30,111 ====== ====== Supplemental pro forma (loss) income per common share............................................... $(2.75) $ .35 ====== ======
2. BUSINESS COMBINATIONS The total purchase price paid to acquire the Predecessor on August 18, 1994 was approximately $358,000, including related costs, and exceeded the historical book value of the net assets acquired. The Acquisition was accounted for by the purchase method and the excess purchase price was allocated to the assets and liabilities of the Predecessor based upon their estimated fair values. Principal components of this excess amount included the revaluation of certain inventories ($38,424), in-process research and development projects ($53,918), purchased technology ($10,748) and goodwill ($70,022). In July 1995, the Company purchased Phase Separations Limited, a United Kingdom company for approximately $7,500. Phase Separations Limited is a manufacturer of chromatography consumable products. This acquisition was also accounted for by the purchase method. In May 1996, the Company purchased TA Instruments Inc. ("TAI") for $84,000, subject to certain adjustments and excluding transaction costs. TAI develops, manufactures, sells and services thermal analysis and rheology instrumentation which is used for the physical characterization of polymers and related materials. Thermal analysis and rheology are among the most prevalent techniques employed in the analyses of polymers and other organic/inorganic materials. The acquisition was accounted for by the purchase method and the excess purchase price was allocated to the assets and liabilities of TAI based upon their estimated fair values. In conjunction with the TAI acquisition, the Company recorded charges of $19,300 for the immediate write-off of in-process research and development, $6,100 for the revaluation of acquired inventory and $43,780 for goodwill. 3. DISCONTINUED OPERATIONS On December 31, 1994, the Company announced a plan to sell its process mass spectrometry business. The largest operation was sold in July 1995 for proceeds, net of associated costs, of approximately $6,500. Remaining operations were sold in January 1996 for proceeds, net of associated costs, of approximately $4,400. The results of this business prior to 1995 have been classified as discontinued operations in the consolidated statements of operations. A reserve of $8,000 was recorded in December 1994 for the estimated loss on disposition of this business. This reserve was reduced by actual losses for the year ended December 31, 1995 which aggregated $546. The net assets of the business have been segregated in the consolidated balance sheets. F-11 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, 1994 DECEMBER 31, 1995 SEPTEMBER 30, 1996 ----------------- ----------------- ------------------ Land.................... $ 3,092 $ 3,092 $ 3,092 Leasehold improvements.. 410 1,206 892 Buildings and improvements............ 26,626 28,653 28,904 Production and other equipment............... 36,795 43,499 52,024 Construction in progress................ 6,638 3,965 6,138 ------- -------- -------- 73,561 80,415 91,050 Less: accumulated depreciation and amortization............ (2,501) (10,154) (16,873) ------- -------- -------- Property, plant and equipment, net.......... $71,060 $ 70,261 $ 74,177 ======= ======== ========
5. INVENTORIES Inventories are classified as follows:
DECEMBER 31, 1994 DECEMBER 31, 1995 SEPTEMBER 30, 1996 ----------------- ----------------- ------------------ Raw materials............ $14,940 $10,719 $17,690 Work in progress......... 4,290 4,201 6,863 Finished goods........... 24,748 26,539 26,931 ------- ------- ------- Total inventories...... $43,978 $41,459 $51,484 ======= ======= =======
6. DEFERRED COMPENSATION In conjunction with the Acquisition, the Company assumed a deferred compensation liability of $4,925 from Millipore to certain key executives of Waters. The liability incurred interest at an annual rate of 7.05%. This liability plus accrued interest was paid to the executives on September 14, 1995. The balance outstanding at December 31, 1994 was $5,055 and was included in other liabilities in the consolidated balance sheet. Interest expense for the period August 19, 1994 to December 31, 1994 and for the year ended December 31, 1995 was $130 and $254, respectively. 7. DEBT On August 18, 1994, the Company issued $100,000 of 12.75% Senior Subordinated Notes, Series B due 2004 (the "Senior Subordinated Notes"). Interest is payable semi-annually commencing September 30, 1994. At the same time, the Company entered into an original bank credit agreement which provided for term loans of up to $205,000 including $30,000 for a revolving credit facility. The interest rate on the term loans was a floating rate based either on the prime rate, as defined, plus 1.750% for Term A, 2.375% for Term B, 2.750% for Term C and 3.125% for Term D portions; or the applicable Eurodollar Rate, as defined, plus 2.750% for Term A, 3.375% for Term B, 3.750% for Term C, and 4.125% for Term D portions. In September 1994, the Company entered into an interest rate protection agreement required by the original bank credit agreement effective through September 1997. This agreement provided payments to the Company if the three month LIBOR rate exceeds 7%, on specified dates, through September 1995 and 8% thereafter through September 1997. Payments would be based upon the excess of three month LIBOR over the aforementioned rates on borrowings aggregating $100,000. Contemporaneously with the Offering, the Company retired all outstanding indebtedness under the original bank credit agreement (the "Prior Bank Credit Agreement") with net proceeds from the Offering and bank financing under a new bank credit agreement ("New Bank Credit Agreement"). The New Bank Credit Agreement is a revolving credit facility with maximum availability of $175,000, as defined. The loans under the New Bank Credit Agreement bear interest for each calendar quarter at a per annum rate equal to, at the Company's option, (i) a floating rate based on the prime rate plus an amount which will vary between zero and 0.50%, or (ii) the applicable Eurodollar Rate plus an amount which will vary between 0.50% and 1.50%, based F-12 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) upon certain Company performance criteria for the previous four quarters. Amounts available under the New Bank Credit Agreement will decrease under certain circumstances and, in any case, by $30,000 in each of 1998 and 1999. The agreement terminates on November 22, 2000. Borrowings under the New Bank Credit Agreement are collateralized by substantially all of the Company's assets. On December 29, 1995, the Company also redeemed $25,000 of Senior Subordinated Notes principal for a call premium of $3,188. In connection with the early retirement of the Prior Bank Credit Agreement and $25,000 of Senior Subordinated Notes principal, the Company recorded a $12,112 extraordinary loss for the writeoff of associated unamortized debt issuance costs, the call premium and the interest rate protection agreement. Under its various loan agreements, the Company is required to meet certain covenants, including certain restrictions on dividend payments, none of which is considered restrictive to the operations of the Company. At December 31, 1995, the interest rate on the $75 million principal amount of Senior Subordinated Notes outstanding was fixed at 12.75% and the weighted average interest rate on the New Bank Credit Agreement borrowings was approximately 6.7% (6.6% at September 30, 1996). The Company's foreign subsidiaries have available short-term lines of credit totaling $8,545 at December 31, 1995 and September 30, 1996. At December 31, 1995, borrowings amounted to $1,933 at a weighted average interest rate of approximately 4.0%. At September 30, 1996, borrowings amounted to $1,300 at a weighted average interest rate of approximately 7.1%. In January 1996, the Company entered into a three-year debt swap agreement with the Bank of Boston. The Company swapped $22,000 in notional amount of floating rate LIBOR borrowings for 2,300,000 yen notional amount of borrowings at a fixed interest rate of 1.525% per annum. At representative interest rates and current exchange rates in effect at January 23, 1996, the effective date of the agreement, the Company would lower its annual interest costs by approximately $900 over the term of the swap agreement. The Company could also incur higher or lower principal repayments over the term of the swap agreement. In March 1996, the Company increased the maximum availability under its senior credit facility (the "Bank Credit Agreement") to $300,000 in order to repurchase its Senior Subordinated Notes (defined below) and provide additional financial flexibility. The availability under the Bank Credit Agreement will decrease under certain circumstances, including upon certain asset sales, issuance of equity and incurrence of debt, will decrease by $45,000 at November 22, 1998 and 1999, and will terminate on the earlier of the date on which a Change of Control Event (as defined in the Bank Credit Agreement) occurs and November 22, 2000. On April 4, 1996, the Company consummated a tender offer (the "Tender Offer") to repurchase $75,000 in principal amount of the Company's 12 3/4% Senior Subordinated Notes (the "Senior Subordinated Notes"). The aggregate purchase price paid by the Company in connection with the Tender Offer was $90,600. The Company funded this redemption through additional borrowings under the Bank Credit Agreement. In the second quarter of 1996, the Company recorded an extraordinary loss of $22,264 related to the early extinguishment of the Senior Subordinated Notes. In March and April 1996, the Company entered into several interest rate protection agreements. These agreements provide payments to the Company if the three month LIBOR rate, as defined, exceeds 8% in 1996, 6% in 1997 and 6.5% in 1998 and 1999 on aggregate borrowings of $183,000 in 1996 and 1997 and $70,000 and $30,000 in 1998 and 1999, respectively. In June 1996, the Company entered into a three-year debt swap agreement with Bankers Trust Company. The Company swapped $7,500 in notional amount of floating rate LIBOR borrowings for 817,500 yen notional amount of borrowings at a fixed interest rate of 2.02% per annum. At representative interest rates and current exchange rates in effect at June 26, 1996, the effective date of the agreement, the Company would lower its annual interest costs by approximately $266 over the term of the swap agreement. The Company could also incur higher or lower principal payments over the term of the swap agreement. F-13 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) 8. INCOME TAXES Income tax data follow in the tables below:
PREDECESSOR COMPANY ------------------------- --------------------------------------- NINE MONTHS YEAR ENDED JANUARY 1 TO AUGUST 19 TO YEAR ENDED ENDED DECEMBER 31, AUGUST 18, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1993 1994 1994 1995 1996 ------------ ------------ ------------ ------------ ------------- The components of income before income taxes were as follows: Domestic............... $ 20,113 $ 15,324 $(84,526) $ 6,210 $(8,928) Foreign................ (5,634) (12,745) (1,384) (1,080) (1,143) -------- -------- -------- ------- ------- Total................. 14,479 2,579 (85,910) 5,130 (10,071) Add back: loss from discontinued operations........... 12 629 7,206 -- -- Add back: loss on extraordinary item...... -- -- -- 12,112 22,264 -------- -------- -------- ------- ------- Income (loss) from continuing operations......... $ 14,491 $ 3,208 $(78,704) $17,242 $12,193 ======== ======== ======== ======= ======= The components of the current and deferred income tax provision were as follows: Current................ $ 4,852 $ 916 $ 1,487 $ 3,129 $ 7,476 Deferred............... (683) -- -- -- -- -------- -------- -------- ------- ------- Total................. $ 4,169 $ 916 $ 1,487 $ 3,129 $ 7,476 ======== ======== ======== ======= ======= The components of the provision for income taxes for financial reporting purposes were as follows: Federal................ $ 4,166 $ 735 $ -- $ -- $ 2,000 State.................. -- -- 129 300 300 Foreign................ -- -- 1,365 2,829 5,176 -------- -------- -------- ------- ------- Total................. 4,166 735 1,494 3,129 7,476 Less: portion applied to discontinued operations (3) (181) 7 -- -- -------- -------- -------- ------- ------- Provision for income taxes................... $ 4,169 $916 $ 1,487 $ 3,129 $ 7,476 ======== ======== ======== ======= ======= The differences between income taxes computed at the United States statutory rate and the provision for income taxes are summarized as follows: Federal tax computed at U.S. statutory income tax rate............. $ 5,068 $ 903 $(30,069) $ 1,796 $(3,524) Puerto Rico rate benefit................. (1,940) -- -- -- -- Foreign Sales Corporation benefit (1,202) -- -- -- -- State income tax net of federal income tax benefit.............. -- -- (5,156) 300 300 Foreign taxes in excess of U.S. statutory income tax rate...... -- -- -- 868 4,441
F-14 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED)
PREDECESSOR COMPANY --------------------------------- ------------------------------------------------- NINE MONTHS ENDED YEAR ENDED JANUARY 1 TO AUGUST 19 TO YEAR ENDED SEPTEMBER 30, DECEMBER 31, 1993 AUGUST 18, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 1996 ----------------- --------------- ----------------- ----------------- ------------- Deferred tax assets not benefitted (benefitted)......... $ 1,965 $-- $35,080 $(2,032) $(4,647) Foreign operating losses not benefitted........... -- -- -- 2,246 1,227 Foreign net operating loss carryforward not utilized............. -- -- -- (256) -- Non-deductible acquisition expenses. -- -- -- -- 9,135 Other.................. 278 13 1,632 207 544 ------- ---- ------- ------- ------- Provision for income $ 4,169 $916 $ 1,487 $ 3,129 $ 7,476 taxes................ ======= ==== ======= ======= ======= The elimination of the Puerto Rico tax rate benefit is a result of the Company's decision to cease manufacturing operations in Puerto Rico during 1994. PREDECESSOR COMPANY --------------------------------- ------------------------------------------------- NINE MONTHS ENDED YEAR ENDED JANUARY 1 TO AUGUST 19 TO YEAR ENDED SEPTEMBER 30, DECEMBER 31, 1993 AUGUST 18, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 1996 ----------------- --------------- ----------------- ----------------- ------------- The tax effects of temporary differences and carryforwards which gave rise to deferred tax liabilities and deferred tax (assets) were as follows: Restructuring charge... $(1,295) $-- $ -- $ -- $ -- Estimated loss on disposal of discontinued operations........... (3,200) (1,900) (1,900) Goodwill amortization.. -- -- (20,677) (12,808) (9,133) Depreciation and capitalized software. 496 77 -- 3,357 1,253 Deferred financing..... -- -- -- (2,569) 265 Deferred compensation.. -- -- -- (1,840) (1,482) Tax credit carryforwards........... -- -- -- (1,221) (1,334) Other.................. 116 (77) 189 513 (727) Net operating loss carryforward.......... -- -- (11,392) (17,704) (17,694) Valuation allowance.... -- -- 35,080 34,172 30,752 ------- ---- ------- ------- ------- Total deferred taxes.. $ (683) $-- $ -- $ -- $ -- ======= ==== ======= ======= =======
At December 31, 1995 the Company had a U.S. net operating loss carryforward of approximately $41,000 which begins to expire in the year 2009. The Company's ability to use the net operating loss carryforward may be limited under Internal Revenue Code Section 382 if a more than 50% change in ownership occurs. The Company had foreign net operating loss carryforwards of approximately $5,000, some of which begin to expire in the year 2000 and some of unlimited duration. The goodwill amortization represents the difference between F-15 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) the book and tax treatment for both goodwill and in-process research and development. Realization of deferred tax assets is contingent upon future taxable income. The valuation allowance relates to the uncertainty of realizing the deferred tax assets. The Company's effective tax rate for the year ended December 31, 1995 was 18.1% before extraordinary charges and for the nine months ended September 30, 1996 was 20% before extraordinary charges and the revaluation of acquired inventory and expensed in-process research and development charges related to the TAI Acquisition, which are not tax deductible. 9. LEASES Lease agreements, expiring at various dates through 2004, cover buildings, office equipment and automobiles. Rental expense was approximately $3,072 in 1993, $3,262 in 1994 and $5,684 in 1995. In 1994 and 1995, Company rent expense included amounts previously allocated to and not classified as direct rent expense of the Predecessor. Future minimum rents payable as of December 31, 1995 under non-cancelable leases with initial terms exceeding one year were as follows:
1996............................................................... $4,459 1997............................................................... 2,963 1998............................................................... 1,884 1999............................................................... 1,375 2000............................................................... 927 thereafter......................................................... 1,082
10. NOTES RECEIVABLE On August 18, 1994, the Company issued common stock at fair market value to senior management in exchange for notes receivable in the amount of $4,925. The notes receivable earned interest at an annual interest rate of 7.05%. Interest income on the notes receivable for the period August 19, 1994 to December 31, 1994 and for the year ended December 31, 1995 was $130 and $254, respectively. The notes receivable were collateralized by the shares of common stock owned by senior management of the Company. Accordingly, the notes receivable were recorded as a reduction of stockholders' equity during the period they were outstanding. On September 14, 1995, the notes were repaid in full. 11. COMMON STOCK Prior to the Offering, the authorized common stock of the Company consisted of 919 shares of Class A, 10 shares of Class B and 194 shares of Class C common stock. All general voting power was vested in the holders of the Class B common stock. The holders of the Class A, Class B and Class C common stock were entitled to receive dividends and distributions from the current and accumulated earnings and profits, as declared by the Board of Directors, in proportion to the number of shares of common stock held. In September 1995, the Company declared and paid a $16,195 distribution to its securityholders. Contemporaneously with the Offering, the Company completed a reclassification in which each share of Class A, Class B, and Class C common stock was converted into a specified number of shares of a single class of Common Stock (the "Reclassification"). At the same time, the authorized number of shares of common stock was increased to 50,000 shares with a par value of $.01 per share. Accordingly, the financial statements have been restated for the Reclassification. Holders of Common Stock are entitled to one vote per share. In November 1995, the Company issued 6,250 shares of Common Stock in an initial public offering for net proceeds of $86,152. F-16 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) 12. REDEEMABLE PREFERRED STOCK On August 18, 1994, as part of the consideration for the Acquisition, the Company authorized and issued one hundred shares of Redeemable Preferred Stock (the "Preferred Stock") with a par value of $.01 per share to Millipore. The Preferred Stock has a liquidation value of $10,000 and earns an annual 6% cumulative dividend based upon the liquidation value. Any accumulated but unpaid dividends are added to the liquidation value. The Company may, at any time, redeem the Preferred Stock at the current liquidation value but in no event later than August 18, 2006. The Preferred Stock was recorded at its estimated fair value of $5,000 on the date of issuance. The excess of the liquidation value over the fair market value is being accreted by periodic charges to additional paid-in capital from the date of issue through August 18, 2006. During the period August 19 to December 31, 1994 and the year ended December 31, 1995 $108 and $301, respectively, were charged against additional paid-in capital to reflect the accretion from fair value to the liquidation value and $222 and $600, respectively, were charged against additional paid-in capital for the accumulated but unpaid dividends. At December 31, 1995, the liquidation preference was $10,822. During the nine month period ended September 30, 1996, $240 was charged against additional paid in capital to reflect the accretion from fair value to liquidation value and $450 was charged against additional paid in capital for the accumulated but unpaid dividends. At September 30, 1996 the liquidation preference was $11,272. 13. STOCK OPTION PLAN The Company's 1994 Stock Option Plan (the "Plan") provides for the grant of stock options to certain key employees of Waters. Stock options under the Plan allowed the purchase of Class A Common Stock of the Company. Concurrent with the Reclassification, each option to purchase Class A Common Stock of the Company was converted into a specified number of options to purchase shares of Common Stock. The exercise price of the options is determined by a committee of the Board of Directors (the "Board") of the Company. Options granted have a term of ten years and vest in five equal installments on the first five anniversaries after the grant. On May 7, 1996, the shareholders approved the 1996 Long-Term Incentive Plan (the "1996 Plan"), which provides for the granting of 1,000,000 shares of Common Stock, consisting of stock options, stock appreciation rights ("SARs"), restricted stock, and other types of awards. Under the 1996 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 1996 Plan is scheduled to terminate on May 7, 2006, unless extended for a period up to five years by action of the Board of Directors. Options granted may be either incentive stock options or non-qualified options. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors. An SAR may be granted alone or in conjunction with an option or other award. No SARs were outstanding as of September 30, 1996. The following table summarizes stock option activity after giving effect to the Reclassification:
NUMBER OF SHARES PRICE PER SHARE ---------------- --------------- Granted........................................ 4,372 $4.00 to $16.28 ----- Outstanding at December 31, 1994.............. 4,372 $4.00 to $16.28 Granted........................................ 663 $4.00 to $16.28 ----- Outstanding at December 31, 1995.............. 5,035 $4.00 to $16.28 Granted........................................ 348 $34.21 Exercised...................................... (102) $4.00 to $16.28 ----- Outstanding at September 30, 1996............. 5,281 $4.00 to $34.21 ===== --------------- Options exercisable at September 30, 1996...... 2,465 ===== Available for grant at September 30, 1996...... 656 =====
F-17 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) On September 14, 1995, the Board amended certain existing stock option agreements as follows: (i) outstanding options for 971 and 129 shares granted in August 1994 and January 1995, respectively, which had a variable exercise price dependent on future events, were amended to fix the exercise price at $9.50 per share and (ii) outstanding stock options for 2,431 and 129 shares granted in August 1994 and January 1995, respectively, were amended to fix both the number of shares as originally granted and to fix the exercise price at $16.28 per share. On September 14, 1995, certain of these amended options had an exercise price below estimated fair value. Accordingly, the Company recorded $5,641 of deferred compensation expense to be recognized over the vesting period of the underlying options. In October 1995, the Board accelerated the vesting period of 1,100 outstanding stock options. Accordingly, the Company immediately charged $3,567 of noncash compensatory stock option expense to selling, general and administrative expenses in 1995. In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") was issued and will require the Company to elect either expense recognition under FAS 123 or its disclosure-only alternative for stock-based employee compensation. The expense recognition provision encouraged by FAS 123 would require fair-value based financial accounting to recognize compensation expense for employee stock compensation plans. FAS 123 must be adopted in the Company's fiscal 1996 financial statements with comparable disclosures for the prior years. The Company has determined that it will elect the disclosure-only alternative. The Company will be required to disclose the pro forma net income or loss and per share amounts in the notes to the financial statements using the fair value based method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. The Company has not determined the impact of these pro forma adjustments. 14. EMPLOYEE STOCK PURCHASE PLAN On February 26, 1996, the Company adopted the 1996 Employee Stock Purchase Plan under which eligible employees may contribute up to 15% of their earnings toward the quarterly purchase of the Company's Common Stock. The plan provides for the rights to purchase a maximum of 250,000 shares of the Company's Common Stock commencing October 1, 1996. To date, no shares have been issued under the plan. Each plan period lasts three months beginning on January 1, April 1, July 1, and October 1 of each year. The purchase price for each share of stock is the lesser of 90% of the market price on the first day of the plan period or 100% of the market price on the last day of the plan period. No compensation expense is recorded in connection with the plan. 15. NON-EMPLOYEE DIRECTOR PLANS On May 7, 1996, the Board and the Company's stockholders approved the 1996 Non-Employee Director Deferred Compensation Plan and the 1996 Non-Employee Director Stock Option Plan ("Director Stock Option Plan"). Under the deferred compensation plan, Outside Directors may elect to defer their fees and credit such fees to either a cash account which earns interest at a market-based rate or to a common stock unit account, for which 100,000 shares of Common Stock have been reserved. Under the Director Stock Option Plan, each Outside Director will receive 1,000 options to acquire shares of Common Stock, and up to 50,000 shares of Common Stock may be issued under such plan. On May 24, 1996 the Compensation Committee granted 6,000 stock options under the Director Stock Option Plan. 16. WARRANT On August 18, 1994, the Company issued a warrant (the "Warrant") to purchase 34 shares of Class A Common Stock and 10 shares of Class C Common Stock in connection with the Company's financing under the Prior Bank Credit Agreement. The Warrant had an exercise price of $.01 per share. The Company valued the F-18 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) Warrant based upon the difference between the fair market value of the Company's common stock as of the date of issuance and the exercise price of the Warrant. The fair market value of the Company's common stock was determined by the cash consideration per share paid by the original investors at the time of the Acquisition. The estimated fair market value of $3,200 for the Warrant was recorded as a component of stockholders' equity. In connection with the Reclassification, the warrant allowed for the purchase of 1,064 shares of the Common Stock at an exercise price of $.01 per share. In October 1995, the Company issued 1,064 shares of Common Stock upon the exercise of this Warrant. 17. FOREIGN CURRENCY CONTRACTS The Company has periodically entered into forward exchange contracts to hedge the impact of foreign currency fluctuations on the U.S. dollar value of certain anticipated and specified future foreign cash flows and foreign net asset values. The unrealized gains and losses on outstanding contracts at period end which relate to anticipated future cash flows are recorded in unrealized losses (gains) on future cash flow hedges in the statements of operations. The realized gains and losses on these contracts and on those contracts relating to specified future foreign cash flows are recorded as realized (gains) losses on cash flow hedges. In December 1995, the Company liquidated those outstanding contracts which hedged anticipated future cash flows. Gains (losses) on contracts hedging net asset values generated a reduction in translation adjustments of $1,313 for the year ended December 31, 1995. At December 31, 1995 and September 30, 1996, the Company had outstanding forward exchange contracts amounting to approximately $3,400 and $6,494, respectively which hedged the dollar value equivalent of specified customer commitments. These contracts have an initial maturity of less than three months. 18. RETIREMENT PLANS Prior to the Acquisition, retirement benefits were provided to employees through the Millipore Corporation Employees' Participation and Savings Plan ("Millipore Participation Plan") and the Retirement Plan for Employees of Millipore Corporation ("Millipore Retirement Plan"). Subsequent to the Acquisition, the Company adopted two new retirement plans for employees effective August 19, 1994; the Waters Employee Investment Plan, a defined contribution plan, and the Waters Retirement Plan, a defined benefit cash balance plan which supersede the aforementioned Millipore Corporation Participation and Retirement plans. Waters employees' accumulated benefit balances in the Millipore Participation Plan were valued as of September 30, 1994 and transferred to the Waters Employee Investment Plan. Millipore and the Company have not yet agreed on the final valuation of the amount of benefits transferable from the Millipore Retirement Plan on behalf of Waters Employees as of the Acquisition date. Upon completion of this valuation, Millipore will transfer the Waters employees' accumulated benefit balances to the Waters Retirement Plan. Waters is currently asserting a claim against Millipore under arbitration procedures specified in the purchase and sale agreement for the Predecessor. Waters contends that Millipore has undervalued the amount of assets it is obligated to transfer from the Millipore Retirement Plan to the Waters successor plan. Waters believes it has meritorious arguments and should prevail, although the outcome is not certain. The Company believes that any outcome of the arbitration proceeding will not be material to the Company. Employees hired prior to the Acquisition date were eligible to participate in the Waters Employee Investment Plan as of the Acquisition date. Employees hired after this date are eligible after one year of service. F-19 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) Employees may contribute from 1%-15% of eligible pay on a pre-tax basis. The Company makes a matching contribution of 50% for contributions up to 6% of eligible pay. Employees are 100% vested in company matching contributions upon becoming eligible for the plan. For the period August 19, 1994 to December 31, 1994 and the year ended December 31, 1995 the Company's matching contributions amounted to $476 and $1,280, respectively. Employees are eligible to participate in the Waters Retirement Plan after one year of service. The Company makes an annual contribution to each employee's account as a percentage of eligible pay based on years of service. In addition, each employee's account is credited for investment returns at the beginning of each year for the prior year at the average 12 month Treasury Bill rate plus 0.5%, limited to a minimum rate of 5% and a maximum of 10%. An employee does not vest until the completion of five years of service at which time the employee becomes 100% vested. Years of service under the Millipore Retirement Plan count toward participation and vesting under the Waters Retirement Plan. A separate estimated actuarial evaluation of the Waters Retirement Plan was performed for the period August 19, 1994 to December 31, 1994 and the year ended December 31, 1995. If the Plan had been in existence for the full year 1994, experience would have differed. Summary data for the Waters Retirement Plan at December 31, 1994 and 1995 are presented in the following table.
AUGUST 19, TO YEAR ENDED DECEMBER 31, 1994 DECEMBER 31, 1995 ----------------- ----------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $2,025 and $4,194, respectively............................ $(2,117) $(4,323) ======= ======= Projected benefit obligation for service rendered to date........................... $(2,117) $(4,424) Estimated plan assets at fair value....... 2,560 2,087 ------- ------- Projected benefit obligation (in excess of) less than fair value of assets....................... 443 (2,337) Unrecognized prior service costs.......... -- 273 Unrecognized net actuarial (loss) gain.... (134) 505 Minimum pension liability adjustment...... -- (677) ------- ------- Prepaid (accrued) pension cost included in the financial statements................ $ 309 $(2,236) ======= ======= Intangible asset.......................... $ -- $ 273 ======= ======= Net periodic pension cost includes the following components: Service cost.............................. $ 543 $ 1,780 Interest cost............................. 68 321 Return on plan assets..................... (60) (137) Amortization and deferral................. (16) (8) ------- ------- Net periodic pension cost................ $ 535 $ 1,956 ======= ======= The projected benefit obligation was calculated using the following assumptions: Discount rate............................. 8.75% 7.25% Return on assets.......................... 8.50% 8.50% Increases in compensation levels.......... 5.00% 4.50%
F-20 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) Net periodic pension cost for the nine-month period ended September 30, 1996 was $1,613. Millipore did not perform separate actuarial calculations for the Predecessor's portion of its Retirement Plan. As a result, comparable 1993 data are not available for the Plan. 19. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS The Company sponsors several unfunded defined benefit post-retirement plans covering U.S. employees. The plans provide medical and life insurance benefits and are, depending on the plan, either contributory or non-contributory. Net periodic post-retirement benefit cost included the following components:
PREDECESSOR COMPANY --------------------------------- ----------------------------------- YEAR ENDED JANUARY 1 TO AUGUST 19 TO YEAR ENDED DECEMBER 31, 1993 AUGUST 18, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 ----------------- --------------- ----------------- ----------------- Service cost-benefits attributed to service during the year......... $363 $257 $37 $82 Interest cost on accumulated post- retirement benefit obligation.............. 245 174 35 64 Net amortization and deferral................ (41) (29) (21) (83) ---- ---- --- --- Net periodic post- retirement benefit cost. $567 $402 $51 $63 ==== ==== === ===
Net post-retirement benefit cost for the nine-month period ended September 30, 1996 was $128. Summary information on the Company's plan at December 31, 1994 and 1995 is presented in the following table:
AUGUST 19 TO YEAR ENDED DECEMBER 31, 1994 DECEMBER 31, 1995 ----------------- ----------------- Accumulated post-retirement benefit obligation: Retirees................................. $ -- $ 152 Fully eligible active plan participants.. 177 45 Other active plan participants........... 469 608 Unrecognized amounts: Prior service costs...................... 1,639 1,556 Net loss (gain).......................... 45 16 ------ ------ Accrued post-retirement benefit cost...... $2,330 $2,377 ====== ======
The Company's accrued post-retirement benefit obligation was $2,330 and $2,377 at December 31, 1994 and 1995, respectively, and is included in other liabilities in the balance sheet. This obligation pertains only to active employees of the Company at the time of the Acquisition and employees hired subsequent to the Acquisition. The obligation to fund post-retirement benefits for retired employees prior to the Acquisition has been retained by Millipore. The discount rate used in determining the accumulated post-retirement benefit obligation was 8.00%, 8.75% and 7.25% as of December 31, 1993, 1994, and 1995, respectively. The assumed health care cost trend rate used F-21 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) in measuring the accumulated post-retirement benefit obligation was 5% in 1994. In 1995 the benefits available under the Plan were amended. As a result, increases in the health care cost trend rate do not result in any additional costs to the Company. 20. MATERIAL TRANSACTIONS/TRANSITION AGREEMENT In connection with the consummation of the Acquisition, the Company and Millipore entered into a Transition Support and Service Agreement (the "Transition Agreement") whereby Millipore agreed to (i) lease office space, (ii) transfer certain personnel, (iii) provide management information systems, administrative, distribution and facilities management support, (iv) provide access to its telephone network, and (v) supply professional support services. The Company believes that the costs incurred under the Transition Agreement are representative of the charges that would be levied by independent third parties for similar services. The Company incurred net expenses pursuant to this agreement of $5,621 for the period August 19, 1994 to December 31, 1994, $5,210 for the year ended December 31, 1995 and $3,696 for the nine months ended September 30, 1996. As of December 31, 1994 and 1995 and September 30, 1996, the Company had a net balance payable to Millipore of approximately $1,394, $463, and $148, respectively. During the period August 19, 1994 to December 31, 1994, the year ended December 31, 1995, and the nine month period ended September 30, 1996, the Company sold product and services totaling $203, $104, and $79, respectively, to Millipore. 21. RELATED PARTY TRANSACTIONS In connection with the Acquisition, the Company entered into a ten-year Professional Services Agreement with AEA Investors Inc. and Bain Capital, Inc. (the "Management Services Agreement") pursuant to which they agreed to pay AEA Investors Inc. and Bain Capital, Inc. an aggregate annual management fee of $1,500, plus out-of-pocket expenses. Pursuant to the Management Services Agreement, AEA Investors Inc. and Bain Capital, Inc. provided general management, financial and other corporate advisory services to the Company. Pursuant to this agreement, AEA Investors Inc. and Bain Capital, Inc. received a cash financial advisory fee of $8,000 at the closing of the Acquisition. The management fee for the period August 19, 1994 to December 31, 1994 was $552. In connection with the Offering, the Management Services agreement was terminated for a fee of $4,000. Management fees excluding the termination fee were $1,393 for the year ended December 31, 1995. In 1995, the Company made loans to certain executive officers of the Company. The loans are collateralized by a pledge of shares of common stock held by these executive officers, bear interest at 5.83% per annum and mature on December 1, 2000. In 1996, the Company made additional loans of a similar nature to executive officers of the Company. These additional loans bear interest of 5.65% per annum and mature on January 8, 2001. Loans receivable of $2,062 and $2,453 at December 31, 1995 and September 30, 1996, respectively, were included in other assets in the balance sheet. 22. BUSINESS SEGMENT INFORMATION The Company operates in one business segment and in the geographical segments indicated in the table below. Sales are reflected in the segment from which the sales are made. The United States segment includes Puerto Rico. The other international segment includes Canada, South America, Australia, Eastern Europe and countries in the former Soviet Union. Transfer sales between geographical areas are generally made at a discount from list price. F-22 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) PREDECESSOR, 1993
UNITED STATES EUROPE JAPAN ASIA OTHER INT'L ELIMINATIONS TOTAL ------------- ------- ------- ------- ----------- ------------ -------- Sales: Unaffiliated sales..... $121,636 $85,906 $39,429 $12,806 $26,267 $ -- $286,044 Unaffiliated export sales to Asia........ 10,953 -- -- -- -- -- 10,953 Unaffiliated export sales to Other Int'l. 7,239 691 -- -- -- -- 7,930 Transfers between areas................ 82,488 -- -- -- -- (82,488) -- -------- ------- ------- ------- ------- -------- -------- Total sales............. $222,316 $86,597 $39,429 $12,806 $26,267 $(82,488) $304,927 ======== ======= ======= ======= ======= ======== ======== Income from operations pre-restructuring...... $ 32,617 $(6,456) $ 2,881 $(1,048) $ 1,569 -- $ 29,563 Restructuring charge.... (11,000) (2,000) -- -- -- -- (13,000) -------- ------- ------- ------- ------- -------- -------- Income from operations post-restructuring..... $ 21,617 $(8,456) $ 2,881 $(1,048) $ 1,569 $ -- $ 16,563 ======== ======= ======= ======= ======= ======== ======== Total assets............ $122,630 $45,734 $22,940 $ 6,969 $ 4,925 $(13,606) $189,592 ======== ======= ======= ======= ======= ======== ========
PREDECESSOR, JANUARY 1, 1994 TO AUGUST 18, 1994
UNITED STATES EUROPE JAPAN ASIA OTHER INT'L ELIMINATIONS TOTAL ------------- ------- ------- ------- ----------- ------------ -------- Sales: Unaffiliated sales..... $ 70,101 $47,373 $26,242 $10,711 $17,253 $ -- $171,680 Unaffiliated export sales to Asia........ 1,441 -- -- -- -- -- 1,441 Unaffiliated export sales to Other Int'l. 2,717 259 -- -- -- -- 2,976 Transfers between 65,064 -- -- -- -- (65,064) -- areas................... -------- ------- ------- ------- ------- -------- -------- Total sales............. $139,323 $47,632 $26,242 $10,711 $17,253 $(65,064) $176,097 ======== ======= ======= ======= ======= ======== ======== Income from operations.. $ 16,781 $(8,109) $ (706) $(2,045) $(1,885) $ -- $ 4,036 ======== ======= ======= ======= ======= ======== ========
F-23 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) COMPANY, AUGUST 19, 1994 TO DECEMBER 31, 1994
UNITED STATES EUROPE JAPAN ASIA OTHER INT'L ELIMINATIONS TOTAL ------------- ------- ------- ------- ----------- ------------ -------- Sales: Unaffiliated sales..... $ 47,663 $39,203 $17,095 $10,450 $13,359 $ -- $127,770 Unaffiliated export sales to Asia........ 1,072 -- -- -- -- -- 1,072 Unaffiliated export sales to Other Int'l. 2,022 193 -- -- -- -- 2,215 Transfers between 43,881 -- -- -- -- (43,881) -- areas................... -------- ------- ------- ------- ------- --------- -------- Total sales............. $ 94,638 $39,396 $17,095 $10,450 $13,359 $ (43,881) $131,057 ======== ======= ======= ======= ======= ========= ======== Loss from operations pre-restructuring...... $(63,973) $240 $ 789 $(1,204) $ 32 $ -- $(64,116) Restructuring charge.... (498) (960) (1,660) (320) (62) (3,500) -------- ------- ------- ------- ------- --------- -------- Loss from operations $(64,471) $ (720) $ (871) $(1,524) $ (30) $ -- $(67,616) post-restructuring..... ======== ======= ======= ======= ======= ========= ======== Total assets............ $331,113 $79,291 $21,503 $12,058 $18,640 $(131,007) $331,598 ======== ======= ======= ======= ======= ========= ========
COMPANY, 1995
UNITED STATES EUROPE JAPAN ASIA OTHER INT'L ELIMINATIONS TOTAL ------------- -------- ------- ------- ----------- ------------ -------- Sales: Unaffiliated sales..... $116,065 $103,144 $47,941 $26,787 $33,749 $ -- $327,686 Unaffiliated export sales to Asia.............. 464 -- -- -- -- -- 464 Unaffiliated export sales to Other Int'l. 3,947 875 -- -- -- -- 4,822 Transfers between 107,506 -- -- -- -- (107,506) -- areas................... -------- -------- ------- ------- ------- --------- -------- Total sales............. $227,982 $104,019 $47,941 $26,787 $33,749 $(107,506) $332,972 ======== ======== ======= ======= ======= ========= ======== Income from operations.. $ 44,780 $ 1,610 $ 2,422 $(1,416) $(1,014) $ -- $ 46,382 ======== ======== ======= ======= ======= ========= ======== Total assets............ $343,768 $ 75,464 $20,537 $11,010 $18,402 $(169,365) $299,816 ======== ======== ======= ======= ======= ========= ========
F-24 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED) 23. QUARTERLY RESULTS The Company's (Predecessor's) unaudited quarterly results are summarized below (In thousands except per share data):
COMPANY --------------------------------------------------------- 1995 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL ------------- -------------- ------------- -------------- -------- Net sales............... $77,554 $84,328 $80,634 $90,456 $332,972 Cost of sales........... 30,282 31,275 30,761 33,898 126,216 Revaluation of acquired inventory............... -- -- 371 554 925 ------- ------- ------- -------- -------- Gross profit........... 47,272 53,053 49,502 56,004 205,831 Selling, general and administrative expenses............... 31,823 32,593 33,259 38,700 136,375 Management fee.......... 387 383 389 4,234 5,393 Research and development expenses................ 4,096 4,418 4,346 4,821 17,681 ------- ------- ------- -------- -------- Operating income (loss).................. 10,966 15,659 11,508 8,249 46,382 Interest expense, net... 8,119 7,955 7,614 6,627 30,315 Foreign currency contracts losses (gains)................ 3,886 2,461 (6,669) (853) (1,175) ------- ------- ------- -------- -------- (Loss) income from continuing operations before income taxes.. (1,039) 5,243 10,563 2,475 17,242 (Credit) provision for income taxes............ (199) 876 1,993 459 3,129 ------- ------- ------- -------- -------- (Loss) income before extraordinary item..... (840) 4,367 8,570 2,016 14,113 Extraordinary item (loss) on early retirement of debt..... -- -- -- (12,112) (12,112) ------- ------- ------- -------- -------- Net (loss) income...... (840) 4,367 8,570 (10,096) 2,001 Less: accretion of and dividend on preferred stock................... 222 226 227 227 902 ------- ------- ------- -------- -------- Net (loss) income available to common stockholders.. $(1,062) $4,141 $8,343 $(10,323) $1,099 ======= ======= ======= ======== ======== Per share information: (Loss) income from continuing operations........... $(.04) $.17 $.35 $.07 $.54 Extraordinary (loss) per share............... -- -- -- (.45) (.49) ------- ------- ------- -------- -------- Net (loss) income per share................... $(.04) $.17 $.35 $(.38) $.05 ======= ======= ======= ======== ======== Weighted average number of common shares outstanding............ 23,852 23,852 23,852 26,774 24,582
F-25 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED)
COMBINED COMPANY AND PREDECESSOR COMPANY PREDECESSOR -------------------------------------- --------------------------- 1994 JULY 1 TO AUGUST 19 TO FIRST QUARTER SECOND QUARTER AUGUST 18 SEPTEMBER 30 FOURTH QUARTER TOTAL ------------- -------------- --------- ------------ -------------- ----------- Net sales............... $71,130 $78,236 $26,731 $ 48,256 $ 82,801 $307,154 Cost of sales........... 29,283 31,131 13,032 17,142 32,598 123,186 Revaluation of acquired inventory.............. -- -- -- 11,647 26,777 38,424 ------- ------- ------- -------- -------- -------- Gross profit........... 41,847 47,105 13,699 19,467 23,426 145,544 Selling, general and administrative expenses............... 32,540 33,216 19,460 13,385 32,364 130,965 Management fee.......... -- -- -- 177 375 552 Expensed in-process research and development............ -- -- -- 53,918 -- 53,918 Restructuring charge.... -- -- -- -- 3,500 3,500 Research and development expenses............... 4,961 5,189 3,250 1,926 4,863 20,189 ------- ------- ------- -------- -------- -------- Operating income (loss)............... 4,346 8,700 (9,011) (49,939) (17,676) (63,580) Interest expense, net... 336 313 178 3,724 8,288 12,839 Foreign currency contracts (gains)...... -- -- -- (214) (709) (923) ------- ------- ------- -------- -------- -------- Income (loss) from continuing operations before income taxes.. 4,010 8,387 (9,189) (53,449) (25,255) (75,496) Provision (credit) for income taxes........... 1,153 2,411 (2,648) 741 746 2,403 ------- ------- ------- -------- -------- -------- Income (loss) from continuing operations........... 2,857 5,976 (6,541) (54,190) (26,001) (77,899) (Loss) income from discontinued operations............. (270) 61 (239) 18 (7,231) (7,661) ------- ------- ------- -------- -------- -------- Net income (loss)...... $ 2,587 $ 6,037 $(6,780) (54,172) (33,232) (85,560) ======= ======= ======= Less: accretion of and dividend on preferred stock.................. 104 226 330 -------- -------- -------- Net loss available to common stockholders.... $(54,276) $(33,458) $(85,890) ======== ======== ========
F-26 WATERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND AS OF SEPTEMBER 30, 1996 IS UNAUDITED)
PREDECESSOR COMPANY -------------------------------------- --------------------------- COMBINED COMPANY JULY 1 TO AUGUST 19 TO AND PREDECESSOR FIRST QUARTER SECOND QUARTER AUGUST 18 SEPTEMBER 30 FOURTH QUARTER 1994 TOTAL ------------- -------------- --------- ------------ -------------- ---------------- Per share information: (Loss) from continuing operations........... $(2.28) $(1.10) (Loss) from discontinued -- (.30) operations........... ------ ------ Net (loss) per share... $(2.28) $(1.40) ====== ====== Weighted average number of common shares outstanding............ 23,852 23,852
F-27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors TA Instruments, Inc.: We have audited the accompanying consolidated balance sheets of TA Instruments, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. 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 financial position of TA Instruments, Inc. and subsidiaries as of December 31, 1994 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Philadelphia, PA February 15, 1996 (except with respect to the matter discussed in Note 16, as to which the date is May 1, 1996) F-28 TA INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE DATA)
YEAR ENDED THREE MONTHS ENDED DECEMBER 31 MARCH 31 ------------------ ----------------------- 1994 1995 1995 1996 -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) Net sales.......................... $ 37,377 $ 46,597 $ 9,731 $ 10,597 Cost of goods sold................. 13,846 17,533 3,701 4,066 -------- -------- -------- -------- Gross profit................... 23,531 29,064 6,030 6,531 Selling, general and administrative expenses.......................... 14,632 16,719 3,796 4,052 Research and development........... 1,950 2,072 553 983 Amortization of intangibles........ 7,091 1,962 435 428 -------- -------- -------- -------- Operating profit (loss)........ (142) 8,311 1,246 1,068 -------- -------- -------- -------- Other (income) expense, net: Interest expense, net............ 4,650 4,278 1,092 955 Other, net....................... (265) (434) (806) 105 -------- -------- -------- -------- 4,385 3,844 286 1,060 -------- -------- -------- -------- Income (loss) before income taxes......................... (4,527) 4,467 960 8 Income tax benefit................. (425) (345) (79) (57) -------- -------- -------- -------- Net income (loss) before preferred dividends........... (4,102) 4,812 1,039 65 Preferred dividends................ 878 1,014 249 273 -------- -------- -------- -------- Net income (loss) available to common shareholders........... $ (4,980) $ 3,798 $ 790 $ (208) ======== ======== ======== ======== Net income (loss) per common and equivalent share: Earnings (loss) per share........ $ (38.57) $ 27.40 $ 5.93 $ (1.61) ======== ======== ======== ======== Weighted average number of common and equivalent shares outstanding..................... 129,110 138,618 133,189 128,969 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-29 TA INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER 31 ------------------ MARCH 31 1994 1995 1996 -------- -------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................. $ 382 $ 5,451 $ 4,721 Trade accounts receivable, less allowance for doubtful accounts of $497, $446 and $416 at December 31, 1994, December 31, 1995 and March 31, 1996.................. 8,720 7,719 6,429 Inventories (Note 4)...................... 6,323 6,384 7,597 Prepaids and other current assets......... 542 384 373 -------- -------- -------- Total current assets.................... 15,967 19,938 19,120 Property and equipment, net (Note 5)....... 4,519 3,437 3,110 Intangible assets, net (Note 6)............ 8,452 7,670 7,455 -------- -------- -------- $ 28,938 $ 31,045 $ 29,685 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt (Note 7)....................................... $ -- $ 5,000 $ 5,000 Accounts payable.......................... 2,214 2,702 2,626 Accrued pension expense................... 730 809 928 Accrued commission expense................ 702 895 643 Accrued warranty expense.................. 392 534 542 Accrued expenses, other................... 1,462 2,197 1,132 Accrued interest.......................... 963 665 665 Deferred service income................... 1,009 998 1,013 Other liabilities (Note 15)............... -- 346 346 -------- -------- -------- Total current liabilities............... 7,472 14,146 12,895 Long-term debt, less current portion (Note 7)........................................ 34,000 25,000 25,000 Deferred income taxes (Note 9)............. 797 436 359 Other liabilities (Note 15)................ 607 -- -- Commitments and contingencies (Notes 13 and 15) Redeemable preferred stock (Notes 8 and 12): Series A voting cumulative redeemable; par value $1.00 per share, 20,000 shares authorized, 18,616 shares issued and outstanding at December 31, 1994, December 31, 1995 and March 31, 1996..... 356 408 411 Series B non-voting cumulative redeemable; par value $1.00 per share, 400,000 shares authorized, 351,147, 351,012 and 350,752 issued and outstanding at December 31, 1994, December 31, 1995 and March 31, 1996, respectively....................... 6,575 7,537 7,807 Stockholders' equity (deficit): Common stock (Notes 8 and 12) Class A and D voting; par value $.01 per share, 450,000 shares authorized, 101,334, 121,863 and 121,863 issued and outstanding at December 31, 1994, December 31, 1995 and March 31, 1996, respectively............................. 1 1 1 Class B and C non-voting; par value $.01 per share, 100,000 shares authorized, 27,674, 7,118 and 7,066 shares issued and outstanding at December 31, 1994, December 31, 1995 and March 31, 1996, respectively............................. -- -- -- Additional paid-in capital................ 1,247 1,842 1,842 Accumulated deficit....................... (22,295) (18,497) (18,705) Translation adjustments................... 178 172 75 -------- -------- -------- Total stockholders' equity (deficit).... (20,869) (16,482) (16,787) -------- -------- -------- $ 28,938 $ 31,045 $ 29,685 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-30 TA INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED THREE MONTHS ENDED DECEMBER 31 MARCH 31 ---------------- ----------------------- 1994 1995 1995 1996 ------- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income (loss)................... $(4,102) $ 4,812 $ 1,039 $ 65 ------- ------- ------- ------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities-- Depreciation and amortization...... 9,160 3,724 984 715 Loss on disposal of equipment...... 101 56 76 32 Deferred income tax benefit........ (425) (345) (79) (57) Compensation expense for perfor- mance plan........................ -- 595 65 -- Changes in assets and liabilities-- Trade accounts receivable, net.... (1,439) 1,001 2,507 1,290 Inventories....................... (827) (394) (990) (1,203) Prepaids and other current assets. 54 158 82 11 Accounts payable.................. 190 488 (48) (76) Accrued expenses.................. (635) 1,149 (227) (1,190) Accrued interest.................. 1 (298) 51 -- Deferred service income........... 77 (11) (13) 15 Other, net........................ (781) (231) (796) (66) ------- ------- ------- ------- Total adjustments................ 5,476 5,892 1,612 (529) ------- ------- ------- ------- Net cash provided by (used in) operating activities............ 1,374 10,704 2,651 (464) ------- ------- ------- ------- Cash flows from investing activities: Capital expenditures................ (657) (405) (85) (77) Capitalized software costs.......... (920) (1,230) (213) (189) ------- ------- ------- ------- Net cash used in investing activ- ities........................... (1,577) (1,635) (298) (266) ------- ------- ------- ------- Cash flows from financing activities: Borrowings under revolving credit... 4,400 3,100 -- -- Repayment of revolving credit....... (5,200) (4,700) (1,600) -- Repayments of long-term debt........ -- (2,400) -- -- ------- ------- ------- ------- Net cash used in financing activ- ities........................... (800) (4,000) (1,600) -- ------- ------- ------- ------- Net (decrease) increase in cash and cash equivalents............ (1,003) 5,069 753 (730) Cash and cash equivalents at begin- ning of period...................... 1,385 382 382 5,451 ------- ------- ------- ------- Cash and cash equivalents at end of period.............................. $ 382 $ 5,451 $ 1,135 $ 4,721 ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-31 TA INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
ADDITIONAL CUMULATIVE COMMON PAID-IN ACCUMULATED TRANSLATION STOCK CAPITAL DEFICIT ADJUSTMENT TOTAL ------ ---------- ----------- ----------- -------- Balance at January 1, 1994. $ 1 $1,257 $(17,326) $ (45) $(16,113) Preferred stock divi- dends................... -- -- (878) -- (878) Repurchase of stock...... -- (10) 11 -- 1 Translation adjustment... -- -- -- 223 223 Net loss................. -- -- (4,102) -- (4,102) ---- ------ -------- ----- -------- Balance at December 31, 1994...................... 1 1,247 (22,295) 178 (20,869) Preferred stock divi- dends................... -- -- (1,014) -- (1,014) Translation adjustment... -- -- -- (6) (6) Contribution of capital for performance plan.... -- 595 -- -- 595 Net income............... -- -- 4,812 -- 4,812 ---- ------ -------- ----- -------- Balance at December 31, 1995...................... 1 1,842 (18,497) 172 (16,482) Preferred stock dividends (unaudited)............. -- -- (273) -- (273) Translation adjustment (unaudited)............. -- -- -- (97) (97) Net income (unaudited)... -- -- 65 -- 65 ---- ------ -------- ----- -------- Balance at March 31, 1996 (unaudited)............... $ 1 $1,842 $(18,705) $ 75 $(16,787) ==== ====== ======== ===== ========
The accompanying notes are an integral part of these consolidated financial statements. F-32 TA INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 1. DESCRIPTION OF BUSINESS: TA Instruments, Inc. (the Company) engages in the design, manufacture, marketing and servicing of analytical instruments which measure the response of materials resulting from controlled changes in temperature (thermal analysis) and stress/strain (rheology). The instruments are used in research and development, quality control, educational and governmental applications. The thermal analysis business represented approximately 89% and 87% of net sales as of December 31, 1994 and 1995, respectively. The Company sells its products primarily throughout the United States, Europe and the Far East. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Material intercompany balances and transactions have been eliminated in consolidation. Interim Financial Statements The financial statements as of March 31, 1996 and for the three months ended March 31, 1995 and 1996 are unaudited. In the opinion of management of the Company, the unaudited financial statements as of March 31, 1996 and for the three months ended March 31, 1995 and 1996, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the full year. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid interest-bearing deposits with maturities of three months or less at time of purchase. Inventories Inventories are stated at lower of cost, determined by the first-in, first- out (FIFO) method, or market. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from five to ten years for financial statement purposes and accelerated methods for tax purposes. The cost of repairs and maintenance is charged to earnings as incurred; significant renewals and betterments are capitalized. Intangible Assets The Company capitalizes software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" (SFAS No. 86). Under SFAS No. 86, costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process incurred internally are required to be expensed as incurred as research and development until technological feasibility has been established for the product. Thereafter, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. For the years ended December 31, 1994 and 1995 and for the three months ended March 31, F-33 TA INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1995 and 1996, amortization expense for software development costs was approximately $0, $196,159, $0 and $116,525, respectively. The costs of unpatented technology, noncompete agreements, tradename, customer lists, workforce and certain other costs arising from acquisitions are amortized over periods ranging from one to five years. Patents are amortized over their remaining legal lives ranging from three to 17 years. The straight-line method of amortization is used. Deferred Service Income Deferred service income represents payments received from customers for extended service contracts. These revenues are deferred and recognized ratably over the terms of the related contracts, principally one year. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109, deferred taxes are required to be classified based on the financial statement classification of the related assets and liabilities which give rise to temporary differences. Deferred taxes result from temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Income taxes, if any, are provided based upon pre-tax accounting income. Differences between tax and financial statement net operating loss carryforwards arise as the result of differences in the recognition of certain income and/or expense items between tax and financial statements. Foreign Currency Translation Foreign currency transactions and the financial statements of the Company's foreign subsidiaries are translated in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" (SFAS No. 52). Approximately 47% of sales are made to customers outside of the United States. Net Income (Loss) Per Share Net income (loss) per share is calculated utilizing the treasury stock method. All per share amounts are based upon weighted average common shares outstanding during the period including the dilutive effect of common stock options. The inclusion of additional shares assuming the exercise of the performance stock options would have been antidilutive. Estimates and Assumptions 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. New Accounting Pronouncements The Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). The new standard requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be F-34 TA INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) recoverable. The long-lived assets and certain identifiable intangibles to be disposed of are to be reported at the lower of carrying amount or fair value less cost to sell. The Company adopted the new accounting standard in 1996 and there was no effect on the financial statements. Reclassifications Certain prior year amounts have been reclassified to conform to current year presentation. 3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Supplemental disclosures consist of the following (in thousands):
YEAR ENDED THREE MONTHS DECEMBER 31 ENDED MARCH 31 -------------- ---------------- 1994 1995 1995 1996 ------ ------ ------- ------- Interest paid................................ $4,684 $4,645 $ 1,053 $ 1,005 ====== ====== ======= ======= Noncash transactions, net--inventories....... $ (288) $ (333) $ (149) $ (10) ====== ====== ======= ======= Noncash transactions, net--property and equipment, including capital additions of $419, $482, $214 and $21, respectively...... $ 288 $ 333 $ 149 $ 10 ====== ====== ======= =======
4. INVENTORIES: Inventories consist of the following (in thousands):
DECEMBER 31 ------------- MARCH 31 1994 1995 1996 ------ ------ -------- Raw materials............................................ $4,154 $4,161 $5,023 Work in process.......................................... 714 726 1,061 Finished goods........................................... 1,455 1,497 1,513 ------ ------ ------ $6,323 $6,384 $7,597 ====== ====== ======
5. PROPERTY AND EQUIPMENT: Property and equipment consist of the following (in thousands):
DECEMBER 31 -------------- MARCH 31 1994 1995 1996 ------- ------ -------- Office fixtures and equipment........................... $ 827 $ 638 $ 644 Computer equipment...................................... 1,331 1,152 1,198 Production equipment.................................... 1,836 983 1,136 Demonstration equipment................................. 6,218 3,193 3,093 Leasehold improvements.................................. 655 581 475 Capital projects in progress............................ 239 190 197 Vehicles................................................ 297 258 264 ------- ------ ------ 11,403 6,995 7,007 Less--Accumulated depreciation.......................... 6,884 3,558 3,897 ------- ------ ------ Net property and equipment............................ $ 4,519 $3,437 $3,110 ======= ====== ======
F-35 TA INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) For the years ended December 31, 1994 and 1995 and for the three month periods ended March 31, 1995 and 1996, depreciation expense was approximately $2,069,000, $1,762,000, $549,000 and $287,000, respectively. 6. INTANGIBLE ASSETS: Intangible assets, not fully amortized, consist of the following (in thousands):
DECEMBER 31 --------------- MARCH 31 1994 1995 1996 ------- ------- -------- Technology............................................. $ 9,633 $ 7,295 $ 7,324 Software development costs............................. 1,557 2,786 2,970 Noncompete agreements.................................. 2,344 2,344 1,262 Tradename.............................................. 325 325 -- Customer lists, workforce.............................. 866 623 563 Start-up, financing and other costs.................... 203 199 132 ------- ------- ------- 14,928 13,572 12,251 Less--Accumulated amortization......................... 6,476 5,902 4,796 ------- ------- ------- Net intangible assets................................ $ 8,452 $ 7,670 $ 7,455 ======= ======= =======
As of December 31, 1994 and 1995 and March 31, 1996, $21,295,000, $2,531,000 and $1,534,000 of fully amortized intangibles were written off. 7. LONG-TERM DEBT: Long-term debt consist of the following (in thousands):
DECEMBER 31 --------------- 1994 1995 ------- ------- Senior notes................................................... $20,000 $20,000 Senior subordinated notes...................................... 10,000 10,000 Junior subordinated notes...................................... 2,400 -- Revolving credit notes......................................... 1,600 -- ------- ------- 34,000 30,000 Less--Current portion.......................................... -- (5,000) ------- ------- Total long-term debt......................................... $34,000 $25,000 ======= =======
Principal maturities of long-term debt at December 31, 1995, are as follows (in thousands): 1996.................................................................... $ 5,000 1997.................................................................... 5,000 1998.................................................................... 5,000 1999.................................................................... 5,000 2000.................................................................... 5,000 Thereafter.............................................................. 5,000 ------- $30,000 =======
F-36 TA INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company has unsecured senior notes outstanding of $20,000,000 as of December 31, 1994 and 1995. The Company is required to make four annual principal payments of $5,000,000 beginning July 31, 1996. The outstanding debt bears interest at an effective rate of 12.9% per annum, payable quarterly. The Company has unsecured senior subordinated notes of $10,000,000 as of December 31, 1994 and 1995. The Company is required to make two annual principal payments of $5,000,000 beginning July 31, 2000. The outstanding debt bears interest at 14.4% per annum, payable quarterly. The Company had unsecured junior subordinated notes of $2,400,000 and $0 as of December 31, 1994 and 1995, respectively. The outstanding debt bore interest at 14.5% per annum, payable annually subject to attaining certain cash flow requirements. The Company has unsecured revolving credit notes available of $13,000,000 and $9,000,000 as of December 31, 1994 and 1995. The Company has revolving credit notes outstanding of $1,600,000 and $0 as of December 31, 1994 and 1995, respectively. Borrowings in multiples of $100,000 are available to the Company in accordance with the terms of notice to the bank. The unpaid principal amount of each revolving note shall bear interest from the date of borrowing to the date of payment at an interest rate equal to the applicable London Interbank Offered Rate (LIBOR) plus 3.25% for each LIBOR period, payable quarterly (effective rate of 8.88% at December 31, 1995). The Company is also required to pay a commitment fee of one-half of one percent per annum on the average daily balance of the unused amount of the $9,000,000 during each LIBOR period. The credit facility will terminate on July 31, 1996. All notes require that certain covenants, working capital and earnings ratios, as defined, be maintained at the end of each fiscal quarter of the Company. Additionally, the Company is generally precluded from declaring capital stock dividends, among other restrictions. All of the long-term debt has been provided by parties who are the majority stockholders of the Company. 8. CAPITAL STOCK: Common Stock The Company has authorized 450,000 shares of Class A and D voting Common Stock, par value $.01 per share, and 100,000 shares of Class B and C nonvoting Common Stock, par value $.01 per share. As of December 31, 1994 and 1995, 101,334 and 121,863 shares of voting common stock were issued and outstanding, respectively. As of December 31, 1994 and 1995, 27,674 and 7,118 shares of nonvoting common stock were issued and outstanding, respectively. Each class of common stock shall be entitled to participate in dividends ratably on a per share basis. Classes B, C and D common stock are convertible into Class A common stock upon the occurrence of certain events, as defined. Redeemable Preferred Stock The Company has authorized 20,000 shares of voting Series A Cumulative Redeemable Preferred Stock (Series A), par value $1.00 per share, and 400,000 shares of nonvoting Series B Cumulative Redeemable Preferred Stock (Series B), par value $1.00 per share (Preferred Stock). As of December 31, 1994 and 1995, 18,616 shares of Series A were issued and outstanding. As of December 31, 1994 and 1995, 351,147 and 351,012 shares of Series B were issued and outstanding, respectively. F-37 TA INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Dividends on the Preferred Stock are accrued at a rate of 14% per annum, and accumulated and compounded quarterly since inception. No dividends on the Preferred Stock shall be declared prior to the earlier of the redemption date of the preferred shares, or the date of liquidation. The Company shall redeem all the outstanding preferred shares on December 31, 2003, at the liquidation value ($10.22 per share plus all accumulated and unpaid dividends) of each share. Subject to certain debt restrictions, the Company may at any time redeem all or any portion of the Preferred Stock outstanding at the liquidation value provided that the redemption is made ratably among all the preferred stockholders or the Company may repurchase the preferred shares in accordance with the provisions of the employee stock plan (Note 12). 9. INCOME TAXES: As of December 31, 1995, the Company has U.S. tax net operating loss carryforwards of approximately $6,032,000 and non-U.S. tax net operating loss carryforwards of approximately $2,175,000 for which a full valuation reserve has been provided. These carryforwards begin to expire in 2005. In addition, the Company has temporary differences as the result of the timing of deductions related to asset reserves, certain intangible assets and accrued expenses. During 1993, in connection with certain foreign acquisitions, a deferred tax liability was recorded for temporary differences associated with identified intangible assets. This deferred tax liability will be reduced as the related assets are amortized to expense. The income tax benefit of $425,000 and $345,000 recognized in the 1994 and 1995 consolidated statements of operations represents the income tax benefit on the amortization of these intangibles. Deferred tax assets and (liabilities) are as follows (in thousands):
DECEMBER 31 ---------------- MARCH 31 1994 1995 1996 ------- ------- -------- Deferred tax asset for loss carryforward............ $ 4,359 $ 3,283 $ 3,283 Deferred tax assets................................. 1,873 1,444 1,444 Deferred tax liabilities............................ (797) (436) (359) Valuation reserve................................... (6,232) (4,727) (4,727) ------- ------- ------- Net deferred tax liability........................ $ (797) $ (436) $ (359) ======= ======= =======
Deferred tax assets primarily relate to temporary differences associated with property and equipment, intangible assets and accrued expenses. A valuation reserve is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has established valuation allowances for all U.S. and foreign net operating loss carryforwards for which realization is dependent on future taxable earnings. F-38 TA INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. PENSION: The Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service, as defined, and the employee's compensation, and the employee's previously accrued benefit under the predecessor plan. The Company makes annual contributions to the plan equal to the maximum amount that can be deducted for income tax purposes. The following table sets forth the plan's funded status and amounts recognized in the Company's balance sheet at December 31 (in thousands):
1994 1995 ------- ------- Actuarial present value of benefit obligations: Vested benefit obligation................................... $ 3,325 $ 3,916 ======= ======= Accumulated benefit obligation.............................. $ 3,471 $ 4,001 ======= ======= Projected benefit obligation for service rendered to date..... $(5,812) $(6,414) Plan assets at fair value..................................... 4,751 5,803 ------- ------- Plan assets less than benefit obligation...................... (1,061) (611) Unrecognized net (gain) loss.................................. 329 (186) ------- ------- Accrued pension cost included in accrued expenses............. $ (732) $ (797) ======= =======
Net periodic pension cost included the following components:
1994 1995 ----- ----- Service cost-benefits earned during the period.................... $ 308 $ 326 Interest cost on projected benefit obligation..................... 455 503 Actual return on plan assets...................................... (63) (789) Asset gain (loss) deferred........................................ (333) 348 ----- ----- Net periodic pension cost......................................... $ 367 $ 388 ===== =====
Assumptions used in accounting for the pension plan are as follows:
1994 1995 ---- ---- Discount rate......................................................... 8.5% 8.5% Rates of increase in compensation levels.............................. 5.0% 5.0% Expected long-term rate of return on assets........................... 9.0% 9.0%
11. SAVINGS AND INVESTMENT PLAN: Effective August 1, 1990, the Company established a 401(k) profit sharing plan covering all employees of the Company who have attained age 21, and who satisfy the service requirements, as defined. Employees may contribute to the plan up to 15% of their salary with a maximum of $9,240 for pre-tax contributions in 1994 and 1995. The Company will match up to 50% of the employee contributions up to 6% of the employee's base salary. Contributions are invested, at the direction of the employee, in one or more funds. Company contributions vest over three years of service with the Company. Company matching contributions are charged to expense as incurred. Amounts charged to expense were approximately $169,000 for December 31, 1994 and 1995 and approximately $41,000 and $43,000 for the three months ended March 31, 1995 and 1996, respectively. 12. EMPLOYEE STOCK PURCHASE AND STOCK OPTION PLAN: In accordance with the provisions of the Employee Stock Purchase and Stock Option Plan (the Plan), effective August 1, 1990, 5,000 shares of nonvoting common stock and 25,000 shares of nonvoting preferred F-39 TA INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) stock were made available for purchase to all employees of the Company. All such shares were purchased in 1990 at fair market value as established by the Board of Directors. The Plan also provides for stock options that may be granted for an additional 23,685 shares of nonvoting common stock. Participatory options for 10,000 shares have been reserved and granted. Additionally, performance options for 13,685 shares may be granted based on the attainment of certain financial targets over the five fiscal years ended December 31, 1995. Performance options earned were 0 and 2,737 for 1994 and 1995, respectively. In total 10,948 performance options were granted under this plan. The performance options will not have a dilutive impact since the majority stockholders are required to forfeit shares equivalent in number to the options being granted. During 1995, compensation expense and an increase in paid-in capital of $595,000 was recorded in the Company's consolidated financial statements for these performance options. The compensation expense was included in selling, general and administrative expenses in the 1995 consolidated statement of operations. The shares purchased and options granted vest over a five-year period, as defined. Once vested, the participants may exercise all or any portion of their options. The exercise price of options granted shall equal the greater of (i) $8.88, or (ii) the book value of a share of nonvoting common stock as determined by the Board of Directors as of the last day of the latest fiscal quarter prior to issuance of the options. All shares and options under the Plan are allocated at the discretion of the Board of Directors. No options will be exercisable after August 1, 2000, the expiration date. The following summarizes plan option activity under the stock option plan. The price per share for all stock option activity was $8.88.
STOCK OPTIONS ------- Exercisable at December 31, 1993........................................ 17,527 Granted............................................................... 684 ------ Exercisable at December 31, 1994........................................ 18,211 Granted............................................................... 2,737 ------ Exercisable at December 31, 1995........................................ 20,948 ======
As of December 31, 1995, substantially all options issued were vested. Under the terms of the plan, 10,948 performance options included above will not have a dilutive effect. 13. LEASES: The Company leases certain office facilities and equipment, manufacturing facilities, and automobiles under noncancelable operating lease agreements. The last lease expires on December 31, 2000. The following is a schedule of future minimum lease payments for operating leases at December 31 (in thousands): 1996.................................................................... $1,333 1997.................................................................... 1,018 1998.................................................................... 823 1999.................................................................... 578 2000.................................................................... 591 ------ Total minimum lease payments.......................................... $4,343 ======
F-40 TA INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rent expense was approximately $1,444,000 and $1,601,000 for 1994 and 1995, respectively. 14. RESEARCH AND DEVELOPMENT: For the years ended December 31, 1994 and 1995 and for the three months ended March 31, 1995 and 1996, the research and development costs amounted to $2,870,000, $3,302,000, $766,000 and $1,172,000, respectively. Of these costs, $920,000, $1,230,000 and $189,000 has been capitalized and included in intangible assets at December 31, 1994 and 1995 and March 31, 1996, respectively. 15. COMMITMENTS AND CONTINGENCIES: In connection with the acquisition of the Company in 1990, the asset purchase agreement provided for contingent payments to the seller equal to 10% of thermal analysis net sales in excess of $37,000,000, subject to certain adjustments, for each of the five full fiscal years ended December 31, 1995, subject to certain maximum payments. The expected payment was included as part of the original purchase price allocation. As of January 1, 1994, the Company had recorded a liability of $1,326,000 plus interest of $571,000. During 1994, the Company revised its estimate of this liability and reduced the estimated obligation to $344,000 plus interest of $263,000. During 1995, the Company again revised its estimate of this liability and reduced the total estimated obligation to $346,000. The estimated obligation is included in other liabilities in the accompanying consolidated balance sheets. During 1994, the Company recorded the reduction in the maximum liability of $982,000 as a reduction of the assigned intangible asset values when the Company was acquired. The reduction in accrued interest expense was recorded as income in the Company's 1994 and 1995 consolidated statements of operations. In connection with the 1993 acquisition of Carri-Med Plc (Carri-Med), a United Kingdom rheological instruments manufacturer, the Company may be required to issue additional shares of its nonvoting common stock to certain of the former owners of Carri-Med. If annual and three-year cumulative rheological sales targets are achieved, the Company will issue 640 nonvoting common shares per year, or a cumulative total of 1,920 shares. When and if additional shares are issued, the additional consideration will be reflected as additional purchase price and allocated to the assets acquired. The Company did not achieve its first or second annual rheological sales targets nor does it anticipate achieving the third annual rheological sales target. As such, no additional shares were issued during 1994 or 1995. Contingencies may exist with respect to taxing authorities' examinations against the Company and its subsidiaries. In 1994, the Internal Revenue Service began an audit of the Company's 1990 through 1993 tax returns. A final report has not yet been issued. In the opinion of management, any settlement of such items will not have a material effect on the Company's consolidated financial position or results of operations. 16. SUBSEQUENT EVENT: The Company entered into an Agreement and Plan of Merger on March 28, 1996 whereby all of the capital stock of the Company will be acquired by Waters Corporation. This transaction was consummated in May 1996. F-41 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPEC- TUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HERE- OF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 11 The Company............................................................... 14 Use of Proceeds........................................................... 15 Price Range of Common Stock and Dividend Policy........................... 15 Capitalization............................................................ 16 Unaudited Pro Forma Financial Data........................................ 17 Selected Consolidated Financial Data...................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 24 Business.................................................................. 36 Management................................................................ 49 Principal and Selling Stockholders........................................ 55 Certain Relationship and Related Transactions............................................................. 56 Description of Certain Indebtedness....................................... 58 Description of Capital Stock.............................................. 59 Shares Eligible for Future Sale........................................... 61 Certain United States Federal Tax Considerations for Non-United States Holders ................................................................. 62 Underwriting.............................................................. 65 Legal Matters............................................................. 66 Experts................................................................... 66 Available Information..................................................... 66 Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2,031,904 SHARES WATERS CORPORATION COMMON STOCK ---------------- PROSPECTUS ---------------- MERRILL LYNCH & CO. , 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II--INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a statement of estimated expenses of the issuance and distribution of the securities being registered other than underwriting compensation: SEC registration fee............................................ $ 19,819 NASD filing fee................................................. 7,041 Blue sky fees and expenses (including attorneys' fees and expenses)...................................................... 25,000 Printing and engraving expenses................................. 75,000 Transfer agent's fees and expenses.............................. 12,000 Accounting fees and expenses.................................... 100,000 Legal fees and expenses......................................... 100,000 Miscellaneous expenses.......................................... 61,140 -------- Total......................................................... $400,000 ========
All amounts are estimated except for the SEC registration fee and the NASD filing fee. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company is incorporated under the laws of the State of Delaware. Section 145 of the General Corporation Law of the State of Delaware ("Section 145") provides that a Delaware corporation may indemnify any person who is, or is threatened to be made, a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was illegal. A Delaware corporation may indemnify any person who is, or is threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director has actually and reasonably incurred. The Company's Second Amended and Restated Certificate of Incorporation provides for the indemnification of directors and officers of the Company to the fullest extent permitted by Section 145. In that regard, the Amended and Restated Certificate of Incorporation provides that the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director or officer of such corporation, or is or was serving at the request of such corporation as a director, officer or member of another corporation, partnership, joint II-1 venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of such corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Indemnification in connection with an action or suit by or in the right of such corporation to procure a judgment in its favor is limited to payment of settlement of such an action or suit except that no such indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the indemnifying corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine that, despite the adjudication of liability but in consideration of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. In addition, the by-laws of the Company provide that the Company shall indemnify to the full extent authorized by law any person made or threatened to be made a party to an action, suit or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer, employee or agent of the Company or is or was serving, at the request of the Company, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. In addition, pursuant to certain Indemnification Agreements dated August 18, 1994 (the "Indemnification Agreements") between the Company and its directors and executive officers, the Company agreed to indemnify such directors and executive officers to the fullest extent permitted by the laws of the State of Delaware. Among other things, the Indemnification Agreements provide indemnification procedures, advancement of expenses during proceedings subject to indemnification and mechanisms for reviewing executive conduct in connection with a claim for indemnification. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On August 18, 1994, WCD Investors Inc. sold (i) to Millipore Corporation 100 shares of Series A Preferred Stock with an aggregate liquidation value of $10,000,000 as partial consideration for the Acquisition, (ii) to AEA stockholders and AEA management an aggregate of 299,500 shares of its Class A common stock, par value $.01, for an aggregate of $29,950,000 in cash, (ii) to certain investment funds managed by Bain an aggregate of 299,500 shares of its Class A common stock, par value $.01, for an aggregate of $29,950,000 in cash, (iii) to Waters senior management an aggregate of 61,000 shares of its Class A common stock, par value $.01, for an aggregate of $6,100,000 in cash and (iv) to BT Investment Partners, Inc. an aggregate of 20,000 shares of its Class A common stock, par value $.01 for an aggregate of $2,000,000 in cash. These sales were made in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act and regulation D promulgated thereunder and Section 3(b) of the Securities Act and Rule 701 promulgated thereunder. On February 1, 1994, WCD Investors Inc. sold to AEA management an aggregate of 2,550 shares of its Class B common stock, par value $.01 for an aggregate of $286.31. On May 20, 1992, WCD Investors Inc. sold to AEA an aggregate of 2,450 shares of its Class B common stock, par value $.01 for an aggregate of $286.31. On August 18, 1994, WCD Investors Inc. sold to certain investment funds managed by Bain an aggregate of 5,000 shares of its Class B common stock, par value $.01, for an aggregate of $600.00. These sales were made in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act and regulation D promulgated thereunder. On February 1, 1994, WCD Investors Inc. sold to AEA management an aggregate of 40,236 shares of its Class C common stock, par value $.01, for an aggregate of $4,713.69. On May 20, 1992 and August 1, 1994, WCD Investors Inc. sold to AEA and AEA stockholders and AEA management, respectively, an II-2 aggregate of 40,336 shares of its Class C common stock, par value $.01, for an aggregate of $4,713.69. On August 18, 1994, WCD Investors Inc. sold (i) to certain investment funds managed by Bain an aggregate of 80,572 shares of its Class C common stock, par value $.01, for an aggregate of $9,668.64 in cash, (ii) to Waters senior management an aggregate of 17,428 shares of its Class C common stock, par value $.01, for an aggregate of $2,091.36 in cash and (iii) to BT Investment Partners, Inc. an aggregate of 5,714 shares of its Class C common stock, par value $.01, for an aggregate of $685.68 in cash. These sales were made in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act and regulation D promulgated thereunder and Section 3(b) of the Securities Act and Rule 701 promulgated thereunder. On August 18, 1994, WCD Investors Inc. issued to BT Securities Corporation (i) warrants to purchase 33,684 shares of its Class A common stock and (ii) warrants to purchase 9,624 shares of its Class C common stock as partial consideration for acting as placement agent for the Senior Notes. These sales were made in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act and regulation D promulgated thereunder. Certain shares issued prior to the initial public offering of the Company are eligible for sale to the public pursuant to Rule 701 under the Securities Act. In general, Rule 701 permits resales of shares issued pursuant to certain compensatory benefit plans and contracts commencing 90 days after the issuer becomes subject to the reporting requirements of the Exchange Act. Such shares may be sold to the public in reliance upon Rule 144, but without compliance with certain restrictions of Rule 144, including the holding period requirements. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits:
NUMBER DESCRIPTION ------ ----------- 1.1 Form of Underwriting Agreement. 3.1 Second Amended and Restated Certificate of Incorporation of Waters Corporation, as amended to date.(1) 3.2 Amended and Restated Bylaws of Waters Corporation, as amended to date.(1) 5.1 Opinion of Kirkland & Ellis. 10.1 Credit Agreement, dated as of November 22, 1995, among Waters Corporation, Waters Technologies Corporation, Bankers Trust Company and other Lenders party thereto.(2) 10.2 First Amendment to Credit Agreement, dated as of March 6, 1996 among Waters Corporation, Waters Technologies Corporation, Bankers Trust Company and other Lenders party thereto.(2) 10.3 Waters Corporation Amended and Restated 1996 Long-Term Performance Incentive Plan. Incorporated by reference to Exhibit A of the Proxy Statement for the 1996 Annual Meeting of Stockholders (the "Proxy Statement"). 10.4 Waters Corporation 1996 Employee Stock Purchase Plan. Incorporated by reference to Exhibit B of the Proxy Statement. 10.5 Waters Corporation 1996 Non-Employee Director Deferred Compensation Plan. Incorporated by reference to Exhibit C of the Proxy Statement. 10.6 Waters Corporation Amended and Restated 1996 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit D to the Proxy Statement. 10.7 Amended and Restated Purchase and Sale Agreement dated as of March 31, 1994 (as executed on June 28, 1994), as amended as of August 5, 1994, August 11, 1994 and August 18, 1994, among Waters Holding Inc., Millipore Corporation and certain of its subsidiaries.(3) 10.8 WCD Investors Inc. Amended and Restated 1994 Stock Option Plan, as amended (including Form of Amended and Restated Stock Option Agreement).(3) 10.9 Waters Corporation Retirement Plan.(3) 10.10 Registration Rights Agreement made as of August 18, 1994, by and among WCD Investors Inc., AEA Investors Inc., certain investment funds controlled by Bain Capital, Inc. and other stockholders of Waters Corporation.(3)
II-3
NUMBER DESCRIPTION ------ ----------- 10.11 Form of Indemnification Agreement, dated as of August 18, 1994, between WCD Investors Inc. and its directors and executive officers.(3) 10.12 Form of Management Subscription Agreement, dated as of August 18, 1994, between WCD Investors Inc. and certain members of management.(3) 10.13 Agreement and Plan of Merger among Waters Corporation, TA Merger Sub, Inc. and TA Instruments, Inc. dated as of March 28, 1996. Incorporated by reference to the Registrant's Report on Form 8-K dated March 29, 1996. 10.14 Offer to Purchase and Consent Solicitation Statement, dated March 7, 1996, of Waters Technologies Corporation. Incorporated by Reference to the Registrant's Report on Form 8-K dated March 11, 1996. 11 Statement of Computation of Per Share Earnings. 21.1 Subsidiaries of Waters Corporation.(1) 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Coopers & Lybrand L.L.P. 23.3 Consent of Arthur Andersen LLP 23.4 Consent of Kirkland & Ellis (to be included in opinion to be filed as Exhibit 5.1). 24.1 Powers of attorney (included on the signature page included in this part II). 27.1 Financial Data Schedule.
- -------- (1) Incorporated by reference to the Registrant's Report on Form 10-K dated March 29, 1996. (2) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-3810.) (3) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-96934). ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offerings of such securities at that time shall be deemed to be the initial bona fide Offerings thereof. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK ON OCTOBER 24, 1996. Waters Corporation /s/ Philip S. Taymor By:_________________________________ NAME: PHILIP S. TAYMOR TITLE: SENIOR VICE PRESIDENT, FINANCE AND ADMINISTRATION AND CHIEF FINANCIAL OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Philip S. Taymor his true and lawful attorney- in-fact, each with full power of substitution and revocation, for him and in his name, place and stead, in any and all capacities (including his capacity as a director and/or officer of Waters Corporation), to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement and Power of Attorney have been signed on October 24, 1996 by the following persons in the capacities indicated with respect to Waters Corporation: SIGNATURE CAPACITY /s/ Douglas A. Berthiaume President, Chief Executive ------------------------------------- Officer, and Chairman of the DOUGLAS A. BERTHIAUME Board of Directors (Principal Executive Officer) /s/ Philip S. Taymor Senior Vice President, ------------------------------------- Finance and Administration PHILIP S. TAYMOR and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Joshua Bekenstein Director ------------------------------------- JOSHUA BEKENSTEIN /s/ Charles L. Brown Director ------------------------------------- CHARLES L. BROWN II-5 /s/ Philip Caldwell Director ------------------------------------- PHILIP CALDWELL /s/ Edward Conard Director ------------------------------------- EDWARD CONARD /s/ Thomas P. Salice Director ------------------------------------- THOMAS P. SALICE /s/ Marc Wolpow Director ------------------------------------- MARC WOLPOW II-6 EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION PAGE NO. ------- -------------------- -------- 1.1 Form of Underwriting Agreement. 3.1 Second Amended and Restated Certificate of Incorporation of Waters Corporation, as amended to date.(1) 3.2 Amended and Restated Bylaws of Waters Corporation, as amended to date.(1) 5.1 Opinion of Kirkland & Ellis. 10.1 Credit Agreement, dated as of November 22, 1995, among Waters Corporation, Waters Technologies Corporation, Bankers Trust Company and other Lenders party thereto.(2) 10.2 First Amendment to Credit Agreement, dated as of March 6, 1996 among Waters Corporation, Waters Technologies Corporation, Bankers Trust Company and other Lenders party thereto.(2) 10.3 Waters Corporation Amended and Restated 1996 Long-Term Performance Incentive Plan. Incorporated by reference to Exhibit A of the Proxy Statement for the 1996 Annual Meeting of Stockholders (the "Proxy Statement"). 10.4 Waters Corporation 1996 Employee Stock Purchase Plan. Incorporated by reference to Exhibit B of the Proxy Statement. 10.5 Waters Corporation 1996 Non-Employee Director Deferred Compensation Plan. Incorporated by reference to Exhibit C of the Proxy Statement. 10.6 Waters Corporation Amended and Restated 1996 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit D to the Proxy Statement. 10.7 Amended and Restated Purchase and Sale Agreement dated as of March 31, 1994 (as executed on June 28, 1994), as amended as of August 5, 1994, August 11, 1994 and August 18, 1994, among Waters Holding Inc., Millipore Corporation and certain of its subsidiaries.(3) 10.8 WCD Investors Inc. Amended and Restated 1994 Stock Option Plan, as amended (including Form of Amended and Restated Stock Option Agreement).(3) 10.9 Waters Corporation Retirement Plan.(3) 10.10 Registration Rights Agreement made as of August 18, 1994, by and among WCD Investors Inc., AEA Investors Inc., certain investment funds controlled by Bain Capital, Inc. and other stockholders of Waters Corporation.(3) 10.11 Form of Indemnification Agreement, dated as of August 18, 1994, between WCD Investors Inc. and its directors and executive officers.(3) 10.12 Form of Management Subscription Agreement, dated as of August 18, 1994, between WCD Investors Inc. and certain members of management.(3) 10.13 Agreement and Plan of Merger among Waters Corporation, TA Merger Sub, Inc. and TA Instruments, Inc. dated as of March 28, 1996. Incorporated by reference to the Registrant's Report on Form 8-K dated March 29, 1996. 10.14 Offer to Purchase and Consent Solicitation Statement, dated March 7, 1996, of Waters Technologies Corporation. Incorporated by Reference to the Registrant's Report on Form 8-K dated March 11, 1996. 11 Statement of Computation of Per Share Earnings. 21.1 Subsidiaries of Waters Corporation.(1) 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Coopers & Lybrand L.L.P. 23.3 Consent of Arthur Andersen LLP 23.4 Consent of Kirkland & Ellis (to be included in opinion to be filed as Exhibit 5.1). 24.1 Powers of attorney (included on the signature page included in this part II). 27.1 Financial Data Schedule.
- -------- (1) Incorporated by reference to the Registrant's Report on Form 10-K dated March 29, 1996. (2) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-3810.) (3) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-96934). EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 Form of Purchase Agreement -------------------------- WATERS CORPORATION (a Delaware corporation) _____________ Shares of Common Stock PURCHASE AGREEMENT ------------------ ____________, 1996 MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Waters Corporation, a Delaware corporation (the "Company" or "Waters"), Waters Technologies Corporation ("Technologies"), a Delaware corporation, and the persons listed in Schedule A hereto (the "Selling Stockholders") confirm their agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") with respect to the sale by the Selling Stockholders and the purchase by the Underwriter, of an aggregate of ___________ shares of Common Stock, par value $.01 per share, of the Company (the "Common Stock"), in the respective numbers set forth opposite the name of each Selling Stockholder in Schedule A hereto to be purchased by the Underwriter are hereinafter called the "Shares." You have advised us that you desire to purchase the Shares. 1 The initial public offering price per share for the Shares and the purchase price per share for the Shares to be paid by the Underwriter shall be agreed upon by the Selling Stockholders and the Underwriter, and such agreement shall be set forth in a separate written instrument substantially in the form of Exhibit A hereto (the "Price Determination Agreement"). The Price Determination Agreement may take the form of an exchange of any standard form of written telecommunication among the Company, Technologies, the Selling Stockholders and the Underwriter and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Shares will be governed by this Agreement, as supplemented by the Price Determination Agreement. From and after the date of the execution and delivery of the Price Determination Agreement, this Agreement shall be deemed to incorporate, and all references herein to "this Agreement" or "herein" shall be deemed to include, the Price Determination Agreement. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-____) covering the registration of the Shares under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus, and either (A) has prepared and proposes to file, prior to the effective date of such registration statement, an amendment to such registration statement, including final prospectus, or (B) if the Company has elected to rely upon Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations"), will prepare and file prospectuses, in accordance with the provisions of Rule 430A and Rule 424(b) ("Rule 424(b)") of the 1933 Act Regulations, promptly after execution and delivery of the Price Determination Agreement. Additionally, if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, the Company will prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The information, if any, included in any prospectus that was omitted from any prospectus included in such registration statement at the time it becomes effective but that is deemed (a) pursuant to Rule 430A(b) to be part of such registration statement at the time it becomes effective is referred to herein as the "Rule 430A Information," and (b) pursuant to Rule 434 to be part of such registration statement at the time it becomes effective is referred to herein as the "Rule 434 Information." Each prospectus used before the time such registration statement becomes effective, and any prospectus that omits the Rule 430A Information or the Rule 434 Information, as applicable, that is used after such effectiveness and prior to the execution and delivery of the Price Determination Agreement is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto, as amended at the time it becomes effective and including, if applicable, the Rule 430A Information and the Rule 434 Information, is herein called the "Original Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and the Original Registration Statement and any Rule 462(b) Registration Statement are herein referred to collectively as the "Registration Statement." The 2 prospectus included in the Original Registration Statement at the time it becomes effective is herein called a "Prospectus," except that, (y) if the final Prospectus first furnished to the Underwriter after the execution of the Price Determination Agreement for use in connection with the offering of the Shares differs from the prospectus included in the Registration Statement at the time it becomes effective (whether or not such prospectus is required to be filed pursuant to Rule 424(b)), the term "Prospectus" shall refer to the final Prospectus first furnished to the Underwriter for such use and (z) if Rule 434 is relied on, the term "Prospectus" shall refer to the preliminary Prospectus last furnished to the Underwriter in connection with the offering of the Shares together with the Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any Term Sheet, or any amendment or supplement to any of the foregoing, shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). The Company, Technologies and the Selling Stockholders understand that the Underwriter proposes to make a public offering of the Shares as soon as you deem advisable after the Registration Statement becomes effective and the Price Determination Agreement has been executed and delivered. Section 1. Representations and Warranties. (a) The Company and ------------------------------ Technologies, jointly and severally, represent and warrant to and agree with the Underwriter that: (i) At the time the Registration Statement becomes effective, and if the Company has elected to rely upon Rule 430A, on the date of the Price Determination Agreement, and on the effective or issue date of each amendment or supplement to the Registration Statement or the Prospectus, and at the Closing Time referred to below, (A) the Registration Statement and any amendments and supplements thereto will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations; (B) neither the Registration Statement nor any amendment or supplement thereto will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (C) neither the Prospectus nor any amendment or supplement to either of them will include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (D) if Rule 434 is relied upon, the Prospectus shall not be "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it becomes effective. Notwithstanding the foregoing, this representation and warranty does not apply to statements or omissions from the Registration Statement or the 3 Prospectus or any amendments or supplements thereto made in reliance upon and in conformity with information furnished or confirmed in writing to the Company by or on behalf of the Underwriter expressly for use in the Registration Statement or the Prospectus or any amendments or supplements thereto. Each preliminary prospectus and the Prospectus delivered to the Underwriter for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Each of Coopers & Lybrand L.L.P. and Arthur Andersen LLP, who are reporting upon the audited consolidated financial statements and schedules included in the Registration Statement, are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iii) The Company and Technologies have all necessary corporate power and authority to execute, deliver and perform their respective obligations under this Agreement and the Price Determination Agreement. This Agreement has been, and the Price Determination Agreement on the date thereof will be, duly authorized, executed and delivered by the Company and Technologies. (iv) The consolidated financial statements of the Company included in the Registration Statement and the Prospectus, together with the related schedules and notes, present fairly the financial position of the Company and its Subsidiaries (as hereinafter defined) and their predecessors as of the dates indicated and the consolidated results of operations, stockholders' equity and cash flows of the Company and its Subsidiaries and their predecessors for the periods specified. The consolidated financial statements of TA Instruments, Inc. ("TAI") included in the Registration Statement and the Prospectus, together with the related schedules and notes, present fairly the financial position of TAI and its subsidiaries and their predecessors as of the dates indicated and the consolidated results of operations, stockholders' equity and cash flows of TAI and its subsidiaries and their predecessors for the periods specified. The financial statements of the Company and its Subsidiaries and their predecessors, and of TAI and its subsidiaries and predecessors, have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The financial statement schedules, if any, included in the Registration Statement present fairly in accordance with GAAP the information required to be stated therein and have been compiled on a basis consistent with that of the audited consolidated financial statements included in the Registration Statement. The selected financial data included in the Prospectus present fairly in accordance with GAAP the information shown therein and have been compiled on a basis consistent with that of the audited consolidated financial statements included in the Registration Statement. The pro forma financial statements and other pro forma financial information included in the Prospectus present fairly the 4 information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (v) The Company and Technologies are corporations duly incorporated, validly existing and in good standing under the laws of the State of Delaware with the requisite corporate power and authority under such laws to own, lease and operate their respective properties and to conduct their respective business as described in the Prospectus and to enter into and perform its obligations under this Agreement and the Price Determination Agreement; and the Company is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on the condition (financial and otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. (vi) The Company's only direct and indirect subsidiaries are listed on Schedule B hereto (collectively, the "Subsidiaries"). The Company's only subsidiaries which had, at December 31, 1995, assets in excess of 5% of the consolidated assets of the Company and its subsidiaries, considered as one enterprise, or had, for the twelve months then ended, net sales in excess of 5% of the consolidated net sales of the Company and its subsidiaries, considered as one enterprise, for such period are listed on Schedule C hereto (collectively, "Material Subsidiaries"). For purposes of the definition of "Material Subsidiary", any subsidiary or assets acquired after December 31, 1995 shall be deemed to have been acquired as of January 1, 1995. Each Material Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation with the requisite corporate power and authority under such laws to own, lease and operate its properties and conduct its business as described in the Prospectus; and each Material Subsidiary is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. Except as disclosed in the Prospectus, all of the outstanding shares of capital stock of each Material Subsidiary have been duly authorized and validly 5 issued and are fully paid and non-assessable, and are owned by the Company, directly or through one or more Material Subsidiaries, free and clear of any pledge, lien, security interest, charge, claim, mortgage or encumbrance of any kind; and none of the outstanding shares of capital stock of the Material Subsidiaries was issued in violation of the preemptive or other similar rights of any stockholder of such corporation. (vii) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus in the column entitled "Actual" under the caption "Capitalization," and the Shares will conform in all material respects to the description thereof contained under the caption "Description of Capital Stock" in the Prospectus. (viii) The Shares to be sold pursuant to this Agreement have been duly authorized by the Company and are validly issued, fully paid and non-assessable; and such Shares are not subject to the preemptive or other similar rights of any stockholder of the Company. (ix) Except as disclosed in the Prospectus, there are no outstanding options, warrants or other rights calling for issuance of, and no commitments, obligations, plans or arrangements to issue, any shares of capital stock of the Company or any of its Subsidiaries or any security convertible into or exchangeable for capital stock of the Company or any of its Subsidiaries. (x) All of the issued and outstanding shares of capital stock of the Company, including the Shares to be sold by the Selling Stockholders pursuant to this Agreement, have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any stockholder of the Company. (xi) Except as described in the Prospectus, since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been (A) any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, (B) any transaction entered into by the Company or any Subsidiary, other than in the ordinary course of business, that is material to the Company and its Subsidiaries, considered as one enterprise, or (C) any dividend or distribution of any kind declared, paid or made by the Company or Technologies on any class of its respective capital stock. (xii) Neither the Company nor any Material Subsidiary is in violation of its charter or by-laws or in default in the performance or observance of 6 any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject, except as disclosed in the Prospectus and except for such defaults that would not in the aggregate have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. The execution, delivery and performance of this Agreement, the Price Determination Agreement and the Custody Agreements and Powers of Attorney among the Company, each of the Selling Stockholders, The First National Bank of Boston, as Depositary and the Attorneys-in-Fact named therein, as Attorneys-in-Fact for the Selling Stockholders (all such agreements collectively, the "Custody Agreement and Power of Attorney"), by the Company or Technologies, as the case may be, the consummation of the transactions contemplated in this Agreement and the Registration Statement and compliance by the Company or Technologies, as the case may be, with the foregoing have been duly authorized by all necessary corporate action on the part of the Company or Technologies, as the case may be, and do not and will not result in any violation of the charter or by-laws of the Company or any Material Subsidiary, and do not and will not conflict with, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien or encumbrance upon any property or assets of the Company or any Material Subsidiary under (A) any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company, or any Material Subsidiary is a party or by which any of them is bound or to which any of their respective properties or assets are subject, or (B) any applicable law, statute, rule, regulation, judgment, order, writ, injunction or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Material Subsidiary or any of their respective properties, assets or operations, except for conflicts, breaches, violations, defaults, liens or encumbrances under clause (A) or (B) which would not have, individually or in the aggregate, a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. (xiii) No authorization, approval, consent, license, order, registration or qualification of or with any government, governmental instrumentality or court (other than as required under the 1933 Act, the 1934 Act, the 1933 Act Regulations, the 1934 Act Regulations and the securities or blue sky laws of the various states in connection with the sale of the Shares) is necessary in connection with the due authorization, execution, delivery and performance of this Agreement, the Price Determination Agreement and the Custody Agreement and Power of Attorney by the Company or Technologies, as the case may be, for the 7 sale and delivery of the Shares or the consummation by the Company and Technologies of the transactions contemplated in this Agreement except such as have been obtained. (xiv) Except as disclosed in the Prospectus, there is no action, suit or proceeding before or by any government, governmental instrumentality or court, domestic or foreign, now pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary that is required to be disclosed in the Registration Statement or Prospectus. (xv) There are no contracts or documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed (including filings deemed made by incorporation by reference). (xvi) The Company and each of its Material Subsidiaries are in compliance with, and each such entity has not received any notice of any outstanding violation of, all laws, ordinances, rules, regulations, judgments, decrees, orders and statutes applicable to it and its operations except, in either case, where any failure by the Company or any Material Subsidiary to comply with any such law, regulation, ordinance or rule would not have, individually or in the aggregate, a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. (xvii) The Company and each of its Material Subsidiaries have good and marketable title to all properties and assets owned by them, free and clear of all liens, encumbrances or restrictions, except such as (A) are described in the Prospectus or (B) do not materially impair or interfere with the current use made of such properties or (C) are neither material in amount nor materially significant, in each case in relation to the business of the Company and its Subsidiaries, considered as one enterprise; all of the leases and subleases material to the businesses of the Company and its Subsidiaries, considered as one enterprise, and under which the Company or any Material Subsidiary holds properties described in the Prospectus, are in full force and effect except to the extent that such failure would not have, individually or in the aggregate, a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its subsidiaries, considered as one enterprise and, except as disclosed in the Prospectus, neither the Company nor any Material Subsidiary has received any notice of any claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Material Subsidiary under any of the leases or subleases mentioned above or affecting or questioning the rights of the Company or any Material Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease, which claims, in the 8 aggregate, might be expected to have, individually or in the aggregate, a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. (xviii) The Company and each of its Material Subsidiaries own or possess all foreign and domestic governmental licenses, permits, certificates, consents, orders, approvals and other authorizations (collectively, "Governmental Licenses") necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as presently conducted, except where the failure to own or possess such Governmental Licenses could not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise; and neither the Company nor any Material Subsidiary has received any notice of proceedings relating to revocation or modification of any such Governmental Licenses that, singly or in the aggregate, could reasonably be expected to have, individually or in the aggregate, a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. (xix) The Company and each of its Material Subsidiaries own or possess, or can acquire on reasonable terms, adequate foreign and domestic patents, patent rights, licenses, trademarks, service marks, trade names, inventions, copyrights and know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) (collectively, "intellectual property") necessary to carry on their businesses as presently conducted except to the extent that the failure to obtain such intellectual property could reasonably be expected to have, individually or in the aggregate, a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise, and neither the Company nor any of its Material Subsidiaries has received any notice of any infringement of or conflict with asserted rights of others with respect to any intellectual property which would render any intellectual property invalid or inadequate to protect the interest of the Company or any Material Subsidiaries therein and which infringement or conflict, singly or in the aggregate, could reasonably be expected to have a material adverse effect on the 9 condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. (xx) The Company and each of its Material Subsidiaries comply with all Environmental Laws (as defined below) except to the extent that failure to comply with such Environmental Laws would not have, individually or in the aggregate, a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. Except as disclosed in the Prospectus, neither the Company nor any of its Material Subsidiaries (i) is the subject of any pending or, to the knowledge of the Company, threatened federal, state or local investigation evaluating whether any remedial action by the Company or any Material Subsidiary is needed to respond to a release of any Hazardous Materials (as defined below) into the environment, resulting from the Company's or any of its Material Subsidiaries' business operations or ownership or possession of any of their properties or assets or (ii) is in contravention of any Environmental Laws that, in the case of (i) or (ii), might be expected to have, individually or in the aggregate, a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. Neither the Company nor any Material Subsidiary has received any notice or claim, nor are there pending or, to the knowledge of the Company, threatened lawsuits against them, with respect to violations of an Environmental Law or in connection with any release of any Hazardous Material into the environment that, individually or in the aggregate, are expected to have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. As used herein, "Environmental Laws" means any foreign, federal, state or local law or regulation applicable to the Company's or any of its Material Subsidiaries' business operations or ownership or possession of any of their properties or assets relating to environmental matters, and "Hazardous Materials" means those substances that are regulated by or form the basis of liability under any Environmental Laws. (xxi) No labor dispute exists with the Company's employees or with employees of its Material Subsidiaries or, to the knowledge of the Company, is imminent that could reasonably be expected to materially and adversely affect the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise; the Company is not aware of any existing or imminent labor disturbance by the employees of its principal suppliers which could reasonably be expected to result in any material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise; and the Company is in compliance with all 10 applicable federal, state, and local laws relating to the payment of wages to employees (including, without limitation, the Fair Labor Standards Act, as amended), except insofar as the failure to comply with such laws would not reasonably be expected to result in any material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise. (xxii) Neither the Company nor any of its affiliates has taken or will take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Common Stock; and neither the Company nor any of its affiliates has distributed or will distribute any prospectus (as such term is defined in the 1933 Act and the 1933 Act Regulations) in connection with the offering and sale of the Shares other than any preliminary prospectus filed with the Commission or the Prospectus or other material permitted by the 1933 Act or the 1933 Act Regulations. (xxiii) All United States federal income tax returns of the Company and the Material Subsidiaries required by law to be filed have been filed and all taxes shown by such returns or otherwise assessed, which are due and payable, have been paid, except for such taxes or tax assessments, if any, as are being contested in good faith and as to which adequate reserves, to the extent required by GAAP, have been provided. All other tax returns (including franchise and income tax returns) of the Company and the Material Subsidiaries required to be filed pursuant to applicable foreign, state or local law have been filed, except insofar as the failure to file such returns would not have, individually or in the aggregate, a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise, and all taxes shown on such returns or otherwise assessed which are due and payable have been paid, except for such taxes or tax assessments, if any, as are being contested in good faith and as to which adequate reserves, to the extent required by GAAP, have been provided. The charges, accruals and reserves on the books of the Company and the Material Subsidiaries in respect of any income and corporate franchise tax liability for any years not finally determined or with respect to which the applicable statute of limitations has not expired are believed to be adequate to meet any assessments or re-assessments for additional income or corporate franchise tax for any years not finally determined. (xxiv) The Company has obtained the written agreements of each Selling Stockholder and executive officer, in the form previously furnished to you, that, for a period of 90 days, such parties will not, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, or exercise any registration rights with respect to, any shares of Common Stock or securities or rights convertible into or exercisable or exchangeable for Common 11 Stock other than the sale of the Shares pursuant to this Agreement and the option of the executive officers to sell 160,000 shares, in the aggregate. The Company has waived, and has obtained the written waivers by the holders of a majority of each of the AEA Registrable Securities and the Bain Registrable Securities (as such terms are defined in the Registration Rights Agreement, dated as of August 18, 1994, among the Company and certain of its stockholders (the "Registration Rights Agreement")) of, any and all of their respective rights under each of Sections 1(a) (in connection with their right to receive written notice) and 2(e) (in connection with the restriction on a registered offering by the Company within six months of another registered offering) under the Registration Rights Agreement. (xxv) There are no holders of securities (debt or equity) of the Company or any of the Subsidiaries, or holders of rights (including, without limitation, preemptive rights), warrants or options to obtain securities of the Company or its Subsidiaries, who have the right to request the Company or any of the Subsidiaries to register securities held by them under the 1933 Act, other than holders who have waived such rights or will not have such rights for the 180 days after the date hereof. (xxvi) The Company and its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general and specific authorizations; (ii) transactions are recorded as necessary to permit preparations of financial statements in conformity with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorizations; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxvii) Neither the Company nor any of its Subsidiaries is an investment company or is controlled by an investment company or investment companies within the meaning of the Investment Company Act of 1940, as amended. (xxviii) The Company has all necessary corporate power and authority to execute, deliver and perform its obligations under the Custody Agreement and Power of Attorney; and the Custody Agreement and Power of Attorney has been duly authorized, executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws relating to or affecting enforcement of creditors' rights generally or by general principles of equity. 12 (b) Each Selling Stockholder, severally and not jointly, represents and warrants to, and agrees with, the Underwriter as follows: (i) At the time the Registration Statement becomes effective, and at all times subsequent thereto up to the Closing Time, (A) the information furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement and any amendments and supplements thereto do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements regarding such Selling Stockholder therein not misleading and (B) the information furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Prospectus does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements regarding such Selling Stockholder therein, in the light of the circumstances under which they were made, not misleading. (ii) Such Selling Stockholder has full right, power and authority to execute, deliver and perform its obligations under this Agreement, the Price Determination Agreement and the Custody Agreement and Power of Attorney, and to sell, transfer and deliver the Shares pursuant to this Agreement; and this Agreement and the Custody Agreement and Power of Attorney have been, and the Price Determination Agreement on the date thereof will be, duly authorized, executed and delivered by or on behalf of such Selling Stockholder and a valid and binding agreement of such Selling Stockholder, enforceable against such Selling Stockholder in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws relating to or affecting enforcement of creditors' rights generally or by general principles of equity. (iii) There is no action, suit or proceeding before or by any government, governmental instrumentality or court, domestic or foreign, now pending or, to the knowledge of such Selling Stockholder, threatened, to which such Selling Stockholder is or would be a party or of which the property of such Selling Stockholder is or may be subject, that (i) seeks to restrain, enjoin, prevent the consummation of or otherwise challenge the sale of Shares by such Selling Stockholder or any of the other transactions contemplated hereby or (ii) questions the legality or validity of any such transactions or seeks to recover damages or obtain other relief in connection with any such transactions. (iv) No authorization, approval, consent, license, order, registration or qualification of or with any government, governmental instrumentality or court (other than under the 1933 Act and the 1933 Act Regulations and the securities or blue sky laws of the various states in connection with the sale of the Offered Shares), domestic or foreign, is required by reason of 13 facts specifically pertaining to such Selling Stockholder or its legal or regulatory status in connection with the due authorization, execution and delivery by such Selling Stockholder of this Agreement, the Price Determination Agreement or the Custody Agreement and Power of Attorney and the valid sale and delivery of the Shares to be sold by such Selling Stockholder hereunder and thereunder. (v) The execution, delivery and performance of this Agreement, the Price Determination Agreement and the Custody Agreement and Power of Attorney by such Selling Stockholder, the sale of the Shares by such Selling Stockholder hereunder and thereunder, the consummation by such Selling Stockholder of the transactions herein and therein contemplated and the compliance by such Selling Stockholder with all the provisions of this Agreement, the Price Determination Agreement and the Custody Agreement and Power of Attorney will not result in a violation of the charter or bylaws of such Selling Stockholders which are corporations or the partnership agreement or certificate of limited partnership, if applicable, of such Selling Stockholders which are partnerships and will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any material agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound, nor will such action result in any violation of the provisions of any statute relating to such Selling Stockholders or its legal or regulatory status or any judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over such Selling Stockholder. (vi) Such Selling Stockholder has, and will at the Closing Time have, valid and marketable title to the Shares to be sold by the Selling Stockholder pursuant to this Agreement, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind; and, at the Closing Time, upon delivery of the Shares to be sold by such Selling Stockholder and payment of the purchase price therefor as contemplated in this Agreement, the Underwriter will receive good and marketable title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. (vii) Certificates for all of the Shares to be sold by such Selling Stockholder pursuant to this Agreement, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank with signatures guaranteed, have been placed in custody with The First National Bank of Boston for delivery to the Underwriters pursuant to this Agreement. (viii) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to, or that might reasonably be expected 14 to, cause or result in stabilization or manipulation of the price of the Common Stock; and such Selling Stockholder has not distributed and will not distribute any prospectus (as such term is defined in the 1933 Act and the 1933 Act Regulations) in connection with the offering and sale of the Shares other than any preliminary prospectus filed with the Commission or the Prospectus or other material permitted by the 1933 Act or the 1933 Act Regulations. (c) Any certificate signed by any officer of the Company and delivered to you or to Fried, Frank, Harris, Shriver & Jacobson as counsel for the Underwriter at or prior to the Closing Time pursuant to this Agreement or the transactions contemplated hereby shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby; and any certificate signed by or on behalf of the Selling Stockholders as such and delivered to you or to counsel for the Underwriter at or prior to the Closing Time pursuant to the terms of this Agreement or the transactions contemplated hereby shall be deemed a representation and warranty by such Selling Stockholders to the Underwriter, as to the matters covered thereby. Section 2. Sale and Delivery to the Underwriter; Closing. (a) On --------------------------------------------- the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, each Selling Stockholder agrees, severally and not jointly, to sell to the Underwriter, and the Underwriter agrees to purchase from each Selling Stockholder, at the purchase price per share set forth in the Price Determination Agreement, the number of Shares being sold by each such Selling Stockholder set forth on Schedule A opposite the name of each such Selling Stockholder. (b) If the Company has elected not to rely upon Rule 430A, the public offering price per share for the Shares and the purchase price per share for the Shares to be paid by the Underwriter shall be agreed upon and set forth in the Price Determination Agreement, dated the date hereof, and an amendment to the Original Registration Statement containing such per share price information will be filed before the Original Registration Statement becomes effective. (c) If the Company has elected to rely upon Rule 430A, the public offering price per share for the Shares and the purchase price per share for the Shares to be paid by the Underwriter shall be agreed upon and set forth in the Price Determination Agreement. In the event that the Price Determination Agreement has not been executed by the close of business on the fourteenth business day following the later of the date on which the Original Registration Statement and any Rule 462(b) Registration Statement becomes effective, this Agreement shall terminate forthwith, without liability of any party to any other party except that Sections 6, 7 and 8 shall remain in effect. 15 (d) Payment of the purchase price for, and delivery of certificates for, the Initial Shares shall be made at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004, or at such other place as shall be agreed upon by the Company, the Selling Stockholders and you, at 9:00 A.M. either (i) on the third or fourth full business day after the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement (in either case, as permitted under Rule 15c6-1 under the Securities Exchange Act of 1934, as amended (the "1934 Act")), or (ii) if the Company has elected to rely upon Rule 430A, on the third or fourth full business day after execution of the Price Determination Agreement (as permitted under Rule 15c6-1 under the 1934 Act) (unless, in either case, postponed pursuant to Section 11), or at such other time not more than ten full business days thereafter as you, the Company and the Selling Stockholders shall determine (such date and time of payment and delivery being herein called the "Closing Time"). Payment shall be made to the Selling Stockholders by wire transfer of immediately available funds to a bank account designated by the Selling Stockholders (or such other person as may be designated pursuant to the Custody Agreement and Power of Attorney), as the case may be, against delivery to you of certificates for the Shares to be purchased by you. 16 (e) Certificates for the Shares to be purchased by the Underwriter shall be in such denominations and registered in such names as you may request in writing at least one business day before the Closing Time. The certificates for the Shares will be made available in New York City for examination and packaging by you not later than 10:00 A.M. on the business day prior to the Closing Time. Section 3. Certain Covenants of the Company. The Company covenants -------------------------------- with the Underwriter as follows: (a) The Company will use its best efforts to cause the Registration Statement to become effective and, if the Company elects to rely upon Rule 430A and subject to Section 3(b), will comply with the requirements of Rule 430A and will notify you promptly, (i) when the Registration Statement, or any post- effective amendment to the Registration Statement, shall have become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission to amend the Registration Statement, to amend or supplement any Prospectus or for additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the institution or threatening of any proceedings for any of such purposes. The Company will make every reasonable effort to prevent the issuance of any such stop order or of any order preventing or suspending such use and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment. If the Company elects to rely on Rule 434 under the 1933 Act Regulations, the Company will use a term sheet that complies with the requirements of Rule 434 under the 1933 Act Regulations. If the Company elects not to rely on Rule 434, the Company will provide the Underwriter with copies of the Prospectus, in such number as the Underwriter may reasonably request, and file or transmit for filing with the Commission such Prospectus in accordance with Rule 424(b) of the 1933 Act Regulations by the close of business in New York on the business day immediately succeeding the date of the Price Determination Agreement. If the Company elects to rely on Rule 434 of the 1933 Act Regulations, the Company will provide the Underwriter with copies of the term sheet and the remainder of the Prospectus, in such number as the Underwriter may reasonably request, and file or transmit for filing with the Commission a Prospectus complying with Rule 434(c)(2) of the 1933 Act Regulations in accordance with Rule 424(b) of the 1933 Act Regulations by the close of business in New York or the business day immediately succeeding the date of the Price Determination Agreement. If the Company uses Rule 434, the Prospectus will not be "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it becomes effective. 17 (b) The Company will not at any time file or make any amendment to the Registration Statement (including any filing under Rule 462(b)), file a Term Sheet or file or make any amendment or supplement (i) if the Company has not elected to rely upon Rule 430A, to the Prospectus or (ii) if the Company has elected to rely upon Rule 430A, to the prospectus included in the Original Registration Statement at the time it becomes effective or to the Prospectus, of which you shall not have previously been advised and furnished a copy or to which you or Fried, Frank, Harris, Shriver & Jacobson as counsel for the Underwriter shall have reasonably objected. (c) The Company has furnished or will furnish to you and your counsel, without charge, one signed copy of the Registration Statement as originally filed and of all amendments thereto (including exhibits filed therewith), whether filed before or after the Registration Statement becomes effective, and copies of all exhibits and documents filed therewith, and signed copies of all accountants consents and certificates of experts, if any, and has furnished or will furnish to you one conformed copy of the Registration Statement as originally filed and each amendment thereto. If applicable, the copies of the Registration Statement and each amendment thereto furnished to the Underwriter will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) The Company will deliver to the Underwriter, without charge, from time to time until the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement (or, if the Company has elected to rely upon Rule 430A, until the time the Price Determination Agreement is executed and delivered), as many copies of each preliminary prospectus as such Underwriter may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will deliver to the Underwriter, without charge, as soon as the Registration Statement shall have become effective (or, if the Company has elected to rely upon Rule 430A, as soon as practicable after the Price Determination Agreement has been executed and delivered) and thereafter from time to time as requested during the period when the Prospectus is required to be delivered under the 1933 Act, such number of copies of the Prospectus (as supplemented or amended) as the Underwriter may reasonably request. (e) The Company will comply to the best of its ability with the 1933 Act and the 1933 Act Regulations, and the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations") so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Shares any event shall occur or condition exist as a result of which it is necessary, in the opinion of counsel for the Underwriter, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectus will not 18 include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such untrue statement or omission or to make the Registration Statement or the Prospectus comply with such requirements. (f) The Company will use its best efforts, in cooperation with the Underwriter, to qualify the Shares for offering and sale under the applicable securities laws of such states and other jurisdictions as you may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Original Registration Statement and any Rule 462(b) Registration Statement; provided, however, that neither the -------- ------- Company nor any Subsidiary shall be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. The Company will file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided. (g) The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its security holders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) For a period of 90 days from the date hereof, the Company will not, without the prior written consent of Merrill Lynch, directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, other than (i) any shares of Common Stock sold by the Company upon the exercise of any option outstanding at the Closing Time granted under the stock option plans of the Company existing at the Closing Time and (ii) issuances by the Company of employee stock options pursuant to the Company's employee stock option plans pursuant to the terms thereof as in effect on the date hereof and the number of shares of Common Stock covered thereby. (i) The Company will use its best efforts to maintain the listing of the Common Stock on the New York Stock Exchange. (j) If the Company has elected to rely upon Rule 430A, it will take such steps as it deems necessary to ascertain promptly whether the forms of prospectus 19 transmitted for filing under Rule 424(b) were received for filing by the Commission and, in the event that they were not, it will promptly file such prospectus. (k) If the Company has elected to rely on Rule 434, it will comply with the requirements of Rule 434, and the Prospectus will not be "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it becomes effective. (l) If the Company has elected to rely upon Rule 462(b), the Company will file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 of the 1933 Act Regulations by the time confirmations are sent or given, as specified by Rule 462(b)(2). (m) For a period of five years after the Closing Time, the Company will furnish to you copies of all annual reports, quarterly reports and current reports filed with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar forms as may be designated by the Commission, and such other documents, reports and information relating to the Company's business or finances as shall be furnished by the Company to its stockholders generally. (n) The Company has complied, and will comply, with all of the provisions of Florida H.B. 1771, as codified in sec. 517.075 Florida Statutes, 1987, as amended, and all regulations promulgated thereunder relating to issuers or their affiliates doing business with the government of Cuba or with any person or affiliate located in Cuba. (o) The Company, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to Sections 13, 14 or 15 of the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. Section 4. Payment of Expenses. (a) The Company will pay all ------------------- expenses incident to the performance of the obligations of the Company and the Selling Stockholders under this Agreement, including (i) the printing and filing of the Registration Statement (including financial statements and exhibits), as originally filed and as amended, the preliminary prospectus and the Prospectus and any amendments or supplements thereto, and the cost of furnishing copies thereof to the Underwriter, (ii) the copying and distribution of this Agreement (including the Price Determination Agreement), the certificates for the Shares and a survey of state securities or blue sky laws (the "Blue Sky Survey"), (iii) the delivery of the certificates for the Shares to the Underwriter, including any capital duties, stamp duties and stock or other transfer taxes payable upon the sale of the Shares to the Underwriter, (iv) the fees and disbursements of the Company's and the Selling Stockholders' counsel and accountants, (v) the 20 qualification of the Shares under the applicable securities laws in accordance with Section 3(f) and any filing fee related to the review of the offering by the National Association of Securities Dealers, Inc. (the "NASD"), and filing fees and reasonable fees and disbursements of Fried, Frank, Harris, Shriver & Jacobson as counsel for the Underwriter in connection therewith and in connection with the Blue Sky Survey, (vi) the fees and expenses of any transfer agent or registrar for the Shares and (vii) the listing fees and expenses incurred in connection with listing the Shares on the New York Stock Exchange. (b) The Company will pay any transfer taxes attributable to the sale by the Selling Stockholders of the Shares and any fees and disbursements of their counsel and accountants, if any. (c) If this Agreement is terminated by you in accordance with the provisions of Section 5, 9(a)(i) and (ii) or 10, the Company shall reimburse the Underwriter for all of its out-of-pocket expenses, including the reasonable fees and disbursements of Fried, Frank, Harris, Shriver & Jacobson as counsel for the Underwriter. Section 5. Conditions of Underwriter's Obligations. In addition to --------------------------------------- the execution and delivery of the Price Determination Agreement, the obligations of the Underwriter to purchase and pay for the Shares that they have respectively agreed to purchase hereunder are subject to the accuracy of the representations and warranties contained herein (including those contained in the Price Determination Agreement) or in certificates of any officer of the Company and the Selling Stockholders delivered pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder, and to the following further conditions: (a) The Original Registration Statement shall have become effective not later than 5:30 P.M. on the date of this Agreement or, with your consent, at a later time and date not later, however, than 5:30 P.M. on the first business day following the date hereof, or at such later time or on such later date as you may agree to in writing; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective not later than the time confirmations are sent or given, as specified by Rule 462(b)(2); and at the Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose shall have been instituted or shall be pending or, to your knowledge or the knowledge of the Company or any of its Subsidiaries, shall have been threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of Fried, Frank, Harris, Shriver & Jacobson as counsel for the Underwriter. If the Company 21 has elected to rely upon Rule 430A, a Prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A). If the Company has elected to rely upon Rule 434, a Term Sheet, which together with the preliminary prospectuses last furnished to the Underwriter in connection with the offering of the Shares shall not be "materially different" as such term is used in Rule 434 from the prospectuses included in the Original Registration Statement at the time it becomes effective, shall have been filed with the Commission in accordance with Rule 424(b). (b) At the Closing Time, you shall have received signed opinions of (i) Kirkland & Ellis, special counsel for the Company and the Selling Stockholders, to the effect set forth on Exhibit B hereto [and (ii) counsel for the next ten largest corporate stockholders], in each case dated as of the Closing Time, in form and substance reasonably satisfactory to Fried, Frank, Harris, Shriver & Jacobson as counsel for the Underwriter. In giving its opinion Kirkland & Ellis may rely, as to all matters governed by the laws of jurisdictions other than the federal law of the United States, the law of the State of New York and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to you. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers or other appropriate representatives of the Company, the Subsidiaries and the Selling Stockholders and certificates of public officials. (c) At the Closing Time, you shall have received the favorable opinion of Fried, Frank, Harris, Shriver & Jacobson as counsel for the Underwriter, dated as of the Closing Time, to the effect that the opinions delivered pursuant to Section 5(b) appear on their face to be appropriately responsive to the requirements of this Agreement except, specifying the same, to the extent waived by you, and with respect to the legal existence of the Company, the Shares, this Agreement, the Registration Statement, the Prospectus and such other related matters as you may require. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the federal law of the United States, the law of the State of New York and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to you. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers or other appropriate representatives of the Company, the Subsidiaries and the Selling Stockholders and certificates of public officials. (d) At the Closing Time, (i) the Registration Statement and the Prospectus, as they may then be amended or supplemented, shall conform in all material respects to the requirements of the 1933 Act and the 1933 Act Regulations, the Company shall have complied in all material respects with Rule 430A and Rule 434 (if it shall have elected to rely thereon), the Registration Statement, as it may then be amended or 22 supplemented, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements in the Registration Statement not misleading, and the Prospectus shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements in the Prospectus, in light of the circumstances under which they were made, not misleading, (ii) there shall not have been, since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, (iii) no action, suit or proceeding at law or in equity shall be pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary that would be required to be set forth in the Prospectus other than as set forth therein and no proceedings shall be pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary before or by any federal, state or other commission, board or administrative agency that could reasonably be expected to materially and adversely affect the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise, other than as set forth in the Prospectus, (iv) the Company shall have complied with all agreements and satisfied all conditions on their parts to be performed or satisfied at or prior to the Closing Time and (v) the other representations and warranties of the Company and Technologies, set forth in Section 1(a) shall be accurate as though expressly made at and as of the Closing Time. At the Closing Time, you shall have received a certificate of the President or Vice President and the chief financial officer or chief accounting officer of the Company, dated as of the Closing Time, to such effect. As used in Section 5(d)(ii) and (iii), the term "Prospectus" means the Prospectus in the form first used to confirm sales of the Shares. (e) At the Closing Time, (i) the representations and warranties of the Selling Stockholders set forth in Section 1(b) and in any certificates by or on behalf of the Selling Stockholders delivered pursuant to the provisions hereof shall be accurate as though expressly made at and as of the Closing Time, (ii) the Selling Stockholders shall have performed their obligations under this Agreement and (iii) you shall have received a certificate of the Selling Stockholders, dated as of the Closing Time, to the effect set forth in subsections (i) and (ii) of this Section 5(e). (f) At the time that this Agreement is executed by the Company, you shall have received from Coopers & Lybrand L.L.P. a letter, dated such date, in form and substance satisfactory to you, together with signed or reproduced copies of such letter for each of the other Underwriters, confirming that they are independent public accountants with respect to the Company and the predecessor of the Company within the meaning of the 1933 Act and the applicable published 1933 Act Regulations, and stating in effect that, except as set forth in such letter: 23 (i) in their opinion, the audited financial statements and the related financial statement schedules included in the Registration Statement and the Prospectus comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations; (ii) on the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the latest available unaudited interim consolidated financial statements of the Company and the predecessor of the Company included in the Registration Statement and the Prospectus, a reading of the minutes of all meetings of the stockholders and directors of the Company and the Subsidiaries and each committee of the board of directors of each of the Company and the Subsidiaries, inquiries of certain officials of the Company and the Subsidiaries responsible for financial and accounting matters and such other inquiries and procedures, including a limited review of such statements under Statement of Accounting Standards 71, as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements as of and for the nine-month periods ended September 30, 1996 and 1995 included in the Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations applicable to unaudited interim financial statements included in registration statements or are not in conformity with GAAP applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement; or (B) at a specified date not more than five days prior to the date of this Agreement, there was (i) any change in the capital stock or consolidated stockholders' equity, (ii) any decrease in consolidated current assets, working capital and total assets or (iii) any increase in long-term debt of the Company and its Subsidiaries as compared with the amounts shown in the latest balance sheet included in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; or (C) for the period from October 1, 1996 to a specified date not more than five days prior to the date of this Agreement, there was any decrease in consolidated net sales, income from operations, or in the total or per-share amounts of consolidated income from continuing operations before income taxes or of consolidated net income or in other items specified by the Underwriter, in each case as compared with the comparable period in the preceding year, except in each case for any decreases that the Registration Statement discloses have occurred or may occur; or 24 (iii) they are unable to and do not express any opinion on the pro forma capitalization or Pro Forma Consolidated Financial Statements of the Company or on the pro forma adjustments applied to the historical amounts included in such statements (the "Pro Forma Information"); however, for purposes of such letter they have: (A) read the Pro Forma Information; (B) made inquiries of certain officials of the Company who have responsibility for financial and accounting matters about the basis for their determination of the pro forma adjustments and whether the Pro Forma Information above complies in form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X; (C) compared the historical amounts in the Pro Forma Information with the Company's audited financial statements or accounting records; and (D) proved the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the Pro Forma Information; and on the basis of such procedures, and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that the Pro Forma Information included in the Registration Statement does not comply as to form in all material respects with the applicable requirements of Rule 11-02 of Regulation S-X and that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements; and (iv) in addition to the procedures referred to in clauses (ii) and (iii) above, they have performed other specified procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which have previously been specified by you and which shall be specified in such letter, and have compared such items with, and have found such items to be in agreement with, the accounting and financial records of the Company and its Subsidiaries. (g) At the time that this Agreement is executed by the Company, you shall have received from Arthur Andersen LLP a letter, dated such date, in form and substance satisfactory to you, confirming that they are independent public accountants with respect to TAI and subsidiaries within the meaning of the 1933 Act and the applicable published 1933 Act Regulations, and stating in effect that, except as set forth in such letter: 25 (i) in their opinion, the audited financial statements of TAI and subsidiaries included in the Registration Statement and the Prospectus comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations; (ii) on the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the latest available unaudited interim consolidated financial statements of TAI and subsidiaries included in the Registration Statement and the Prospectus, a reading of the minutes of all meetings of the stockholders and directors of TAI and each committee of the board of directors of TAI, inquiries of certain officials of TAI who have responsibility for financial and accounting matters and such other inquiries and procedures, including a limited review of such statements under Statement of Accounting Standards 71, as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements as of and for the three-month periods ended March 31, 1996 and 1995 included in the Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations applicable to unaudited interim financial statements included in registration statements or are not in conformity with GAAP applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement; (B) at April 30, 1996, there was (i) any change in the capital stock or consolidated stockholders' equity (deficit), (ii) any decrease in consolidated current assets or (iii) any increase in long- term debt of TAI and subsidiaries as compared with the amounts shown in the latest balance sheet included in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; or (C) for the period from April 1, 1996 to April 30, 1996, there was any decrease in consolidated net sales, operating profit, or loss before taxes or in other items specified by the Underwriter, in each case as compared with the comparable period in the preceding year, except in each case for any decreases that the Registration Statement discloses have occurred or may occur; and (iii) in addition to the procedures referred to in clauses (ii) above, they have performed other specified procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which have previously been specified by you and which shall be 26 specified in such letter, and have compared such items with, and have found such items to be in agreement with, the accounting and financial records of TAI and subsidiaries. (h) At the Closing Time, you shall have received from each of Coopers & Lybrand L.L.P. and Arthur Andersen LLP a letter, in form and substance satisfactory to you and dated as of the Closing Time, and to the effect that they reaffirm the statements made in the letter furnished pursuant to Sections 5(f) and 5(g), except that the specified date referred to shall be a date not more than five days prior to the Closing Time. In the event the Company relies on Rule 430A and the final Prospectus furnished to the Underwriter in connection with the offering of the Shares differs from the Prospectus included in the Registration Statement at the time of effectiveness, such letter shall update the procedures referred to in clauses 5(f)(ii), (iii) and (iv) with respect to Coopers and Lybrand L.L.P. and clauses 5(g)(ii) and (iii) with respect to Arthur Andersen LLP. (i) At the Closing Time, you shall have received a certificate of the Chief Financial Officer of the Company as to certain agreed upon accounting matters. (j) At the Closing Time, counsel for the Underwriter shall have been furnished with all such documents, certificates and opinions as they may reasonably request for the purpose of enabling them to pass upon the issuance and sale of the Shares as contemplated in this Agreement and the matters referred to in Section 5(c) and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company and the Selling Stockholders, the performance of any of the covenants of the Company and the Selling Stockholders, or the fulfillment of any of the conditions herein contained; and all proceedings taken by the Company and the Selling Stockholders at or prior to the Closing Time in connection with the authorization, issuance and sale of the Shares as contemplated in this Agreement shall be reasonably satisfactory in form and substance to you and to Fried, Frank, Harris, Shriver & Jacobson as counsel for the Underwriter. (k) Each Selling Stockholder shall have delivered to you on or prior to the Closing Time a copy of a properly completed and executed United States Treasury Department Form W-9 or W-8 (or other applicable form or statement specified by Treasury Department regulations). (l) The "lock-up" agreements between you and each Selling Stockholder and executive officer, delivered to you on or before the date hereof, shall be in full force and effect at the Closing Time. If any of the conditions specified in this Section 5 shall not have been fulfilled when and as required by this Agreement to be fulfilled, this Agreement may be terminated by you upon notice to the Company and the Selling Stockholders at any time at or prior to the Closing Time, and such termination shall be without liability of any 27 party to any other party except as provided in Section 4 herein. Notwithstanding any such termination, the provisions of Sections 6 and 7 herein shall remain in effect. 28 Section 6. Indemnification. (a) The Company and Technologies, --------------- jointly and severally, agree to indemnify and hold harmless the Underwriter and each person, if any, who controls the Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the extent and in the manner set forth in clauses (i), (ii) and (iii) below. In addition, each Selling Stockholder, severally and not jointly, agrees to indemnify and hold harmless the Underwriter and each person, if any, who controls the Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; 29 (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(e) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by the Underwriter), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, - -------- ------- liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by the Underwriter expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); provided, further, that such indemnity agreement with -------- ------- respect to any preliminary prospectus shall not inure to the benefit of the Underwriter (or any persons controlling the Underwriter) from whom the person asserting such loss, claim, damage or liability purchased the Shares which are the subject thereof if such person did not receive a copy of the Prospectus (or the Prospectus as amended or supplemented) at or prior to the confirmation of the sale of such Shares to such person in any case where such delivery is required by the 1933 Act and the untrue statement or omission or alleged untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented); provided, however, that with respect to each Selling Stockholder, ----------------- the indemnification provision in this paragraph (a) shall be only with respect to the information furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement (or any amendment thereto), including Rule 430A Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that the aggregate liability of any Selling Stockholder - ------------------ pursuant to this paragraph (a) shall be limited to the net proceeds received by such Selling Stockholder from the Shares purchased by the Underwriter from such Selling Stockholder pursuant to this Agreement and the Price Determination Agreement; and provided, further, that no Selling Stockholder shall be liable -------- ------- for any untrue statement, alleged untrue statement, omission or alleged omission of any other Selling Stockholder. 30 (b) The Company and Technologies, jointly and severally, agree to indemnify and hold harmless each of the Selling Stockholders and each person, if any, who controls any Selling Stockholder within the meaning of Section 15 of the 1933 Act and Section 20 of the 1934 Act to the same extent that the Company and Technologies have agreed to indemnify and hold harmless the Underwriter pursuant to the preceding paragraph; provided, however, the Company and Technologies shall not be liable under this paragraph to the extent any loss, liability, claim, damage or expense described in the preceding paragraph arises out of or is based upon an untrue statement, alleged untrue statement, omission or alleged omission based upon information relating to such Selling Stockholder expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (c) The Underwriter agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and each Selling Stockholder and each person, if any, who controls each Selling Stockholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by the Underwriter expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (d) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by the Underwriter, and, in the case of parties indemnified pursuant to Section 6(c) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related 31 actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of all judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (e) If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (f) The provisions of this Section shall not affect any agreement among the Company and the Selling Stockholders with respect to indemnification. Section 7. Contribution. If the indemnification provided for in ------------ Section 6 is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, Technologies and the Selling Stockholders on the one hand and the Underwriter on the other hand from the offering of the Shares pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, Technologies and the Selling Stockholders on the one hand and of the Underwriter on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, Technologies and the Selling Stockholders on the one hand and the Underwriter on the other hand in connection with the offering of the Shares pursuant to this Agreement shall be deemed to be in the 32 same respective proportions as the total net proceeds from the offering of the Shares pursuant to this Agreement (before deducting expenses) received by the Company, Technologies and the Selling Stockholders and the total underwriting discount received by the Underwriter, in each case as set forth on the cover of the Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet bear to the aggregate initial public offering price of the Shares as set forth on such cover. The relative fault of the Company, Technologies and the Selling Stockholders on the one hand and the Underwriter on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, Technologies or the Selling Stockholders or by the Underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, Technologies, the Selling Stockholders and the Underwriter agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, (i) no Selling Stockholder shall be required to contribute any amount in excess of the amount of the total net proceeds received by such Selling Stockholder from the Shares purchased from such Selling Stockholder and (ii) the Underwriter shall not be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that the Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls the Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each 33 person, if any, who controls the Company or any Selling Stockholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company or such Selling Stockholder, as the case may be. Section 8. Representations, Warranties and Agreements to Survive ----------------------------------------------------- Delivery. The representations, warranties, indemnities and agreements of the - -------- Company, Technologies and the Selling Stockholders contained in this Agreement and the Price Determination Agreement, or contained in certificates of officers of the Company or its Subsidiaries or the Selling Stockholders submitted pursuant hereto, will remain operative and in full force and effect regardless of any investigation made by or on behalf of the Company, Technologies, the Selling Stockholders or the Underwriter or controlling person and will survive delivery of and payment for the Shares. Section 9. Termination of Agreement. (a) The Underwriter may ------------------------ terminate this Agreement, by notice to the Company and the Selling Stockholders, at any time at or prior to the Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if a downgrading shall have occurred in the rating accorded the Company's debt securities by any "nationally recognized statistical rating organization," as that term is defined by the Commission for purposes of Rule 436(g)(2) under the 1933 Act, or any such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities, or (iii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Underwriter, impracticable to market the Shares or to enforce contracts for the sale of the Shares, or (iv) if trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or if trading generally on the American Stock Exchange or the New York Stock Exchange or the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (v) if a banking moratorium has been declared by either Federal or New York authorities. (b) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in 34 Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. Section 10. Default by the Company or the Selling Stockholders. (a) -------------------------------------------------- If any Selling Stockholder shall fail at the Closing Time to sell and deliver the number of Shares that it is obligated to sell, then the Underwriter may, at its option, by notice to the Company and the Selling Stockholders, either (i) terminate this Agreement without any liability on the part of any non-defaulting party except to the extent provided in Section 4 and except that the provisions of Sections 6 and 7 shall remain in effect or (ii) elect to purchase the Shares which the non-defaulting party has agreed to sell hereunder. No action taken pursuant to this Section shall relieve such Selling Stockholder from liability, if any, in respect of such default. Section 11. Notices. All notices and other communications under this ------- Agreement shall be in writing and shall be deemed to have been duly given if delivered, mailed or transmitted by any standard form of telecommunication (notices transmitted by telecopier to be promptly confirmed in writing). Notices to you shall be directed to you c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated at Merrill Lynch World Headquarters, North Tower, World Financial Center, New York, New York 10281, attention of Jack Kiernan, with a copy to Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004, attention of Valerie Ford Jacob, Esq.; notices to the Company and Technologies shall be directed to the Company and Technologies at 34 Maple Street, Milford, MA 01757, attention of Douglas A. Berthiaume, with a copy to Kirkland & Ellis at Citicorp Center, 153 East 53rd Street, New York, New York 10022-4675, attention of Lance C. Balk, Esq.; and notices to the Selling Stockholders shall be directed to Bain Capital, Inc., Two Copley Place, Boston, MA 02116, attention of Joshua Bekenstein, with a copy to Kirkland & Ellis at Citicorp Center, 153 East 53rd Street, New York, New York 10022-4675, attention of Lance C. Balk, Esq. Section 12. Parties. This Agreement is made solely for the benefit ------- of the Underwriter, the Company, Technologies, the Selling Stockholders and, to the extent expressed, any person controlling the Company, Technologies, the Selling Stockholders or the Underwriter, and the directors of the Company, its officers who have signed the Registration Statement, and their respective executors, administrators, successors and assigns and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser, as such purchaser, from the Underwriter of the Shares. SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED ---------------------- BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. SPECIFIED TIMES OF THE DAY REFER TO NEW YORK CITY TIME. 35 Section 14. Jurisdiction. Each of the undersigned hereby irrevocably ------------ submits in any suit, action or proceeding arising out of or in relation to this Agreement, or any of the transactions contemplated hereby, to the jurisdiction and venue of any federal or state court in the Borough of Manhattan, City of New York, State of New York. Section 15. Counterparts. This Agreement may be executed in one or ------------ more counterparts and, when a counterpart has been executed by each party, all such counterparts taken together shall constitute one and the same agreement. 36 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Selling Stockholders a counterpart hereof, whereupon this instrument will become a binding agreement among the Company, the Selling Stockholders and the Underwriter in accordance with its terms. Very truly yours, WATERS CORPORATION By -------------------------------------- Name: Philip S. Taymor Title: Senior Vice President, Finance and Administration and Chief Financial Officer, Treasurer and Assistant Secretary WATERS TECHNOLOGIES CORPORATION By -------------------------------------- Name: Philip S. Taymor Title: Vice President, Finance and Administration and Chief Financial Officer, and Assistant Secretary THE SELLING STOCKHOLDERS NAMED IN SCHEDULE A HERETO By -------------------------------------- Name: Joshua Bekenstein Title: Attorney-in-Fact 37 Confirmed and accepted as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: -------------------------------------- Name: Karen B. Harris Title: Vice President [131709] 38 Exhibit A WATERS CORPORATION (a Delaware corporation) ____________ Shares of Common Stock PRICE DETERMINATION AGREEMENT ----------------------------- ___________ , 1996 MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Reference is made to the Purchase Agreement dated _________ , 1996 (the "Purchase Agreement") among Waters Corporation (the "Company"), Waters Technologies Corporation ("Technologies"), the Selling Stockholders listed in Schedule A thereto and hereto (the "Selling Stockholders") and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"). The Purchase Agreement provides for the purchase by the Underwriter from the Selling Stockholders, subject to the terms and conditions set forth therein, of an aggregate of __________ shares (the "Shares") of the Company's common stock, par value $.01 per share. This Agreement is the Price Determination Agreement referred to in the Purchase Agreement. Pursuant to Section 2 of the Purchase Agreement, the undersigned agree with the Underwriter as follows: 1. The initial public offering price per share for the Shares shall be $_____________. 2. The purchase price per share for the Shares to be paid by the Underwriter shall be $___________, representing an amount equal to the initial public offering price set forth above, less $_______ per share. The Company and Technologies, jointly and severally, represent and warrant to the Underwriter that the representations and warranties of the Company and Technologies set forth in Section 1(a) of the Purchase Agreement are accurate as though expressly made at and as of the date hereof. Additionally, if the Company elects to rely upon Rule 462(b), the Company represents and warrants to the Underwriter that: (a) the Company has filed a Rule 462(b) Registration Statement in compliance with and that is effective upon filing pursuant to Rule 462(b) and has received confirmation of its receipt; and (b) the Company has given irrevocable instruments for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 of the 1933 Act Regulations, or the Commission has received payment of such filing fee. Each Selling Stockholder, severally and not jointly, represents and warrants to the Underwriter that the representations and warranties of such Selling Stockholder set forth in Section 1(b) of the Purchase Agreement are accurate as though expressly made at and as of the date hereof. This Agreement shall be governed by the laws of the State of New York, without regard to principles of conflicts of laws. A-2 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company, Technologies and the Selling Stockholders a counterpart hereof, whereupon this instrument along with all counterparts and together with the Purchase Agreement shall be a binding agreement among the Underwriter, the Company, Technologies and the Selling Stockholders in accordance with its terms and the terms of the Purchase Agreement. Very truly yours, WATERS CORPORATION By -------------------------------------- Name: Title: WATERS TECHNOLOGIES CORPORATION By -------------------------------------- Name: Title: THE SELLING STOCKHOLDERS NAMED IN SCHEDULE A HERETO By -------------------------------------- Name: Title: Attorney-in-Fact A-3 Confirmed and accepted as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By -------------------------------------- Name: Karen B. Harris Title: Vice President A-4 SCHEDULE A
Number of Shares Selling Stockholder to be Sold Total.........................
SCHEDULE B
Subsidiaries Place of Incorporation - ------------ ---------------------- Waters Technologies Corporation....Delaware Waters Investments Limited.........Delaware TA Instruments, Inc. ..............Delaware Extrel F.T.M.S. ...................Delaware Nihon Waters Limited...............Delaware Nihon Waters K.K. .................Japan Waters Asia Limited................Delaware Waters China Limited...............Hong Kong Waters Operating Corp. ............Delaware Waters Australia Pty. Ltd. ........Australia Waters NV..........................Belgium Waters Ltda. ......................Brazil Waters Limited/Waters Limitee......Canada Waters A/S.........................Denmark Waters Oy..........................Finland Waters France Holding Corp. .......Delaware Waters Holding SA..................France Waters SA..........................France Waters GmbH........................Germany Waters S.r.l. .....................Italy Waters SA de CV....................Mexico Waters Chromatography BV...........Netherlands Waters Chromatography Europe BV....Netherlands Waters Chromatografia SA...........Spain Waters Sverige AB..................Sweden Waters AG..........................Switzerland Waters GesMBH......................Austria Waters Kft.........................Hungary Waters Sp.Zo.o.....................Poland Waters Ltd. .......................U.K. Phase Separations Ltd. ............U.K. Phase Separations EURL.............France
Phase Separations B.V. ............Netherlands Phase Separations Inc. ............Connecticut
A-7 SCHEDULE C
Material Subsidiaries Place of Incorporation - --------------------- ---------------------- Waters Technologies Corporation....Delaware Waters Investments Limited.........Delaware TA Instruments, Inc. ..............Delaware Waters Holding SA..................France Waters SA. ........................France Waters GmbH........................Germany Waters Ltd. .......................U.K.
================================================================================ WATERS CORPORATION (a Delaware corporation) ____________ Shares of Common Stock PURCHASE AGREEMENT ------------------ Dated: ___________, 1996 ================================================================================ Exhibit B Form of Opinion of Kirkland & Ellis Pursuant to Section 5(b) of the U.S. Purchase Agreement ___________, 1996 MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED Merrill Lynch World Headquarters North Tower World Financial Center New York, NY 10281-1209 Re: Waters Corporation ------------------ Ladies and Gentlemen: We have acted as counsel for Waters Corporation, a Delaware corporation (the "Company"), Waters Technologies Corporation, a Delaware corporation ("Technologies") and the Selling Stockholders, including Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P., BCIP Associates and BCIP Trust Associates, L.P. (collectively, the "Bain Capital Entities"), in connection with the sale, pursuant to the Purchase Agreement (the "Purchase Agreement") dated ___________, 1996, among the Company, Technologies, the selling stockholders named in Schedule A thereto (the "Selling Stockholders"), and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"), of __________ shares by the Selling Stockholders ("the "Shares"), of the Company's common stock, par value $0.01 per share ("Common Stock"), and the related Price Determination Agreement (the "Price Determination Agreement") dated __________, 1996 among the Company, Technologies, the Selling Stockholders and the Underwriter. Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Purchase Agreement. We have examined, among other things, the following: (1) copies of the Registration Statement on Form S-1 (No. 333-____) filed by the Company with the Commission on _________, 1996 for the purpose of registering the offering of the Shares under the Securities Act, as amended on _________, 1996 and __________, 1996, in each case including all exhibits thereto (as amended to the date hereof, the "Registration Statement"); (2) a copy of the Company's preliminary prospectus dated __________, 1996 relating to the Shares and a copy of the Company's final prospectus dated __________, 1996, relating to the Shares (the final prospectus, the "Prospectus"); (3) a copy of the Purchase Agreement and the Price Determination Agreement; (4) a copy of the Custody Agreement and Power of Attorney, dated as of October ___, 1996, by and among the Company, the Selling Stockholders, the Attorneys-in-Fact named therein and The First National Bank of Boston (all such agreements collectively, the "Custody Agreement and Power of Attorney"); (5) certain letter agreements between certain stockholders of the Company in favor of the Underwriter (the "Lock-up Agreements"); (6) the Registration Rights Agreement made as of August 18, 1994 by and among the Company and certain stockholders of the Company (the "Registration Rights Agreement"); (7) copies of the certificates of incorporation and byaws of the Company, and Technologies, as amended to date; and (8) copies of a unanimous written consent signed by each member of the Board of Directors of the Company on October ___, 1996 and a unanimous written consent signed by each member of the Board of Directors of Technologies on _______________, 1996;. The Purchase Agreement, the Price Determination Agreement, and the Custody Agreement and Power of Attorney are collectively referred to as the "Transaction Agreements." The Purchase Agreements, the Price Determination Agreements and the Custody Agreement and Power of Attorney are collectively referred to as the "Selling Stockholder Agreements." In addition, we have examined and relied, to the extent we deemed proper, on the originals or copies certified or otherwise identified to our satisfaction of all such corporate or partnership records of the Company and the Bain Capital Entities and such other instruments and certificates of public officials, officers and representatives of the Company and the Bain Capital Entities and other persons, and we have made such investigations of law as we have deemed appropriate. We have assumed the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to the originals of all documents submitted to us as copies, and the authenticity of the originals of all documents submitted to us as copies. In our examination, we have assumed the genuineness of the signatures of persons B-2 purportedly signing all documents and instruments, the authority and capacity of such persons signing on behalf of the parties thereto other than the Company and the Bain Capital Entities and the due authorization, execution and delivery of all documents by the parties thereto other than the Company and the Bain Capital Entities. As to matters of fact, we have relied (without independent investigation) upon oral or written statements or representations of officers of the Company, the Selling Stockholders and the Bain Capital Entities. Nothing has been brought to our attention which causes us to believe, however, that such statements or representations are misleading. To the extent it may be relevant to the opinions expressed herein, (i) we have assumed that the Power of Attorney and Custody Agreement of each Selling Stockholder other than the Bain Capital Entities has been duly authorized, executed and delivered by each party thereto and constitutes a valid and binding agreement of each party thereto other than such Selling Stockholder and the Company and (ii) we are relying upon oral advice of the staff of the Securities and Exchange Commission (the "Commission") that the Commission has issued an order declaring the Registration Statement effective. Whenever any statement contained herein with respect to the existence or absence of facts is indicated to be based on our knowledge or awareness, we are referring to the actual knowledge of those Kirkland & Ellis attorneys who have represented the Company and the Bain Capital Entities. Except as expressly set forth herein, where our opinion is based upon our "knowledge," we have not undertaken any independent investigation (other than inquiries of senior officers of the Company and the Bain Capital Entities) to determine the existence or absence of such facts and no inference as to our knowledge concerning such facts should be drawn from the fact of our representation of such entities. Subject to the foregoing and to the further assumptions, qualifications and limitations set forth below: (i) The Company is a corporation validly existing and in good standing under the General Corporation Law of the State of Delaware with requisite corporate power and authority under such laws to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Purchase Agreement. (ii) Each of the Subsidiaries of the Company organized under the laws of the United States and listed on Schedule A hereto (the "Domestic Subsidiaries") is a corporation validly existing and in good standing under the laws of the jurisdiction of its incorporation with requisite corporate power and authority under such laws to own its properties and conduct its business as described in the Prospectus, and is duly qualified to B-3 transact business as a foreign corporation and is in good standing under the laws of each jurisdiction set forth opposite such Domestic Subsidiary's name on Schedule A hereto. (iii) Each of the Company and Technologies has all necessary corporate power and authority to execute, deliver and perform its obligations under each of the Transaction Agreements to which it is a party; each of the Transaction Agreements has been duly authorized, executed and delivered by each of the Company and Technologies which is a party thereto; and each of the Transaction Agreements constitutes the valid and binding obligation of each of the Company and Technologies which is a party thereto, enforceable against the Company or Technologies, as the case may be, in accordance with its terms. (iv) All of the issued and outstanding shares of capital stock of the Company (including the shares of Common Stock to be sold by the Selling Stockholders pursuant to the Purchase Agreement) have been duly authorized and validly issued and are fully paid and non-assessable; and, to our knowledge, none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any stockholder of the Company. The Company has the authorized capitalization set forth in the Prospectus under the caption "Capitalization." (v) Except as disclosed in the Prospectus, (a) all of the outstanding shares of capital stock of each Domestic Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable and, based solely upon a review of the stock transfer records of such Domestic Subsidiary, are owned of record by the Company, directly or through one or more Subsidiaries, free and clear of any pledge, lien, security interest, charge, claim, mortgage or encumbrance of any kind, and (b) to our knowledge, none of the outstanding shares of capital stock of the Domestic Subsidiaries was issued in violation of the preemptive or other similar rights of any stockholder of such Domestic Subsidiaries. (vi) Except as disclosed in the Prospectus, to our knowledge, there are no outstanding options, warrants or other rights calling for issuance of, and no commitments, obligations, written plans or arrangements to issue, any shares of capital stock of the Company or any Subsidiary or any security convertible into or exchangeable for capital stock of the Company or any Subsidiary. (vii) The statements made in the Prospectus under the captions "Description of Capital Stock" and "Description of Certain Indebtedness" have been reviewed by us and are accurate and fairly summarize the agreements or other documents described therein in all material respects. B-4 (viii) No authorization, approval, consent, license, order, registration or qualification of or with any government, governmental instrumentality or court (other than as required under the securities or blue sky laws of the various states, as to which we express no opinion) is necessary under any applicable law, statute, rule or regulation that in our experience is normally applicable to transactions of the type provided for in the Transaction Agreements in connection with the execution, delivery and performance of the Transaction Agreements by the Company or Technologies or for the sale and delivery of the Shares, except such as have been obtained. (ix) The execution, delivery and performance of the Transaction Agreements by the Company or Technologies, as the case may be, and the sale and delivery of the Shares will not result in any violation of the charter or bylaws of the Company or Technologies and do not and will not conflict with, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien or encumbrance upon any property or assets of the Company or Technologies under (a) any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument filed as an exhibit to the Registration Statement, (b) any applicable law, statute, rule, or regulation that in our experience is normally applicable to transactions of the type provided for in the Transaction Agreements, or (c) any judgment, order, writ, injunction or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or Technologies or any of their respective properties, assets or operations described in the Prospectus or as set forth on a schedule attached hereto (which the Company has advised us are the only judgments, orders, writs, injunctions or decrees of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or Technologies or any of their respective properties or operations, by which the Company or Technologies is bound). We express no opinion in clause (b) of this paragraph (ix) with respect to the information contained in, or the accuracy, completeness or correctness of, the Prospectus or the Registration Statement, which matters are dealt with in paragraphs (vii), (xiv) and our separate letter to the Underwriter dated the date hereof. (x) We have been advised by the Commission that the Registration Statement was declared effective under the 1933 Act at __________ Eastern Time, on ____________, 1996; the required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to our knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or have been threatened by the Commission under the 1933 Act. B-5 (xi) To our knowledge, other than as disclosed in the Prospectus, there are no legal or governmental proceedings pending or threatened to which the Company or Technologies is or may be a party or to which any property of the Company or Technologies is or may be the subject which, if determined adversely to the Company or Technologies, could, individually or in the aggregate, reasonably be expected to (x) result in a material adverse effect on the financial condition of the Company and its Subsidiaries, considered as one enterprise or (y) materially and adversely affect the execution, delivery and performance by the Company or Technologies of the Transaction Agreements. To our knowledge, there are no statutes or regulations, and no legal or governmental actions, suits or proceedings pending or threatened against the Company or Technologies that are required to be described in the Prospectus that are not so described. (xii) To our knowledge, except as set forth in the Prospectus, the Company and the Subsidiaries are in compliance with, and each such entity has not received any notice of any outstanding violation of, all laws, ordinances, rules, regulations, judgments, decrees, orders and statutes applicable to the Company or any Subsidiary and any of their respective operations, except, in either case, where any failure by the Company or any Subsidiary to comply with any such law, regulation, ordinance or rule could not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the financial condition of the Company and its Subsidiaries, considered as one enterprise. (xiii) To our knowledge, except as set forth in the Prospectus and except as provided in the Registration Rights Agreement, there are no holders of securities (debt or equity) of the Company or any Subsidiary or holders of rights (including, without limitation, preemptive rights), warrants or options to obtain securities of the Company or any Subsidiary who have the right to request the Company or any Subsidiary to register securities held by them under the 1933 Act as a result of the filing of the Registration Statement by the Company or the offering contemplated therein, other than holders who have waived such rights or will not have such rights for the 180-day period after the date of the Prospectus. (xiv) The statements made in the Prospectus under the caption "Certain United States Federal Tax Consequences to Non-United States Holders" insofar as they constitute federal statutes, rules and regulations, have been reviewed by us and fairly present the information disclosed therein in all material respects. (xv) The Company is not an investment company within the meaning of the Investment Company Act of 1940, as amended. B-6 (xvi) Each of the Bain Capital Entities has the partnership power and authority to enter into the Selling Stockholder Agreements and to sell, transfer and deliver the Shares to be sold by it under the Purchase Agreement. The Selling Stockholder Agreements have been duly authorized, executed and delivered by or on behalf of each of the Bain Capital Entities and constitute the valid and binding obligations of each of the Bain Capital Entities, enforceable against the Bain Capital Entities in accordance with their terms. [(xvii) The Purchase Agreement and the Price Determination Agreement have been duly authorized, executed and delivered by or on behalf of each Selling Stockholder other than the Bain Capital Entities (collectively, the "Minority Stockholders").] [(xviii) The Custody Agreement and Power of Attorney constitutes the valid and binding obligation of each Minority Stockholder enforceable against each Minority Stockholder in accordance with its terms.] (xix) The execution, delivery and performance of the Selling Stockholder Agreements by or on behalf of the Bain Capital Entities do not and will not result in a violation of the partnership agreement or certificate of limited partnership, as applicable, of the Bain Capital Entities and, to our knowledge, do not and will not conflict with, or result in a breach of any of the terms and provisions of, or constitute a default under (A) any statute, rule or regulation relating to any of the Bain Capital Entities or their legal or regulatory status which in our experience is normally applicable to transactions of the type provided for in the Selling Stockholder Agreements, (B) any material judgment, order, writ, injunction or decree of any court or governmental agency or body, domestic or foreign, having jurisdiction over any of the Bain Capital Entities or (C) any material contract, agreement or other instrument listed on Schedule B hereto to which any of the Bain Capital Entities is a party or by which any of them are bound. (xx) The execution, delivery and performance of the Selling Stockholder Agreements by or on behalf of each Selling Stockholder will not contravene any provision of the General Corporation Law of the State of Delaware, the laws of the State of New York or the federal laws of the United States of America applicable to such Selling Stockholder, provided that the foregoing opinion is limited to such laws which, in our experience, are normally applicable to public offerings of securities of the type contemplated by the Purchase Agreement excluding laws that are applicable to any Selling Stockholder solely because of its specific status (including regulatory status), other than its status as a Selling Stockholder. (xxi) No consent, approval, authorization or order of or qualification by the State of Delaware (as it relates to the General Corporation Law of the State of Delaware), B-7 the State of New York or any federal governmental body or agency is required for the performance by any Selling Stockholder of its obligations under the Selling Stockholder Agreements, except such as have been obtained under the Securities Act or such as may be required by the securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriter, provided that the foregoing opinion is limited to such consents, approvals, authorizations, orders or qualification which, in our experience, are normally applicable to public offerings of securities of the type contemplated by the Purchase Agreements excluding consents, approvals, authorizations, orders or qualifications that are applicable to any Selling Stockholder solely because of its specific status (including regulatory status), other than its status as a Selling Stockholder. (xxii) Assuming that the Underwriter purchases the Shares to be delivered by or on behalf of the Selling Stockholders at the Closing Time in good faith and without notice of any security interests, claims, liens, equities, encumbrances and other adverse claims as such term is used in Section 8-302 of the Uniform Commercial Code as in effect in the State of New York, the delivery of certificates representing such Shares, duly endorsed to the Underwriter or in blank, will pass to the Underwriter valid title to such Shares, free and clear of all security interests, claims, liens, equities, encumbrances and other adverse claims. Our opinions are subject to the following further qualifications: (a) Our opinions regarding enforceability are subject to (x) the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent transfer or other similar laws, (y) the effect of general principles of equity (regardless of whether enforcement is considered in proceedings at law or in equity), and (z) limitations imposed by federal or state securities laws on principles of public policy to enforcement of rights to indemnification and contribution. (b) Our opinions expressed herein are limited to matters governed by the federal laws of the United States of America, the laws of the State of New York and the General Corporation Law of the State of Delaware. This letter is furnished to you pursuant to Sections 5(b) of the Purchase Agreement, is solely for your benefit, and is not to be used, circulated, quoted or otherwise relied upon by any other person or by you for any other purpose, without our prior written consent. Very truly yours, B-8 Schedule A - Domestic Subsidiaries ----------------------------------
Jurisdiction(s) in which Jurisdiction of Qualified as a Foreign Subsidiary Organization Corporation - --------------------------- --------------- -------------------------- Waters Technologies Delaware California, Colorado,Connecticut, Corporation Florida, Georgia, Iowa, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington, West Virginia, Wisconsin Waters Investments Limited Delaware None TA Instruments, Inc. Delaware [ ]
Schedule B - Material Contracts of the Bain Capital Entities ------------------------------------------------------------ Agreement of Limited Partnership of Bain Capital Fund IV, L.P. ("Fund IV"), dated April 12, 1993 Certificate of Limited Partnership for Fund IV, dated August 28, 1992 Investment and Advisory Agreement, dated April 16, 1993 between Fund IV and Bain Capital, Inc. Agreement of Limited Partnership of Bain Capital Fund IV-B, L.P. ("Fund IV-B"), dated April 12, 1993 Certificate of Limited Partnership for Fund IV-B, dated April 6, 1993 Investment and Advisory Agreement, dated April 16, 1993 between Fund IV-B and Bain Capital, Inc. Agreement of Limited Partnership of Bain Capital Partners IV, L.P. ("BCP-IV"), dated April 5, 1993 Certificate of Limited Partnership for BCP-IV, dated August 28, 1992 Certificate of Incorporation of Bain Capital Investors, Inc., dated April 5, 1993 Amended and Restated Partnership Agreement of BCIP Associates dated as of January 24, 1991 Amended and Restated Limited Partnership Agreement of BCIP Trust Associates dated as of January 24, 1991 __________, 1996 MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED Merrill Lynch World Headquarters North Tower World Financial Center New York, NY 10281-1209 Re: Waters Corporation ------------------ Ladies and Gentlemen: We have acted as counsel for Waters Corporation, a Delaware corporation (the "Company") and Waters Technologies Corporation, a Delaware corporation ("Technologies") in connection with (i) the Purchase Agreement (the "Purchase Agreement") dated __________, 1996, among the Company, Technologies, the selling stockholders named in Schedule A thereto (the "Selling Stockholders"), and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") and (ii) the related Price Determination Agreement dated __________, 1996 among the Company, Technologies, the Selling Stockholders and the Underwriter. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Purchase Agreement. Because the primary purpose of our professional engagement was not to establish factual matters and because of the wholly or partially non-legal character of many determinations involved in the preparation of (i) the Registration Statement on Form S-1 (Registration No. 333-____) (as amended, the "Registration Statement"), in each case as filed by the Company with the Securities and Exchange Commission (the "Commission"), and (ii) the final prospectus, dated ___________, 1996 (the "Prospectus") filed by the Company with the Commission on ____________, 1996, we are not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (except to the extent expressly set forth in paragraphs (vii) and (xiv) of our opinion letter to you of even date herewith) and make no representation that we have independently verified the accuracy, completeness or fairness of such statements (except as aforesaid). However, in our capacity as special counsel to the Company and the Selling Stockholders, we have participated in the preparation of the Registration Statement and the Prospectus and we met with and participated in telephone conferences with representatives of the Company, representatives of Bain Capital, Inc., representatives of Coopers & Lybrand L.L.P., the Company's independent auditors, your representatives and representatives of Fried, Frank, Harris, Shriver & Jacobson, your legal counsel, during which the contents of the Registration Statement and the Prospectus and related matters were discussed. In addition, we reviewed certain documents furnished to us by the Company and the Selling Stockholders. Based on our participation in the above-mentioned conferences, our review of the documents described above, our understanding of applicable law and the experience we have gained in our practice thereunder, we advise you that (i) the Registration Statement, at the time it became effective, and the Prospectus (in each case other than the financial statements and related schedules and financial data therein, as to which we express no opinion) comply as to form in all material respects with the requirements of the Securities Act of 1933, as amended, and the rules and regulations thereunder except that we express no opinion in this clause (i) with respect to the matters covered by the following clause (ii); (ii) although we do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (except for those referred to in paragraphs (vii) and (xiv) of our opinion letter to you of even date herewith), on the basis of our understanding of applicable law and experience we have gained in our practice thereunder, nothing has come to our attention that would cause us to believe that, as of its effective date, the Registration Statement (including the Rule 430A Information but excluding the financial statements and related schedules and financial data therein, as to which we express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of their dates, the Prospectus or any amendment or supplement thereto (other than the financial statements and financial data therein, as to which we express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or that, as of the Closing Time, either the Registration Statement or the Prospectus (in each case other than the financial statements and related schedules and financial data therein, as to which we express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (iii) we do not know of any amendment to the Registration Statement required to be filed or of any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus which are not filed or described as required. This letter is furnished to you pursuant to Section 5 (b) of the Purchase Agreement, is solely for your benefit, and is not to be used, circulated, quoted or otherwise relied upon by any other person or by you for any other purpose, without our prior written consent. Very truly yours, C-2 EX-5.1 3 OPINION OF KIRKLAND & ELLIS Exhibit 5.1 October 24, 1996 Waters Corporation 34 Maple Street Milford, MA 01757 Re: Shares of Common Stock, $0.01 par value --------------------------------------- Ladies and Gentlemen: We are acting as counsel to Waters Corporation, a Delaware corporation (the "Company"), in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), of a Registration Statement on Form S-1 (Registration No. 333-______ (the "Registration Statement") pertaining to the registration of a proposed offering of up to 2,031,904 shares of the Company's Common Stock, $0.01 par value per share ("Common Stock")) which are proposed to be offered by certain stockholders of the Company (the "Selling Stockholder Shares"). We have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary for the purposes of this opinion, including the following: (a) a form of Second Amended and Restated Certificate of Incorporation (the "Restated Charter"); (b) the Amended and Restated Bylaws of the Company; and (c) certain resolutions adopted by the Board of Directors of the Company. In addition, we have made such other and further investigations as we have deemed necessary to enable us to express the opinions hereinafter set forth. Based upon the foregoing and having regard to legal considerations that we deem relevant, and subject to the comments and qualifications set forth below, it is our opinion that the Common Stock has been duly authorized and the Selling Stockholder Shares have been duly and validly issued and are fully paid and nonassessable. For purposes of this opinion, we have with your permission made the following assumptions, in each case without independent verification: (1) the authenticity of all documents submitted to us as originals, (2) the conformity to the originals of all documents submitted to us as copies, (3) the authenticity of the originals of all documents submitted to us as copies, (4) the genuineness of the signatures of persons signing all documents in connection with which this opinion is rendered, (5) the authority of such persons signing all documents on behalf of the parties thereto, and (6) the due authorization, execution and delivery of all documents by the parties thereto. Waters Corporation October , 1996 Page 2 We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the section entitled "Legal Matters" in the prospectus included in the Registration Statement. In giving such consent, we do not thereby concede that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the Rules and Regulations promulgated thereunder. We do not find it necessary for purposes of this opinion to cover, and accordingly we do not purport to cover herein, the application of the securities or "Blue Sky" laws of the various states to the offering and sale of the Common Stock. This opinion shall be limited to the laws of the State of Delaware. This opinion is furnished to you in connection with the filing of the Registration Statement and is not to be used, circulated, quoted or otherwise relied upon for any other purpose. Very truly yours, KIRKLAND & ELLIS EX-11 4 WATERS COMPUTATION OF PER SHARE EARNINGS Exhibit 11 WATERS CORPORATION AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED -------------------- AUGUST 19, TO YEAR ENDED SEPTEMBER SEPTEMBER DECEMBER 31, 1994 DECEMBER 31, 1995 30, 1995 30, 1996 ----------------- ----------------- --------- --------- Historical Common stock outstanding, beginning of period.............. 21,482 21,482 21,482 28,796 Weighted average cheap stock.................. 3,540 3,136 3,540 -- Weighted average number of common stock equivalent shares...... -- 266 -- 5,189 Weighted average number of shares in connection with the Company's IPO and upon exercise of the Warrant............ -- 840 -- -- Weighted average shares issued upon exercise of stock options.......... -- -- -- 46 Less: Assumed purchase (1,170) (1,162) (1,170) (2,504) of treasury shares..... -------- ------- -------- ------- Weighted average number 23,852 24,582 23,852 31,527 of common shares....... ======== ======= ======== ======= (Loss) income from continuing operations.. $(80,191) $14,113 $12,097 $ 4,717 (Loss) from discontinued operations Extraordinary Item...... (7,213) -- -- (22,264) -------- ------- -------- ------- Net (loss) income..... (87,404) 2,001 12,097 (17,547) Less: accretion of and 6% dividend on preferred stock........ (330) (902) (676) (689) Net (loss) income available to common (87,734) $ 1,099 $(11,421) (18,236) stockholders......... ======== ======= ======== ======= Income (loss) income per common share: (Loss) income per common share from continuing operations........... $ (3.38) $ 0.54 $ 0.48 $ 0.13 (Loss) per common share from discontinued operations........... (0.30) -- -- -- Extraordinary (loss) per -- (0.49) -- (0.71) common share........... -------- ------- -------- ------- Net (loss) income per $ (3.68) $ 0.05 $ 0.48 $ (0.58) common share......... ======== ======= ======== =======
- -------- (1) In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 83 ("SAB No. 83") all common equivalent shares and other potentially dilutive instruments (including stock options and warrants) issued during the twelve month period prior to the initial filing date of the Company's initial public offering Registration Statement have been included in the calculation as if they were outstanding for all periods presented. The common equivalent shares for stock options and warrant were determined using the treasury stock method at the initial public offering price of $15.00 per share. (2) Fully diluted net (loss) income per share is the same as primary net (loss) income per share. EX-23.1 5 CONSENT OF COOPERS & LYBRAND L.L.P. EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report dated January 23, 1996, on our audits of the consolidated financial statements of Waters Corporation and Subsidiaries. We also consent to the reference of our firm under the caption "Experts." /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Boston, Massachusetts October 22, 1996 EX-23.2 6 CONSENT OF COOPERS & LYBRAND L.L.P. EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report which includes an explanatory paragraph addressing certain costs and expenses presented in the financial statements which represents allocations and management's estimates of the costs of services provided by Millipore Corporation, dated February 10, 1995, on our audits of the financial statements of Waters Chromatography Division of Millipore Corporation (the "Predecessor"). We also consent to the reference of our firm under the caption "Experts." /s/ Coopers & Lybrand, L.L.P. Coopers & Lybrand L.L.P. Boston, Massachusetts October 22, 1996 EX-23.3 7 CONSENT OF ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Exhibit 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this Waters Corporation Registration Statement. /s/ Arthur Andersen LLP Philadelphia, PA October 24, 1996 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 2,111 0 84,621 1,443 51,484 140,450 91,050 16,873 363,780 81,362 226,252 6,922 0 289 40,452 363,780 279,692 279,692 103,944 110,044 146,315 0 11,140 12,193 7,476 4,717 0 (22,264) 0 (17,547) $(.58) $(.58)
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