-----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, JyNDdcpQ8DcQEJWgLXhEosqHalrYZWaE60IaPZeRN/cIXm6h3t92Evr0lXUwiozj Z0GUbgswwA4RFN/K+wVN/Q== 0001125282-05-005303.txt : 20051014 0001125282-05-005303.hdr.sgml : 20051014 20051014160107 ACCESSION NUMBER: 0001125282-05-005303 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20050731 FILED AS OF DATE: 20051014 DATE AS OF CHANGE: 20051014 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALL CORP CENTRAL INDEX KEY: 0000075829 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 111541330 STATE OF INCORPORATION: NY FISCAL YEAR END: 0802 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04311 FILM NUMBER: 051139005 BUSINESS ADDRESS: STREET 1: 2200 NORTHERN BLVD CITY: EAST HILLS STATE: NY ZIP: 11548 BUSINESS PHONE: 5164845400 MAIL ADDRESS: STREET 1: 2200 NORTHERN BLVD CITY: EAST HILLS STATE: NY ZIP: 11548 10-K 1 b409199_10k.htm FORM 10-K Prepared and filed by St Ives Financial

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  
  For the fiscal year ended July 31, 2005  
  or  
     
          Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  
  For the transition period from           to            
     
  Commission File Number 1- 4311  

PALL CORPORATION
(Exact name of registrant as specified in its charter)

New York   11-1541330
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
2200 Northern Boulevard, East Hills, NY   11548
(Address of principal executive offices)   (Zip Code)

(516) 484-5400
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

  Title of each class   Name of each exchange on which registered  
  Common Stock, $.10 par value   New York Stock Exchange  
  Common Share Purchase Rights   New York Stock Exchange  

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes   No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Act). Yes   No

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes   No

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, computed by reference to the closing price of a share of common stock on January 31, 2005 (the last business day of the registrant’s most recently completed second fiscal quarter) was $3,272,219,919.

On October 4, 2005, there were 124,271,966 outstanding shares of the registrant’s common stock, $.10 par value.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s proxy statement for the 2005 annual meeting of shareholders, scheduled to be held on November 16, 2005 (hereinafter referred to as the “Proxy Statement”), are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

        Page No.
         
PART I        
         
Item 1.   Business.   3
         
Item 2.   Properties.   6
         
Item 3.   Legal Proceedings.   7
         
Item 4.   Submission of Matters to a Vote of Security Holders and Executive Officers of the Registrant.   9
         
PART II        
         
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.   10
         
Item 6.   Selected Financial Data.   11
         
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.   12
         
Item 7A.   Quantitative and Qualitative Disclosure About Market Risk.   26
         
Item 8.   Financial Statements and Supplementary Data.   27
         
Item 9.   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.   27
         
Item 9A.   Controls and Procedures.   28
         
Item 9B.   Other Information.   29
         
PART III        
         
Item 10.   Directors and Executive Officers of the Registrant.   30
         
Item 11.   Executive Compensation.   30
         
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.   30
         
Item 13.   Certain Relationships and Related Transactions.   30
         
Item 14.   Principal Accounting Fees and Services.   30
         
PART IV        
         
Item 15.   Exhibits and Financial Statement Schedules.   31
         
SIGNATURES    34
         
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   35
         
FINANCIAL STATEMENT SCHEDULE II –    
         
  70

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     PART I

ITEM 1. BUSINESS.

(a) General development of business.

Pall Corporation, a New York corporation incorporated in July 1946, and its subsidiaries (hereinafter collectively called the “Company” or referred to as “we” or “our” unless the context requires otherwise) is a leading supplier of fine filters, principally made by the Company using its proprietary filter media, and other fluid clarification and separations equipment for the removal of solid, liquid and gaseous contaminants from a wide variety of liquids and gases.

We serve customers in two principal markets: Life Sciences and Industrial. The two principal markets are further divided into five segments: Medical and BioPharmaceuticals (which comprise the Life Sciences business) and General Industrial, Aerospace and Microelectronics (which comprise the Industrial business).

Additional information about the Company is available on its website at www.pall.com. The Company’s periodic and current reports filed with the U.S. Securities and Exchange Commission (“SEC”) are also available free of charge on its website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

(b) Financial information about market segments.

For financial information of the Company by market segment, please see the Segment Information and Geographies note in the notes accompanying the consolidated financial statements of the Company and the sections under the captions “Review of Market Segments and Geographies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7 of this report).

(c) Narrative description of business.

Pall Corporation is a materials science and engineering company with the broadest-based filtration, separations and purification capabilities. Our proprietary products are used to discover, develop and produce pharmaceuticals, produce safe drinking water, protect hospital patients, remove white blood cells from blood, enhance the quality and efficiency of manufacturing processes, keep equipment running efficiently and protect the environment. Requirements for product quality, purity, environmental preservation, health and safety apply to a wide range of industries and across geographic borders. We have a 59-year history of commercializing successful products and continue to develop new materials and technologies for the Life Sciences and Industrial markets and their increasingly difficult fluid filtration, purification and separation challenges. We have an array of core materials and technologies that can be combined and manipulated in many ways to solve complex fluid separation challenges. These proprietary materials, coupled with our ability to engineer them into useful forms are the cornerstones of our capabilities. Our proprietary materials enable us to provide customers with products that are well matched to their needs, to develop new products and to enter new markets.

We actively pursue applications in which Pall products can make a substantial difference to the customer and especially target projects that will provide them real gains in performance and economics. The products sold are principally filters made with proprietary Pall filter media produced by chemical film casting, melt-blowing of polymer fibers, papermaking and metallurgical processes. Metal and plastic housings for our filters and a wide variety of appurtenant devices are also made. Competition is intense in all of our markets and includes many large and small companies in our global markets; however, no one company has a significant presence in all of our markets. Engineered systems represent a growing portion of our revenues. These systems set the stage for future annuity sales and are an important part of our growth strategy.

LIFE SCIENCES BUSINESS:

During the first quarter of fiscal year 2003, we reorganized the Life Sciences business. As a result, the hospital and medical OEM sub-segments, which were previously part of the BioPharmaceuticals segment, were combined with the Blood segment to create a new segment called Medical. In addition, as part of the restructuring plan announced in the first quarter of fiscal year 2005, the Biosciences division results, which were previously part of the BioPharmaceuticals segment, have been recorded within the Medical segment. Life Sciences segment information for prior periods has been restated for these changes.

Our Life Sciences technologies facilitate the process of drug discovery and development and production. Pall technologies are also used at the point of patient care. Our broad capability in the life sciences industry is a competitive strength and an important element of our strategy going forward.

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Sales in the medical and biopharmaceuticals markets are made through direct sales and through distribution. Backlog information is omitted for these markets, as we do not consider it meaningful to an understanding of these portions of the Company’s business.

We feel that safety, efficacy, ease of use, technical support, as well as price, are the principal competitive factors in this business, although economy of use is important. Our principal competitors in the Medical segment include Baxter, Asahi Medical, MacoPharma, Terumo and Fresenius, and our principal competitors in the BioPharmaceuticals segment include Millipore, Sartorius and CUNO (a 3M company) and Amersham Biosciences (part of GE Healthcare).

MEDICAL:

Pall Medical products improve the safety of blood transfusions and help control the spread of infections in hospitals. The Company’s products are also used in research laboratories in drug discovery, gene manipulation and proteomics applications. Products related to transfusion safety are the Company’s largest product family. Pall’s blood filters remove unwanted white cells and infectious prions from donor blood. Pall’s enhanced Bacterial Detection System tests platelets for the presence of bacteria prior to transfusion. Prion reduction and bacterial detection is a newer market opportunity for us. Hospital acquired infections continue to be a major problem for the world’s health care systems. Our water, breathing circuit, intravenous filters and other medical devices help protect patients from these costly infections.

BIOPHARMACEUTICALS:

The BioPharmaceuticals segment includes sales of separation systems and disposable filters primarily to pharmaceutical and biotechnology companies. We provide a broad range of advanced filtration solutions for each critical stage of drug development through drug production. Our filtration systems and validation services allow drug manufacturers the quickest and surest path through the regulatory process and on to the market.

We believe that our established record of product performance and innovation is a strong competitive advantage among biopharmaceutical customers because of the high costs and safety risks associated with drug development and production.

INDUSTRIAL BUSINESS:

We provide enabling and process enhancing technologies throughout the industrial marketplace. This includes the aerospace, microelectronics, municipal and industrial water, fuels, chemicals, energy, and food and beverage industries. We have the capability to provide customers with integrated solutions for all of their process fluids.

GENERAL INDUSTRIAL:

Included in this diverse segment are sales of filters, coalescers and separation systems for hydraulic, fuel and lubrication systems on mechanical equipment across many industries, as well as to producers of oil, gas, electricity, chemicals, food and beverages, municipal and industrial water and paper. Virtually all of the raw materials, process fluids and waste streams that course through industry are candidates for multiple stages of filtration, separations and purification.

We believe that technologies that purify water for use and reuse represent an important opportunity. Governments around the world are implementing stringent new regulations governing drinking water standards and we believe that our filters and systems provide a solution for these requirements. These standards apply to municipal water supplies throughout the U.S. and in a growing number of countries. Industry, which consumes enormous quantities of water, also increasingly needs to filter water before, during and after use both to conserve it and to ensure it meets discharge requirements. Opportunities to filter water exist in every one of our businesses.

Backlog at July 31, 2005 (the end of the Company’s 2005 fiscal year) was approximately $144,985,000 compared with $128,410,000 at July 31, 2004 (fiscal 2004 year end). Our sales to General Industrial customers are made through our personnel, distributors and manufacturers’ representatives. We believe that product performance and quality, and service to the customer, as well as price, are the principal competitive factors in this market. Our principal competitors in the General Industrial segment include CUNO (a 3M company), US Filter (a Siemens business), Sartorius and Parker Hannifin.

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AEROSPACE:

The Aerospace segment includes sales of filtration and fluid monitoring equipment to the aerospace industry for use on commercial and military aircraft, including hydraulic, lubrication, and fuel filters, coalescers to remove water from fuel, filters to remove viruses from aircraft cabin air and filter monitoring systems. Our products and systems are also used in ships and land-based military vehicles. Commercial and Military sales represented 54% and 46%, respectively, of total Aerospace sales in fiscal year 2005.

Our products are sold to customers in this segment through a combination of direct sales and through distribution. Backlog at July 31, 2005 was approximately $98,070,000 compared with $84,794,000 on July 31, 2004. Competition varies by product, and no single competitor competes with us across all sub-segments of Aerospace; however, our principal competitors include Donaldson, ESCO Technologies Inc. and CLARCOR.

We believe that performance and quality of product and service, as well as price, are determinative in most sales.

MICROELECTRONICS:

Included in this segment are sales of disposable filtration products to producers of semiconductors, computer terminals, fiber optics, disk drives, displays and photographic film. The drive to shrink the size of computer components requires increasingly finer levels of filtration and purification, sometimes down to the level of parts per quadrillion. From the raw materials of silicon and water to the gases and chemicals of chip manufacture, we have extensive engineered solutions for the needs of this demanding industry.

Our products are sold to customers in this segment through our own personnel, distributors and manufacturers’ representatives. Backlog at July 31, 2005 was approximately $16,579,000 compared with $15,976,000 at July 31, 2004. We believe that performance, quality of product and service, as well as price, are determinative in most sales. The principal competitors in the Microelectronics market include Entegris (formerly Mykrolis) and Mott.

The following comments relate to the five segments discussed above:

RAW MATERIALS:

Most raw materials used by the Company are available from multiple sources. A limited number of materials are proprietary products of major chemical companies. Management believes that the Company could find satisfactory substitutes for these materials should they become unavailable, as it has done several times in the past.

PATENTS:

The Company owns a broad range of patents covering its filter media, filter designs and other products, but it considers these to be mainly defensive, and relies on its proprietary manufacturing methods and engineering skills. However, it does act against infringers when management believes such action is economically justified.

The following comments relate to the Company’s business in general:

1) With few exceptions, research activities conducted by the Company are Company sponsored. Research expenditures totaled $56,183,000 in 2005, $57,279,000 in 2004 and $52,204,000 in 2003.
   
2) No one customer provided 10% or more of the Company’s consolidated sales in fiscal years 2005, 2004 or 2003.
   
3) The Company is in substantial compliance with federal, state and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. To date, compliance with environmental matters has not had a material effect upon the Company’s capital expenditures or competitive position. For a further description of environmental matters in this report, see Item 3, Legal Proceedings, and the Contingencies and Commitments note in the notes accompanying the consolidated financial statements.
   
4) At July 31, 2005, the Company employed approximately 10,400 persons.     
   
(d) Financial information about geographic areas.

For financial information of the Company by geographic area, please see the Segment Information and Geographies note in the notes accompanying the consolidated financial statements of the Company, and the sections under the captions “Review of Market Segments and Geographies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7 of this report).

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ITEM 2. PROPERTIES.

The following are the Company’s significant facilities (i.e., facilities with square footage in excess of 25,000 square feet):

Location     Type     Markets     Square Feet  
   
   
   
 
                     
OWNED:                    
                     
Western Hemisphere                    
Cortland, NY     Plant & office     Life Sciences & Industrial     338,000  
East Hills, NY     Office, plant & warehouse     Headquarters & all markets     320,000  
DeLand, FL     Plant     Industrial     279,000  
Fajardo, Puerto Rico     Plants, warehouse & laboratory     Life Sciences & Industrial     258,000  
Pt. Washington, NY     Office, laboratory & training center     Life Sciences & Industrial     234,000  
Ann Arbor, MI     Plant, office & warehouse     Life Sciences     180,000  
New Port Richey, FL     Plant & office     Industrial     179,000  
Timonium, MD     Plant & office     Industrial     160,000  
Covina, CA     Plant, office & laboratory     Life Sciences     134,000  
Ft. Myers, FL     Plant, office & warehouse     Industrial     111,000  
Pensacola, FL     Plant     Life Sciences     93,000  
Hauppauge, NY     Plant & office     Life Sciences     75,000  
Putnam, CT     Plant     Life Sciences & Industrial     63,000  
                     
Europe                    
Bad Kreuznach, Germany     Plant & office     Life Sciences & Industrial     390,000  
Portsmouth, U.K.     Plant, office, warehouse & laboratory     Life Sciences & Industrial     381,000  
Waldstetten, Germany     Plant & office     Industrial     249,000  
Crailsheim, Germany     Plant & office     Industrial     215,000  
Tipperary, Ireland     Plant & office     Industrial     178,000  
Redruth, U.K.     Plant, office & warehouse     Industrial     163,000  
Bazet, France     Plant & office     Industrial     132,000  
Ilfracombe, U.K.     Plant & office     Life Sciences & Industrial     125,000  
Newquay, U.K.     Plant & office     Life Sciences & Industrial     110,000  
Frankfurt, Germany     Office & warehouse     Life Sciences & Industrial     75,000  
Ascoli, Italy     Plant, office & warehouse     Life Sciences     71,000  
Saint-Germain, France     Office, warehouse & laboratory     Life Sciences & Industrial     60,000  
                     
Asia                    
Tsukuba, Japan     Plant, laboratory & warehouse     Life Sciences & Industrial     122,000  
                     
LEASED:                    
                     
Western Hemisphere                    
Cortland, NY     Warehouse     Industrial     108,000  
Timonium, MD     Plant     Industrial     71,000  
Covina, CA     Plant & warehouse     Life Sciences     66,000  
Tijuana, Mexico     Plant     Life Sciences     40,000  
San Diego, CA     Plant     Industrial     26,000  
Europe                    
Johannesburg, South Africa     Office & warehouse     Life Sciences & Industrial     96,000  
Milan & Ascoli, Italy     Office & warehouses     Life Sciences & Industrial     89,000  
Madrid, Spain     Office, laboratory & warehouse     Life Sciences & Industrial     61,000  
Hamburg & Rostock, Germany     Office & warehouse     Life Sciences & Industrial     52,000  
Vienna, Austria     Office & warehouse     Life Sciences & Industrial     44,000  
Cergy, France     Plant, office, warehouse & laboratory     Life Sciences     43,000  
Ternay, France     Plant, office & warehouse     Industrial     33,000  
Saint-Germain, France     Office     Life Sciences & Industrial     26,000  
Stroud, U.K.     Plant     Life Sciences     25,000  
                     
Asia                    
Beijing, China     Plant, office & warehouse     Life Sciences & Industrial     249,000  
Melbourne & Somersby, Australia     Office & warehouse     Life Sciences & Industrial     102,000  
Tokyo, Osaka, Nagoya, Japan     Offices     Life Sciences & Industrial     50,000  

In the opinion of management, these premises are suitable and adequate to meet the Company’s requirements.

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ITEM 3. LEGAL PROCEEDINGS.

The Company has environmental matters discussed below at the following three sites: Ann Arbor, Michigan; Pinellas Park, Florida and Glen Cove, New York.

Ann Arbor, Michigan:

In February 1988, an action was filed in the Circuit Court for Washtenaw County, Michigan (“Court”) by the State of Michigan (“State”) against Gelman Sciences Inc. (“Gelman”), a subsidiary acquired by Pall Corporation (the “Company” or “Pall”) in February 1997. The action sought to compel Gelman to investigate and remediate contamination near Gelman’s Ann Arbor facility and requested reimbursement of costs the State had expended in investigating the contamination, which the State alleged was caused by Gelman’s disposal of waste water from its manufacturing process. Pursuant to a consent judgment entered into by Gelman and the State in October 1992 (amended September 1996 and October 1999), which resolved that litigation, Gelman is remediating the contamination without admitting wrongdoing. In February 2000, the State Assistant Attorney General filed a Motion to Enforce Consent Judgment in the Court seeking approximately $4,900,000 in stipulated penalties for the alleged violations of the consent judgment and additional injunctive relief. Gelman disputed these assertions. Following an evidentiary hearing in July 2000, the Court took the matter of penalties “under advisement.” The Court issued a Remediation Enforcement Order (“the REO”) requiring Gelman to submit and implement a detailed plan that will reduce the contamination to acceptable levels within five years. Gelman’s plan has been submitted to, and approved by, both the Court and the State. Although Gelman has met monthly milestones established under the plan and although contaminant concentrations have been significantly reduced, the goal of reducing contaminant levels to acceptable levels within five years has not been met. The Court, however, concluded that Gelman was in compliance with the terms the REO in a subsequent order issued in December 2004 (see below) and has expressed its satisfaction with Gelman’s progress during recent hearings.

In February 2004, the Court instructed Gelman to submit its Final Feasibility Study describing how it intends to address an area of groundwater contamination not addressed by the previously approved plan. Gelman has submitted its Feasibility Study as instructed. The State also submitted its plan for remediating this area of contamination to the Court. On December 17, 2004, the Court issued its Order and Opinion Regarding Remediation and Contamination of the Unit E Aquifer (the “Unit E Order”). The Court adopted, with limited modifications, Gelman’s remediation plan for this area of contamination. The Court also noted that Gelman was in compliance with the Court’s previous REO. The State has not appealed the Unit E Order. Gelman is now in the process of implementing the requirements of the Order.

In correspondence dated June 5, 2001, the State asserted that additional stipulated penalties in the amount of $142,000 were owed for a separate alleged violation of the consent judgment. The Court found that a “substantial basis” for Gelman’s position existed and again took the State’s request “under advisement”, pending the results of certain groundwater monitoring data. Those data have been submitted to the Court, but no ruling has been issued. On August 9, 2001, the State made a written demand for reimbursement of $227,470 it has allegedly incurred for groundwater monitoring. Gelman considers this claim barred by the consent judgment.

On May 12, 2004, the City of Ann Arbor (the “City”) filed a lawsuit against Gelman in Washtenaw County Circuit Court. The City’s suit seeks damages, including the cost of replacing a municipal water supply well allegedly affected by the 1,4-dioxane groundwater contamination, as well as injunctive relief in the form of an order requiring Gelman to remediate the soil and groundwater beneath the City. The contaminant levels allegedly detected in the municipal well at issue, however, are well below applicable cleanup standards and Gelman will vigorously defend against the claim.

By Order dated July 19, 2005, the Court granted Gelman’s motion for partial summary disposition, in part, dismissing two of the City’s three common law claims. Gelman will continue to challenge the legal and factual basis of the City’s remaining statutory and common law claims. The trial, if one is necessary, is set for May 1, 2006.

On June 25, 2004, the Company was sued in the United States District Court for the Eastern District of Michigan by a private plaintiff in connection with the groundwater contamination. The complaint seeks both money damages and injunctive relief requiring remediation of the contamination. The plaintiff also seeks to represent a larger class of property owners and residents who plaintiff claims are affected by the groundwater contamination. On August 25, 2004, the Company filed a motion for summary judgment seeking to dismiss the plaintiff’s claims. In response, plaintiff’s counsel sought and was granted permission to amend the complaint. An amended complaint was filed on November 17, 2004, which added seven plaintiffs. The Company does not believe that there is substantive merit to the named plaintiffs’ claims or a basis for class certification.

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On December 27, 2004, the Company filed a second motion for summary judgment addressing the new plaintiffs’ claims. In response, plaintiffs sought, and were granted, leave to file a second amended complaint adding a federal statutory claim. Plaintiffs were also granted leave to conduct limited discovery. Discovery is nearing completion and the Company is to re-file its dispositive motion by October 17, 2005. No trial date has been set. The Company will continue to vigorously defend the lawsuit.

On August 10, 2005, the City filed a lawsuit against Gelman under the Federal Superfund Statute ("CERCLA") for recovery of the City’s alleged response costs, including well replacement costs. Gelman filed its responsive pleadings on September 15, 2005 and will vigorously defend the lawsuit.

Pinellas Park, Florida:

In 1995, as part of a facility closure, an environmental site assessment was conducted to evaluate any soil and groundwater impacts from chemicals that may have been used at the Company’s Pinellas Park facility during the previous 24-year period of manufacturing and testing operations conducted by the Company at the facility. MIBK (methyl isobutyl ketone) concentrations in groundwater were found to be higher than regulatory levels. Soil excavation was conducted in 1998 and subsequent groundwater sampling showed MIBK concentrations below the regulatory level.

In October 2000, environmental consultants for a prospective buyer of the property found groundwater contamination in excess of regulatory levels outside the building, but on the Company’s property. The contamination in the groundwater consisted of chlorinated solvents (perchloroethylene, trichloroethylene) and their breakdown products (cis-1,2-dichloroethene, trans-1,2-dichloroethene, vinyl chloride) in excess of regulatory levels. In October 2001, a Site Assessment Report (SAR) was submitted to the Florida Department of Environmental Protection (FDEP), which showed details of contamination locations and concentrations.

In July 2002, a Supplemental Contamination Assessment Plan (SCAP) and an Interim Remedial Action Plan (IRAP) were prepared by the Company’s consultants/contractors and submitted to FDEP. A revised IRAP was submitted by the Company in December 2003, and it was accepted by the FDEP in January 2004. A Remedial Action Plan (RAP) was submitted in June 2004. The RAP received approval and field activities have commenced.

Glen Cove, New York:

A March 1994 report indicated groundwater contamination consisting of chlorinated solvents at a neighboring site to the Company’s Glen Cove facility, and later reports found both shallow and intermediate zone contamination. In 1999, the Company entered into an Order on Consent with the New York State Department of Environmental Conservation (NYSDEC), and completed a Phase II Remedial Investigation at the Glen Cove facility.

The NYSDEC has finalized the Record of Decision (ROD) for the shallow and intermediate groundwater zone termed OU-1, and the Company has signed an Order on Consent for OU-1 effective July 5, 2004. This Order requires the Company to prepare a Remedial Design/Remedial Action Work Plan to address groundwater conditions.

The ROD for the deep groundwater zone (OU-2) has been deferred by the NYSDEC until additional data is available to delineate contamination and select an appropriate remedy. The NYSDEC requested the Company and a neighboring potentially responsible party (“PRP”) to enter into a joint Order on Consent for the remedial investigation. The PRP appears unwilling to enter into an Order and the Company has been informed by the NYSDEC that it will undertake the OU-2 investigation at the PRP’s property. The Company has not yet entered into an Order for the OU-2 investigation at its facility.

In addition to the aforementioned environmental matters, on December 3, 2004, a third-party action was commenced against the Company in the United States District Court for the Eastern District of New York in connection with ground water contamination. Plaintiff Anwar Chitayat (“Chitayat”) seeks recovery against defendants Vanderbilt Associates and Walter Gross for environmental costs allegedly incurred, and to be incurred, in connection with the disposal of hazardous substances from property located in Hauppauge, New York (the Site). The Site is a property located in the same industrial park as a Company facility. Walter Gross claims that the Company is responsible for releasing hazardous substances into the soil and groundwater at its property, which then migrated to the Site. Walter Gross seeks indemnification and contribution under Section 113 of CERCLA from third-party defendants in the event he is found liable to Chitayat. The plaintiff has moved to amend his complaint to add a claim for contribution under Section 113 of CERCLA against the Company, and the Company is opposing this proposed amendment.

     *     *     *

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The Company’s balance sheet at July 31, 2005 contains environmental liabilities of $24,535,000, which relate to the aforementioned items. In the opinion of management, the Company is in substantial compliance with applicable environmental laws and its accruals for environmental remediation are adequate at this time.

Reference is also made to the Contingencies and Commitments note in the notes accompanying the consolidated financial statements in this report.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of the Company’s shareholders during the fourth quarter of its fiscal year 2005.

EXECUTIVE OFFICERS OF THE REGISTRANT

Name     Age*     Current Positions Held     First Appointed an
Executive Officer		  
   
   
   
 
                     
Eric Krasnoff**     53     Chairman and Chief Executive Officer     1986  
Marcus Wilson**     50     President and Chief Financial Officer     1998  
Donald B. Stevens     60     Chief Operating Officer     1994  
Neil MacDonald     55     Group Vice President     2000  
Roberto Perez     56     Group Vice President     2003  
Steven Chisolm     47     Senior Vice President     1998  
James Western     54     Senior Vice President     2004  
Lisa McDermott     40     Vice President of Finance and Chief Accounting Officer     2004  

   * Age as of October 14, 2005.

** Messrs. Krasnoff and Wilson are directors of the Company and members of the Board’s Executive Committee.

None of the persons listed above is related.

For more than the past five years, the principal occupation of people listed above has been their employ by the registrant.

None of the above persons has been involved in those legal proceedings required to be disclosed by Item 401(f) of Regulation S-K during the past five years.

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     PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company’s common stock is listed on the New York Stock Exchange under the symbol PLL. The table below sets forth quarterly data relating to the Company’s common stock prices and cash dividends declared per share for the past two fiscal years.

  2005   2004   Cash Dividends
Declared Per Share		      
 
 
 
     
Price per share High   Low   High   Low   2005   2004      
 
 
 
 
 
 
     
Quarter: First
 $25.89   $22.07   $25.95   $21.55   $0.09   $0.09      
Second
 29.80   25.87   28.04   23.56   0.10   0.09      
Third
 27.89   25.68   27.50   22.31   0.10   0.09      
Fourth
 31.52   26.19   26.22   22.00   0.10   0.09      

As of September 28, 2005 there were approximately 4,324 holders of record of the Company’s common stock.

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” of the Company’s common stock.

    (In thousands, except per share data)  
   
 
Period   Total Number
of Shares
Purchased		     Average Price
Paid Per Share		     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)		     Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1) 		 
 
   
   
   
 
May 1, 2005 to May 31, 2005
     —       —       —     $ 275,002  
June 1, 2005 to June 30, 2005
     —       —       —     $ 275,002  
July 1, 2005 to July 31, 2005
     461     $ 30.91       461     $ 260,754  
   
   
   
         
Total     461     $ 30.91       461          
   
   
   
         
   
(1) On October 17, 2003, the Company’s Board of Directors (“the Board”) authorized and announced the expenditure of up to $200,000 to repurchase shares of the Company’s common stock. On October 14, 2004, the Board authorized the additional expenditure of up to another $200,000 for the repurchase of the Company’s common stock. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on this authorization. During the fourth quarter of fiscal year 2005, we purchased 461 shares in open-market transactions at an aggregate cost of $14,248 with an average price per share of $30.91. Total repurchases in fiscal year 2005 were 2,435 shares at an aggregate cost of $64,246 with an average price per share of $26.38. Total repurchases in fiscal year 2004 were 3,099 shares at an aggregate cost of $75,000 with an average price per share of $24.20. Therefore, $260,754 remains to be expended under the current stock repurchase program. Repurchased shares are held in treasury for use in connection with the Company’s stock plans and for general corporate purposes.
     
    During the fourth quarter of fiscal year 2005, there were no previously issued shares tendered in partial payment of employee stock option exercises. In fiscal year 2005, 13 shares were traded in by employees in payment of stock option exercises at an average price of $27.19 per share and an aggregate cost of $346.

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ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth selected financial data for the last five fiscal years. This selected financial data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-K.

On April 24, 2002, the Company acquired the Filtration and Separations Group (“FSG”). The acquisition was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”). The operating results of FSG are reported in the Company’s results of operations from April 28, 2002.

(In millions, except per share data)   2005   2004   2003   2002   2001  
 
 
 
 
 
 
RESULTS FOR THE YEAR:                                
Net sales   $ 1,902.3   $ 1,770.7   $ 1,613.6   $ 1,290.8   $ 1,235.4  
Cost of sales     978.9     899.1     810.0     654.9     591.2  
Selling, general and administrative expenses     621.4     583.5     536.2     440.0     404.0  
Research and development     56.2     57.3     52.2     54.8     56.1  
Restructuring and other charges, net     38.8     12.5     47.5     26.8     17.2  
Interest expense, net     25.9     20.5     24.5     14.3     16.6  
   
 
 
 
 
 
Earnings before income taxes     181.1 (a)   197.8     143.2     100.0 (b)   150.3  
Provision for income taxes     40.3     46.2     40.0     26.8     32.3  
   
 
 
 
 
 
Net earnings   $ 140.8   $ 151.6   $ 103.2   $ 73.2   $ 118.0  
   
 
 
 
 
 
Earnings per share:                                
Basic
     1.13     1.21     0.84     0.60     0.96  
Diluted
     1.12     1.20     0.83     0.59     0.95  
Dividends declared per share     0.39     0.36     0.36     0.52     0.68  
Capital expenditures     86.2     61.3     62.2     69.9     77.8  
Depreciation and amortization     90.9     88.9     83.9     74.0     71.5  
                                 
YEAR-END POSITION:                                
Working capital   $ 703.3   $ 629.3   $ 516.9   $ 477.8   $ 465.1  
Property, plant and equipment, net     608.8     600.4     600.2     605.1     503.0  
Total assets     2,265.3     2,182.7     2,016.7     2,010.4     1,548.5  
Long-term debt, net of current portion     510.2     488.7     489.9     619.7     359.1  
Total liabilities     1,125.3     1,128.3     1,082.2     1,190.7     778.5  
Stockholders’ equity     1,140.0     1,054.4     934.5     819.7     770.0  
   
(a) Includes Restructuring and other charges, net, of $39.6 (including $.8 related to a one-time purchase accounting adjustment to step up the value of inventory acquired from Biosepra Process Division (“Biosepra”) from Ciphergen Biosystems, Inc., by $2.4, in accordance with SFAS No. 141, in the opening balance sheet. This step up increased cost of sales by $.8 in fiscal year 2005 concurrent with the sale of a portion of the underlying inventory. The step up amount is considered non-recurring in nature because, although the Company acquired the manufacturing operations of Biosepra, this adjustment was required by SFAS No. 141 as an elimination of the manufacturing profit in inventory acquired from Biosepra and subsequently sold in the period).
(b) Includes Restructuring and other charges, net, of $32.8 (including $6.0 related to a one-time purchase accounting adjustment to step up the value of inventory acquired from FSG, by $6.0, in accordance with SFAS No. 141, in the opening balance sheet. This step up increased cost of sales by $6.0 in fiscal year 2002 concurrent with the sale of the underlying inventory. The step up amount is considered non-recurring in nature because, although the Company acquired the manufacturing operations of FSG, this adjustment was required by SFAS No. 141 as an elimination of the manufacturing profit in inventory acquired from FSG and subsequently sold in the period).

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements and Risk Factors

You should read the following discussion together with the consolidated financial statements and notes thereto and other financial information in this Form 10-K report. The discussions under the subheadings “Review of Market Segments and Geographies” below are in local currency unless indicated otherwise. Management considers local currency growth an important measure because by excluding the volatility of exchange rates, underlying volume growth is clearer. As used below, “½%” indicates that we have rounded the relevant data up or down to the nearest one-half percentage point. Dollar amounts discussed below are in thousands, unless otherwise indicated, except per share dollar amounts. In addition, per share dollar amounts are discussed on a diluted basis.

The matters discussed in this Annual Report on Form 10-K contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on current Company management expectations and are subject to risks and uncertainties which could cause actual results to differ materially. The Company is subject to risks and uncertainties including, but not limited to: fluctuations in foreign currency exchange rates; regulatory approval and market acceptance of new technologies; changes in product mix and product pricing and in interest rates and cost of raw materials; the Company’s success in enforcing its patents and protecting its proprietary products and manufacturing techniques and its ability to achieve the savings anticipated from its cost reduction initiatives; global and regional economic conditions and legislative, regulatory and political developments; and domestic and international competition in the Company’s global markets.

Business Reorganization

During fiscal year 2005, the Company undertook to reorganize its business structure into three underlying vertically integrated business units: Life Sciences, comprising Medical and BioPharmaceuticals; Aeropower, comprising Aerospace and the Machinery & Equipment portion of the current General Industrial segment; and Process Technologies, comprising General Industrial’s Food & Beverage, Fuels & Chemicals, Power Generation, Municipal Water divisions and Microelectronics. This reorganization is continuing and management has decided to further integrate the Industrial businesses (Aeropower and Process Technologies) to form one vertically integrated Industrial business unit. Thus, in the future the Company’s new structure will consist of two vertically integrated business units: Life Sciences and Industrial. Each business unit will have integrated support functions and responsibility for global manufacturing, sales and marketing, research and development, and finance functions to enable the Company to better meet its customers’ needs and in order to achieve greater efficiencies and profit growth. This revised organizational structure is in contrast to the former matrix organizational structure where, within each geography, these functions supported the market-based part of the matrix on a shared basis (as opposed to being directly vertically integrated into these business units).

It is expected that once the reorganization is complete, senior management of the Company, including the Company’s chief executive officer, will manage the Company and make key decisions about the allocation of Company resources based on the two business units. The Company’s sales subsidiaries will continue to sell Life Sciences and Industrial products. As such, overhead costs of these subsidiaries have been, and will continue to be, shared by the businesses.

Since the Company is in the process of changing its management approach, organizational structure, operating performance assessment and internal business unit financial reporting, a change to the manner in which the Company presents segment information in its financial statements may result. The accounting and financial reporting systems at each of the Company’s entities, as well as at the Corporate office, are being assessed for conversion to support the strategic reorganization of the business and the requirements of management in the new structure. Additionally, certain of the internal segment financial reporting accounting principles utilized in the measurement and evaluation of the profitability of the Company’s business units (such as the allocation of shared overhead costs) are also being reassessed for consistency with the underlying reorganized structure of the business.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Although these estimates are based on management’s knowledge of current events and actions we may undertake in the future, actual results may differ from estimates. The following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results, and that require judgment. See also the notes accompanying the consolidated financial statements, which contain additional information regarding our accounting policies.

Purchase Accounting and Goodwill

Determining the fair value of certain assets and liabilities acquired in a business combination in accordance with SFAS No. 141 is judgmental in nature and often involves the use of significant estimates and assumptions. There are various methods used to estimate the value of tangible and intangible assets acquired, such as discounted cash flow and market multiple approaches. Some of the more significant estimates and assumptions inherent in the two approaches include: projected future cash flows (including timing); discount rate reflecting the risk inherent in the future cash flows; perpetual growth rate; determination of appropriate market comparables; and the determination of whether a premium or a discount should be applied to comparables. There are also judgments made to determine the expected useful lives assigned to each class of assets and liabilities acquired.

Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. The Company performs goodwill impairment tests on an annual basis. In response to changes in industry and market conditions, the Company could be required to strategically realign its resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill. Based on impairment tests performed, there was no impairment of goodwill in fiscal years 2005, 2004 and 2003.

Revenue Recognition

Revenue is recognized when title and risk of loss have transferred to the customer and when contractual terms have been fulfilled. Long-term contracts are accounted for under the percentage of completion method based upon the ratio of costs incurred to date compared with estimated total costs to complete them. The cumulative impact of revisions to total estimated costs is reflected in the period of the change, including anticipated losses. Such revisions could result in a material adjustment in the period of the change.

Allowance for Doubtful Accounts

We evaluate our ability to collect outstanding receivables and provide allowances when collection becomes doubtful. In performing this evaluation, significant estimates are involved, including an analysis of specific risks on a customer-by-customer basis. Based upon this information, management reserves an amount believed to be uncollectible. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.

Inventories

Inventories are valued at the lower of cost (principally on the first-in, first-out method) or market. The Company records adjustments to the carrying value of inventory based upon assumptions about historic usage, future demand and market conditions. These adjustments are estimates which could vary significantly, either favorably or unfavorably, from actual requirements if future conditions, customer inventory levels or competitive conditions differ from our expectations.

Recoverability of Available-for-Sale Investments

Other than temporary losses relating to available-for-sale investments are recognized in earnings when management determines that the recoverability of the cost of the investment is unlikely. Such losses could result in a material adjustment in the period of the change. Management considers numerous factors, on a case-by-case basis, in evaluating whether the decline in market value of an available-for-sale security below cost is other than temporary. Such factors include, but are not limited to, (i) the length of time and the extent to which the market value has been less than cost; (ii) the financial condition and the near-term prospects of the issuer of the investment; and (iii) whether the Company’s intent to retain the investment for the period of time is sufficient to allow for any anticipated recovery in market value.

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Pension Plans

The Company sponsors pension plans in various forms covering substantially all employees who meet eligibility requirements. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense and liability related to those plans for which the benefit is actuarially determined (i.e., defined benefit plans). These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by the Company, within certain guidelines. In addition, the Company’s actuarial consultants also use subjective factors, such as withdrawal and mortality rates, to calculate the liabilities and expense. The actuarial assumptions used by the Company are long-term assumptions and may differ materially from actual experience in the short-term due to changing market and economic conditions and changing participant demographics. These differences may have a significant effect on the amount of pension expense recorded by the Company.

Pension expense associated with our defined benefit plans was $29,890 in fiscal year 2005, which was based on a weighted average discount rate of 5.68% (calculated using the projected benefit obligation) and a weighted average expected long-term rate of return on plan assets of 6.55% (calculated using the fair value of plan assets).

The expected rates of return on the various defined benefit pension plans’ assets are based on the asset allocation of each plan and the long-term projected return of those assets. If the expected long-term rate of return on plan assets was reduced by 50 basis points, projected pension expense in fiscal year 2005 would have increased approximately $1,200. The discount rates used for defined benefit plans are set by benchmarking against investment grade corporate bonds in each country (e.g., in the U.S., Moody’s AA or better). If the weighted average discount rate was reduced by 50 basis points, pension expense in fiscal year 2005 would have increased by approximately $3,500.

Accrued Expenses and Contingencies

Management estimates certain material expenses in an effort to record those expenses in the period incurred. The accrual requiring the most judgmental estimation relates to environmental proceedings. Environmental accruals are recorded based upon historical costs incurred and estimates for future costs of remediation and on-going legal expenses which have a high degree of uncertainty. When no estimate in a given range is deemed to be better than any other, the low end of the range is accrued.

Self-insured workers’ compensation insurance accruals are recorded based on insurance claims processed including applied loss development factors as well as historical claims experience for claims incurred but not yet reported. Employee medical insurance accruals are recorded based on medical claims processed as well as historical medical claims experience for claims incurred but not yet reported. Differences between estimates and assumptions and actual results could result in an accrual requirement materially different from the calculated accrual.

Income Taxes

Significant judgment is required in determining our worldwide income tax expense provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenue and expense that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid double taxation. No assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net earnings in the period in which such a determination is made.

We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, there is no assurance that the valuation allowance would not need to be increased to cover additional deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a material adverse impact on our income tax provision and net earnings in the period in which such determination is made.

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On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated, as defined in the Act. As of July 31, 2005, we have not provided deferred taxes on $1,036,983 of undistributed foreign subsidiaries’ earnings since substantially all such earnings were expected to be permanently invested in foreign operations. The range of reasonably possible amounts, based upon law, that are being considered for repatriation due to the aforementioned provision is between zero and $500,000. The related potential range of income tax is between zero and $26,250. The extent to which we ultimately take advantage of this provision depends on a number of factors, including the manner in which funds will be utilized and the ability to obtain financing abroad.

Results of Operations 2005 Compared with 2004

Review of Consolidated Results

Sales for the fiscal year 2005 increased 7½% to $1.9 billion from $1.77 billion in fiscal year 2004. Exchange rates increased reported sales in the year by $58,625, primarily due to the strengthening of the Euro and to a lesser extent the British Pound and Japanese Yen. In local currency (i.e., had exchange rates not changed year over year), sales increased 4%. Overall, pricing reduced sales by 1% in the year and as such, the overall volume increase was 5%. Sales in our BioPharmaceuticals segment, which has benefited from strong demand in the biotechnology sector, grew 12% in local currency in the year. General Industrial sales were up 7½%, fueled by double-digit growth in our Municipal Water and Fuels & Chemicals submarkets, while Microelectronics sales increased 4%. Sales in our Aerospace segment were down 3½% due to the timing of large projects. Sales in our Medical segment were down 2½% reflecting a weakness in our North American blood filtration business. By geography, sales in the Western Hemisphere grew 3%, driven by strong growth in BioPharmaceuticals and General Industrial. These gains were partly offset by shortfalls in Medical and Aerospace. Sales in Asia increased 13½%, with all segments contributing to this gain, with the exception of Aerospace. Growth in General Industrial sales in Asia was particularly strong at 24%. In Europe, sales were flat as growth in our Life Sciences business was offset by shortfalls in Microelectronics and General Industrial (Municipal Water, Machinery & Equipment and Power Generation). We expect overall sales in local currency to grow in the mid single-digit range in fiscal year 2006. For a detailed discussion of sales, refer to “Review of Market Segments and Geographies.”

Cost of sales in the year, as a percentage of sales, was 51.5% as compared to 50.8% in fiscal year 2004, reflecting the impact of increased systems business (i.e., which have lower gross margins) as well as pricing reductions in our Medical business, partly offset by savings generated from our cost reduction initiatives. We expect cost of sales, as a percentage of sales, to improve slightly in fiscal year 2006.

Selling, general and administrative expenses, as a percentage of sales, improved to 32.7% in fiscal year 2005 as compared to 33% last year. In fiscal year 2005, savings realized from our cost reduction initiatives (see discussion below) and reduced bonus levels were partly offset by costs related to Sarbanes Oxley compliance and the ongoing vertical integration of our businesses. Foreign currency translation is estimated to have increased selling, general and administrative expenses by approximately $20,200 in fiscal year 2005. Excluding the impact of foreign exchange, selling, general and administrative expenses, as a percentage of sales improved 40 basis points as compared with fiscal year 2004.

We continue to move forward with our cost reduction initiatives (“CoRe”). At the beginning of fiscal year 2005, we expected to achieve $20,000 in savings for the full year related to our Indirect Expenditure cost reduction initiatives and other initiatives that focus on our cost of manufacturing. The majority of these savings were to be generated in the second half of fiscal year 2005. These programs generated about $5,000 in savings in the first half of fiscal year 2005; however, in the third and fourth quarters we saw a lower rate of savings than originally expected which, coupled with price increases for steel, plastics, energy costs and freight, reduced our expected savings. We estimate that savings generated, net of these cost increases, approximated $14,000 for the full fiscal year 2005. We are expecting continued improvement in selling, general and administrative expenses, as a percentage of sales, in fiscal year 2006.

Research and development expenses decreased $1,096 in dollars and to 3.0% of sales from 3.2% in fiscal year 2004. Fiscal year 2005 reflects spending on biotechnology products, such as chromatography, prion filters and industrial material projects. We expect research and development expenses in dollars to increase moderately in fiscal year 2006.

In fiscal year 2005, we recorded restructuring and other charges, net, of $38,763, primarily related to our CoRe initiatives including our plans for a structure comprised of vertically integrated business units discussed above. In addition, restructuring and other charges, net, include the write-down of an investment in Panacos Pharmaceuticals, Inc., formerly known as V.I. Technologies, Inc. (“VITEX”), that was deemed other-than-temporarily impaired and an increase to our environmental reserves. Furthermore, restructuring and other charges, net included a charge of $11,953 related to the early extinguishment of our $100,000 private placement 7.83% unsecured senior notes. The charge represents the payment to the note holders under the make-whole provision of the notes reduced by our carrying value of the notes.

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In fiscal year 2004, we recorded restructuring and other charges, net, of $12,477. The restructuring and other charges, net, reflect severance and other costs incurred as a result of the streamlining of our manufacturing operations in the United Kingdom (“U.K.”), Japan and Germany and reorganizing our Medical and BioSciences management structure, as well as the sale of certain manufacturing plants in Germany. Additionally, restructuring and other charges, net, reflects an increase in our environmental liabilities of $20,837 principally as a result of a change in the estimated duration and costs of the remediation effort at the Ann Arbor, Michigan facility of the Company’s subsidiary Gelman Sciences, partly offset by a gain on the sale of our investment in Oiltools International and non-recurring income related to a decrease of pension liabilities in Germany. The adjustment to pension liabilities was due to an over accrual of pension expense that occurred during the preceding five-year period, the effect of which was not significant in any period.

The details of the charges for the years ended July 31, 2005, July 31, 2004 and August 2, 2003 can be found in the Restructuring and Other Charges note accompanying the consolidated financial statements.

The following table summarizes the activity related to restructuring liabilities that were recorded in fiscal years 2005, 2004 and 2003:

    Severance   Lease
Termination
Liabilities &
Other		   Total    
   
 
 
   
2005                      
Original Charge   $ 17,496   $ 2,928   $ 20,424    
Utilized     (8,404 )   (2,739 )   (11,143 )  
Other changes (a)     (86 )   4     (82 )  
   
 
 
   
Balance at July 31, 2005   $ 9,006   $ 193   $ 9,199    
   
 
 
   
2004                      
Original Charge   $ 4,117   $ 538   $ 4,655    
Utilized     (2,765 )   (538 )   (3,303 )  
   
 
 
   
Balance at July 31, 2004     1,352     —     1,352    
Utilized     (1,243 )   —     (1,243 )  
Reversal of excess reserves (b)     (22 )   —     (22 )  
Other changes (a)     (87 )   —     (87 )  
   
 
 
   
Balance at July 31, 2005   $ —   $ —   $ —    
   
 
 
   
2003                    
Original Charge (c)   $ 13,868   $ 8,897   $ 22,765    
Utilized     (7,211 )   (6,367 )   (13,578 )  
   
 
 
   
Balance at Aug. 2, 2003     6,657     2,530     9,187    
Utilized     (5,167 )   (1,770 )   (6,937 )  
Other changes (a)     (428 )   (510 )   (938 )  
   
 
 
   
Balance at July 31, 2004     1,062     250     1,312    
Utilized     (529 )   (73 )   (602 )  
Reversal of excess reserves (b)     (120 )   —     (120 )  
Other changes (a)     (413 )   (177 )   (590 )  
   
 
 
   
Balance at July 31, 2005   $ —   $ —   $ —    
   
 
 
   
a) Other changes reflect translation impact. In addition, fiscal year 2003 includes the reversal of excess restructuring accruals of $1,250 related to the FSG acquisition that were originally recorded as adjustments to goodwill in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination.

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b) Reflects the reversal in fiscal year 2005 of excess restructuring reserves recorded in the consolidated statements of earnings in fiscal years 2003 and 2004.
   
c) Includes severance and other exit costs of $7,453 and $6,578, respectively, related to FSG employees and facilities that were recorded as adjustments to goodwill in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination.

Net interest expense in fiscal year 2005 increased to $25,950 from $20,501 in fiscal year 2004. The increase in net interest expense reflects the impact of higher interest rates on our variable rate debt and the termination of fixed to variable rate interest rate swaps. In addition, interest expense was affected by higher debt levels earlier this fiscal year that were partly related to the acquisition of Biosepra (refer to the Liquidity and Capital Resources section of this Management’s Discussion and Analysis for a discussion of net and gross debt). We expect net interest expense in fiscal year 2006 to increase approximately $2,000-$3,000 compared with fiscal year 2005.

The underlying tax rate (i.e., the tax rate on earnings before income taxes, excluding restructuring and other charges) was 24% in fiscal year 2005, unchanged from fiscal year 2004. We expect our underlying tax rate to remain at 24% in fiscal year 2006.

Net earnings in fiscal year 2005 were $140,816, or $1.12 per share, compared with net earnings of $151,573, or $1.20 per share in fiscal year 2004. In summary, net earnings reflect organic sales growth and an improvement in selling, general and administrative expenses (as a percentage of sales) offset by the impact of lower gross margins as well as increased net interest expense and restructuring and other charges, net. We estimate that foreign currency translation added approximately 4 cents to earnings per share in fiscal year 2005. We expect earnings per share in fiscal year 2006 to be in the range of $1.31 – $1.46 per share. This range includes the impact of stock compensation and the adoption of SFAS No. 123R, “Share-Based Payment”, which we estimate will cost approximately 8 cents in earnings per share. In light of our ongoing cost reduction initiatives, we may incur severance and other restructuring costs in fiscal year 2006; however, because these costs are not estimable at this time, this range does not contemplate such charges.

Review of Market Segments and Geographies

Market Segments:

The table below presents sales for the fiscal years ended July 31, 2005 and July 31, 2004 by market segment, including the effect of exchange rates for comparative purposes. In the first quarter of fiscal year 2005, we implemented the first phase of our vertical integration plan by integrating our Medical and BioSciences divisions. Accordingly, our BioSciences business, which was formerly reported under our BioPharmaceutical segment, was combined with our Medical segment. Segment information for prior periods has been restated to conform to the current presentation.

    2005   2004   %
Change		   Exchange
Rate
Difference		   % Change in
Local
Currency		    
   
 
 
 
 
   
Medical   $ 443,256   $ 444,015     —     $ 10,107     (2 ½ )  
BioPharmaceuticals     321,480     277,176     16       11,002     12      
   
 
       
         
Total Life Sciences     764,736     721,191     6       21,109     3      
   
 
         
           
General Industrial     742,994     666,771     11 ½     27,897     7 ½    
Aerospace     175,095     178,178     (1 ½ )   3,387     (3 ½ )  
Microelectronics     219,459     204,607     7 ½     6,232     4      
   
 
       
         
Total Industrial     1,137,548     1,049,556     8 ½     37,516     5      
   
 
       
         
Total   $ 1,902,284   $ 1,770,747     7 ½   $ 58,625     4      
   
 
       
         

Life Sciences sales in fiscal year 2005 increased 3% compared to fiscal year 2004. Life Sciences represented approximately 40% of our total sales in fiscal year 2005 compared with 41% in fiscal year 2004.

Within Life Sciences, Medical segment sales in fiscal year 2005 were down 2½%, reflecting a weakness in our Blood Filtration portion of the business. The BioSciences and Hospital portions of our Medical business were up slightly. Medical sales in Europe and Asia were up 4% in both geographies, while sales in the Western Hemisphere, the largest portion of the Medical business, were down 7%. Within Medical, sales in our Blood Filtration submarket were down 6%. The shortfall reflects a weakness in the Western Hemisphere (which accounts for approximately 63% of our global Blood Filtration business), where sales were down 8½%. The blood bank market is highly competitive throughout the world and is characterized by various national and private tender processes. The contract with our largest blood bank customer, which expired in June 2005, was renewed for a term of three years. Our contract with another large blood bank customer will not be renewed beyond its 2006 expiration, however, we are still doing business with them as they transition to their new provider. In BioSciences, the other Medical submarket, sales increased 1½%, as growth in our Laboratory business was partly offset by a decline in our OEM business. Overall, we expect sales in our Medical segment to be up modestly in fiscal year 2006.

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BioPharmaceuticals segment sales in fiscal year 2005 increased 12% compared to fiscal year 2004, driven by strong demand in the biotechnology sector. Systems sales increased 67% compared with fiscal year 2004. The acquisition of Biosepra and Euroflow accounted for 1½% of the BioPharmaceuticals sales growth in the year. By geography, all geographies exhibited strong growth in BioPharmaceuticals sales; however, growth was particularly robust in the Western Hemisphere, where sales increased 17%. The growth in the Western Hemisphere reflects strong demand from the biotechnology sector while Europe is continuing to recover from tough market conditions related to industry consolidations and the downturn in the plasma market. The significant growth in systems sales in fiscal year 2005 bodes well for future sales of our disposable products. We expect sales in the BioPharmaceuticals segment to increase in the double-digit range in fiscal year 2006.

Our Industrial business accounted for approximately 60% of our total sales in fiscal year 2005 as compared with 59% in fiscal year 2004. Industrial sales grew 5% in fiscal year 2005, as growth in General Industrial and Microelectronics was partly offset by a decline in Aerospace.

General Industrial segment sales, which account for about 65% of our Industrial business, were up 7½% compared with fiscal year 2004. The increase in sales in our General Industrial segment was driven by double-digit growth in our Municipal Water and Fuels & Chemicals submarkets.

Within General Industrial, Municipal Water sales grew 26% driven by repeat orders from existing municipal customers. Also, our success rate for winning municipal project bids has significantly improved as a result of our cost savings initiatives. Municipal Water sales in Asia almost tripled, as water scarcity is driving growth in this region. Sales in the Western Hemisphere increased 36½% driven by tighter EPA regulations. Sales in Europe were down 8½% partly due to timing of projects in the municipal sector. Overall, orders were strong in the fourth quarter as well, increasing 67½%. Sales in our Fuels & Chemicals submarket grew 15% driven by double-digit growth rates in all geographies. The growth in this market reflects energy availability concerns and environmental pressures. Sales in our Power Generation submarket increased 8½%. By geography, sales in Asia were up 57%. Sales in the Western Hemisphere and Europe were down 10% and 6½%, respectively, reflecting timing of large systems sales. Sales in our Machinery & Equipment submarket decreased 1%. By geography, strong growth in the Western Hemisphere (15½%) and Asia (24%) was offset by a decline in Europe of 13½%. Sales growth in Asia was driven by increased activity in the steel industry in China and in the mining industry in Australia. Food & Beverage sales increased 2½%. By geography, Asia achieved double-digit growth reflecting our success in the regional brewing market. Sales in the Western Hemisphere were down 2%, while sales in Europe were flat. Overall, we expect sales in the General Industrial segment, to increase in the high single-digit range in fiscal year 2006.

Aerospace sales were down 3½% reflecting the timing of large projects in the Military and Marine Water portion of this business. By geography, overall Aerospace sales in the Western Hemisphere were down 4½%, while sales in Europe were flat. In Asia, the smallest of our Aerospace markets, sales were down 12½%. Military sales decreased 10½% compared to last year reflecting shortfalls in the Western Hemisphere and Asia of 15½% and 11½%, respectively. Military sales in Europe were up 4½%. Commercial sales increased 7½% reflecting growth in the Western Hemisphere and Europe. Military comprised 46% of total Aerospace sales in fiscal 2005 compared with 50% in fiscal 2004. We are seeing further positive signs in the commercial market in the Western Hemisphere and Asia. Our OEM airframe customers are increasing their production plans and global air travel has shown double-digit growth. We expect our Military portion of the business to improve as well. We expect sales in the Aerospace segment, to increase in the mid single-digit range in fiscal year 2006.

Microelectronics sales in fiscal year 2005 were up 4% reflecting growth in the Western Hemisphere (4½%) and Asia (9½%). In Europe, sales were down 15% as there is continued malaise blanketing the industry there. On a positive note, we have seen some rebound in the OEM market in the Western Hemisphere compared to a year ago. The thin film rigid disk market remains strong due to the rapid adoption of micro drive enabled MP3 players; accordingly, we are pursuing this market. We continue to diversify and expand into the macroelectronics market, which is not directly tied to the cyclicality of the semiconductor industry. We expect sales in the Microelectronics segment, to increase in the mid single-digit range in fiscal year 2006.

The consolidated operating profit as a percentage of sales was 16.7% in fiscal year 2005 as compared to 17.5% in fiscal year 2004. Operating profit dollars increased by $8,488, or 2½%, to $317,646. The operating profit details for the years ended July 31, 2005 and July 31, 2004 can be found in the Segment Information and Geographies note accompanying the consolidated financial statements.

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In Life Sciences, overall operating profit as a percentage of sales in fiscal year 2005 increased to 20.9% from 20.6% in fiscal year 2004, as an increase in Medical operating profit margin, was partly offset by a decline in BioPharmaceuticals. Operating profit dollars increased $10,641, or 7%.

Within Life Sciences, Medical operating profit improved to 18.6% from 18% in fiscal year 2004. Operating profit dollars increased $2,598, or 3½%. The improvement in operating profit reflects the impact of our cost reduction programs, particularly with manufacturing efficiencies partly offset by the impact of pricing pressures.

Operating profit in BioPharmaceuticals was 24% of sales as compared to 24.9% in fiscal year 2004, reflecting the impact of increased systems sales, which carry a lower margin. Operating profit dollars increased $8,043, or 11½%, generated by the strong growth in sales.

Overall operating profit margins in Industrial were 13.9% as compared with 15.3% in fiscal year 2004. Operating profit dollars were down from fiscal year 2004 primarily reflecting a decreased level of profitability in our Aerospace segment.

Within Industrial, General Industrial operating profit was 11.2% as compared to 11.7% in fiscal year 2004. The decline in margin was primarily attributable to the significant growth in systems sales in the period. Operating profit dollars increased $4,660, or 6% reflecting the growth in sales partly offset by the impact of reduced margins related to a change in product mix. Aerospace operating profit was 19.3% as compared to 24.5% in fiscal year 2004, while operating profit dollars declined by $9,870, or 22½%, reflecting lower military and marine water sales. Microelectronics operating profit margin was 18.9%, up 10 basis points from fiscal year 2004. Operating profit dollars increased $3,057, or 8%, reflecting the growth in sales.

Geographies:

The table below presents sales for the years ended July 31, 2005 and July 31, 2004 to unaffiliated customers by geography, including the effect of exchange rates for comparative purposes.

    2005   2004   % Change   Exchange
Rate Difference		     % Change in
Local Currency		    
   
 
 
 
   
   
Western Hemisphere   $ 689,172   $ 667,535     3     $ 2,500     3      
Europe     782,481     735,969     6 ½     42,541       ½    
Asia     430,631     367,243     17 ½     13,584     13 ½    
   
 
       
           
Total   $ 1,902,284   $ 1,770,747     7 ½   $ 58,625     4      
   
 
       
           

By geography, sales in the Western Hemisphere increased 3% in both local currency and on a reported basis compared with fiscal year 2004, as strong growth in BioPharmaceuticals and General Industrial was partly offset by a decline in Medical and Aerospace. Exchange rates increased sales in the year by $2,500, primarily related to the strengthening of the Canadian dollar. Operating profit increased to 17.5% of total sales (including intercompany sales to other geographies) as compared with 14.9% in fiscal year 2004. Operating profit dollars increased $33,628, or 26½% reflecting the improvement in margin as well as the growth in sales.

In Europe, sales were flat as double-digit growth in BioPharmaceuticals and modest growth in Medical was offset by shortfalls in General Industrial (Municipal Water, Machinery & Equipment and Power Generation) and Microelectronics. The strengthening of European currencies added $42,541 in sales resulting in reported sales growth of 6½%. Operating profit was 11.1% of total sales (including intercompany sales to other geographies) as compared to 14.4% in fiscal year 2004, while operating profit dollars were down $19,976, or 16½%.

Sales in Asia increased 13½% with all segments contributing to this gain with the exception of Aerospace. The strengthening of Asian currencies added $13,584 in sales, resulting in reported sales growth of 17½%. Operating profit was 14.6% of total sales (including intercompany sales to other geographies) as compared with 16.8% in fiscal year 2004, reflecting the impact of increased General Industrial system sales. Operating profit dollars increased by $1,403, or 2%.

General corporate expenses decreased $7,323 in fiscal year 2005. The decline in expenses reflects the impact of our cost reduction programs, reduced bonus expense and a decrease in consulting expenses related to our cost reduction programs partly offset by increased costs related to Sarbanes Oxley compliance initiatives.

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Results of Operations 2004 Compared with 2003

Review of Consolidated Results

Sales for fiscal year 2004 increased 9½% to $1.77 billion from $1.61 billion in fiscal year 2003. Exchange rates increased reported sales in the year by $109,892, or 6½%, primarily due to the strengthening of the Euro and to a lesser extent the British Pound and Japanese Yen. In local currency, sales increased 3%. Overall, a decrease in pricing reduced sales by about 1%, which was offset by an increase in volume of 4%. Sales growth was negatively impacted by a decline in Aerospace segment sales attributable to non-recurring sales related to the Iraqi conflict in fiscal 2003. Sales growth was strong in our Microelectronics segment as the semiconductor industry continued to rebound. Sales in our Medical segment were up in the low single-digit range. BioPharmaceuticals segment sales were flat, while General Industrial segment sales posted low-single digit growth. By geography, Asia reported double-digit sales growth, while the Western Hemisphere achieved mid single-digit growth. The growth in Asia and the Western Hemisphere was partly offset by a decline in sales in Europe, primarily attributable to lower Aerospace sales. For a detailed discussion of sales, refer to “Review of Market Segments and Geographies.”

Cost of sales in fiscal year 2004, as a percentage of sales, increased to 50.8% from 50.2% in fiscal year 2003. The increase in cost of sales, as a percentage of sales, reflects the impact of product mix as well as volume changes in our Aerospace segment and the impact of a pricing decrease in our Medical segment.

Selling, general and administrative expenses as a percentage of sales in fiscal year 2004 decreased to 33% as compared to 33.2% in fiscal year 2003. The improvement in selling, general and administrative expenses reflects synergies achieved related to our FSG integration efforts and the effects of our cost reduction programs, partly offset by increased pension and consulting costs as well as the impact of foreign exchange. Foreign exchange is estimated to have increased selling, general and administrative expenses by approximately $42,700 in fiscal year 2004. The increase in consulting costs relates primarily to our cost reduction programs as well as Sarbanes-Oxley compliance initiatives.

We continued to move forward with our four cost reduction initiatives. Net savings from the indirect expenditure cost reduction initiative approximated $2,500 in fiscal year 2004, in the Western Hemisphere.

Research and development expenses were 3.2% of sales in fiscal year 2004, on par with fiscal year 2003.

In fiscal year 2004, we recorded restructuring and other charges, net, of $12,477. The restructuring and other charges, net, reflect severance and other costs incurred as a result of the streamlining of our manufacturing operations in the United Kingdom (“U.K.”), Japan and Germany and reorganizing our Medical and BioSciences management structure, as well as the sale of certain manufacturing plants in Germany. Additionally, restructuring and other charges, net, reflects an increase in our environmental liabilities of $20,837 principally as a result of a change in the estimated duration and costs of the remediation effort at the Ann Arbor, Michigan facility of the Company’s subsidiary Gelman Sciences, partly offset by a gain on the sale of our investment in Oiltools International and non-recurring income related to a decrease of pension liabilities in Germany. The adjustment to pension liabilities was due to an over accrual of pension expense that occurred during the preceding five-year period, the effect of which was not significant in any period.

In fiscal year 2003, we recorded restructuring and other charges of $47,524 reflecting the write-off of in-process research and development acquired in the FSG acquisition of $37,600 and restructuring and other charges of $9,924 (primarily severance and other exit costs). The fiscal year 2003 charges were primarily related to the FSG acquisition and the realignment of our Life Sciences business, including the transfer of Medical manufacturing from Ireland.

The details of the charges for the years ended July 31, 2004 and August 2, 2003 can be found in the Restructuring and Other Charges note accompanying the consolidated financial statements.

Net interest expense decreased $3,937 compared to fiscal year 2003. The reduction in net interest expense reflects lower debt levels from our pay down of debt of about $22,000.

In fiscal year 2004 the underlying tax rate was 24% compared with 22% in fiscal year 2003 reflecting increased earnings in higher tax rate jurisdictions.

Net earnings in fiscal year 2004 were $151,573, or $1.20 per share, compared with net earnings of $103,202, or 83 cents per share in fiscal year 2003. In summary, net earnings benefited from organic sales growth, increased gross profit dollars generated by a higher level of sales, decreased interest expense and the benefit of foreign exchange rates. An increase in selling, general and administrative expense dollars (pension and consulting related to the cost reduction program and Sarbanes-Oxley initiatives) and the impact of a higher underlying tax rate partly offset the above. In addition, fiscal year 2004 included restructuring and other charges, net, of $12,477, whereas fiscal year 2003 included the write-off of in-process research and development acquired in the FSG acquisition of $37,600 and severance and other charges of $9,924. We estimate that foreign currency translation added approximately 7 cents to earnings per share in fiscal year 2004.

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Review of Market Segments and Geographies

Market Segments:

The table below presents sales for the fiscal years ended July 31, 2004 and August 2, 2003 by market segment including the effect of exchange rates for comparative purposes. In the first quarter of fiscal year 2005, we implemented the first phase of our vertical integration plan by integrating our Medical and BioSciences divisions. Accordingly, our BioSciences business, which was formerly reported under our Biopharmaceutical segment, was combined with our Medical segment. Segment information for prior periods has been restated to conform to the current presentation.

  2004     2003     %
Change		     Exchange
Rate
Difference		     %
Change in
Local
Currency		    
 
   
 
   
   
Medical $ 444,015   $ 411,058     8     $ 19,337     3 ½    
BioPharmaceuticals   277,176     257,867     7 ½     19,748     —      
 
 
         
           
Total Life Sciences   721,191     668,925     8       39,085     2      
 
 
         
           
General Industrial   666,771     595,210     12       52,416     3      
Aerospace   178,178     185,431     (4 )     6,897     (7 ½)  
Microelectronics   204,607     164,069     24 ½     11,494     17 ½    
 
         
           
Total Industrial   1,049,556     944,710     11       70,807     3 ½    
 
         
           
Total $ 1,770,747   $ 1,613,635     9 ½   $ 109,892     3      
 
 
         
           

Life Sciences sales increased 2% in fiscal year 2004 compared with fiscal year 2003. Life Sciences represented approximately 41% of our total sales in fiscal year 2004, consistent with fiscal year 2003.

Within Life Sciences, Medical segment sales grew 3½% as growth in our Blood Filtration business was partly offset by a decline in BioSciences. By geography, the Western Hemisphere and Europe posted growth in Medical sales of 8% and 3½%, respectively. Sales in Asia, which comprised the smallest portion of our Medical business, were down. Blood Filtration sales increased 7% (Western Hemisphere and Europe) compared to fiscal year 2003. The blood bank market is highly competitive throughout the world and is characterized by various national and private tender processes. We successfully extended for a further year our contract with our largest blood bank customer, while another large blood bank customer notified us that their contract would not be renewed beyond its 2006 expiration. In BioSciences, the other portion of our Medical business, sales were down 3½% (all geographies), reflecting a weakness in the laboratory portion of the business, which was affected by research spending cuts. BioPharmaceuticals segment sales were flat in fiscal year 2004, reflecting the distress in the plasma fractionation industry. In addition, the timing of capital orders in the biotechnology industry negatively impacted sales growth. By geography, mid single-digit growth in Asia was offset by a decrease in the Western Hemisphere. Sales in Europe were flat.

Our Industrial business accounted for approximately 59% of total sales in fiscal year 2004, consistent with fiscal year 2003. Industrial sales grew 3½% as compared with fiscal year 2003. Growth in Microelectronics was strong, while General Industrial segment sales, which accounted for about 63% of our Industrial business, were up 3%. Aerospace sales were down 7½%.

Within General Industrial, all submarkets contributed to the increase in sales in fiscal year 2004. Sales in our Power Generation submarket increased 15% with all geographies contributing to this gain. The Western Hemisphere benefited from a large water filtration sale to a power station in Denver, Colorado and all geographies benefited from our Total Fluid Management approach. Sales in our Fuels & Chemicals submarket grew 3½% reflecting strong sales in Asia partly offset by a decline in the Western Hemisphere. Sales in Europe were up modestly. Sales in our Machinery & Equipment submarket increased slightly, as strong growth in Asia and modest growth in the Western Hemisphere were largely offset by a decline in Europe. Sales in the Western Hemisphere and Europe were negatively impacted by difficult industry conditions. Sales in Water Processing increased 5½%, driven by strong growth in the Western Hemisphere. Sales in the Western Hemisphere have been positively impacted by more stringent EPA regulations. Sales in our Food & Beverage submarket increased 2%, driven by strong growth in the Western Hemisphere. In the fourth quarter, sales in this market reached a record $50 million. We successfully applied our Total Fluid Management solutions to the wine, soft drink and spirits market and we are now the sole supplier of filtration and separation products to some large global customers.

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Aerospace sales decreased 7½%, reflecting a decline in Military sales of 15% (in Europe and Asia) partly offset by an increase in Commercial sales of 1½%. The decline in Military sales reflects a difficult comparison, as fiscal year 2003 reflected non-recurring sales related to the Iraqi conflict estimated at about $15 million. Excluding the impact of the nonrecurring sales, total Aerospace sales increased 1%. Military sales comprised approximately 50% of total Aerospace sales compared with 55% in fiscal year 2003.

Microelectronics sales grew 17½% compared with fiscal year 2003 as the recovery of the cyclical semiconductor market continued. In the fourth quarter, sales increased 27%, marking the third consecutive quarter of achieving strong double-digit growth. Growth for the year was driven by the Western Hemisphere and Asia where sales increased 13½% and 26%, respectively. Sales in Europe, the smallest of our Microelectronics markets, declined 1½%. While in fiscal year 2003 we initially saw growth in the macro side of the semiconductor market (digital displays, information storage, ink jet printing), in fiscal 2004 we began to see growth across the whole spectrum of the market, including increased OEM activity and fab upgrades and production.

The consolidated operating profit as a percentage of sales declined to 17.5% from 17.9% in fiscal year 2003.

In Life Sciences, overall operating profit was 20.6% compared with 20.9% in fiscal year 2003 reflecting a decline in BioPharmaceuticals operating profit margin partly offset by an improvement in Medical.

Within Life Sciences, Medical operating profit improved to 18.0% from 17.3% in fiscal year 2003. Operating profit dollars increased by $8,670 or 12%. The improvement in operating profit reflects manufacturing-based cost reduction programs and synergies realized as a result of the reorganization of the Critical Care and Blood Businesses (refer to the Restructuring and Other Charges note accompanying the consolidated financial statements for discussion of actions taken in fiscal year 2003) partly offset by a decrease in pricing. Operating profit in BioPharmaceuticals declined to 24.9% of sales, from 26.7% in fiscal year 2003 reflecting a change in product mix. Operating profit dollars were on par with fiscal year 2003.

Overall operating profit margins in Industrial declined to 15.3% from 15.7% in fiscal year 2003. General Industrial operating profit improved to 11.7% from 11.3% in fiscal year 2003, while operating profit dollars increased by $10,733, or 16%. Aerospace operating profit declined to 24.5% from 28.4%, while operating profit dollars decreased $8,959 or 17%, reflecting lower military sales as discussed above. Microelectronics operating profit increased to 18.8% from 17.1% in fiscal year 2003, while operating profit dollars increased $10,373 or 37%. The increase in Microelectronics operating profit margin and dollars reflects the strong growth in sales as discussed above.

Geographies:

The table below presents sales for the fiscal years ended July 31, 2004 and August 2, 2003 to unaffiliated customers by geography including the effect of exchange rates for comparative purposes.

    2004     2003     %
Change		     Exchange
Rate
Difference		     %
Change in
Local Currency		    
 
 
   
 
   
   
Western Hemisphere   $ 667,535   $ 630,307     6     $ 3,251     5 ½    
Europe     735,969     671,660     9 ½     81,496     (2 ½)    
Asia     367,243     311,668     18       25,145     10      
 
 
         
           
Total   $ 1,770,747   $ 1,613,635     9 ½   $ 109,892     3      
   
 
         
           

By geography, sales in the Western Hemisphere increased 5½% year over year. Exchange rates increased sales by $3,251, primarily related to the strengthening of the Canadian Dollar, resulting in reported sales growth of 6%. Operating profit increased to 14.9% of total sales (including intercompany sales to other geographies) as compared with 14.6% in fiscal year 2003. Operating profit dollars increased $11,200, or 9½% reflecting the increase in sales.

In Europe, sales declined 2½% compared with fiscal year 2003. The decline in sales reflects the impact of the non-recurring Aerospace sales related to the Iraqi conflict, which were recorded in fiscal year 2003. The strengthening of European currencies added $81,496 in sales resulting in reported sales growth of 9½%. Operating profit declined to 14.4% of total sales (including intercompany sales to other geographies) from 15.9% in fiscal year 2003, while operating profit dollars were flat. The decrease in operating profit margin primarily reflects a shift in product mix and the decline in Aerospace sales.

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Sales in Asia increased 10% as compared to fiscal year 2003. The strengthening of Asian currencies added $25,145 in sales, resulting in reported sales growth of 18%. The increase in sales resulted from strong growth in General Industrial and Microelectronics sales as cited above. In addition, sales have been favorably impacted by a shift during the latter part of fiscal year 2003 from the way FSG recorded sales through their U.S. and European manufacturing sites to the way Pall records sales through local sales companies. This shift resulted in sales being recorded in Asia that, prior to the change, were recorded in the Western Hemisphere and Europe consistent with the FSG methodology. Operating profit increased to 16.8% of total sales (including intercompany sales to other geographies) from 16.6% in fiscal year 2003, reflecting the strong sales growth as discussed above. Operating profit dollars increased $10,262, or 19½%.

General corporate expenses increased $5,405 compared with fiscal year 2003, reflecting increased pension, consulting and insurance costs partly offset by savings achieved as a result of our cost reduction program.

Liquidity and Capital Resources

On August 24, 2004, we terminated our existing five-year $200,000 unsecured senior revolving credit facility (dated August 30, 2000) and closed on an expanded $300,000, five-year, variable rate (LIBOR or prime based) unsecured senior revolving credit facility. Initial borrowings under the new facility were used to repay amounts outstanding under the existing $200,000 unsecured senior revolving credit facility and the remaining balance on our $100,000 bank loan (dated October 2002) which amounted to $50,000. On July 29, 2005, in order to capitalize on a precipitous and favorable shift in market and credit conditions, we opted to terminate the August 24, 2004 unsecured senior revolving credit facility, replacing it with a further expanded $350,000, five-year, variable rate (LIBOR or prime based), unsecured senior revolving credit facility. In addition to securing pricing concessions that more than offset incremental transactional costs, certain non-financial covenants were liberalized. The new facility also provides for limited borrowing in designated foreign currencies. The foreign currency capability will assist us in managing foreign exchange exposure. We borrowed $190,000 under the new facility and used the proceeds principally to (1) redeem all of our $100,000 private placement 7.83% senior notes otherwise due in August 2010, including approximately $3,241 in accrued interest and $14,702 in make-whole payments and (2) repay the $65,250 of borrowings, accrued interest and fees due under our then existing $300,000 unsecured senior revolving credit facility entered into on August 24, 2004, and (3) various fees associated with the new facility. The new unsecured senior revolving credit facility contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults. We were in compliance with all covenants of our various debt agreements as of July 31, 2005.

In addition, we refinanced, our Yen 3 billion loan, which was due on June 20, 2005, until June 20, 2007. The terms require us to make interest payments at a floating rate based upon Yen LIBOR. On May 9, 2005, we entered into a forward dated “receive variable, pay fixed” interest rate swap related to this loan (notional amount Yen 3 billion) with the same financial institution. We will receive payments at a variable rate based upon Yen LIBOR, and will make payments at an all-in fixed rate of 0.36% on a notional amount of Yen 3 billion. The swap has the same term as the loan.

For more detail regarding the aforementioned transactions, refer to the Notes Payable and Long-Term Debt note accompanying the consolidated financial statements.

Net cash provided by operating activities in fiscal year 2005 was $161,608, a decrease of $30,338 as compared with fiscal year 2004. The decrease in cash flow reflects the impact of decreased earnings and changes in working capital items, particularly inventory and income tax payable.

Free cash flow, which is defined as net cash provided by operating activities less capital expenditures, was $75,455 in fiscal year 2005, as compared with $130,684 in fiscal year 2004. The decrease in free cash flow reflects the factors discussed above, as well as a higher level of capital expenditures. We believe this measure is important because it is a key element of our planning. We utilize free cash flow, which is a non-GAAP measure, as one way to measure our current and future financial performance. The following table reconciles free cash flow to net cash provided by operating activities:

      2005     2004     2003    
   
 
 
   
Net cash provided by operating activities   $ 161,608   $ 191,946   $ 230,353    
Less capital expenditures     86,153     61,262     62,170    
   
 
 
   
Free cash flow   $ 75,455   $ 130,684   $ 168,183    
   
 
 
   

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The Company’s balance sheet is affected by spot exchange rates used to translate local currency amounts into U.S. dollars. In comparing spot exchange rates at July 31, 2005 to those at July 31, 2004, the Euro has strengthened against the U.S. dollar, while the British Pound and the Japanese Yen have weakened against the U.S. dollar.

Working capital was approximately $703,300, a ratio of 2.5 at July 31, 2005 as compared with $629,300, a ratio of 2.3 at July 31, 2004. Accounts receivable days sales outstanding were 84 days, as compared to 81 days in fiscal year 2004. Inventory turns, for the four quarters ended July 31, 2005, were 2.9 as compared to 3.1 at July 31, 2004. The effect of foreign exchange increased net inventory and net accounts receivable by $25 and $3,894, respectively, and decreased other current assets by $384, as compared with year-end fiscal 2004. Additionally, foreign exchange increased accounts payable and other current liabilities by $998. Overall, net debt (debt net of cash and cash equivalents), as a percentage of total capitalization (net debt plus equity), was 24.5%. Net debt increased by approximately $30,000 compared with year-end fiscal 2004. The impact of capital leases increased net debt by $9,900, while the impact of foreign exchange rates (primarily on cash) reduced net debt by $2,600 and the fair value adjustment and the termination of our fixed to variable interest rate swaps carried as part of debt decreased net debt by approximately $2,200. As such, the actual cash increase in our net debt was approximately $24,900 in fiscal year 2005. Total gross debt decreased approximately $12,400 as compared with year-end fiscal 2004. The impact of capital leases increased gross debt by $9,900, while the fair value adjustment and the termination of our fixed to variable interest rate swaps carried as part of debt reduced gross debt by approximately $2,200. As such, the actual cash decrease in our gross debt was approximately $20,100 in fiscal year 2005.

Proceeds from stock plans were $62,490 in fiscal year 2005. Capital expenditures were $86,153 in fiscal year 2005. Depreciation and Amortization expense were $83,956 and $6,965, respectively. In fiscal year 2006, capital expenditures are expected to be slightly above the fiscal year 2005 level, while depreciation and amortization expense are expected to total approximately $93,000.

On October 17, 2003, our Board of Directors authorized the expenditure of up to $200,000 to repurchase shares of our common stock. Furthermore, on October 14, 2004, our Board of Directors authorized an additional expenditure of another $200,000 to repurchase shares. During fiscal year 2004 and fiscal year 2005, we repurchased stock of $75,000 and $64,246, respectively. This leaves $260,754 remaining of the $400,000 the Board of Directors authorized for share repurchases at July 31, 2005. In fiscal year 2005, we paid dividends of $47,075. We increased our quarterly dividend to $0.10 per share from the previous level of $0.09 effective as of January 20, 2005. We expect to pay dividends of about $49,600 for the full fiscal year 2006.

At July 31, 2005, we owned 617.5 shares of the common stock of VITEX at an adjusted cost basis of $8.00 per share (original cost less any impairment losses previously recorded). Our shares and cost basis reflect the effect of a 1 for 10 reverse stock split on March 15, 2005. Our investment in VITEX has been recorded at the July 31, 2005 fair market value of $3.09 per share, or $1,908 in the accompanying consolidated balance sheet. During the first quarter of fiscal year 2005, we recorded an impairment charge of $2,875 related to our investment in VITEX as its decline in fair market value was deemed to be other-than-temporary. In August 2005, we sold all of our 617.5 shares for proceeds aggregating $6,783. The resulting gain of $1,806, net of fees and commissions, will be recognized in the first quarter of fiscal year 2006. For more detail regarding our investment in VITEX, refer to the Other Non-Current Assets note accompanying the consolidated financial statements.

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated, as defined in the Act. As of July 31, 2005, we have not provided deferred taxes on $1,036,983 of undistributed foreign subsidiaries’ earnings since substantially all such earnings were expected to be permanently invested in foreign operations. The range of reasonably possible amounts, based upon law, that are being considered for repatriation due to the aforementioned provision is between zero and $500,000. The related potential range of income tax is between zero and $26,250. The extent to which we ultimately take advantage of this provision depends on a number of factors, including the manner in which funds will be utilized and the ability to obtain financing abroad.

We consider our existing lines of credit, along with the cash generated from operations, to be sufficient for both short-term and long-term growth.

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The following is a summary of our contractual commitments as of July 31, 2005:

      Year Ended              
      2006     2007     2008     2009     2010     Thereafter     Total  
   
 
 
 
 
 
 
 
Long-term debt   $ 1,359   $ 28,627   $ 1,408   $ 1,475   $ 191,547   $ 287,104   $ 511,520  
Operating leases     23,281     15,021     8,988     5,901     3,297     7,083     63,571  
Purchase commitments     75,602     15,747     9,902     6,452     119     —     107,822  
Employment contracts     6,737     4,166     —     —     —     —     10,903  
Other commitments     1,026     489     327     80     35     60     2,017  
   
 
 
 
 
 
 
 
Total commitments   $ 108,005   $ 64,050   $ 20,625   $ 13,908   $ 194,998   $ 294,247   $ 695,833  
   
 
 
 
 
 
 
 

Recently Issued Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (“SFAS No. 151”). SFAS No. 151 amends guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight handling costs and wasted material requiring that such items be recognized as current-period charges. In addition, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will become effective for fiscal years beginning after June 15, 2005. We do not believe adoption of SFAS No. 151 will have a material impact on our consolidated financial statements.

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated, as defined in the Act. In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP FAS 109-2”). FSP FAS 109-2 allows companies additional time to evaluate the effect of the Act as to whether unrepatriated foreign earnings continue to qualify for the SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”) exception regarding non-recognition of deferred tax liabilities and requires explanatory disclosures from those who need the additional time. As of July 31, 2005, we have not provided deferred taxes on the undistributed earnings of foreign subsidiaries since substantially all such earnings were expected to be permanently invested in foreign operations. The extent to which we will ultimately take advantage of this provision depends on a number of factors, including the manner in which the funds will be utilized and the ability to obtain financing abroad. The range of reasonably possible amounts, based upon the law, that are being considered for repatriation due to the aforementioned provision is between zero and $500,000. The related potential range of income tax is between zero and $26,250.

In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“FSP FAS 109-1”). FSP FAS 109-1 clarifies that the qualified production activities deduction should be treated as a special deduction as described in SFAS No. 109. The impact of the deduction will be reported in the period in which the deduction is claimed. We are in the process of assessing the effect of FSP FAS 109-1 on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (“SFAS No. 153”). SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchange transactions in fiscal periods beginning after June 15, 2005. We do not believe adoption of SFAS No. 153 will have a material impact on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123, Share-Based Payment (“SFAS No. 123(R)”), which supercedes SFAS No. 123 and APB No. 25. SFAS No. 123(R) addresses the accounting for shared-based payment transactions (excluding employee stock-ownership plans) in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123(R) requires the company to recognize the grant-date fair-value of equity-based compensation issued to employees in the income statement. SFAS No. 123(R) eliminates a company’s ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB No. 25, which had been permitted in SFAS No. 123 as originally issued. SFAS No. 123(R) will become effective for fiscal years beginning after June 15, 2005. Additionally, in March 2005, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No.

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107, Share-Based Payment (“SAB No. 107”), which provided additional guidance on certain implementation issues with respect to SFAS No. 123(R). We are currently finalizing our assessment of the impact adoption of SFAS No. 123(R) will have; however, had we adopted SFAS No. 123(R) in prior periods, we believe that the impact of that standard would have approximated the impact of SFAS No. 123 as previously disclosed under the requirements of SFAS No. 123 and SFAS No. 148 in the footnotes to our consolidated financial statements.

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”), which will require entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes Accounting Principles Board Opinion No. 20, Accounting Changes (“APB No. 20”), which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. Another significant change in practice under SFAS No. 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate. Under APB No. 20, such a change would have been reported as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Our primary market risks relate to adverse changes in foreign currency exchange rates and interest rates. The sensitivity analyses presented below assume simultaneous shifts in each respective rate, and quantify the impact on our earnings and cash flows. The changes used for these analyses reflect our view of changes that are reasonably possible over a one-year period. Actual changes that differ from the changes used for these analyses could yield materially different results.

Foreign Currency

Our reporting currency is the U.S. dollar. Because we operate through subsidiaries or branches in over thirty countries around the world, our earnings are exposed to translation risk when the financial statements of the subsidiaries or branches, as stated in their functional currencies, are translated into the U.S. dollar. We estimate that foreign exchange translation added 4 cents to earnings per share in fiscal year 2005.

Most of our products are manufactured in the U.S., including Puerto Rico, Germany and the United Kingdom, and then sold into many countries. The primary foreign currency exposures relate to adverse changes in the relationships of the U.S. dollar to the British Pound (“the Pound”), the Japanese Yen (“the Yen”) and the Euro, as well as adverse changes in the relationship of the Pound to the Euro. Exposure exists when the functional currency of the buying subsidiaries weakens against the U.S. dollar, the Pound or the Euro thus causing an increase of the product cost to the buying subsidiary, which adversely affects the Company’s consolidated gross margin and net earnings. The effect of foreign exchange is partially mitigated because of the significant level of manufacturing done in Europe. The deterioration of the Yen against the U.S. dollar has a greater proportional adverse effect on our earnings because the majority of Japan’s purchases are sourced from the U.S. In fiscal year 2005, the Euro, the Pound and the Yen appreciated by approximately 6%, 4½% and 2½%, respectively, against the U.S. dollar compared with the average exchange rates in effect in fiscal year 2004. Additionally, the Euro appreciated against the Pound by approximately 1%. Due to the difficulty in estimating the economic effect of foreign currency rates, particularly in periods of high volatility of such rates, we do not provide such estimated effects and report only the translation effect to earnings per share disclosed above.

We are also exposed to transaction risk from adverse changes in exchange rates. These short-term transaction exposures are primarily Yen, Euro, Pound, Singapore dollar and Australian dollar denominated receivables held in the U.S. and Euro-denominated receivables held in the United Kingdom. These short-term exposures to changing foreign currency exchange rates are managed by purchasing forward foreign exchange contracts (“forwards”) to offset the earnings and cash flow impact of non-functional currency denominated receivables and payables as well as the expeditious payment of balances. In addition, we enter into loans denominated in foreign currencies to offset the earnings and cash flow impact of nonfunctional currency-denominated receivables. We do not enter into forwards for trading purposes. At July 31, 2005, these exposures amounted to approximately $44,529 and were offset by forwards with a notional principal amount of $36,874. If a hypothetical 10% simultaneous adverse change had occurred in exchange rates, net earnings would have decreased by approximately $1,199, or approximately 1 cent per share.

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Interest Rates

We are exposed to changes in interest rates, primarily due to our financing and cash management activities, which include long and short-term debt as well as cash and certain short-term, highly liquid investments considered to be cash equivalents.

Our debt portfolio is comprised of both fixed and variable rate borrowings. We manage the composition of the portfolio, and concurrently interest rate exposure by employing interest rate swaps. Giving effect to interest rate swaps, the Company’s debt portfolio was approximately 40% variable rate at July 31, 2005, down from approximately 60% variable rate at July 31, 2004. The impetus for this change was management’s reevaluation and reassessment of the interest rate environment which led to the early termination of pay variable-receive fixed interest rate swaps, with an aggregate notional amount of $230,000 related to the $280,000 6% private placement senior notes due in 2012. As of July 31, 2005, we had cash flow interest rate swaps (i.e., variable to fixed rate swaps) with notional amounts aggregating $51,726 outstanding. The fair value of our interest rate swaps at July 31, 2005 was a liability of $11. The cash flows on the above mentioned interest rate swaps mirror the cash flows of the hedged underlying debt instruments. We do not enter into interest rate swaps for trading purposes.

For the year ended July 31, 2005, interest expense, net of interest income, was $25,950. A hypothetical 10% increase in market interest rates over the actual fiscal year 2005 average rate would increase net interest expense by $409.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements required by this item are located immediately following the signature pages of this Form 10-K. See Item 15 (a)(1) for a listing of financial statements provided.

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(In thousands,
except per share data)
First Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
  
 
 
 
 
 
   
2005:                                  
Net sales   $ 414,732   $ 469,473   $ 493,543   $ 524,536   $ 1,902,284    
Gross profit     199,872     224,932     244,989     253,575     923,368    
Restructuring and other charges, net (a)     5,523     5,438     4,292     23,510     38,763    
Earnings before income taxes     29,249     41,676     56,654     53,492     181,071    
Net earnings     21,699     32,045     43,678     43,394     140,816    
Earnings per share:                                  
Basic
     0.17     0.26     0.35     0.35     1.13    
Diluted
     0.17     0.26     0.35     0.34     1.12    
                                   
2004:                                  
Net sales   $ 374,286   $ 428,085   $ 463,921   $ 504,455   $ 1,770,747    
Gross profit     180,065     206,869     230,287     254,407     871,628    
Restructuring and other charges, net (a)     (3,703 )   13,668     681     1,831     12,477    
Earnings before income taxes     33,001     30,687     61,130     73,014     197,832    
Net earnings     24,668     24,856     46,514     55,535     151,573    
Earnings per share:                                  
Basic
     0.20     0.20     0.37     0.44     1.21    
Diluted
     0.19     0.20     0.37     0.44     1.20    
   
(a) Refer to the Restructuring and Other Charges note in the notes accompanying the consolidated financial statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

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ITEM 9A. CONTROLS AND PROCEDURES.

DISCLOSURE CONTROLS AND PROCEDURES

For the fiscal year ended July 31, 2005 and prior to the filing date of this Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a–15 and 15d–15 under the Securities Exchange Act of 1934. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

INTERNAL CONTROL OVER FINANCIAL REPORTING

(a) Management’s report on internal control over financial reporting.

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as of July 31, 2005. Management’s assessment of the effectiveness of the company’s internal control over financial reporting as of July 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

(b) Attestation report of the registered public accounting firm.

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Pall Corporation:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Pall Corporation and subsidiaries maintained effective internal control over financial reporting as of July 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pall Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such

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other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Pall Corporation maintained effective internal control over financial reporting as of July 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Pall Corporation maintained, in all material respects, effective internal control over financial reporting as of July 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pall Corporation and subsidiaries as of July 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended July 31, 2005, and our report dated October 12, 2005 expressed an unqualified opinion on those consolidated financial statements.

  /s/ KPMG LLP
       KPMG LLP

Melville, New York
October 12, 2005

(c) Changes in internal control over financial reporting.

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal fourth quarter ended July 31, 2005, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

ITEM 9B. OTHER INFORMATION.

Not applicable.

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     PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

(a) Identification of directors:

Information required by this item is included in the Proxy Statement under the captions Proposal 1 - “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated by reference in this report.

(b) Identification of executive officers:

Information regarding executive officers is contained in Part I, Item 4 of this report, pursuant to General Instruction G of this form.

     *       *         *

The Company has adopted a code of ethics applicable to its Chief Executive Officer, Chief Financial Officer, Controller and other employees with important roles in the financial reporting process, which code was adopted by the Audit Committee of the Board of Directors during its meeting in July 2003, in accordance with the requirements of the Sarbanes Oxley Act of 2002. The code of ethics has been filed as an exhibit to this report and is also available on the Company’s website located at www.pall.com/policies. In addition, the Company will provide to any person, without charge, upon request, a copy of the code of ethics, by addressing your request in writing to the Corporate Compliance and Ethics Officer, Pall Corporation, 2200 Northern Boulevard, East Hills, New York 11548.

The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on the website specified above.

The board of directors has an audit committee, a compensation committee, an executive committee, a nominating committee and a planning and governance committee. The board of directors has adopted a written charter for each of these committees and a corporate governance policy. In addition, the Company has codes of conduct that apply to every employee and its directors. The charters, corporate governance policy and codes of conduct are available on the Company’s website located at www.pall.com or by sending your request in writing to the Corporate Secretary, Pall Corporation, 2200 Northern Boulevard, East Hills, New York 11548.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is included in the Proxy Statement under the caption “Compensation and Other Benefits of Senior Management,” and is incorporated by reference in this report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this item is included in the Proxy Statement under the captions “Beneficial Ownership of Common Stock and Restricted Stock Units” and “Equity Compensation Plan Information,” and is incorporated by reference in this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is included in the Proxy Statement under the captions Proposal 1 - “Election of Directors” and “Indebtedness of Executive Officers and Directors under Stock Option Plans” and is incorporated by reference in this report.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required by this item is included in the Proxy Statement under the caption “Information Concerning Independent Auditors—Disclosure about Fees,” and is incorporated by reference in this report.

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     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Documents filed as part of the Form 10-K:

(1) The following items are filed as part of this report:
    Report of Independent Registered Public Accounting Firm
    Consolidated Balance Sheets – July 31, 2005 and July 31, 2004
    Consolidated Statements of Earnings - years ended July 31, 2005, July 31, 2004 and August 2, 2003
    Consolidated Statements of Stockholders’ Equity - years ended July 31, 2005, July 31, 2004 and August 2, 2003
    Consolidated Statements of Cash Flows - years ended July 31, 2005, July 31, 2004 and August 2, 2003
    Notes to consolidated financial statements
   
(2) The following financial statement schedule is filed as part of this report:
    Schedule II – Valuation and Qualifying Accounts
     
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or in the notes thereto.
     
(3)   Exhibits:
    The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
   
  Exhibit Index
   
Exhibit
Number		 Description of Exhibit
   
3(i)* Restated Certificate of Incorporation of the Registrant as amended through November 23, 1993, filed as Exhibit 3(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 30, 1994.
   
3(ii)* By-Laws of the Registrant as amended through April 13, 2005, filed as exhibit 3(ii) to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2005.
   
4(i)* Indenture dated as of August 1, 2002, by and among Pall Corporation as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York, as Trustee, relating to the Registrant’s 6% Senior Notes due August 1, 2012 filed as Exhibit 4(iii) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 3, 2002.
   
4(ii)† Credit Agreement dated July 29, 2005, between Pall Corporation and JPMorgan Chase Bank and the Other Lenders Party Thereto.
   
  The exhibits filed herewith do not include other instruments with respect to long-term debt of the Registrant and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees, pursuant to Item 601(b) (4) (iii) of Regulation S-K, that it will furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

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Exhibit  
Number Description of Exhibit
   
10.1*‡ Employment Agreement dated January 21, 2004, as amended and restated effective July 20, 2005, between the Registrant and Eric Krasnoff, filed as Exhibit 10.5 to the Registrant’s Form 8-K filed on July 25, 2005.
   
10.2*‡ Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson, filed as Exhibit 10.2 to the 2003 10-K.
   
10.3*‡ Amendment dated August 20, 2005 to Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson, filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on September 2, 2005.
   
10.4*‡ Employment Agreement dated November 15, 2001, between the Registrant and Donald B. Stevens, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002.
   
10.5*‡ Employment Agreement dated November 15, 2001, between the Registrant and Steven Chisolm, filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002.
   
10.6*‡ Employment Agreement dated May 1, 2003 between the Registrant and Andrew Denver, filed as Exhibit 10.7 to the 2003 10-K.
   
10.7*‡ Employment Agreement dated June 6, 2003 between the Registrant and Roberto Perez, filed as Exhibit 10.10 to the 2003 10-K.
   
10.8*‡ Employment Agreement dated August 1, 2004 between the Registrant and James R. Western, Jr., filed as Exhibit 10.11 to the 2004 10-K.
   
10.9*‡ Service Agreement dated March 1, 2002, between Pall Europe Limited and Neil MacDonald, filed as Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
   
10.10*‡ Service Contract dated February 26, 2001, between Pall Deutschland GmbH Holding and Heinz Ulrich Hensgen, filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 28, 2001.
   
10.11†‡ Employment Agreement dated June 1, 2004 between the Registrant and Lisa McDermott.
   
10.12*‡ Pall Corporation Supplementary Profit-Sharing Plan as amended effective July 19, 2005, filed as Exhibit 10.3 to the Registrant’s Form 8-K filed on July 25, 2005.
   
10.13*‡ Pall Corporation Profit-Sharing Plan as amended and restated as of July 1, 1998, filed as Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 3, 2002.
   
10.14*‡ Pall Corporation Profit-Sharing Plan amended pursuant to provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, filed as Exhibit 10.17 to the 2003 10-K.
   
10.15*‡ Pall Corporation Supplementary Pension Plan as amended effective July 19, 2005, filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on September 2, 2005.
   
10.16*‡ Pall Corporation 2004 Executive Incentive Bonus Plan, as amended effective July 19, 2005, filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on July 25, 2005.

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Exhibit  
Number Description of Exhibit
   
10.17*‡ Pall Corporation 1991 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
   
10.18*‡ Pall Corporation 1993 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
   
10.19*‡ Pall Corporation 1995 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
   
10.20*‡ Pall Corporation 1998 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
   
10.21*‡ Pall Corporation 2005 Stock Compensation Plan, as amended effective July 19, 2005, filed as Exhibit 10.3 to the Registrant’s Form 8-K filed on July 25, 2005.
   
10.22*‡ Pall Corporation Stock Option Plan for Non-Employee Directors, as amended effective November 10, 1998, filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998.
   
10.23*‡ Pall Corporation 2001 Stock Option Plan for Non-Employee Directors, as amended September 17, 2004, filed as Exhibit 10.25 to the 2004 Form 10-K.
   
10.24*‡ Pall Corporation Management Stock Purchase Plan as amended effective July 19, 2005, filed as Exhibit 10.3 to the Registrant’s Form 8-K filed on July 25, 2005.
   
10.25*‡ Pall Corporation Employee Stock Purchase Plan as amended effective October 17, 2003, filed as Exhibit 10.27 to the 2003 10-K.
   
10.26*‡ Principal Rules of the Pall Supplementary Pension Scheme, filed as Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 29, 1995.
   
10.27*‡ Pall Deutschland GmbH Holding, Concept Of An Additional Pension Plan For Senior Executives, filed as Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 3, 1996.
   
14* Pall Corporation Code of Ethics applicable to its Chief Executive Officer, Chief Financial Officer, Controller and other employees with important roles in the financial reporting process, filed as Exhibit 99.1 to the 2004 10-K.
   
21† Subsidiaries of the Registrant.
   
23† Consent of Independent Registered Public Accounting Firm.
   
31.1† Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2† Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1† Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2† Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

* Incorporated herein by reference.
   
† Exhibit filed herewith
   
‡ Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   Pall Corporation
     
October 14, 2005
 By: /s/ MARCUS WILSON
         Marcus Wilson, President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ ERIC KRASNOFF    
     Eric Krasnoff Chairman of the Board and Chief Executive Officer October 14, 2005
     
/s/ MARCUS WILSON    
     Marcus Wilson President, Chief Financial Officer and Director October 14, 2005
     
/s/ LISA MCDERMOTT    
     Lisa McDermott Vice President – Finance and Chief Accounting Officer October 14, 2005
     
/s/ ABRAHAM APPEL    
     Abraham Appel Director October 14, 2005
     
/s/ DANIEL J. CARROLL, JR.    
     Daniel J. Carroll, Jr. Director October 14, 2005
     
/s/ JOHN H. F. HASKELL, JR.    
     John H. F. Haskell, Jr. Director October 14, 2005
     
/s/ ULRIC S. HAYNES, JR.    
     Ulric S. Haynes, Jr. Director October 14, 2005
     
/s/ EDWIN W. MARTIN    
     Edwin W. Martin Director October 14, 2005
     
/s/ KATHERINE L. PLOURDE    
     Katherine L. Plourde Director October 14, 2005
     
/s/ HEYWOOD SHELLEY    
     Heywood Shelley Director October 14, 2005
     
/s/ EDWARD L. SNYDER    
     Edward L. Snyder Director October 14, 2005
     
/s/ EDWARD TRAVAGLIANTI    
     Edward Travaglianti Director October 14, 2005
     
/s/ JAMES D. WATSON    
     James D. Watson Director October 14, 2005

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Pall Corporation:

We have audited the accompanying consolidated balance sheets of Pall Corporation and subsidiaries as of July 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the years in the three-year period ended July 31, 2005. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pall Corporation and subsidiaries as of July 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Pall Corporation and subsidiaries internal control over financial reporting as of July 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 12, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

  /s/ KPMG LLP
       KPMG LLP

Melville, New York
October 12, 2005

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PALL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

        July 31, 2005     July 31, 2004  
     
 
 
                           ASSETS              
Current assets:              
  Cash and cash equivalents   $ 164,928   $ 207,277  
  Accounts receivable     493,650     468,905  
  Inventories     365,929     302,861  
  Other current assets     135,885     133,116  
     
 
 
 
Total current assets
     1,160,392     1,112,159  
Property, plant and equipment, net     608,758     600,383  
Goodwill     252,904     239,660  
Intangible assets     50,004     44,129  
Other non-current assets     193,243     186,396  
     
 
 
 
Total assets
   $ 2,265,301   $ 2,182,727  
     
 
 
                LIABILITIES AND STOCKHOLDERS’ EQUITY              
Current liabilities:              
  Notes payable   $ 24,299   $ 28,968  
  Accounts payable     142,839     117,707  
  Accrued liabilities     217,280     209,523  
  Income taxes     58,928     84,986  
  Current portion of long-term debt     1,359     30,514  
  Dividends payable     12,434     11,162  
     
 
 
 
Total current liabilities
     457,139     482,860  
Long-term debt, net of current portion     510,161     488,686  
Deferred income taxes     10,321     16,005  
Other non-current liabilities     147,703     140,737  
     
 
 
 
Total liabilities
     1,125,324     1,128,288  
     
 
 
Stockholders’ equity:              
 
Common stock, par value $.10 per share; 500,000 shares authorized; 127,958 shares issued
     12,796     12,796  
  Capital in excess of par value     121,934     115,489  
  Retained earnings     1,066,848     984,117  
  Treasury stock, at cost (2005 – 3,616 shares, 2004 – 3,937 shares)     (90,878 )   (92,047 )
  Stock option loans     (1,808 )   (2,308 )
  Accumulated other comprehensive income (loss):              
 
Foreign currency translation
     80,412     77,585  
 
Minimum pension liability
     (49,353 )   (37,559 )
 
Unrealized investment gains (losses)
     33     (3,275 )
 
Unrealized losses on derivatives
     (7 )   (359 )
     
 
 
        31,085     36,392  
     
 
 
Total stockholders’ equity     1,139,977     1,054,439  
     
 
 
Total liabilities and stockholders’ equity   $ 2,265,301   $ 2,182,727  
     
 
 

See accompanying notes to consolidated financial statements.

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PALL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

      Years Ended    
      July 31, 2005     July 31, 2004     August 2, 2003    
   
 
 
   
Net sales   $ 1,902,284   $ 1,770,747   $ 1,613,635    
Cost of sales     978,916     899,119     810,039    
   
 
 
   
Gross profit     923,368     871,628     803,596    
                       
Selling, general and administrative expenses     621,401     583,539     536,194    
Research and development     56,183     57,279     52,204    
Restructuring and other charges, net     38,763     12,477     47,524    
Interest expense, net     25,950     20,501     24,438    
   
 
 
   
Earnings before income taxes     181,071     197,832     143,236    
Provision for income taxes     40,255     46,259     40,034    
   
 
 
   
Net earnings   $ 140,816   $ 151,573   $ 103,202    
   
 
 
   
Earnings per share:                      
Basic
   $ 1.13   $ 1.21   $ 0.84    
Diluted
   $ 1.12   $ 1.20   $ 0.83    
Average shares outstanding:                      
Basic
     124,645     125,685     123,275    
Diluted
     125,598     126,737     124,214    

See accompanying notes to consolidated financial statements.

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PALL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

Years Ended August 2, 2003, July 31,
2004 and July 31, 2005		     Common Stock     Capital
in Excess
of Par
Value		     Retained Earnings     Treasury
Stock		     Stock
Option Loans		     Accumulated
Other
Comprehensive
Loss		     Total     Comprehensive Income  
 
 
 
 
 
 
 
 
 
Balance at August 4, 2002   $ 12,796   $ 110,745   $ 832,308   $ (110,799 ) $ (3,259 ) $ (22,071 ) $ 819,720        
Comprehensive income:                                                  
  Net earnings                 103,202                       103,202   $ 103,202  
 
Other comprehensive income (loss):
                                                  
   
Translation adjustment
                                   46,335     46,335     46,335  
   
Minimum pension liability
                                   (29,975 )   (29,975 )   (29,975 )
   
Unrealized investment gains
                                   4,671     4,671     4,671  
   
Unrealized gain on derivatives
                                   627     627     627  
                                             
 
Comprehensive income                                             $ 124,860  
                                             
 
Dividends declared                 (44,678 )                     (44,678 )      
Issuance of 1,892 shares for stock plans and pension funding
                 (6,142 )   40,601                 34,459        
Restricted stock units related to stock plans
        (1,129 )                           (1,129 )      
Stock option loans                             1,304           1,304        
                                                   
Balance at August 2, 2003     12,796     109,616     884,690     (70,198 )   (1,955 )   (413 )   934,536        
Comprehensive income:                                                  
  Net earnings                 151,573                       151,573     151,573  
 
Other comprehensive income (loss):
                                                  
   
Translation adjustment
                                   48,679     48,679     48,679  
   
Minimum pension liability
                                   (4,505 )   (4,505 )   (4,505 )
   
Unrealized investment losses
                                   (7,710 )   (7,710 )   (7,710 )
   
Unrealized gain on derivatives
                                   341     341     341  
                                             
 
Comprehensive income                                             $ 188,378  
                                             
 
Dividends declared                 (45,247 )                     (45,247 )      
Issuance of 2,438 shares for stock plans
           4,848     (6,899 )   53,151                 51,100        
Restricted stock units related to stock plans
        1,025                             1,025        
Purchase of 3,099 shares                       (75,000 )               (75,000 )      
Stock option loans                           (353 )         (353 )      
   
Balance at July 31, 2004     12,796     115,489     984,117     (92,047 )   (2,308 )   36,392     1,054,439        
Comprehensive income:                                                  
  Net earnings                 140,816                       140,816     140,816  
 
Other comprehensive income (loss):
                                                  
   
Translation adjustment
                                   2,827     2,827     2,827  
   
Minimum pension liability
                                   (11,794 )   (11,794 )   (11,794 )
   
Unrealized investment losses
                                   3,308     3,308     3,308  
   
Unrealized gain on derivatives
                                   352     352     352  
                                             
 
Comprehensive income                                             $ 135,509  
                                             
 
Dividends declared                 (48,585 )                     (48,585 )      
Issuance of 2,756 shares for stock plans
           5,404     (9,500 )   65,415                 61,319        
Restricted stock units related to stock plans
        1,041                             1,041        
Purchase of 2,435 shares
                       (64,246 )               (64,246 )      
Stock option loans                           500           500        
Balance at July 31, 2005   $ 12,796   $ 121,934   $ 1,066,848   $ (90,878 ) $ (1,808 ) $ 31,085   $ 1,139,977        
   
 
 
 
 
 
 
       

See accompanying notes to consolidated financial statements.

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PALL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

      Years Ended  
    July 31, 2005   July 31, 2004   August 2, 2003  
   
 
 
 
Operating activities:                    
Net earnings   $ 140,816   $ 151,573   $ 103,202  
Adjustments to reconcile net earnings to net cash provided by operating activities:                    
Restructuring and other charges, net
     38,763     12,477     47,524  
Depreciation and amortization of long-lived assets
     90,921     88,935     83,939  
Amortization of net proceeds from terminated interest rate swaps
     (1,711 )   (2,552 )   (1,004 )
Deferred income taxes
     (1,898 )   (18,666 )   (10,337 )
Provisions for doubtful accounts
     3,979     3,217     3,103  
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
                    
Accounts receivable
     (24,800 )   (26,765 )   14,132  
Inventories
     (54,604 )   (15,817 )   (5,725 )
Other assets
     (9,547 )   23,623     (6,759 )
Accounts payable and accrued expenses
     8,203     (10,416 )   (10,406 )
Income taxes receivable/payable
     (23,531 )   (10,386 )   6,129  
Other liabilities
     (4,983 )   (3,277 )   6,555  
   
 
 
 
Net cash provided by operating activities     161,608     191,946     230,353  
   
 
 
 
Investing activities:                    
Acquisitions of businesses, net of disposals and cash acquired     (30,879 )   (2,005 )   (14,113 )
Advances to and investments in strategic alliances     —     (2,125 )   (6,541 )
Proceeds from sale of strategic investments     915     21,344     —  
Capital expenditures     (86,153 )   (61,262 )   (62,170 )
Disposals of fixed assets     5,127     4,115     11,714  
Proceeds from sale of retirement benefit assets     19,173     22,668     34,306  
Purchases of retirement benefit assets     (19,392 )   (30,307 )   (40,878 )
Other     (3,354 )   (3,679 )   (3,265 )
   
 
 
 
Net cash used by investing activities     (114,563 )   (51,251 )   (80,947 )
   
 
 
 
Financing activities:                    
Notes payable     (4,842 )   8,181     (375,399 )
Long-term borrowings     315,349     40,014     510,192  
Repayments of long-term debt     (330,412 )   (70,159 )   (294,890 )
Net proceeds from stock plans     62,490     51,772     30,133  
Purchase of treasury stock     (64,246 )   (75,000 )   —  
Make whole payment to redeem senior notes     (14,702 )   —     —  
Payments/proceeds related to terminated interest rate swaps     (10,044 )   —     21,000  
Dividends paid     (47,075 )   (45,097 )   (44,376 )
   
 
 
 
Net cash used by financing activities     (93,482 )   (90,289 )   (153,340 )
   
 
 
 
Cash flow for year     (46,437 )   50,406     (3,934 )
Cash and cash equivalents at beginning of year     207,277     149,753     145,424  
Effect of exchange rate changes on cash     4,088     7,118     8,263  
   
 
 
 
Cash and cash equivalents at end of year   $ 164,928   $ 207,277   $ 149,753  
   
 
 
 
Supplemental disclosures:                    
Interest paid
   $ 26,158   $ 17,527   $ 26,742  
Income taxes paid (net of refunds)
     75,215     56,549     35,900  
Non-cash investing and financing activities:                    
Pension obligations funded by 210 shares of treasury stock
     —     —     4,288  
Capital lease entered into for new building
     7,272     4,438     —  

See accompanying notes to consolidated financial statements.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

ACCOUNTING POLICIES AND RELATED MATTERS

The Company

Pall Corporation and its subsidiaries (hereinafter collectively called “the Company” unless the context requires otherwise) manufacture and market filtration and separation products and systems throughout the world to a diverse group of customers within two principal markets - Life Sciences and Industrial.

The Company’s fiscal year ends on July 31, and the Company’s fiscal quarters end on October 31, January 31 and April 30. Prior to fiscal year 2004, the Company’s fiscal year ended on the Saturday closest to July 31, except that the Company’s foreign subsidiaries were on a July 31 fiscal year. The years ended July 31, 2005, July 31, 2004, and August 2, 2003, each comprise 52 weeks.

Presentation and Use of Estimates

The financial statements of the Company are presented on a consolidated basis with its subsidiaries, substantially all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation.

Financial statements of foreign subsidiaries have been translated into U.S. dollars at exchange rates as follows: (i) balance sheet accounts at year-end rates, except equity accounts which are translated at historic rates, and (ii) income statement accounts at weighted average rates. Translation gains and losses are reflected in stockholders’ equity, while transaction gains and losses, which result from the settlement of foreign denominated receivables and payables at rates that differ from rates in effect at the transaction date, are reflected in income. Transaction losses, net, in fiscal years 2005, 2004 and 2003 amounted to $2,796, $1,727 and $1,363, respectively.

To prepare the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, management is required to make assumptions that may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but not limited to, inventory valuation; provisions for doubtful accounts; asset impairment; depreciable lives of fixed assets and useful lives of patents and amortizable intangibles; fair value of financial instruments; income tax assets and liabilities; pension valuations; restructuring and other charges; valuation of assets acquired and liabilities assumed in business combinations; revenue recognition and liabilities for items such as environmental remediation. The Company is subject to uncertainties such as the impact of future events, economic, environmental and political factors, and changes in the business climate; therefore, actual results may differ from those estimates. When no estimate in a given range is deemed to be better than any other when estimating contingent liabilities, the low end of the range is accrued. Accordingly, the accounting estimates used in the preparation of the Company’s consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements.

Certain prior year amounts have been reclassified in the Company’s balance sheet, statements of cash flow and market segment information to conform to the current year presentation.

Cash and Cash Equivalents

All financial instruments purchased with a maturity of three months or less, other than amounts held in the benefits protection trust, are considered cash equivalents. Cash equivalents are held until maturity.

Inventories

Inventories are valued at the lower of cost (principally on the first-in, first-out method) or market.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

Investments

Investments (which represent an equity interest of less than 20% and have readily determinable market values) are considered available-for-sale securities; as such, these investments are carried at fair value in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS No. 115”). Unrealized gains and losses on these securities are reported as a separate component of stockholders’ equity until realized from sale or when unrealized losses are deemed to be other than temporary. Other than temporary losses are recognized in earnings when management determines that the recoverability of the cost of the investment is unlikely. The Company considers numerous factors, on a case-by-case basis, in evaluating whether the decline in market value of an available-for-sale security below cost is other than temporary. Such factors include, but are not limited to, (i) the length of time and the extent to which the market value has been less than cost; (ii) the financial condition and the near-term prospects of the issuer of the investment; and (iii) whether the Company’s intent to retain the investment for the period of time is sufficient to allow for any anticipated recovery in market value. Investments are included in “Other non-current assets” in the Consolidated Balance Sheets.

Acquisition Accounting

Acquisitions are accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations (“SFAS No. 141”). SFAS No. 141 requires that the total cost of an acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition. The allocation of the purchase price is dependent upon certain valuations and other studies.

Long-Lived Assets

The Company accounts for its goodwill and intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). As such, goodwill is not amortized and is assessed for impairment at least annually and whenever events or circumstances indicate impairment might have occurred. The Company evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, the overall fair value for the reporting unit is compared to its book value including goodwill. In the case that the overall fair value of the reporting unit is less than the book value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the book value of the goodwill. The implied fair value for the goodwill is determined based on the difference between the overall fair value of the reporting unit and the fair value of the net identifiable assets. If the implied fair value of the goodwill is less than the book value, the difference is recognized as an impairment. No adjustments resulted from this assessment.

The Company’s amortizable intangible assets, which are composed almost entirely of patented and unpatented technology and trademarks, are subject to amortization for periods ranging up to 20 years, principally on a straight-line basis. Property, plant and equipment are stated at cost. Depreciation of plant and equipment is provided over the estimated useful lives of the respective assets, ranging up to 50 years and 10 years, respectively, principally on the straight-line basis.

The Company periodically reviews its depreciable and amortizable long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

Revenue Recognition

Revenue is recognized when title and risk of loss have transferred to the customer and when contractual terms have been fulfilled. Long-term contracts are accounted for under the percentage of completion method based upon the ratio of costs incurred to date compared with estimated total costs to complete. The cumulative impact of revisions to total estimated costs is reflected in the period of the change, including anticipated losses.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

Stock Plans

Stock plans are accounted for using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related interpretations. Under APB No. 25, compensation expense would be recorded if, on the date of grant, the market price of the underlying stock exceeded its exercise price. During the three years ended July 31, 2005, the Company has not issued stock options with an exercise price below the date of grant market price. As permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS No. 148”), the Company has retained the accounting prescribed by APB No. 25 and presents the SFAS No. 123 information in the notes to its consolidated financial statements. Refer to the Stock Plans note for a description of the Company’s stock plans.

The following table illustrates the effect on net earnings and earnings per share if the Company had accounted for its stock based compensation plans under the fair value method of accounting under SFAS No. 123, as amended by SFAS No. 148:

        2005     2004     2003  
     
 
 
 
  Net earnings, as reported   $ 140,816   $ 151,573   $ 103,202  
  Pro forma stock compensation
       expense, net of tax benefit		     11,667     11,608     13,658  
     
 
 
 
  Pro forma net earnings   $ 129,149   $ 139,965   $ 89,544  
     
 
 
 
                       
  Earnings per share:                    
  Basic–as reported   $ 1.13   $ 1.21   $ .84  
  Basic–pro forma   $ 1.04   $ 1.11   $ .73  
  Diluted–as reported   $ 1.12   $ 1.20   $ .83  
  Diluted–pro forma   $ 1.03   $ 1.10   $ .72  

The pro forma stock compensation expense, net of tax benefit, is primarily related to stock option awards. The fair value of stock-based compensation awards granted is calculated using the Black-Scholes option-pricing model. The following weighted average assumptions were used in estimating the fair value of stock-based compensation awards:

          2005     2004     2003  
       
 
 
 
 
Average fair value of stock-based
compensation awards granted
   $ 7.93   $ 8.30   $ 6.75  
  Valuation assumptions:                    
    Expected dividend yield     1.8 %   1.7 %   1.9 %
    Expected volatility     30.0 %   36.8 %   33.0 %
    Expected life (years)     5     5     10  
    Risk-free interest rate     3.9 %   4.4 %   4.1 %

Environmental Matters

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as facts and circumstances change, assessment and remediation efforts progress or as additional technical or legal information becomes available. Costs of future expenditures for environmental remediation obligations are not discounted to their present value and are expected to be disbursed over an extended period of time. Accruals for environmental liabilities are included in “Accrued liabilities” and “Other non-current liabilities” in the Consolidated Balance Sheets.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

Income Taxes

Pall Corporation and its domestic subsidiaries file a consolidated Federal income tax return.

Taxes on income are provided using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse.

For further discussion, refer to the Income Taxes note.

Earnings Per Share

The Consolidated Statements of Earnings present basic and diluted earnings per share. Basic earnings per share is determined by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share considers the potential effect of dilution on basic earnings per share assuming potentially dilutive securities that meet certain criteria, such as stock options, were outstanding since issuance. The treasury stock method is used to determine the dilutive effect of potentially dilutive securities. Employee stock options and restricted stock units of 212, 166 and 4,748 for fiscal 2005, 2004 and 2003, respectively, were not included in the computation of diluted shares because their effect would have been antidilutive.

The following is a reconciliation between basic shares outstanding and diluted shares outstanding:

        2005     2004     2003  
     
 
 
 
  Basic shares outstanding     124,645     125,685     123,275  
  Effect of dilutive securities (a)     953     1,052     939  
     
 
 
 
  Diluted shares outstanding     125,598     126,737     124,214  
     
 
 
 

(a) Refer to the Stock Plans note for a description of the Company’s stock plans.

Derivative Instruments

The Company accounts for its derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”). SFAS No. 133 establishes accounting and reporting standards for derivative instruments as either assets or liabilities in the statement of financial position based on their fair values. Changes in the fair values are reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. Derivative instruments are designated and accounted for as either a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For derivatives designated as effective cash flow hedges, changes in fair values are recognized in other comprehensive income. Changes in fair values related to fair value hedges as well as the ineffective portion of cash flow hedges are recognized in earnings. Changes in the fair value of the underlying hedged item of a fair value hedge are also recognized in earnings. The Company measures ineffectiveness related to hedged foreign currency exchange rate exposures (forward contracts and cross currency swaps) using spot exchange rates.

ACQUISITIONS

2005:

On November 30, 2004, the Company acquired the BioSepra Process Division (“Biosepra”) from Ciphergen Biosystems, Inc. The purchase price was approximately $32,000, net of cash and debt, subject to a post closing adjustment of the purchase price based upon certain quantitative thresholds as defined in the purchase agreement. The adjustment to the purchase price was finalized on April 11, 2005, resulting in a reduction in the purchase price of approximately $1,100. Biosepra develops, manufactures and markets chromatography sorbents for use in the purification of protein in drug development and production.

On January 21, 2005, the Company acquired the remaining interest in Euroflow (UK) of Stroud, England (“Euroflow”) which it did not already own. The purchase price was $1,466, net of cash. Euroflow manufactures pilot and production scale chromatography columns for the biotechnology industry. The Company has held exclusive global marketing and distribution rights to Euroflow chromatography columns and associated technologies since 2002. In addition, the Company had loans and advances totaling $9,255 outstanding from Euroflow at the date of acquisition.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

The acquisitions are being accounted for using the purchase method of accounting in accordance with SFAS No. 141. The allocation of the purchase price is dependent upon certain valuations some of which have not progressed to a stage where there is sufficient information to make such allocations. As such, the cost of the acquisitions has been preliminarily allocated in the accompanying consolidated balance sheet at July 31, 2005. The results of these valuations will result in revisions to the purchase price allocation that may be significant and will be reported in future periods as increases and decreases to the excess cost over net assets acquired and liabilities assumed.

The following table summarizes the preliminary allocation of the purchase prices to the assets acquired and liabilities assumed at the dates of the acquisitions:

  Purchase price   $ 38,349  
  Transaction costs     564  
     
 
 
Total purchase price
     38,913  
  Cash acquired     7,470  
     
 
 
Total purchase price, net of cash acquired
     31,443  
     
 
           
  Accounts receivable, net     1,710  
  Inventories     9,886  
  Other current assets     1,658  
  Property plant and equipment, net     6,771  
  Other non-current assets     10,604  
     
 
 
Total assets acquired
     30,629  
     
 
           
  Accounts payable and other current liabilities     4,564  
  Long-term debt     2,562  
  Due to the Company (from Euroflow)     9,255  
  Other non-current liabilities     630  
     
 
 
Total liabilities assumed
     17,011  
     
 
  Excess cost over book value of net assets acquired   $ 17,825  
     
 

Based upon the markets Biosepra and Euroflow serve, the excess of cost over the fair value of the net assets acquired was assigned to the Company’s BioPharmaceutical segment. Any resulting goodwill related to the Biosepra and Euroflow acquisitions will not be tax deductible. Pro forma financial information related to the acquisitions has not been provided, as it is not material to the Company’s results of operations and cash flows.

2003:

On March 4, 2003, the Company acquired the assets, primarily manufacturing equipment and intellectual property, of Whatman Hemasure Inc., a wholly owned subsidiary of Whatman plc (“the seller”) for cash of $5,950.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

RESTRUCTURING AND OTHER CHARGES, NET

The following tables summarize the restructuring related items and other charges/(income) recorded in fiscal years 2005, 2004 and 2003:

 
2005
     Restructuring (1)     Other
Charges/
(Income) (2)		     Total    
 
 
 
 
   
  Early extinguishment of debt, net (a)   $ —   $ 11,953   $ 11,953    
  Severance     17,496     —     17,496    
  Impairment of investments (b)     —     3,615     3,615    
  Other exit costs     2,928     —     2,928    
  Loss on sale and impairment of assets     226     —     226    
  Environmental matters (c)     —     2,077     2,077    
  Other     —     836     836    
     
 
 
   
        20,650     18,481     39,131    
  Reversal of excess reserves     (368 )   —     (368 )  
     
 
 
   
      $ 20,282   $ 18,481   $ 38,763    
     
 
 
   
                         
  Cash   $ 19,666   $ 16,716   $ 36,382    
  Non-cash     616     1,765     2,381    
     
 
 
   
      $ 20,282   $ 18,481   $ 38,763    
     
 
 
   
                         
 
2004
                      
 
                     
  Environmental matters (c)   $ —   $ 20,837   $ 20,837    
  German pension liability (d)     —     (5,626 )   (5,626 )  
  Severance     4,117     —     4,117    
  Other exit costs     538     —     538    
  Loss/(gain) on sale of assets (b)     63     (7,127 )   (7,064 )  
  Other     —     (253 )   (253 )  
     
 
 
   
        4,718     7,831     12,549    
  Reversal of excess reserves     (72 )   —     (72 )  
     
 
 
   
      $ 4,646   $ 7,831   $ 12,477    
     
 
 
   
                         
  Cash   $ 4,583   $ 14,178   $ 18,761    
  Non-cash     63     (6,347 )   (6,284 )  
     
 
 
   
      $ 4,646   $ 7,831   $ 12,477    
     
 
 
   
 
2003
                      
 
                     
  In-process research and development (e)   $ —   $ 37,600   $ 37,600    
  Severance     6,415     —     6,415    
  Asset write-offs/ impairment     1,122     —     1,122    
  Other exit costs     2,319     —     2,319    
  Other     —     68     68    
     
 
 
   
      $ 9,856   $ 37,668   $ 47,524    
     
 
 
   
                         
  Cash   $ 8,734   $ 68   $ 8,802    
  Non-cash     1,122     37,600     38,722    
     
 
 
   
      $ 9,856   $ 37,668   $ 47,524    
     
 
 
   

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(1) Restructuring:

On April 24, 2002, the Company acquired the Filtration and Separations Group (“FSG”) and management began formulating integration plans and identifying synergistic opportunities. The study conducted in connection with the FSG integration led to a much broader initiative to examine the overall structure of the Company and the manner in which it conducted business activities with the objective of increasing revenue growth and achieving cost reduction. This resulted in a series of restructuring activities that commenced in fiscal year 2003 with focus on the integration of FSG with the Company, and have been ongoing ever since, culminating in the realignment of the overall business structure (described summarily below and in more detail in the Segment Information and Geographies note), which commenced at the end of fiscal year 2004.

2003:

• In connection with the FSG acquisition, during the fourth quarter of fiscal year 2002 and during the first three quarters of fiscal year 2003, the Company announced and implemented plans to eliminate redundant employees and facilities and to consolidate certain manufacturing lines with other Company facilities. In addition, the Company consolidated its routes to market in the United States, Europe and Asia which resulted in the termination of certain sales employees worldwide and, in Asia, payments were made to certain distributors to terminate these relationships. Furthermore, the Company announced and implemented plans to reorganize and streamline its German operations. The plans included the elimination of some functional overlap, changes in routes to market and the rationalization of product lines. Restructuring and other exit costs related to FSG employees and facilities were recorded as adjustments to goodwill in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination.
• The Company reorganized its Life Sciences business such that the Company’s hospital and medical OEM sub-segments were combined with the former Blood segment resulting in the termination of employees holding positions made redundant by the reorganization and incurrence of severance obligations.
• Furthermore, the Company announced plans to move certain Medical manufacturing from Tipperary, Ireland to Puerto Rico and Tijuana, Mexico.

2004:

• The Company implemented a plan to reorganize and streamline its operations in Japan. The plan, which affected both sales and support personnel, was aimed at increasing productivity to result in a more efficient sales-focused operation in Japan. As a result of these actions, the Company recorded severance liabilities for the termination of certain employees and exit costs related to the relocation of its Japan headquarters.
• The Company continued its plan to streamline manufacturing operations which resulted in headcount reductions in the United Kingdom and Germany as well as the sale of certain manufacturing plants in Germany primarily acquired as part of the FSG acquisition.
• In the fourth quarter of fiscal year 2004, the Company continued its Life Sciences reorganization by implementing a plan to reorganize its Medical and BioSciences management structure in order to better serve its customers in these markets. As a result of the plan, certain management positions were made redundant and the Company recorded severance liabilities for the termination of employees.

2005:

• The Company began to implement its plan to reorganize its business structure into vertically-integrated business units, as discussed further in the Segment Information and Geographies note, and continued its cost reduction initiatives. As a result, the Company recorded severance liabilities for the termination of certain employees worldwide as well as other costs related to the reorganization.
• In the first quarter of fiscal year 2005, the Company completed the sale begun in the fourth quarter of fiscal year 2004 of certain manufacturing plants in Germany acquired as part of the FSG acquisition, which resulted in the recognition of a gain of $387.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

(2) Other Charges/(Income):

(a) Early extinguishment of debt, net:
    In the fourth quarter of fiscal year 2005, the Company recorded a charge of $11,953 related to the early extinguishment of its $100,000 private placement 7.83% unsecured senior notes. The charge represents the payment to the note holders under the make-whole provision of the notes reduced by the Company’s carrying value of the notes.
   
(b) Investments:
    In fiscal year 2004, the Company recorded a gain on the sale of its investment in Oiltools International of $7,580. In fiscal year 2005, the Company recorded a charge of $2,875 for the other-than-temporary diminution in value of its strategic investment in Panacos Pharmaceuticals, Inc., formerly known as V.I. Technologies, Inc. (“VITEX”). In addition, the Company recorded a charge of $740 for the other-than-temporary diminution of a certain investment in equity securities held by its benefits protection trust. For further discussion of the Company’s investments, refer to the Other Current and Non-Current Assets note.
   
(c) Environmental Matters:
    In fiscal year 2004, the Company increased its environmental liabilities by $20,837, principally as a result of a change in the estimated duration and costs of the remediation effort at the Ann Arbor, Michigan facility of the Company’s subsidiary Gelman Sciences. In fiscal year 2005, the Company further increased its environmental remediation reserves by $2,077 related to matters in various facilities. For more detail regarding environmental matters, please refer to the Contingencies and Commitments note.
   
(d) German pension liability:
    Reflects an adjustment in fiscal year 2004 to pension liabilities in Germany due to an over accrual of pension expense that occurred during the preceding five-year period, the effect of which was not significant in any period.
   
(e) Purchase accounting adjustments:
    During the first quarter of fiscal year 2003, the Company also recorded a charge of $37,600 to write-off in-process research and development acquired in the acquisition of FSG.

The following table summarizes the activity related to restructuring liabilities that were recorded in fiscal years 2005, 2004 and 2003:

        Severance     Lease
Termination
Liabilities &
Other		     Total    
     
 
 
   
  2005                      
  Original Charge   $ 17,496   $ 2,928   $ 20,424    
  Utilized     (8,404 )   (2,739 )   (11,143 )  
  Other changes (a)     (86 )   4     (82 )  
     
 
 
   
  Balance at July 31, 2005   $ 9,006   $ 193   $ 9,199    
     
 
 
   
  2004                      
  Original Charge   $ 4,117   $ 538   $ 4,655    
  Utilized     (2,765 )   (538 )   (3,303 )  
     
 
 
   
  Balance at July 31, 2004     1,352     —     1,352    
  Utilized     (1,243 )   —     (1,243 )  
  Reversal of excess reserves (b)     (22 )   —     (22 )  
  Other changes (a)     (87 )   —     (87 )  
     
 
 
   
  Balance at July 31, 2005   $ —   $ —   $ —    
     
 
 
   

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

      Severance     Lease
Termination
Liabilities &
Other		     Total    
   
 
 
   
2003                      
Original Charge (c)   $ 13,868   $ 8,897   $ 22,765    
Utilized     (7,211 )   (6,367 )   (13,578 )  
   
 
 
   
Balance at Aug. 2, 2003     6,657     2,530     9,187    
Utilized     (5,167 )   (1,770 )   (6,937 )  
Other changes (a)     (428 )   (510 )   (938 )  
   
 
 
   
Balance at July 31, 2004     1,062     250     1,312    
Utilized     (529 )   (73 )   (602 )  
Reversal of excess reserves (b)
     (120 )   —     (120 )  
Other changes (a)     (413 )   (177 )   (590 )  
   
 
 
   
Balance at July 31, 2005   $ —   $ —   $ —    
   
 
 
   
   
a) Other changes reflect translation impact. In addition, fiscal year 2003 includes the reversal of excess restructuring accruals of $1,250 related to the FSG acquisition that were originally recorded as adjustments to goodwill in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination.
   
b) Reflects the reversal of excess restructuring reserves recorded in the consolidated statements of earnings in fiscal years 2003 and 2004.
   
c) Includes severance and other exit costs of $7,453 and $6,578, respectively, related to FSG employees and facilities that were recorded as adjustments to goodwill in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination.

ACCOUNTS RECEIVABLE

Accounts receivable are summarized as follows:

        2005     2004    
     
 
   
  Billed   $ 463,959   $ 460,062    
  Unbilled     43,206     20,905    
     
 
   
  Total     507,165     480,967    
  Less allowances for doubtful accounts     (13,515 )   (12,062 )  
     
 
   
  Accounts receivable   $ 493,650   $ 468,905    
     
 
   

Unbilled receivables principally relate to long-term contracts recorded under the percentage-of-completion method of accounting.

INVENTORIES

The major classes of inventory are as follows:

        2005     2004    
     
 
   
  Raw materials and components   $ 113,202   $ 88,341    
  Work-in-process     44,837     45,747    
  Finished goods     207,890     168,773    
     
 
   
      $ 365,929   $ 302,861    
     
 
   

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

        2005     2004    
     
 
   
  Land   $ 39,270   $ 39,289    
  Buildings and improvements     447,660     420,841    
  Machinery and equipment     715,692     678,972    
  Furniture and fixtures     75,895     77,345    
     
 
   
        1,278,517     1,216,447    
  Less: Accumulated depreciation and amortization     669,759     616,064    
     
 
   
  Property, plant and equipment, net   $ 608,758   $ 600,383    
     
 
   

GOODWILL AND INTANGIBLE ASSETS

The following table presents goodwill, net of accumulated amortization, allocated by reportable segment in accordance with SFAS No. 142:

        2005     2004    
     
 
   
  Medical   $ 28,578   $ 28,433    
  BioPharmaceuticals     45,538     28,602    
     
 
   
  Life Sciences     74,116     57,035    
     
 
   
  General Industrial     151,878     154,753    
  Aerospace     5,704     6,127    
  Microelectronics     21,206     21,745    
     
 
   
  Industrial     178,788     182,625    
     
 
   
      $ 252,904   $ 239,660    
     
 
   

The change in the carrying amount of goodwill is primarily attributable to the excess of cost over the fair value of the net assets acquired relating to the acquisitions of Biosepra and Euroflow, which are reflected in the Biopharmaceuticals segment and the reversal of excess restructuring reserves and tax allowances. For more detail regarding the acquisitions of Biosepra and Euroflow, refer to the Acquisitions note. In addition, goodwill has been restated for the Life Sciences segment for July 31, 2004 consistent with the Company’s implementation of an integrated business approach in the first quarter of fiscal year 2005. Refer to the Segment Information and Geographies note for a more detailed description.

Intangible assets consist of the following:

 
 
2005
  
     
   
 
 
Gross
Accumulated Amortization
Net
  
     
 
 
   
  Patents and unpatented technology   $ 88,098   $ 41,858   $ 46,240    
  Trademarks     4,545     1,849     2,696    
  Other     5,301     4,233     1,068    
     
 
 
   
      $ 97,944   $ 47,940   $ 50,004    
     
 
 
   


 
 
2004
  
     
   
 
 
Gross
Accumulated Amortization
Net
  
     
 
 
   
  Patents and unpatented technology   $ 76,724   $ 36,108   $ 40,616    
  Trademarks     3,619     1,432     2,187    
  Other     5,090     3,764     1,326    
     
 
 
   
      $ 85,433   $ 41,304   $ 44,129    
     
 
 
   

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

Patents and trademarks include costs to register new patents and trademarks. Patents also include expenditures to successfully defend certain patents as well as for paid-up licenses for third-party patents.

Amortization expense for fiscal years 2005, 2004 and 2003 was $6,762, $7,888 and $7,833, respectively. Amortization expense is estimated to be approximately $7,176 in 2006, $7,185 in 2007, $6,208 in 2008, $5,745 in 2009 and $5,678 in 2010.

OTHER CURRENT AND NON-CURRENT ASSETS

Other current assets consist of the following:

        2005     2004    
     
 
   
  Prepaid expenses   $ 21,858   $ 22,859    
  Deferred income taxes     57,632     68,888    
  Income tax receivable     38,641     21,411    
  Other receivables     17,754     19,958    
     
 
   
      $ 135,885   $ 133,116    
     
 
   

Other non-current assets consist of the following:

        2005     2004    
     
 
   
  Deferred income taxes (a)   $ 89,787   $ 74,803    
  Investments (b)     6,605     13,139    
  Retirement benefit assets (b)     59,998     61,027    
  Intangible pension assets (c)     11,379     10,598    
  Other     25,474     26,829    
     
 
   
      $ 193,243   $ 186,396    
     
 
   
                   
(a) Refer to the Income Taxes note for further discussion.
   
(b) The Company has invested in certain companies to form strategic alliances, enabling the Company to broaden its portfolio of products. Included in investments are certain investments of $6,576 and $6,499 at July 31, 2005 and July 31, 2004, respectively, that the Company classifies as available-for-sale. Amongst these investments is the Company’s investment in VITEX, a leading developer of a broad portfolio of blood products and systems using its proprietary viral reduction technology. At July 31, 2005, the Company owned 617.5 shares of VITEX stock (as adjusted for the one for ten reverse stock split declared by VITEX on March 15, 2005; the number of shares and per share amounts within this note for periods before the subject stock split have all been restated for the split for comparability purposes). At July 31, 2005 and July 31, 2004, the Company’s cost basis, as adjusted by previous impairment charges, was $8.00 per share and $12.70 per share, respectively. In August 2005, the Company sold the 617.5 shares for proceeds aggregating $6,783. The resulting gain of $1,806, net of fees and commissions, will be recognized in the first quarter of fiscal year 2006.
   
  Also included in investments at July 31, 2004, was the Company’s investment in and loans to Euroflow, prior to the Company’s acquisition of Euroflow (refer to the Acquisitions note for further detail), aggregating $6,640.
   
  Retirement benefit assets are held to satisfy obligations related to certain unfunded retirement benefit plans, which provide benefits to eligible employees in Germany and the U.S. Included therein are guaranteed investment contracts of $24,795 and $23,746 as of July 31, 2005 and July 31, 2004, respectively. The guaranteed investment contracts were established to pay for supplementary retirement benefits related to unfunded plans in Germany. The July 31, 2005, and July 31, 2004, balance sheets reflect related liabilities in the amounts of $51,814 and $41,211, respectively.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

  Also included within retirement benefit assets is a benefits protection trust, with assets aggregating $35,203 and $37,281 as of July 31, 2005 and July 31, 2004, respectively, established for the purpose of satisfying certain unfunded supplemental retirement benefit obligations in the U.S. for eligible executives in the event of a change of control of the Company. In addition to holding cash equivalents primarily to satisfy short-term cash requirements relating to benefit payments, the trust primarily invests in U.S. government obligations, debt obligations of corporations and financial institutions with high credit ratings and equity mutual fund shares. Contractual maturity dates of debt securities held by the trust range from 2005 to 2028. Such debt and equity securities are classified as available-for-sale and aggregated $33,522 and $27,236 as of July 31, 2005 and July 31, 2004, respectively. The July 31, 2005 and July 31, 2004, balance sheets reflect liabilities related to the trust in the amounts of $55,014 and $45,348, respectively.
   
  The following is a summary of the Company’s available-for-sale investments by category at July 31, 2005 and July 31, 2004:
                                     
  Cost/
Amortized
Cost
Basis		   Fair Value   Gross
Unrealized
Holding
Gains		   Gross
Unrealized
Holding
Losses		   Net
Unrealized
Holding
Gains/
(Losses)		   Foreign
Exchange
Gains/
(Losses)		  
 
 
 
 
 
 
 
  2005                                      
  Equity securities   $ 10,085   $ 10,614   $ 1,448   $ (1,235 ) $ 213   $ 316  
  Debt securities:                                      
 
U.S. Treasury
     8,833     8,783     —     (50 )   (50 )   —  
 
Other U.S. government
     10,954     10,855     —     (99 )   (99 )   —  
 
CMO/mortgage-backed
     474     500     26     —     26     —  
 
Corporate
     9,432     9,375     —     (57 )   (57 )   —  
 
 
 
 
 
 
 
      $ 39,778   $ 40,127   $ 1,474   $ (1,441 ) $ 33   $ 316  
 
 
 
 
 
 
 
  2004                                      
  Equity securities   $ 13,679   $ 9,932   $ 58   $ (3,638 ) $ (3,580 ) $ (167 )
  Debt securities:                                      
 
U.S. Treasury
     5,435     5,378     —     (57 )   (57 )   —  
 
Other U.S. government
     10,437     10,363     —     (74 )   (74 )   —  
 
CMO/mortgage-backed
     939     992     53     —     53     —  
 
Corporate
     6,967     7,070     103     —     103     —  
 
 
 
 
 
 
 
      $ 37,457   $ 33,735   $ 214   $ (3,769 ) $ (3,555 ) $ (167 )
 
 
 
 
 
 
 

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

  The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
                       
      Less than 12 months   12 months or greater   Total  
     
 
 
 
  Fair Value   Gross
Unrealized
Holding
Losses		   Fair Value   Gross
Unrealized
Holding
Losses		   Fair Value   Gross
Unrealized
Holding
Losses		  
 
 
 
 
 
 
 
  2005                                      
  Equity securities   $ 3,705   $ 1,235   $ —   $ —   $ 3,705   $ 1,235  
  Debt securities:                 —     —              
 
U.S. Treasury
     8,783     50     —     —     8,783     50  
 
Other U.S. government
     10,855     99     —     —     10,855     99  
 
Corporate
     9,375     57     —     —     9,375     57  
 
 
 
 
 
 
 
      $ 32,718   $ 1,441   $ —   $ —   $ 32,718   $ 1,441  
 
 
 
 
 
 
 
                 
      Less than 12 months   12 months or greater   Total  
     
 
 
 
  Fair Value   Gross
Unrealized
Holding
Losses		   Fair Value   Gross
Unrealized
Holding
Losses		   Fair Value   Gross
Unrealized
Holding
Losses		  
 
 
 
 
 
 
 
  2004                                      
  Equity securities   $ 5,001   $ 2,814   $ 3,433   $ 824   $ 8,434   $ 3,638  
  Debt securities:                                    
 
U.S. Treasury
     5,378     57     —     —     5,378     57  
 
Other U.S. government
     10,363     74     —     —     10,363     74  
 
 
 
 
 
 
 
      $ 20,742   $ 2,945   $ 3,433   $ 824   $ 24,175   $ 3,769  
 
 
 
 
 
 
 
   
  The following table shows the proceeds and gross gains and losses from the sale of available-for-sale investments for the years ended July 31, 2005, July 31, 2004 and August 2, 2003:
                   
      2005    2004    2003    
     
 
 
   
  Proceeds from sales   $ 6,900   $ 12,663   $ 19,643    
  Realized gross gains on sales     160     304     747    
  Realized gross losses on sales     2     283     102    
   
(c) Intangible pension assets represent the unfunded accumulated benefit obligations to the extent of unrecognized prior service costs. Refer to the Pension and Profit Sharing Plans and Arrangements note for further discussion.

NOTES PAYABLE AND LONG-TERM DEBT

At July 31, 2005, the Company had unsecured credit facilities which require no compensating balances, totaling approximately $137,505. In addition to providing short-term liquidity and overdraft protection, these facilities also support various “credit enhancement” programs (guarantee, performance, warranty) and other financial exposures (foreign exchange forward contracts) of the Company. At July 31, 2005, notes payable were $24,299 and an additional $20,078 was committed to various credit enhancement programs. The weighted average interest rates on notes payable at the end of fiscal years 2005 and 2004 were 3.7% and 4.5%, respectively.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

Long-term debt consists of:

    2005    2004    
   
 
   
Senior revolving credit facility, due in 2010 (a)   $ 190,000   $ 54,000    
Private placement senior notes, due in 2010 (a)     —     100,000    
Private placement senior notes, due in 2012 (b)     280,000     280,000    
Bank loan, due through October 2007 (b)     —     50,000    
Yen denominated loan, due in 2007 (c)     26,727     26,931    
Other     14,606     5,790    
   
 
   
      511,333     516,721    
SFAS No. 133 fair value adjustment, net (d)     187     2,479    
   
 
   
Total long-term debt     511,520     519,200    
Current portion     (1,359 )   (30,514 )  
   
 
   
Long-term debt, net of current portion   $ 510,161   $ 488,686    
   
 
   
                 
(a) On July 29, 2005, the Company entered into a five-year $350,000 unsecured senior revolving credit facility with a syndicate of banks, which expires on July 29, 2010. Simultaneously, the Company borrowed $190,000 under this facility and used the proceeds principally to (1) redeem all of its $100,000 private placement 7.83% senior notes (discussed below), including approximately $3,241 in accrued interest and $14,702 in make-whole payments and (2) repay the $65,250 of borrowings, accrued interest and fees due under its then existing $300,000 unsecured senior revolving credit facility entered into on August 24, 2004 (discussed below), and (3) various fees associated with the new facility. The existing $300,000 unsecured senior revolving credit facility was terminated upon the execution of the new $350,000 revolving credit facility. Letters of credit outstanding against the $350,000 revolving credit facility as of July 31, 2005 were approximately $12,396.
   
  Borrowings under the new facility bear interest at either a variable rate based upon LIBOR or at the prime rate of the Administrative Agent. The new facility contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults. The financial covenants are as follows:
     
  i.      Minimum interest coverage ratio: The Ratio of Earnings Before Net Interest, Taxes, Depreciation, Amortization and the Non-Cash Portion of Non-Recurring Charges and Income (“EBITDA”) to Net Interest Expense shall not be less than 5 to 1 computed on the basis of cumulative results for the most recently ended four consecutive quarters.
     
  ii.      Maximum funded debt ratio: The Ratio of Consolidated Funded Debt to EBITDA shall not exceed 3 to 1, EBITDA computed on the basis of cumulative results for the most recently ended four consecutive quarters.
   
  On August 24, 2004, the Company entered into a five-year $300,000 unsecured senior revolving credit facility with a syndicate of banks, which was due to expire on August 24, 2009. Simultaneously, the Company borrowed $125,000 under this facility and used the proceeds principally to repay (1) $71,200 ($54,000 outstanding as of July 31, 2004) of borrowings under its then existing $200,000 unsecured senior revolving credit facility entered into on August 30, 2000, (2) the $50,000 balance due on its then existing $100,000 bank loan (discussed below) which otherwise was to mature on October 18, 2007 and (3) various fees associated with the new facility. Both the $200,000 revolving credit facility and the $100,000 bank loan were terminated upon the execution of the new revolving credit facility. This facility was terminated on July 29, 2005, as described above.
   
  On August 29, 2000, the Company completed a $100,000 private placement of 7.83% unsecured senior notes due in 2010. In addition, on August 30, 2000, the Company closed a five-year $200,000 unsecured senior revolving credit facility, which was due to expire on August 30, 2005. The balance outstanding under this facility of $54,000 as of July 31, 2004 was classified as long-term based on the refinancing of this indebtedness on August 24, 2004, as described above. Also as discussed above, on July 29, 2005, the balance due on the $100,000 private placement was repaid.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

    The Company was in compliance with all covenants of its various debt agreements as of July 31, 2005.
   
(b) On August 6, 2002, the Company completed a private placement offering of $280,000 of 6% senior notes due on August 1, 2012. The notes are unsecured and unsubordinated obligations of the Company and rank pari passu to its other outstanding unsecured and unsubordinated indebtedness.
     
    On October 18, 2002, the Company entered into a $100,000 bank loan, bearing interest at a variable rate based upon LIBOR or the prime rate of the Administrative Agent, which matured in quarterly installments of $5,000 starting in January 2003 and running through October 2007. As discussed above, the balance due on the $100,000 loan was repaid on August 24, 2004.
   
(c) The Company refinanced its Yen 3 billion loan (approximately $26,727 as of July 31, 2005), which was due on June 20, 2005, until June 20, 2007. Interest payments are at a variable rate based upon Yen LIBOR. The Company has designated the June 2005 Yen 3 billion loan as a non-derivative hedge of its net Yen investment in a Japanese subsidiary. As a result of such designation, adjustments related to the fair market value of the Yen 3 billion loan are reported in other comprehensive income.
   
(d) Refer to the Financial Instruments and Risks and Uncertainties note for further discussion of the Company’s hedging activities.

The aggregate annual maturities of long-term debt during fiscal years 2006 through 2010 are approximately as follows:

  2006   $ 1,359    
  2007     28,627    
  2008     1,408    
  2009     1,475    
  2010     191,547    

Interest expense, net, for fiscal years 2005, 2004 and 2003 is comprised of:

      2005   2004   2003    
     
 
 
   
  Interest expense   $ 30,895   $ 24,143   $ 28,450    
  Interest income     4,945     3,642     4,012    
     
 
 
   
  Interest expense, net   $ 25,950   $ 20,501   $ 24,438    
     
 
 
   

FINANCIAL INSTRUMENTS AND RISKS AND UNCERTAINTIES

The Company is exposed to market risks, such as changes in foreign currency exchange rates and interest rates. The purpose of the Company’s foreign currency hedging program is to reduce the risk caused by short-term changes in exchange rates. To accomplish this, the Company uses certain contracts, primarily foreign currency forward contracts (“forwards”), which minimize cash flow risks from changes in foreign currency exchange rates. The Company manages interest risk using a mix of fixed-rate and variable-rate debt. To manage this risk in a cost efficient manner, the Company enters into interest rate swaps in which the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. Derivative instruments are not used for speculative or trading purposes.

The Company entered into two consecutive, non-concurrent, “receive fixed, pay variable” fair value interest rate swap transactions related to the then existing $100,000 private placement of 7.83% notes due in 2010. Both transactions had an aggregate notional amount of $100,000 and both were terminated prior to maturity to enable the Company to monetize, or realize, gains in the fair value of the swaps. The initial swap was entered into in fiscal year 2001 and terminated in fiscal year 2002. The second swap was entered into in fiscal year 2002 (concurrent with the termination of the first swap) and was terminated in fiscal year 2003. Proceeds related to the terminations in fiscal years 2002 and 2003, net of accrued interest due to the Company of $1,035 in fiscal year 2003, totaled $1,000 and $7,533, respectively; such amounts being reflected as a realized adjustment to the carrying value of the underlying indebtedness and amortized, as a reduction of interest expense, over the then remaining life of such indebtedness. A combined unamortized balance of $5,506 was written off on July 29, 2005 pursuant to the early extinguishment of the $100,000 private placement 7.83% senior notes due in 2010.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

The Company also entered into two consecutive, non-concurrent, “receive fixed, pay variable” fair value interest rate swap transactions related to the $280,000 private placement 6.00% notes due in 2012. Both transactions had an aggregate notional amount of $230,000 and both were terminated prior to maturity. The initial swap was entered into in fiscal year 2003 and terminated that same year to monetize, or realize, gains in the fair market value of the swap. Proceeds, net of accrued interest due to the Company of $2,667, were $13,467 and are being amortized as a reduction of interest expense over the remaining life of the underlying indebtedness. The second swap was entered into in fiscal year 2003 (concurrent with the termination of the first swap) and was terminated in fiscal year 2005 to effect a decision by management to increase the fixed rate portion of the Company’s debt portfolio in response to changes in the interest rate environment. The cash outlay, augmented by accrued interest due to the Company of $894, totaled $10,938; such amount being amortized as an increase to interest expense over the remaining life of the underlying indebtedness. The unamortized balance of both swaps, netting to $187 at July 31, 2005, is reflected as a realized adjustment to the carrying value of the underlying indebtedness.

The components of SFAS No. 133 fair value adjustment, net, as reflected in the note entitled “Notes Payable and Long-Term Debt” are as follows:

    2005    2004    
   
 
   
  $280,000
Private
Placement		   $100,000
Private
Placement		   $280,000
Private
Placement		   Total    
 
 
 
 
   
Realized   $ 187   $ 6,589   $ 11,752   $ 18,341    
Unrealized     —     —     (15,862 )   (15,862 )  
 
 
 
 
   
Total   $ 187   $ 6,589   $ (4,110 ) $ 2,479    
 
 
 
 
   

On March 7, 2003, the Company entered into a forward dated “receive variable, pay fixed” interest rate swap related to the Yen 3 billion loan that matured in June 2005, whereby the Company received payments at a variable rate based upon Yen LIBOR and made payments at a fixed rate of .95% on a notional amount of Yen 3 billion. Concurrent with the maturity of the underlying Yen 3 billion loan, this swap terminated in June 2005. On May 9, 2005 the Company entered into a forward dated “receive variable, pay fixed” interest rate swap related to the June 2005 refinancing of the Yen 3 billion loan. The Company will receive payments at a variable rate based upon Yen LIBOR, and will make payments at an all-in fixed rate of 0.36% on a notional amount of Yen 3 billion. The swap has the same term as the Yen 3 billion loan.

In April 2003, the Company amended the terms of the “receive variable, pay fixed” interest rate swap related to certain borrowings under the senior credit facility. The Company receives payments at a variable rate based on LIBOR and makes payments at an effective rate of 4.3% on a notional amount of $25,000. The swap expires in February 2006.

In June 2005, pursuant to the execution of a Yen 3.5 billion loan from a U.S. dollar functional Netherlands subsidiary of the Company (“PNBV”) to a Japanese subsidiary of the Company (“NPL”), PNBV entered into a cross currency swap with a financial institution. Under the terms of the agreement, PNBV will make interest payments to the financial institution at a fixed rate, based upon a notional amount of Yen 3.5 billion. In return, the financial institution will make interest payments to PNBV, at a fixed rate, based upon a $32,154 notional amount (the U.S. dollar equivalent of the Yen 3.5 billion based upon the spot rate on the date of the closing of this transaction). At the end of this arrangement, PNBV will remit the Yen 3.5 billion principal, which it will receive from NPL, to the financial institution, which in turn will remit the $32,154 to PNBV.

As of July 31, 2005, the Company had interest rate swaps and forwards outstanding with notional amounts aggregating $51,726 and $36,874, respectively, whose fair values were a liability of $11 and $76, respectively. Other comprehensive income includes $11 of cumulative unrealized losses on variable to fixed rate interest rate swaps (i.e., cash flow hedges) of which $22 is expected to be reclassified into earnings within one year.

The credit risk related to the interest rate swaps and the forwards is considered low because such instruments are entered into only with financial institutions having high credit ratings and are generally settled on a net basis.

The Company considers the fair value of all non-derivative financial instruments to be not materially different from their carrying value at year-end, except for fixed rate debt with a face value of $280,000, a carrying value of $280,187 and a fair value of $296,500. The fair market value was determined by calculating the present value of all future cash flows (i.e., interest and principal) using the discount factor mandated by the indenture in the event of early extinguishment.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

The Company’s cash and cash equivalents are in high-quality securities placed with a wide array of financial institutions with high credit ratings. This investment policy limits the Company’s exposure to concentration of credit risks.

The Company’s products are sold to a diverse group of customers throughout the world. The Company is subject to certain risks and uncertainties as a result of changes in general economic conditions, sources of supply, competition, foreign exchange rates, tax reform, litigation and regulatory developments. The diversity and breadth of the Company’s products and geographic operations mitigate the risk that adverse changes in any event would materially affect the Company’s financial position. Additionally, as a result of the diversity of its customer base, the Company does not consider itself exposed to concentration of credit risks. These risks are further minimized by placing credit limits, ongoing monitoring of customers’ account balances, and assessment of customers’ financial strength.

INCOME TAXES

The components of earnings before income taxes are as follows:

    2005   2004   2003  
   
 
 
 
Domestic operations, including Puerto Rico   $ 37,621   $ 52,612   $ 19,042  
Foreign operations     143,450     145,220     124,194  
   
 
 
 
    $ 181,071   $ 197,832   $ 143,236  
   
 
 
 
The provisions for income taxes consist of the following items:                    
Current:                    
Federal and Puerto Rico
   $ 9,069   $ 18,240   $ 6,744  
Foreign
     33,084     46,685     43,627  
   
 
 
 
      42,153     64,925     50,371  
   
 
 
 
Deferred:                    
Federal and Puerto Rico
     3,273     (18,105 )   (12,027 )
Foreign
     (5,171 )   (561 )   1,690  
   
 
 
 
      (1,898 )   (18,666 )   (10,337 )
   
 
 
 
    $ 40,255   $ 46,259   $ 40,034  
   
 
 
 

A reconciliation of the provisions for income taxes follows:

    % of Pretax Earnings  
   
 
    2005   2004   2003  
   
 
 
 
Computed “expected” tax expense
     35.0 %   35.0 %   35.0 %
Tax benefit of Puerto Rico operations
     (8.4 )   (8.4 )   (14.3 )
Non-deductibility of in-process research and development write-off
     —     —     9.2  
Change in valuation allowance
     0.6     (1.6 )   3.4  
Foreign income and withholding taxes,
net of U.S. foreign tax credits
     (4.5 )   (4.5 )   (4.7 )
Other
     (0.5 )   2.9     (0.7 )
   
 
 
 
Effective tax rate
     22.2 %   23.4 %   27.9 %
   
 
 
 

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

The Company has two Puerto Rico subsidiaries that are organized as “possessions corporations” as defined in Section 936 of the Internal Revenue Code. The Small Business Job Protection Act of 1996 repealed Section 936 of the Internal Revenue Code which provided a tax credit for U.S. companies with operations in certain U.S. possessions, including Puerto Rico. For companies with existing qualifying Puerto Rico operations, such as The Company, Section 936 will be phased out, with a decreasing credit being available through the last taxable year beginning before January 1, 2006.

The Company also operates a third Puerto Rico entity as a branch of a wholly owned controlled foreign corporation (“CFC”). Under U.S. tax principles, the earnings of a CFC are normally subject to U.S. tax only upon repatriation. Accordingly, no taxes have been provided on the unrepatriated earnings of this subsidiary.

The components of the net deferred tax asset at July 31, 2005 and July 31, 2004, are as follows:

      2005   2004    
     
 
   
  Deferred tax asset:                
 
Tax loss and tax credit carry-forwards
   $ 122,794   $ 146,514    
 
Inventories
     18,544     14,166    
 
Compensation and benefits
     56,039     48,656    
 
Environmental
     8,300     10,003    
 
Accrued expenses
     12,409     17,693    
 
Other
     39,233     18,748    
     
 
   
  Gross deferred tax asset     257,319     255,780    
 
Valuation allowance
     (57,631 )   (68,829 )  
     
 
   
  Total deferred tax asset     199,688     186,951    
     
 
   
  Deferred tax liability:                
 
Plant and equipment
     (38,615 )   (36,971 )  
 
Pension assets
     (8,840 )   (10,086 )  
 
Other
     (15,993 )   (12,208 )  
     
 
   
  Total deferred tax liability     (63,448 )   (59,265 )  
     
 
   
  Net deferred tax asset   $ 136,240   $ 127,686    
     
 
   

As of July 31, 2005, the Company had available tax operating loss, tax capital loss and tax credit carry forwards subject to expiration as follows:

      Losses          
     
         
  Year of Expiration   Operating   Capital   Tax Credits    
     
 
 
   
  2006   $ —   $ —   $ 5,818    
  2007-2015     8,958     66,656     55,588    
  2016-2025     5,750     —     —    
     
 
 
   
 
Subtotal
     14,708     66,656     61,406    
  Indefinite     58,573     —     14,007    
     
 
 
   
 
Total
   $ 73,281   $ 66,656   $ 75,413    
     
 
 
   

The valuation allowance has been reduced by $11,198 as of July 31, 2005. During the period, a charge of $2,488 was recorded to goodwill due to the release of valuation allowances of acquired net operating losses. The remainder of the reduction was primarily the result of the expiration of previously reserved operating losses in various foreign entities.

In evaluating the reasonableness of the valuation allowance, management assesses whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Ultimately, the realization of deferred tax assets is dependent upon generation of future taxable income during those periods in which temporary differences become deductible and/or credits can be utilized. To this end, management considers the level of historical taxable income, the scheduled reversal of deferred tax liabilities, tax-planning strategies and projected future taxable income. Based on these considerations, and the indefinite carry-forward availability of certain deferred tax credits (principally related to alternative minimum tax), management believes it is more likely than not that the Company will realize the benefit of the deferred tax asset, net of the July 31, 2005 valuation allowance.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

If subsequently recognized, the tax benefit attributable to $38,184 would be charged to goodwill. This valuation allowance relates primarily to pre-acquisition tax operating loss and tax capital loss carry forwards.

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated, as defined in the Act. As of July 31, 2005, the Company has not provided deferred taxes on $1,036,983 of undistributed foreign subsidiaries’ earnings since substantially all such earnings were expected to be permanently invested in foreign operations. The range of reasonably possible amounts, based upon the law, that are being considered for repatriation due to the aforementioned provision is between zero and $500,000. The related potential range of income tax is between zero and $26,250. The extent to which the Company will ultimately take advantage of this provision depends on a number of factors, including the manner in which the funds will be utilized and the ability to obtain financing abroad.

ACCRUED AND OTHER NON-CURRENT LIABILITIES

Accrued liabilities consist of the following:

      2005   2004    
     
 
   
  Payroll and related taxes   $ 93,869   $ 91,081    
  Benefits     33,001     38,395    
  Interest payable     18,784     14,047    
  Environmental remediation (a)     5,699     7,276    
  Other     65,927     58,724    
     
 
   
      $ 217,280   $ 209,523    
     
 
   

Other non-current liabilities consist of the following:

      2005   2004    
     
 
   
  Retirement benefits   $ 126,399   $ 100,629    
  Environmental remediation (a)     18,836     22,416    
  Fair value of interest rate swaps (b)     —     15,862    
  Other     2,468     1,830    
     
 
   
      $ 147,703   $ 140,737    
     
 
   
(a) For further discussion regarding environmental remediation liabilities refer to the Contingencies and Commitments note.
   
(b) For further discussion regarding interest rate swaps refer to the Financial Instruments and Risks and Uncertainties note.

PENSION AND PROFIT SHARING PLANS AND ARRANGEMENTS

Pension Plans

The Company provides substantially all domestic and foreign employees with retirement benefits. Funding policy for domestic plans, which is primarily comprised of a cash balance pension plan, is in accordance with the Employee Retirement Income Security Act of 1974 (“ERISA”); for foreign plans, funding is determined by local tax laws and regulations. Pension costs charged to operations totaled $29,890, $24,962 and $17,723 in fiscal years 2005, 2004 and 2003, respectively.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

The Company uses a July 31 measurement date for its defined benefit pension plans. The following table reflects the change in benefit obligations, change in plan assets and funded status for these plans:

        U.S. Plans   Foreign Plans  
       
 
 
        2005   2004   2005   2004  
       
 
 
 
 
  Change in benefit obligation:                          
    Benefit obligation – beginning of year   $ 153,145   $ 141,291   $ 239,452   $ 205,958  
    Curtailments and settlements     —     —     141     (1,110 )
    Service cost     6,633     6,540     6,897     7,423  
    Interest cost     9,227     8,416     12,864     11,408  
    Plan participant contributions     —     —     2,464     2,425  
    Plan amendments     1,682     937     —     3,572  
    Actuarial loss (gain)     26,151     6,195     47,667     (5,450 )
    Total benefits paid     (10,646 )   (10,234 )   (9,939 )   (8,202 )
    Effect of exchange rates     —     —     (8,165 )   23,428  
       
 
 
 
 
  Benefit obligation – end of year     186,192     153,145     291,381     239,452  
       
 
 
 
 
  Change in plan assets (a):                          
    Fair value of plan assets – beginning of year     74,529     66,576     139,302     118,204  
    Actual return on plan assets     10,319     7,756     27,858     5,639  
    Company contributions     17,597     10,431     10,049     6,439  
    Plan participant contributions     —     —     2,464     2,425  
    Benefits paid from plan assets     (10,646 )   (10,234 )   (9,939 )   (8,202 )
    Effect of exchange rates     —     —     (5,620 )   14,797  
       
 
 
 
 
  Fair value of plan assets – end of year     91,799     74,529     164,114     139,302  
       
 
 
 
 
  Funded status (a):     (94,393 )   (78,616 )   (127,267 )   (100,150 )
    Unrecognized actuarial loss     46,696     27,168     99,355     79,293  
    Unrecognized prior service cost     8,107     7,309     3,642     4,413  
    Unrecognized transition (asset) obligation     (85 )   (127 )   —     142  
       
 
 
 
 
  Net amount recognized   $ (39,675 ) $ (44,266 ) $ (24,270 ) $ (16,302 )
       
 
 
 
 
  Amount recognized in the balance sheet consists of:                          
    Prepaid benefit   $ —   $ —   $ —   $ —  
    Accrued benefit liability     (71,403 )   (66,600 )   (77,365 )   (59,693 )
    Intangible asset     7,990     6,815     3,389     3,783  
    Accumulated other comprehensive income     23,738     15,519     49,706     39,608  
       
 
 
 
 
  Net amount recognized   $ (39,675 ) $ (44,266 ) $ (24,270 ) $ (16,302 )
       
 
 
 
 
                             
  Accumulated benefit obligation   $ 162,787   $ 138,680   $ 241,347   $ 195,175  
                             
  Plans with accumulated benefit obligations in excess of plan assets consist of the following:                          
                               
    Accumulated benefit obligation   $ 162,787   $ 138,680   $ 241,347   $ 195,175  
    Projected benefit obligation     186,192     153,145     291,381     239,452  
    Plan assets at fair value     91,799     74,529     164,114     139,302  
     
  (a) The Company has certain unfunded supplemental defined benefit plans, which provide benefits to eligible executives in the U.S. and employees abroad. As such, the above tables do not include the Company’s assets relating to these plans of $34,107 and $36,341 for the U.S. plans and $24,795 and $23,746 for the foreign plans as of July 31, 2005 and July 31, 2004, respectively. Liabilities, included in the tables above, related to these plans were $53,711 and $44,177 for the U.S. plans and $51,814 and $41,211 for the foreign plans as of July 31, 2005 and July 31, 2004, respectively.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

Net periodic benefit cost for the Company’s defined benefit pension plans includes the following components:

    U.S. Plans   Foreign Plans  
   
 
 
    2005   2004   2003   2005   2004   2003  
   
 
 
 
 
 
 
 
Service cost
 $ 6,633   $ 6,540   $ 5,185   $ 6,897   $ 7,423   $ 7,382  
 
Interest cost
   9,227     8,416     8,459     12,864     11,408     9,685  
 
Expected return on plan assets
   (5,196 )   (5,455 )   (6,232 )   (9,333 )   (9,207 )   (8,990 )
 
Amortization of prior service cost
   884     749     674     501     499     208  
 
Amortization of net transition asset
   (42 )   (81 )   (226 )   21     32     (150 )
 
Recognized actuarial loss
   1,500     1,195     571     5,274     4,107     1,121  
 
(Gain) loss due to curtailments and settlements
   —     —     —     660     (664 )   36  
   
 
 
 
 
 
 
 
Net periodic benefit cost
 $ 13,006   $ 11,364   $ 8,431   $ 16,884   $ 13,598   $ 9,292  
   
 
 
 
 
 
 

The following table provides the weighted-average assumptions used to determine benefit obligations and net periodic benefit cost:

    U.S. Plans   Foreign Plans  
   
 
 
    2005   2004   2003   2005   2004     2003  
   
 
 
 
 
   
 
 
Assumptions used to determine benefit obligations
                                    
 
Discount rate
   5.25 %   6.25 %   6.25 %   4.51 %   5.32 %   5.10 %
 
Rate of compensation increase
   3.67 %   3.50 %   4.00 %   3.79 %   3.64 %   3.65 %
                                       
 
Assumptions used to determine net periodic benefit cost
                                    
 
Discount rate
   6.25 %   6.25 %   7.25 %   5.32 %   5.10 %   5.62 %
 
Expected long-term rate of return on plan assets
   7.00 %   8.00 %   9.00 %   6.30 %   6.31 %   6.30 %
 
Rate of compensation increase
   3.50 %   4.00 %   4.00 %   3.64 %   3.65 %   3.58 %

The Company determines its actuarial assumptions on an annual basis. To develop the expected long-term rate of return on plan assets assumption, the Company considers the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based upon the target asset allocation to develop the expected long-term rate of return on plan assets assumption for the portfolio.

The following table provides the Company’s weighted average target plan asset allocation and actual asset allocation by asset category:

      2005   2004    
     
 
   
      Target
Allocation		   Actual
Allocation		   Actual
Allocation		    
     
 
 
   
  Equity securities     60-70%     70 %   69 %  
  Debt securities     21-30%     23 %   22 %  
  Other     5-10%     7 %   9 %  

The Company’s investment objective for defined benefit plan assets is to meet the plans’ benefit obligations, while preserving plan assets. The investment strategies focus on asset class diversification, liquidity to meet benefit payments and an appropriate balance of long-term return and risk. Plan assets are diversified across several investment managers and are generally invested in liquid funds that track broad market equity and bond indices. Plan fiduciaries oversee the investment allocation process, which includes selecting investment managers, commissioning periodic asset-liability studies, setting long-term strategic targets and monitoring asset allocations.

Management’s best estimate of the Company’s cash requirements for the defined benefit plans for the year ending July 31, 2006 is $23,392. This is comprised of expected benefit payments of $5,456, which will be paid directly to participants of unfunded plans from Company assets, as well as expected Company contributions to funded plans of $17,936. Expected contributions are dependent on many variables, including the variability of the market value of the assets as compared to the obligation and other market or regulatory conditions. Accordingly, actual funding may differ greatly from current estimates.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

The following table provides the pension benefits expected to be paid to participants, which include payments funded from the Company’s assets, as discussed above, as well as payments paid from plan assets:

  Expected pension benefit payments
  2006     $  17,559  
  2007     18,694  
  2008     20,097  
  2009     20,032  
  2010     20,354  
  2011-2015     115,453  

Defined Contribution Plans

The Company’s 401(k) and profit sharing plan covers substantially all domestic employees of the Company and its participating subsidiaries, other than those employees covered by a union retirement plan. The Plan provides that participants may voluntarily contribute a percentage of their compensation and the Company will make a matching contribution equal to 100% of the first 3% of each participant’s contributions. Company contributions in excess of the matching contribution are contingent upon realization of profits of the Company and its participating subsidiaries, unless the Board of Directors decides otherwise. The expense associated with the plan for fiscal years 2005, 2004, and 2003 was $5,297, $5,781 and $5,775, respectively.

The Company and its subsidiaries also participate in defined contribution pension plans primarily for the benefit of certain foreign employees. The expense associated with these plans was $4,266, $2,165 and $1,686 for fiscal years 2005, 2004 and 2003, respectively.

CONTINGENCIES AND COMMITMENTS

Certain facilities of the Company are involved in environmental proceedings. The most significant matter pertains to the Company’s subsidiary, Gelman Sciences Inc. (“Gelman”), which constitutes most of the $24,535 and $29,692 of accruals in the Company’s Consolidated Balance Sheets at July 31, 2005, and July 31, 2004, respectively. The Company recorded charges of $2,077 and $20,837 in fiscal years 2005 and 2004, respectively, related to environmental matters. The increases recorded to the environmental liabilities represent management’s best estimate of the cost to be incurred to perform remediation. The estimates are based upon the feasibility of the use of certain remediation technologies and processes as well as the facts known to management at the time the estimates are made. (Refer to the Accounting Policies and Related Matters - Presentation and Use of Estimates note).

Nearly ten years prior to the Company’s acquisition of Gelman in February 1997, an action was filed in the Circuit Court for Washtenaw County, Michigan (“Court”) by the State of Michigan (“State”) seeking to compel Gelman to investigate and remediate contamination near Gelman’s Ann Arbor facility and requested reimbursement of costs the State had expended in investigating the contamination, which the State alleged was caused by Gelman’s disposal of waste water from its manufacturing process. Pursuant to a consent judgment entered into by Gelman and the State in October 1992 (amended September 1996 and October 1999), which resolved that litigation, Gelman is remediating the contamination without admitting wrongdoing. In February 2000, the State Assistant Attorney General filed a Motion to Enforce Consent Judgment in the Court seeking approximately $4,900 in stipulated penalties for the alleged violations of the consent judgment and additional injunctive relief. Gelman disputed these assertions. Following an evidentiary hearing in July 2000, the Court took the matter of penalties “under advisement.” The Court issued a Remediation Enforcement Order (“the REO”) requiring Gelman to submit and implement a detailed plan that will reduce the contamination to acceptable levels within five years. Gelman’s plan has been submitted to, and approved by, both the Court and the State. Although Gelman has met monthly milestones established under the plan and although contaminant concentrations have been significantly reduced, the goal of reducing contaminant levels to acceptable levels within five years has not been met. The Court, however, concluded that Gelman was in compliance with the terms of the REO in a subsequent order issued in December 2004 (see below).

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

In February 2004, the Court instructed Gelman to submit its Final Feasibility Study describing how it intends to address an area of groundwater contamination not addressed by the previously approved plan. Gelman has submitted its Feasibility Study as instructed. The State also submitted its plan for remediating this area of contamination to the Court. On December 17, 2004, the Court issued its Order and Opinion Regarding Remediation and Contamination of the Unit E. Aquifer (the “Unit E Order”). The Court adopted, with limited modifications, Gelman’s remediation plan for this area of contamination. The Court also noted that Gelman was in compliance with the Court’s previous REO. The State has not appealed the Unit E Order. Gelman is now in the process of implementing the requirements of the Order.

On May 12, 2004, the City of Ann Arbor (the “City”) filed a lawsuit against Gelman in Washtenaw County Circuit Court. The City’s suit seeks damages, including the cost of replacing a municipal water supply well allegedly affected by the 1,4-dioxane groundwater contamination, as well as injunctive relief in the form of an order requiring Gelman to remediate the soil and groundwater beneath the City. The contaminant levels allegedly detected in the municipal well at issue, however, are well below applicable cleanup standards and the Gelman will vigorously defend against the claim.

By Order dated July 19, 2005, the Court granted Gelman’s motion for partial summary disposition, in part, dismissing two of the City’s three common law claims. Gelman will continue to challenge the legal and factual basis of the City’s remaining statutory and common law claims. The trial, if one is necessary, is set for May 1, 2006.

On June 25, 2004, the Company was sued in the United States District Court for the Eastern District of Michigan by a private plaintiff in connection with the groundwater contamination. The complaint seeks both money damages and injunctive relief requiring remediation of the contamination. The plaintiff also seeks to represent a larger class of property owners and residents who plaintiff claims are affected by the groundwater contamination. On August 25, 2004, the Company filed a motion for summary judgment seeking to dismiss the plaintiff’s claims. In response, plaintiff’s counsel sought and was granted permission to amend the complaint. An amended complaint was filed on November 17, 2004, which added seven plaintiffs. The Company does not believe that there is substantive merit to the named plaintiffs’ claims or a basis for class certification.

On December 27, 2004, the Company filed a second motion for summary judgment addressing the new plaintiffs’ claims. In response, plaintiffs sought, and were granted leave to file a second amended complaint adding a federal statutory claim. Plaintiffs were also granted leave to conduct limited discovery. Discovery is nearing completion and the Company is to re-file its dispositive motion by October 17, 2005. No trial date has been set. The Company will continue to vigorously defend the lawsuit.

On August 10, 2005, the City filed a lawsuit against Gelman under the Federal Superfund Statute (“CERCLA”) for recovery of the City’s alleged response costs, including well replacement costs. Gelman filed its responsive pleadings on September 15, 2005 and will vigorously defend the lawsuit.

In the opinion of management, the Company is in substantial compliance with applicable environmental laws and its accruals for environmental remediation are adequate at this time. Because regulatory standards under environmental laws are becoming increasingly stringent, there can be no assurance that future developments, additional information and experience gained will not cause the Company to incur material environmental liabilities or costs beyond those accrued in its consolidated financial statements.

The Company and its subsidiaries are subject to certain other legal actions that arise in the normal course of business. It is management’s opinion that these other actions will not have a material effect on the Company’s financial position.

The Company warrants its products against defect in design, materials and workmanship over various time periods. Warranty costs are recorded based upon experience. The warranty accrual as of July 31, 2005 and July 31, 2004 is immaterial to the financial position of the Company and the change in the accrual for fiscal year 2005 is immaterial to the Company’s consolidated results of operations, cash flows and financial position.

As of July 31, 2005, the Company had performance bonds outstanding relating primarily to its long-term contracts with governmental agencies of approximately $57,778.

The Company and its subsidiaries lease office and warehouse space, automobiles, computers and office equipment. Rent expense for all operating leases amounted to approximately $24,103 in 2005, $22,870 in 2004, and $21,944 in 2003. Future minimum rental commitments at July 31, 2005, for all non-cancelable operating leases with initial terms exceeding one year are $23,281 in 2006; $15,021 in 2007; $8,988 in 2008; $5,901 in 2009; $3,297 in 2010 and $7,083 thereafter.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

The Company and its subsidiaries have various non-cancelable purchase commitments for goods or services with various vendors that have terms in excess of one year. Future purchase commitments at July 31, 2005, for the aforementioned purchase commitments are $43,355 in 2006; $15,747 in 2007; $9,902 in 2008; $6,452 in 2009 and $119 in 2010.

The Company has employment agreements with its executive officers, the terms of which expire at various times through August 2005. Such agreements, which have been revised from time to time, provide for minimum salary levels, adjusted annually for cost-of-living changes, as well as for incentive bonuses that are payable if specified management goals are attained as discussed in the Incentive Compensation Plan note. The aggregate commitment for future salaries at July 31, 2005, excluding bonuses, was approximately $10,903.

COMMON STOCK

Shareholder Rights Plan

In 1989, the Board of Directors adopted, and the Company’s shareholders approved, a Shareholder Rights Plan. Under the Plan, as amended on April 20, 1999, one right is attached to each outstanding share of the Company’s common stock. Each right, when it becomes exercisable, will entitle the registered holder to purchase one share of the Company’s common stock at an initial exercise price of $80 per share, subject to adjustment in certain events. The rights will become exercisable and will trade separately from the common stock (1) ten days after any person or group acquires 20% or more of the Company’s outstanding common stock (an Acquiring Person), or (2) ten business days after any person or group commences or announces a tender offer for 20% or more of the outstanding common stock. If any person or group becomes an Acquiring Person, each holder of a right, other than rights owned by the Acquiring Person, would thereafter be entitled, upon exercise of the right at the exercise price, to receive a number of shares of common stock of the Company having a market value at that time of twice the exercise price of the right. Alternatively, the Board of Directors could exchange the rights not owned by the Acquiring Person for common stock at an exchange ratio of one share of common stock per right. In addition, if the Company is acquired in a merger or other business combination, or 50% or more of its consolidated assets or earning power are sold, each holder of a right would thereafter be entitled, upon exercise of the right at the exercise price, to receive a number of shares of the most powerful voting capital stock of the acquiring company which at the time of the business combination or sale had a market value of twice the exercise price of the right.

The rights will expire on December 1, 2009, unless earlier redeemed. The rights are redeemable by the Board of Directors for one-third of a cent per right at any time until a person or group becomes an Acquiring Person.

Stock Repurchase Programs

On October 17, 2003, the Company’s Board of Directors authorized the expenditure of up to $200,000 to repurchase shares of the Company’s common stock. On October 14, 2004, the Board authorized the additional expenditure of up to another $200,000 for the repurchase of the Company’s common stock. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on these authorizations. In fiscal year 2004, the Company purchased 3,099 shares at an aggregate cost of $75,000 with an average price per share of $24.20. In fiscal year 2005, the Company purchased 2,435 shares at an aggregate cost of $64,246 with an average price per share of $26.38. Therefore, $260,754 remains to be expended under the current stock repurchase program. Repurchased shares are held in treasury for use in connection with the Company’s stock plans and for general corporate purposes.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

STOCK PLANS

Stock Purchase Plans

During fiscal year 2000, the Company’s shareholders approved two stock purchase plans, a Management Stock Purchase Plan (“MSPP”) and an Employee Stock Purchase Plan (“ESPP”). These plans enable employees of the Company to purchase the Company’s common stock. Participation in the MSPP is limited to certain executives as designated by the Compensation Committee of the Board of Directors, which also established common stock ownership targets for participants. Participation in the ESPP is available to all employees except those that are included in the MSPP.

The purpose of the MSPP is to encourage key employees of the Company to increase their ownership of shares of the Company’s common stock by providing such employees with an opportunity to elect to have portions of their total annual compensation paid in the form of restricted units, to make cash purchases of restricted units and to earn additional matching restricted units which vest over a three year period for matches prior to August 1, 2003 and vest over four years for matches made thereafter. Such restricted units aggregated 616 and 597 as of July 31, 2005 and July 31, 2004, respectively. In fiscal years 2005 and 2004, approximately 77 and 78 vested restricted units, respectively were distributed. During fiscal years 2005, 2004 and 2003 participants’ deferred compensation and cash payments amounted to $2,508, $2,836 and $1,142 and the Company recognized $754, $563 and $554, respectively, of expense related to matching restricted units.

The ESPP enables participants to purchase shares of the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the market price at the beginning or end of each semi-annual stock purchase period. The semi-annual offering periods end in April and October. During fiscal years 2005, 2004 and 2003, the Company issued 404, 304 and 305 shares at an average price of $21.23, $18.99 and $14.86, respectively.

All of the above shares were issued from treasury stock.

Stock Option Plans

The Company has adopted several plans that provide for the granting of stock options to employees and non-employee directors at option prices equal to the market price of the common stock at the date of grant. On November 17, 2004, the Company’s shareholders approved the 2005 Stock Compensation Plan (the “2005 Plan”) which: (a) amended the 2001 Stock Option Plan for non-employee directors to reduce the total number of shares remaining available for grants from 261 to 150, (b) terminated all other stock plans, except that options outstanding thereunder remain in effect in accordance with their terms, and (c) provided for the issuance of up to 5,000 shares under the 2005 Plan. The 2005 Plan permits the Company to grant to its employees and non-employee directors other forms of equity compensation in addition to stock options (that is, restricted shares, restricted units, performance shares and performance units).

In addition to the 423 stock options granted under the 2005 Plan, restricted stock units were also awarded in fiscal year 2005. The fair value of the awards are determined by reference to the closing price of the stock on the date of the award, and are charged to earnings over the service periods during which the awards are deemed to be earned; one year, in the case of the annual award units to non-employee directors, and four years, in the case of units awarded to employees. The annual award units granted to non-employee directors of the Company vest immediately and are converted to shares once the director ceases to be a member of the Board. A total of 9 units were awarded to non-employee directors in fiscal year 2005, with a market value of $252, of which $147 was charged to expense in fiscal year 2005. Restricted stock units to employees cliff-vest after the fourth anniversary of the date of grant. A total of 261 restricted stock units, net of forfeitures, were granted to employees in fiscal year 2005, with a market value of $7,842, of which $233 was charged to expense in fiscal year 2005.

The forms of option adopted provide that the options may not be exercised within one year from the date of grant, and expire if not completely exercised within 10 years from the date of grant. For the most part, in any year after the first year, the options can be exercised with respect to only up to 25% of the shares subject to the option, computed cumulatively. The Company’s shareholders have approved all of the Company’s stock option plans.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

Changes in the options outstanding during fiscal years 2003, 2004 and 2005 are summarized in the following table:

      Number of
Options		     Price Range     Weighted
Average
Price		     Options
Exercisable		    
     
   
   
   
   
Balance – August 4, 2002
Fiscal Year 2003:		     7,387      4.47-24.56     20.50     3,796    
Options granted
     3,930     16.13-23.89     17.33          
Options exercised
     (1,265 )    4.47-23.94     18.28          
Options terminated
     (1,521 )   16.13-22.09     20.30          
     
                     
Balance – August 2, 2003
Fiscal Year 2004:		     8,531     11.50-24.56     19.36     2,824    
Options granted
     167     22.57-26.84     24.79          
Options exercised
     (2,062 )    11.50-23.94     18.97          
Options terminated
     (256 )   16.13-23.94     19.77          
     
                     
Balance – July 31, 2004
Fiscal Year 2005:		     6,380     16.10-26.84     19.61     2,577    
Options granted
     450     24.65-30.83     28.76          
Options exercised
     (2,267 )   16.13-24.56     20.23          
Options terminated
     (261 )   16.10-24.56     19.18          
     
                     
Balance – July 31, 2005     4,302     16.10-30.83     20.27     1,988    
     
                     

As of July 31, 2005, 9,002 shares of common stock of the Company were reserved for the exercise of stock options and restricted stock units. To the extent treasury shares are used to satisfy option exercises, these reserved shares will not be issued.

The following table summarizes the status of stock options outstanding and exercisable as of July 31, 2005, by range of exercise price:

            Options Outstanding     Options Exercisable  
           
   
 
Exercise
Price
Range		     Number
Outstanding		     Weighted
Average
Exercise
Price		     Weighted
Average
Remaining
Contractual
Life (in years)		     Number
of Options
Exercisable 		    Weighted
Average
Exercise
Price		  
   
   
   
   
   
 
$15.42-18.50     2,305     $17.16     7.2     649     $16.98  
$18.51-21.58     83     $21.71     6.0     53     $20.74  
$21.59-24.66     1,378     $22.27     5.8     1,263     $22.20  
$24.67-27.75     297     $26.75     7.0     23     $26.45  
$27.76-30.83     239     $30.46     6.9     —     —  
     
               
       
      4,302     $20.27     6.7     1,988     $20.50  
     
               
       

INCENTIVE COMPENSATION PLAN

The plan provides additional compensation to officers and key employees of the Company and its subsidiaries based upon the achievement of specified management goals. The Compensation Committee of the Board of Directors establishes the goals on which the Company’s executive officers are compensated, and management establishes the goals for other covered employees. The aggregate amounts charged to expense in connection with the plan were $10,898, $16,377 and $19,960 for fiscal years 2005, 2004 and 2003, respectively.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

OTHER COMPREHENSIVE INCOME

The Company has elected to report comprehensive income in the Consolidated Statement of Stockholders’ Equity. The changes in the components of other comprehensive income are as follows:

      Pretax Amount     Tax Effect     Net Amount    
   
 
 
   
                       
2003                      
Unrealized translation adjustment   $ 43,584   $ 2,751   $ 46,335    
Minimum pension liability adjustment     (43,354 )   13,379     (29,975 )  
Unrealized investment gains *     4,555     116     4,671    
Unrealized gains on derivatives     965     (338 )   627    
   
 
 
   
Other comprehensive income   $ 5,750   $ 15,908   $ 21,658    
   
 
 
   
2004                      
Unrealized translation adjustment   $ 46,431   $ 2,248   $ 48,679    
Minimum pension liability adjustment     (6,946 )   2,441     (4,505 )  
Unrealized investment losses *     (7,738 )   28     (7,710 )  
Unrealized gains on derivatives     525     (184 )   341    
   
 
 
   
Other comprehensive income   $ 32,272   $ 4,533   $ 36,805    
   
 
 
   
2005                      
Unrealized translation adjustment     (39 )   2,866     2,827    
Minimum pension liability adjustment     (18,317 )   6,523     (11,794 )  
Unrealized investment gains *     3,588     (280 )   3,308    
Unrealized gains on derivatives     540     (188 )   352    
   
 
 
   
Other comprehensive income   $ (14,228 ) $ 8,921   $ (5,307 )  
   
 
 
   

* The unrealized (losses) gains on available-for-sale securities, net of related taxes, consisted of the following:

      2005     2004     2003  
   
 
 
 
Net unrealized (losses) gains arising during the period, net of tax (expense) benefit of $(22), $28 and $116 in 2005, 2004 and 2003, respectively
   $ (48 ) $ (7,871 ) $ 4,516  
Realized loss included in net earnings for the period     —     161     —  
Adjustment for unrealized loss included in net earnings due to impairment     3,356     —     155  
   
 
 
 
Other comprehensive income (loss)   $ 3,308   $ (7,710 ) $ 4,671  
   
 
 
 

SEGMENT INFORMATION AND GEOGRAPHIES

Financial information on the business segments identified as reporting segments in accordance with the provision of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” follows.

Life Sciences:

  Medical: includes sales of disposable blood filtration and cardiovascular filtration products primarily to blood centers and hospitals. In addition, Medical includes products used in research laboratories in drug discovery, gene manipulation and proteomics applications.
   
  BioPharmaceuticals: includes sales of separation systems and disposable filters primarily to pharmaceutical and biotechnology companies.
   
  During the first quarter of fiscal year 2003, the Company reorganized its Life Sciences business to improve profitability. As a result, the hospital and medical OEM sub-segments, which were previously part of the BioPharmaceuticals segment, were combined with the Blood segment to create a new segment called Medical. In addition, as part of the restructuring plan announced in the first quarter of fiscal year 2005, the Biosciences division results, which were previously part of the BioPharmaceuticals segment, have been recorded within the Medical segment. Life Sciences segment information for prior periods has been restated for these changes.

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

Industrial:

  General Industrial: the Company’s most diverse sub-segment, includes sales of filters, coalescers, and separation systems for hydraulic, fuel and lubrication systems on manufacturing equipment across many industries as well as to producers of oil, gas, electricity, chemicals, food and beverages, municipal water, and paper.
   
  Aerospace: includes sales of filtration products, fluid monitoring equipment and shipboard water/waste water filtration products to the aerospace industry for use on commercial and military aircraft, ships and land-based vehicles.
   
  Microelectronics: includes sales of disposable filtration products to producers of semiconductors, computer terminals, fiber optics, disc drives, thin film rigid discs, and photographic film.

The above segments benefit from shared resources such that certain assets and activities are shared and are not specifically identifiable to a particular segment. Accounts receivable and inventory are most specifically identifiable to the segments, whereas certain operating assets, principally property, plant and equipment, are shared. Similarly, certain expenses incurred by those entities for various support functions such as human resources, information services, finance, facility costs (including depreciation expense) and other overhead costs are allocated to the segments using various methodologies based upon the nature of the expense. As such, this segment information includes extensive allocation of costs, which are judgmental in nature.

Cash and cash equivalents, short-term investments, investments and retirement benefit assets, income taxes, goodwill and intangible assets and headquarters assets, all of which are managed at the Corporate level, are included in Corporate assets. Expenses associated with the headquarters operations, amortization of intangible assets, interest expense, net, the provision for income taxes, as well as restructuring and other charges are currently excluded from the measurement and evaluation of the profitability of the Company’s reportable segments.

During fiscal year 2005, the Company undertook to reorganize its business structure into three underlying vertically integrated business units: Life Sciences, comprising Medical and BioPharmaceuticals; Aeropower, comprising Aerospace and the Machinery & Equipment portion of the current General Industrial segment; and Process Technologies, comprising General Industrial’s Food & Beverage, Fuels & Chemicals, Power Generation, Municipal Water divisions and Microelectronics. This reorganization is continuing and management has decided to further integrate the Industrial businesses (Aeropower and Process Technologies) to form one vertically integrated Industrial business unit. Thus, in the future the Company’s new structure will consist of two vertically integrated business units: Life Sciences and Industrial. Each business unit will have integrated support functions and responsibility for global manufacturing, sales and marketing, research and development, and finance functions to enable the Company to better meet its customers’ needs and in order to achieve greater efficiencies and profit growth. This revised organizational structure is in contrast to the former matrix organizational structure where, within each geography, these functions supported the market-based part of the matrix on a shared basis (as opposed to being directly vertically integrated into these business units).

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

MARKET SEGMENT INFORMATION

      2005     2004     2003    
   
 
 
   
SALES TO UNAFFILIATED CUSTOMERS:                      
Medical   $ 443,256   $ 444,015   $ 411,058    
BioPharmaceuticals     321,480     277,176     257,867    
   
 
 
   
Life Sciences     764,736     721,191     668,925    
   
 
 
   
General Industrial     742,994     666,771     595,210    
Aerospace     175,095     178,178     185,431    
Microelectronics     219,459     204,607     164,069    
   
 
 
   
Industrial     1,137,548     1,049,556     944,710    
   
 
 
   
Total   $ 1,902,284   $ 1,770,747   $ 1,613,635    
   
 
 
   
OPERATING PROFIT:                      
Medical   $ 82,320   $ 79,722   $ 71,052    
BioPharmaceuticals     77,143     69,100     68,900    
   
 
 
   
Life Sciences     159,463     148,822     139,952    
   
 
 
   
General Industrial     82,886     78,226     67,493    
Aerospace     33,764     43,634     52,593    
Microelectronics     41,533     38,476     28,103    
   
 
 
   
Industrial     158,183     160,336     148,189    
   
 
 
   
Subtotal
     317,646     309,158     288,141    
Restructuring and other charges, net     (39,600 )(a)   (12,477 )   (47,524 )  
General corporate expenses     (71,025 )   (78,348 )   (72,943 )  
Interest expense, net     (25,950 )   (20,501 )   (24,438 )  
   
 
 
   
Earnings before income taxes   $ 181,071   $ 197,832   $ 143,236    
   
 
 
   
DEPRECIATION AND AMORTIZATION:                      
Medical   $ 22,073   $ 20,884   $ 19,779    
BioPharmaceuticals     12,734     12,527     11,040    
   
 
 
   
Life Sciences     34,807     33,411     30,819    
   
 
 
   
General Industrial     26,540     26,943     26,415    
Aerospace     5,289     4,985     4,304    
Microelectronics     8,354     7,551     7,222    
   
 
 
   
Industrial     40,183     39,479     37,941    
   
 
 
   
Subtotal
     74,990     72,890     68,760    
Corporate     15,931     16,045     15,179    
   
 
 
   
Total   $ 90,921   $ 88,935   $ 83,939    
   
 
 
   
CAPITAL EXPENDITURES:                      
Life Sciences   $ 38,492   $ 28,368   $ 32,761    
Industrial     43,499     30,054     26,739    
   
 
 
   
Subtotal
     81,991     58,422     59,500    
Corporate     4,162     2,840     2,670    
   
 
 
   
Total   $ 86,153   $ 61,262   $ 62,170    
   
 
 
   
IDENTIFIABLE ASSETS:                      
Medical   $ 176,459   $ 165,714          
BioPharmaceuticals     136,336     118,899          
Shared Life Sciences Assets     270,579     270,552          
   
 
         
Life Sciences     583,374     555,165          
   
 
         
General Industrial     372,865     331,692          
Aerospace     78,578     72,770          
Microelectronics     95,341     82,670          
Shared Industrial Assets     306,054     298,882          
   
 
         
Industrial     852,838     786,014          
   
 
         
Subtotal
     1,436,212     1,341,179          
Corporate     829,089     841,548          
   
 
         
Total   $ 2,265,301   $ 2,182,727          
   
 
         

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PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

GEOGRAPHIES

      2005     2004     2003    
   
 
 
   
SALES TO UNAFFILIATED CUSTOMERS:                      
Western Hemisphere   $ 689,172   $ 667,535   $ 630,307    
Europe     782,481     735,969     671,660    
Asia     430,631     367,243     311,668    
   
 
 
   
Total   $ 1,902,284   $ 1,770,747   $ 1,613,635    
   
 
 
   
INTERCOMPANY SALES BETWEEN GEOGRAPHIC AREAS:                      
Western Hemisphere   $ 231,576   $ 185,538   $ 164,512    
Europe     126,718     104,034     87,057    
Asia     6,529     4,736     3,828    
   
 
 
   
Total   $ 364,823   $ 294,308   $ 255,397    
   
 
 
   
TOTAL SALES:                      
Western Hemisphere   $ 920,748   $ 853,073   $ 794,819    
Europe     909,199     840,003     758,717    
Asia     437,160     371,979     315,496    
Eliminations     (364,823 )   (294,308 )   (255,397 )  
   
 
 
   
Total   $ 1,902,284   $ 1,770,747   $ 1,613,635    
   
 
 
   
OPERATING PROFIT:                      
Western Hemisphere   $ 160,863   $ 127,235   $ 116,035    
Europe     101,102     121,078     120,992    
Asia     63,934     62,531     52,269    
Eliminations     (8,253 )   (1,686 )   (1,155 )  
   
 
 
   
Subtotal
     317,646     309,158     288,141    
Restructuring and other charges, net     (39,600 )(a)   (12,477 )   (47,524 )  
General corporate expenses     (71,025 )   (78,348 )   (72,943 )  
Interest expense, net     (25,950 )   (20,501 )   (24,438 )  
   
 
 
   
Earnings before income taxes   $ 181,071   $ 197,832   $ 143,236    
   
 
 
   
IDENTIFIABLE ASSETS:                      
Western Hemisphere   $ 616,887   $ 592,832          
Europe     582,171     554,689          
Asia     262,906     211,340          
Eliminations     (25,752 )   (17,682 )        
   
 
         
Subtotal
     1,436,212     1,341,179          
Corporate     829,089     841,548          
   
 
         
Total   $ 2,265,301   $ 2,182,727          
   
 
         
   
(a) Included in restructuring and other charges, net, for the purposes of evaluation of segment and geographic profitability in fiscal year 2005 is a charge of $837 related to a one-time purchase accounting adjustment to step up the value of inventory acquired from Biosepra by $2,431, in accordance with SFAS No. 141, in the opening balance sheet. This step up increased cost of sales by $837 in fiscal year 2005 concurrent with the sale of a portion of the underlying inventory. The step up amount is excluded from operating profit since management considers it non-recurring in nature because, although the Company acquired the manufacturing operations of Biosepra, this adjustment was required by SFAS 141 as an elimination of the manufacturing profit in inventory acquired from Biosepra and subsequently sold in the period.

Sales by the Company’s U.S. operations to unaffiliated customers totaled approximately $648,000, $632,000, and $600,000 in fiscal years 2005, 2004 and 2003, respectively. Included therein are export sales of approximately $61,000, $56,000 and $72,000 in fiscal years 2005, 2004 and 2003, respectively. Sales by the Company’s subsidiaries in Germany amounted to approximately $199,000, $201,000 and $183,000 in fiscal years 2005, 2004 and 2003, respectively. Sales by the Company’s subsidiary in Japan amounted to approximately $204,000, $179,000 and $169,000 in fiscal years 2005, 2004 and 2003, respectively. The Company considers its foreign operations to be of major importance to its future growth prospects. The risks related to the Company’s foreign operations include the local political and regulatory developments as well as the regional economic climate.

Intercompany sales between geographic areas are generally priced on the basis of a markup of manufacturing costs to achieve an appropriate sharing of the profit between the parties.

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PALL CORPORATION AND SUBSIDIARIES

FINANCIAL STATEMENT SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

Description   Balance at Beginning of Year   Additions to Reserve   Write-offs   Translation Adjustments   Balance at End of Year  
 
 
 
 
 
 
Allowance for doubtful accounts:
                                
Year Ended:
                                
July 31, 2005
   $ 12,062   $ 3,979   $ (2,634 ) $ 108   $ 13,515  
July 31, 2004
   $ 11,700   $ 3,217   $ (3,277 ) $ 422   $ 12,062  
August 2, 2003
   $ 12,906   $ 3,103   $ (4,975 ) $ 666   $ 11,700  
                                 
Reserve for inventory obsolescence:
                                
Year Ended:
                                
July 31, 2005
   $ 26,009   $ 9,867   $ (6,160 ) $ 126   $ 29,842  
July 31, 2004
   $ 27,492   $ 6,706   $ (9,044 ) $ 855   $ 26,009  
August 2, 2003
   $ 37,177   $ 8,808   $ (19,883 ) $ 1,390   $ 27,492  

 

70

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Page ---- ARTICLE I Definitions SECTION 1.01. Defined Terms.................................................................1 SECTION 1.02. Classification of Loans and Borrowings.......................................26 SECTION 1.03. Terms Generally..............................................................26 SECTION 1.04. Accounting Terms; GAAP.......................................................26 SECTION 1.05. Currency Translation.........................................................26 ARTICLE II The Credits SECTION 2.01. Commitments..................................................................27 SECTION 2.02. Loans and Borrowings.........................................................27 SECTION 2.03. Requests for Revolving Borrowings............................................28 SECTION 2.04. Competitive Bid Procedure....................................................29 SECTION 2.05. Swingline Loans..............................................................31 SECTION 2.06. Letters of Credit............................................................32 SECTION 2.07. Funding of Borrowings........................................................37 SECTION 2.08. Interest Elections...........................................................38 SECTION 2.09. Termination and Reduction of Commitments; Increase of Commitments............39 SECTION 2.10. Repayment of Loans; Evidence of Debt.........................................41 SECTION 2.11. Prepayment of Loans..........................................................42 SECTION 2.12. Fees.........................................................................43 SECTION 2.13. Interest.....................................................................44 SECTION 2.14. Alternate Rate of Interest...................................................45 SECTION 2.15. Increased Costs..............................................................46 SECTION 2.16. Break Funding Payments.......................................................47 SECTION 2.17. Taxes........................................................................48 SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-offs..................49 SECTION 2.19. Mitigation Obligations; Replacement of Lenders...............................51 SECTION 2.20. Additional Reserve Costs.....................................................52 SECTION 2.21. Redenomination of Certain Alternative Currencies.............................52
2 ARTICLE III Representations and Warranties SECTION 3.01. Existence, Qualification and Power; Compliance with Laws.....................53 SECTION 3.02. Authorization; No Contravention..............................................53 SECTION 3.03. Governmental Authorization; Other Consents...................................54 SECTION 3.04. Binding Effect...............................................................54 SECTION 3.05. Financial Statements; No Material Adverse Effect.............................54 SECTION 3.06. Litigation...................................................................54 SECTION 3.07. No Default...................................................................55 SECTION 3.08. Ownership of Property; Liens.................................................55 SECTION 3.09. Environmental Compliance.....................................................55 SECTION 3.10. Insurance....................................................................55 SECTION 3.11. Taxes........................................................................55 SECTION 3.12. ERISA Compliance.............................................................56 SECTION 3.13. Subsidiaries; Equity Interests...............................................56 SECTION 3.14. Margin Regulations; Investment Company Act; Public Utility Holding Company Act..........................................................56 SECTION 3.15. Disclosure...................................................................57 SECTION 3.16. Compliance With Laws.........................................................57 SECTION 3.17. Permits and Licenses, Etc....................................................57 SECTION 3.18. Labor Disputes and Acts of God...............................................57 SECTION 3.19. Specially Designated Nationals or Blocked Persons List.......................57 ARTICLE IV Conditions SECTION 4.01. Effective Date...............................................................57 SECTION 4.02. Each Credit Event............................................................59 ARTICLE V Affirmative Covenants SECTION 5.01. Financial Statements.........................................................59 SECTION 5.02. Certificates; Other Information..............................................60 SECTION 5.03. Notices......................................................................62 SECTION 5.04. Payment of Obligations.......................................................63 SECTION 5.05. Preservation of Existence, Etc...............................................63 SECTION 5.06. Maintenance of Properties....................................................63 SECTION 5.07. Maintenance of Insurance.....................................................64 SECTION 5.08. Compliance with Laws.........................................................64 SECTION 5.09. Books and Records............................................................64
3 SECTION 5.10. Inspection Rights............................................................64 SECTION 5.11. Use of Proceeds..............................................................64 SECTION 5.12. Guarantee Requirement........................................................64 SECTION 5.13. Environmental Laws...........................................................65 SECTION 5.14. Borrower Ratings.............................................................65 ARTICLE VI Negative Covenants SECTION 6.01. Liens........................................................................65 SECTION 6.02. Investments..................................................................66 SECTION 6.03. Priority Indebtedness........................................................67 SECTION 6.04. Fundamental Changes..........................................................67 SECTION 6.05. Dispositions.................................................................68 SECTION 6.06. Restricted Payments..........................................................68 SECTION 6.07. Change in Nature of Business.................................................69 SECTION 6.08. Transactions with Affiliates.................................................69 SECTION 6.09. Burdensome Agreements........................................................69 SECTION 6.10. Use of Proceeds..............................................................69 SECTION 6.11. Financial Covenants..........................................................69 SECTION 6.12. Hazardous Materials..........................................................69 SECTION 6.13. Certain Agreements, Amendment and Waivers....................................70 SECTION 6.14. Inactive Domestic Subsidiaries...............................................70 ARTICLE VII Events of Default SECTION 7.01. Events of Default............................................................70 SECTION 7.02. Remedies Upon Event of Default...............................................72 SECTION 7.03. Application of Funds.........................................................73 ARTICLE VIII The Agents ARTICLE IX Miscellaneous SECTION 9.01. Notices......................................................................76 SECTION 9.02. Waivers; Amendments..........................................................76
4 SECTION 9.03. Expenses; Indemnity; Damage Waiver...........................................77 SECTION 9.04. Successors and Assigns.......................................................79 SECTION 9.05. Survival.....................................................................82 SECTION 9.06. Counterparts; Integration; Effectiveness.....................................82 SECTION 9.07. Severability.................................................................83 SECTION 9.08. Right of Setoff..............................................................83 SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process...................83 SECTION 9.10. WAIVER OF JURY TRIAL.........................................................84 SECTION 9.11. Headings.....................................................................84 SECTION 9.12. Confidentiality..............................................................84 SECTION 9.13. Interest Rate Limitation.....................................................85 SECTION 9.14. Conversion of Currencies.....................................................85 SECTION 9.15. Releases of Guarantees.......................................................85 SECTION 9.16. USA Patriot Act..............................................................85 SECTION 9.17. Waiver Under Existing Credit Agreement.......................................85
5 SCHEDULES: Schedule 2.01 -- Commitments Schedule 2.06 -- Existing Letters of Credit Schedule 3.09 -- Environmental Compliance Schedule 3.11 -- Tax-Sharing Agreements Schedule 3.13 -- Subsidiaries and Affiliates Schedule 6.01 -- Existing Liens Schedule 6.02 -- Other Investments Schedule 6.14 -- Inactive Domestic Subsidiaries EXHIBITS: Exhibit A -- Form of Assignment and Assumption Exhibit B -- Form of Borrower's Counsel's Opinion Exhibit C -- Form of Guaranty Agreement Exhibit D -- Mandatory Costs Rate Exhibit E -- Form of Note Exhibit F -- Form of Compliance Certificate FIVE-YEAR CREDIT AGREEMENT dated as of July 29, 2005, among Pall Corporation, a New York corporation; the LENDERS party hereto; JPMORGAN CHASE BANK, N.A., as Administrative Agent; and J. P. Morgan Europe Limited, as London Agent. The Borrower (such term and the other capitalized terms used and not otherwise defined herein having the meanings assigned to them in Article I) has requested the Lenders to extend credit to enable them to (a) borrow on a revolving credit basis on and after the date hereof and at any time and from time to time prior to the Maturity Date a principal amount not in excess of US$350,000,000 at any time outstanding, (b) obtain Letters of Credit in an aggregate stated amount not in excess of US$50,000,000 at any time outstanding and (c) provide a procedure under which Lenders may bid on an uncommitted basis on short-term borrowings by the Borrower maturing on or prior to the Maturity Date. The proceeds of such borrowings are to be used for the financing of working capital requirements and other general corporate purposes of the Borrower and the Subsidiaries, including the redemption, repurchase or defeasance of the 7.83% Senior Notes, the refinancing of the Existing Credit Agreement and other indebtedness and the financing of Permitted Acquisitions. The Letters of Credit will be used for general corporate purposes of the Borrower and the Subsidiaries. The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions herein set forth. Accordingly, the parties hereto agree as follows: ARTICLE I Definitions SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "6.00% Senior Notes" means the 6.00% senior notes due August 1, 2012 issued by the Borrower pursuant to the Indenture. "7.83% Senior Notes" means the 7.83% senior notes due August 29, 2010 issued by the Borrower. "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "Adjusted LIBO Rate" means, with respect to any Eurocurrency Borrowing for any Interest Period, an interest rate per annum equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Administrative Agent" means JPMCB, in its capacity as Administrative Agent for the Lenders hereunder and under the Loan Documents or, as applicable, such 2 Affiliates thereof as it shall from time to time designate by notice to the Borrower and the Lenders for the purpose of performing its obligations hereunder. "Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Agents" means, collectively, the Administrative Agent and the London Agent. "Agreement" means this Credit Agreement, as modified, amended or restated from time to time. "Agreement Currency" has the meaning assigned to such term in Section 9.14(b). "Alternate Base Rate" means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Alternative Currency" means (a) Sterling, Euro and Yen and (b) any other currency that may be requested by the Borrower in a notice to the Administrative Agent, and agreed upon by all the Lenders, that is freely transferable and convertible into US Dollars in the London market and for which LIBO Rates can be determined by reference to the Telerate screen as provided in the definition of "LIBO Rate". "Applicable Agent" means (a) with respect to a Loan or Borrowing denominated in US Dollars or any Letter of Credit, and with respect to any payment hereunder that does not relate to a particular Loan or Borrowing, the Administrative Agent and (b) with respect to a Loan or Borrowing denominated in any Alternative Currency, the London Agent. "Applicable Creditor" has the meaning assigned to such term in Section 9.14(b). "Applicable Percentage" means, with respect to any Lender, the percentage of the total Commitments represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. 3 "Applicable Rate" means, for any day, with respect to any Eurocurrency Revolving Loan or with respect to the facility fees payable hereunder, as the case may be, the applicable rate per annum set forth below under the caption "Facility Fee Rate" or "Eurocurrency Spread", as applicable, based upon (a) the ratings by S&P and Moody's, respectively, applicable on such date to the Index Debt and (b) in the case of the Eurocurrency Spread, the Utilization on such date:
========================================================================================================== Facility Fee Eurocurrency Index Debt Ratings: Rate Spread - ---------------------------------------------------------------------------------------------------------- Utilization is Utilization is less than or greater than equal to 50% 50% - ---------------------------------------------------------------------------------------------------------- Category 1 0.080% 0.27% 0.37% ---------- A/A2 or higher - ---------------------------------------------------------------------------------------------------------- Category 2 0.090% 0.31% 0.41% ---------- A-/A3 - ---------------------------------------------------------------------------------------------------------- Category 3 0.100% 0.35% 0.45% ---------- BBB+/Baa1 - ---------------------------------------------------------------------------------------------------------- Category 4 0.125% 0.45% 0.55% ---------- BBB/Baa2 - ---------------------------------------------------------------------------------------------------------- Category 5 0.150% 0.55% 0.65% ---------- BBB-/Baa3 - ---------------------------------------------------------------------------------------------------------- Category 6 0.200% 0.75% 0.85% ---------- BB+/Ba1 or lower ==========================================================================================================
For purposes of the foregoing, (i) if either S&P or Moody's shall not have in effect a rating for the Index Debt (other than by reason of the circumstances referred to in the last sentence of this definition), then such rating agency shall be deemed to have established a rating in Category 6; (ii) if the ratings established or deemed to have been established by Moody's and S&P for the Index Debt shall fall within different Categories, the Applicable Rate shall be based on the higher of the two ratings unless one of the two ratings is two or more Categories lower than the other, in which case the Applicable Rate shall be determined by reference to the Category next above that of the lower of the two ratings; and (iii) if the ratings established or deemed to have been established by S&P and Moody's for the Index Debt shall be changed (other than as a result of a change in the rating system of S&P or Moody's), such change shall be effective as of the date on which it is first announced by the applicable rating agency, irrespective of when notice of such change shall have been furnished by the Borrower to the Agent and the Lenders pursuant to Section 5.03(e) or otherwise. Each change in the Applicable Rate shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of S&P or Moody's shall change, or if either such rating agency shall cease to be in the business of rating corporate debt obligations, the Borrower and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of 4 any such amendment, the Applicable Rate shall be determined by reference to the rating most recently in effect prior to such change or cessation. "Approved Fund" has the meaning assigned to such term in Section 9.04. "Assignment and Assumption" means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "Attributable Indebtedness" means, on any date, (a) in respect of any Capital Lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease Obligation or any Sale-Leaseback Transaction that does not result in a Capital Lease, the capitalized amount of the remaining lease payments under the relevant lease that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a Capital Lease. "Audited Financial Statements" means the audited consolidated balance sheet of the Borrower and the Subsidiaries as at July 31, 2004, and the related audited consolidated statements of earnings, shareholders' equity and cash flows of the Borrower and the Subsidiaries for the Fiscal Year then ended, including the notes thereto. "Augmenting Lender" has the meaning set forth in Section 2.09(d)(i). "Availability Period" means the period from and including the Effective Date to but excluding the earlier of the Maturity Date and the date of termination of the Commitments. "Board" means the Board of Governors of the Federal Reserve System of the United States of America. "Borrower" means Pall Corporation, a New York corporation. "Borrower Materials" has the meaning set forth in Section 5.02. "Borrowing" means (a) Revolving Loans of the same Class, Type and currency, made, converted or continued on the same date and, in the case of Eurocurrency Loans, as to which a single Interest Period is in effect, (b) a Competitive Loan or group of Competitive Loans of the same Type made on the same date and as to which a single Interest Period is in effect or (c) a Swingline Loan. "Borrowing Minimum" means (a) in the case of a Borrowing denominated in US Dollars, US$5,000,000 and (b) in the case of a Borrowing denominated in any Alternative Currency, the smallest amount of such Alternative Currency that is a multiple of 5,000,000 units of such currency that has a US Dollar Equivalent in excess of US$5,000,000. 5 "Borrowing Multiple" means (a) in the case of a Borrowing denominated in US Dollars, US$1,000,000 and (b) in the case of a Borrowing denominated in any Alternative Currency, 1,000,000 units of such currency. "Borrowing Request" means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.03. "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; provided, that (a) when used in connection with a Eurocurrency Loan denominated in any currency, the term "Business Day" shall also exclude any day on which banks are not open for dealings in deposits denominated in such currency in the London interbank market, (b) when used in connection with a Loan denominated in Euro, the term "Business Day" shall also exclude any day on which the TARGET payment system is not open for the settlement of payments in Euro and (c) when used in connection with a Loan denominated in Yen, the term "Business Day" shall also exclude any day on which banks are not open for dealings in deposits in Yen in Tokyo. "Calculation Date" means (a) the last Business Day of each calendar quarter and (b) solely with respect to any Alternative Currency for a requested new Borrowing for which an Exchange Rate was not established on the immediately preceding Calculation Date, the Business Day immediately preceding the date on which such Borrowing is to be made; provided that the Administrative Agent may in addition designate the last day of any other month as a Calculation Date if it reasonably determines that there has been significant volatility in the foreign currency markets. "Capital Lease" means with respect to any Person, as of the date of determination, any lease the obligations of which are required to be capitalized on the balance sheet of such Person in accordance with GAAP applied on a consistent basis. The amount of any Capital Lease as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date. "Cash Collateralize" has the meaning set forth in Section 2.06(j). "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender's or the Issuing Bank's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Change of Control" means an event or series of events by which: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its 6 capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have "beneficial ownership" of all securities that such person or group has the right to acquire (such right, an "option right"), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 30% or more of the equity securities of the Borrower entitled to vote for members of the board of directors or equivalent governing body of the Borrower on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); (b) during any period of 12 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Borrower ceases to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors); or (c) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation thereof, will result in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Borrower, or control over the Equity Interests of the Borrower entitled to vote for members of the board of directors or equivalent governing body of the Borrower on a fully-diluted basis (and taking into account all such securities that such Person or group has the right to acquire pursuant to any option right) representing 30% or more of the combined voting power of such securities. "Charges" has the meaning set forth in Section 9.13. "Class", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, Competitive Loans or Swingline Loans. "Closing Date" means the date of this Agreement. 7 "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commitment" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans and to acquire participations in Letters of Credit and Swingline Loans hereunder, expressed as an amount representing the maximum aggregate permitted amount of such Lender's Revolving Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.09 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender's Commitment is set forth on Schedule 2.01, or in the Assignment and Assumption pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders' Commitments is US$350,000,000. "Commitment Increase" has the meaning set forth in Section 2.09(d)(i). "Competitive Bid" means an offer by a Lender to make a Competitive Loan in accordance with Section 2.04. "Competitive Bid Rate" means, with respect to any Competitive Bid, the Margin or the Fixed Rate, as applicable, offered by the Lender making such Competitive Bid. "Competitive Bid Request" means a request by the Borrower for Competitive Bids in accordance with Section 2.04. "Competitive Loan" means a Loan made pursuant to Section 2.04. "Compliance Certificate" means a certificate substantially in the form of Exhibit F. "Consolidated EBITDA" means, for any four consecutive fiscal quarter period, for the Borrower and the Subsidiaries on a consolidated basis, an amount equal to the Consolidated Net Income (Net Loss) of the Borrower and the Subsidiaries for such period, plus the sum, without duplication, for such period of (a) Consolidated Interest Charges, (b) depreciation and amortization expenses or charges, (c) income taxes to any government or governmental instrumentality expensed on the Borrower's or the Subsidiaries' books (whether paid or accrued) and (d) non-cash, non-recurring charges or losses, if any, minus the sum, without duplication, for such period of (a) non-cash non-recurring gains, if any, (b) interest income, determined in accordance with GAAP applied on a consistent basis and (c) income tax credits or refunds from any government or governmental instrumentality recorded on the Borrower's or the Subsidiaries' books. All the foregoing categories shall be calculated with respect to the Borrower and the Subsidiaries on a consolidated basis. At any time Consolidated EBITDA is required to be calculated hereunder, the Borrower shall use the amounts set forth in the financial statement or statements delivered to the Administrative Agent covering the last four consecutive fiscal quarters pursuant to the terms hereof. 8 "Consolidated Funded Indebtedness" means, as of any date of determination, for the Borrower and its Subsidiaries on a consolidated basis, the sum of (a) the outstanding principal amount of all obligations, whether current or long-term, for borrowed money (including Obligations hereunder) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, (b) all purchase money Indebtedness, (c) all direct obligations arising under letters of credit (including standby and commercial), bankers' acceptances, bank guaranties, surety bonds and similar instruments, (d) all obligations in respect of the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business), (e) Attributable Indebtedness in respect of Capital Leases and Synthetic Lease Obligations, (f) without duplication, all Guarantees with respect to outstanding Indebtedness of the types specified in clauses (a) through (e) above of Persons other than the Borrower or any Subsidiary, and (g) all Indebtedness of the types referred to in clauses (a) through (f) above of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which the Borrower or a Subsidiary is a general partner or joint venturer, unless such Indebtedness is expressly made non-recourse to the Borrower or such Subsidiary. "Consolidated Interest Charges" means, for any four fiscal quarter period, for the Borrower and the Subsidiaries on a consolidated basis, the sum, for such period, of (a) all interest, premium payments, debt discount, fees, charges and related expenses of the Borrower and the Subsidiaries in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, and (b) the portion of rent expense of the Borrower and the Subsidiaries with respect to such period under Capital Leases that is treated as interest in accordance with GAAP. "Consolidated Leverage Ratio" means, as of any date of determination, the ratio of (a) Consolidated Funded Indebtedness to (b) Consolidated EBITDA. "Consolidated Net Income (Net Loss)" means, for any period, the net income (or net loss) of the Borrower and the Subsidiaries on a consolidated basis for such period determined in accordance with GAAP applied on a consistent basis. "Consolidated Net Interest Coverage Ratio" means, as of any date of determination, the ratio of (a) Consolidated EBITDA to (b) Consolidated Interest Charges less interest income earned by the Borrower and the Subsidiaries, in each case for the four fiscal quarter period ending on such date. "Consolidated Net Tangible Assets" means, at any time, Consolidated Tangible Assets minus all current liabilities of the Borrower and the Subsidiaries, all as set forth in the most recent consolidated balance sheet of the Borrower and the Subsidiaries delivered pursuant to Section 5.01 (or, prior to any such delivery, referred to in Section 3.05) as of such date of determination, determined on a consolidated basis in accordance with GAAP. 9 "Consolidated Tangible Assets" means, at any time, the aggregate amount of assets (less applicable accumulated depreciation, depletion and amortization and other reserves and other properly deductible items) of the Borrower and the Subsidiaries minus all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other intangible assets of the Borrower and the Subsidiaries, all as set forth in the most recent consolidated balance sheet of the Borrower and the Subsidiaries delivered pursuant to Section 5.01 (or, prior to any such delivery, referred to in Section 3.05) as of such date of determination, determined on a consolidated basis in accordance with GAAP. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies, or the dismissal or appointment of the management, of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "Debtor Relief Laws" means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally. "Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Disposition" or "Dispose" means the sale, transfer, license, lease or other disposition (including any sale and leaseback transaction) of any property by any Person, including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivables or any rights and claims associated therewith. "Domestic Subsidiary" shall mean a Subsidiary incorporated or organized under the laws of the United States of America, any State thereof or the District of Columbia. "Effective Date" means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02). "Eligible Investments" means (a) direct obligations of the United States of America or any governmental agency thereof which are fully guaranteed or insured by the United States of America; provided that such obligations mature within two years from the date of acquisition thereof; (b) US Dollar denominated certificates of time deposit maturing within one year issued by any bank organized and existing under the laws of the United States of America or any state thereof and having aggregate capital and surplus in excess of $1,000,000,000; (c) money market mutual funds having assets in excess of $1,000,000,000; (d) commercial paper rated not less than P-1 or A-1 or their equivalent by Moody's or S&P, respectively; (e) tax exempt securities of an issuer 10 organized in the United States of America rated A or better by Moody's or S&P; (f) repurchase agreements entered into with any bank, trust company or financial institution organized under the laws of the United States of America or any state thereof or under the laws of Puerto Rico, having capital and surplus in an aggregate amount not less than $1,000,000,000 and relating to any of the obligations referred to in clause (a) above; (g) short-term investments by any non-Domestic Subsidiary made in the ordinary course of its business and in accordance with the Borrower's guidelines and procedures, provided that the aggregate amount of such investments by the non-Domestic Subsidiaries shall not exceed $50,000,000, at any one time outstanding; or (h) cash. "EMU Legislation" means the legislative measures of the European Union for the introduction of, changeover to or operation of the Euro in one or more member states. "Environmental Laws" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower, any other Loan Party or any of their respective Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "Equity Interests" means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of 11 Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a "reportable event" (as defined in Section 4043 of ERISA) with respect to a Pension Plan for which notice thereof has not been waived pursuant to the regulations under Section 4043(c) of ERISA as in effect on the date hereof; (b) a withdrawal by the Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA Affiliate if such liability, taken together with any other such liabilities then existing, would reasonably be expected to have a Material Adverse Effect. "Euro" or "(euro)" means the single currency of the European Union as constituted by the Treaty on European Union and as referred to in the EMU Legislation. "Eurocurrency", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate (or, in the case of a Competitive Loan, the LIBO Rate). "Event of Default" has the meaning assigned to such term in Article VII. "Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended. "Exchange Rate" means on any day, for purposes of determining the US Dollar Equivalent of any other currency, the rate at which such other currency may be exchanged into US Dollars at the time of determination on such day on the Reuters WRLD Page for such currency. In the event that such rate does not appear on any Reuters WRLD Page, the Exchange Rate shall be determined by reference to such other publicly available service for displaying exchange rates as may be agreed upon by the Applicable Agent and the Borrower, or, in the absence of such an agreement, such Exchange Rate shall instead be the arithmetic average of the spot rates of exchange of the Applicable Agent in the market where its foreign currency exchange operations in respect of such currency are then being conducted, at or about such time as the Applicable Agent shall elect after determining that such rates shall be the basis for determining the Exchange Rate, on such date for the purchase of US Dollars for delivery two Business 12 Days later; provided that if at the time of any such determination, for any reason, no such spot rate is being quoted, the Applicable Agent may use any reasonable method it deems appropriate to determine such rate, and such determination shall be conclusive absent manifest error. "Excluded Subsidiary" means any Subsidiary that is (a) an Inactive Domestic Subsidiary, (b) a Foreign Subsidiary or (c) a Securitization Entity. "Excluded Taxes" means, with respect to either Agent, any Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, the jurisdiction in which its applicable lending office is located, (b) any branch profit taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which such recipient is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.19(b)), any withholding tax that is imposed by the United States of America on payments by the Borrower to such Foreign Lender from locations in the United States of America on amounts payable at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender's failure to comply with Section 2.17(e), except to the extent that (i) such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.17(a) or (ii) such withholding tax shall have resulted from the making of any payment to a location other than the office designated by the Applicable Agent or such Lender for the receipt of payments of the applicable type from the Borrower. "Existing Credit Agreement" means the Credit Agreement dated as of August 24, 2004, as amended, among the Borrower, the lenders party thereto and JPMCB, as administrative agent. "Existing Letters of Credit" means each letter of credit previously issued for the account of the Borrower pursuant to the Existing Credit Agreement that is (a) outstanding on the Effective Date and (b) listed on Schedule 2.06, but shall not include any renewal or extension of any Existing Letter of Credit other than an Existing Letter of Credit issued by JPMCB or an Affiliate thereof. "Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. 13 "Financed Portion" means, at any time, with respect to a Securitization Transaction, the greatest amount of the claims of the parties providing financing (whether through direct purchases of receivables or interests therein or through other financing arrangements), however evidenced, including direct claims on collections of a party providing financing and including debt or equity interests or securities (other than any seller's interests retained by any wholly owned Subsidiary) of a purchasing vehicle, permitted to be outstanding at such time under such Securitization Transaction (assuming the satisfaction of all conditions to issuance) or, if greater, the maximum purchase limit, however denominated, under such Securitization Transaction. "Financial Officer" means the chief financial officer, principal accounting officer, treasurer or controller of the Borrower. "Fiscal Year" means any period of twelve consecutive calendar months ending on July 31st; references to a Fiscal Year with a number corresponding to any calendar year (e.g., the "2004 Fiscal Year") refer to the Fiscal Year ending on July 31st of such calendar year. "Fixed Rate" means, with respect to any Competitive Loan (other than a Eurocurrency Competitive Loan), the fixed rate of interest per annum specified by the Lender making such Competitive Loan in its related Competitive Bid. "Fixed Rate Loan" means a Competitive Loan bearing interest at a Fixed Rate. "Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than the United States of America or any State thereof or the District of Columbia. "Foreign Subsidiary" shall mean any Subsidiary that is not a Domestic Subsidiary. "GAAP" means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession in the United States, that are applicable to the circumstances as of the date of determination, consistently applied. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" means, as to any Person, any (a) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing 14 any Indebtedness or other obligation payable or performable by another Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring in any other manner the obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligee against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness or other obligation of any other Person, whether or not such Indebtedness or other obligation is assumed by such Person (or any right, contingent or otherwise, of any holder of such Indebtedness to obtain any such Lien). The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith. The term "Guarantee" as a verb has a corresponding meaning. "Guaranty Agreement" means the Guaranty Agreement among the Subsidiary Loan Parties and the Administrative Agent, substantially in the form of Exhibit C. "Guarantee Requirement" means, at any time on or after the Effective Date, the requirement that: (i) Administrative Agent shall have received from each Subsidiary Loan Party either (i) a counterpart of the Guaranty Agreement, duly executed and delivered on behalf of such Subsidiary Loan Party, or (ii) in the case of any Person that becomes a Subsidiary Loan Party after the Effective Date, a supplement to the Guaranty Agreement, in the form specified therein, duly executed and delivered on behalf of such Subsidiary Loan Party, and in each case, the Guaranty Agreement and, if applicable, such supplement to the Guaranty Agreement, shall be in full force and effect and enforceable against each such Subsidiary Loan Party; and (ii) each Subsidiary Loan Party shall have obtained all consents and approvals required to be obtained by it in connection with the execution and delivery of the Guaranty Agreement and the performance of its obligations thereunder. "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, 15 polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Inactive Domestic Subsidiary" means a Subsidiary (a) identified as such on Schedule 6.14 hereto or hereafter acquired or formed by the Borrower and designated as an "Inactive Domestic Subsidiary" by written notice to the Administrative Agent and (b) that does not own any assets (other than nominal assets) or conduct any operations, or directly or indirectly own any Equity Interests in any Subsidiary other than other Inactive Domestic Subsidiaries. "Increase Effective Date" has the meaning set forth in Section 2.09(d)(ii). "Increasing Lender" has the meaning set forth in Section 2.09(d)(i). "Indebtedness" means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments; (b) all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), bankers' acceptances, bank guaranties, surety bonds and similar instruments; (c) net obligations of such Person under any Swap Contract; (d) all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business and, in each case, not past due for more than 60 days after the date on which such trade account payable was created); (e) indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; (f) Capital Leases and Synthetic Lease Obligations; (g) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interest in such Person or any other Person, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; (h) all Guarantees of such Person in respect of any of the foregoing; and (i) all Securitization Transactions. For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any Capital Lease or Synthetic Lease Obligation as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date. "Indemnitee" has the meaning set forth in Section 9.03(b). "Indemnified Taxes" means Taxes other than Excluded Taxes. 16 "Indenture" means the Indenture dated as of August 1, 2002, naming the Borrower as issuer, certain Subsidiaries as guarantors and The Bank of New York as trustee, under which the 6.00% Senior Notes were issued. "Index Debt" means senior, unsecured, Long-Term Indebtedness for borrowed money of the Borrower that is not guaranteed by any other Person or subject to any other credit enhancement. "Initial Loans" has the meaning set forth in Section 2.09(d)(ii). "Interest Election Request" means a request by the Borrower to convert or continue a Revolving Borrowing in accordance with Section 2.08. "Interest Payment Date" means (a) with respect to any ABR Loan (including any Swingline Loan), the last day of each March, June, September and December, (b) with respect to any Eurocurrency Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurocurrency Borrowing with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration after the first day of such Interest Period and (c) with respect to any Fixed Rate Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Fixed Rate Borrowing with an Interest Period of more than 90 days' duration (unless otherwise specified in the applicable Competitive Bid Request), each day prior to the last day of such Interest Period that occurs at intervals of 90 days' duration after the first day of such Interest Period, and any other dates that are specified in the applicable Competitive Bid Request as Interest Payment Dates with respect to such Borrowing. "Interest Period" means (a) with respect to any Eurocurrency Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect and (b) with respect to any Fixed Rate Borrowing, the period (which shall not be less than 14 days or more than 180 days) commencing on the date of such Borrowing and ending on the date specified in the applicable Competitive Bid Request; provided, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurocurrency Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period pertaining to a Eurocurrency Borrowing that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. 17 "Investment" means, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of capital stock or other securities of another Person, (b) a loan, advance or capital contribution to, or assumption of debt of or purchase or other acquisition of any other debt or equity participation or interest in, another Person, including any partnership or joint venture interest in such other Person, or (c) the purchase or other acquisition (in one transaction or a series of transactions) of assets of another Person that constitute a business unit. For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment. "Issuing Bank" means JPMCB, in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.06(i) and, in respect of the Existing Letters of Credit only, the issuers of such Existing Letters of Credit, as set forth in Schedule 2.06. The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. "JPMCB" means JPMorgan Chase Bank, N.A. and its successors. "Judgment Currency" has the meaning assigned to such term in Section 9.14(b). "LC Disbursement" means a payment made by the Issuing Bank pursuant to a Letter of Credit. "LC Exposure" means, at any time, the sum of (a) the aggregate undrawn amounts of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time. "Lenders" means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to an Assignment and Assumption, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption. Unless the context otherwise requires, the term "Lenders" includes the Swingline Lender. "Letter of Credit" means any letter of credit issued pursuant to this Agreement and each Existing Letter of Credit. "Letter of Credit Extension" means, with respect to any Letter of Credit, the issuance thereof or extension of the expiry date thereof, or the increase of the amount thereof. "LIBO Rate" means, with respect to any Eurocurrency Borrowing denominated in any currency for any Interest Period, the rate appearing on the applicable 18 page of the Telerate Service for such currency (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Applicable Agent from time to time for purposes of providing quotations of interest rates applicable to deposits in the London interbank market) at approximately 11:00 a.m., London time, on the Quotation Date for such Interest Period, as the rate for deposits in such currency with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO Rate" with respect to such Eurocurrency Borrowing for such Interest Period shall be the rate at which deposits in such currency the US Dollar Equivalent of which is US$5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement in the nature of a security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any easement, right of way or other encumbrance on title to real property, and any financing lease having substantially the same economic effect as any of the foregoing). "Loan Documents" means this Agreement, the Guaranty Agreement and each supplement thereto and each promissory note delivered pursuant to this Agreement, as such documents may be amended, modified, supplemented or restated from time to time. "Loan Parties" means the Borrower and the Subsidiary Loan Parties. "Loans" means the loans made by the Lenders to the Borrower pursuant to this Agreement. "Local Time" means (a) with respect to a Loan or Borrowing denominated in US Dollars or any Letter of Credit, New York City time, and (b) with respect to a Loan or Borrowing made in any other currency, London time. "London Agent" means J. P. Morgan Europe Limited. "Long-Term Indebtedness" means any Indebtedness that, in accordance with GAAP, constitutes (or, when incurred, constituted) a long-term liability. "Mandatory Costs Rate" has the meaning set forth in Exhibit D. "Margin" means, with respect to any Competitive Loan bearing interest at a rate based on the LIBO Rate, the marginal rate of interest, if any, to be added to or subtracted from the LIBO Rate to determine the rate of interest applicable to such Loan, as specified by the Lender making such Loan in its related Competitive Bid. 19 "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of the Borrower and the Subsidiaries, taken as a whole, (b) a material impairment of the ability of any Loan Party to perform its obligations under any Loan Document to which it is a party or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against any Loan Party of any Loan Document to which it is a party. "Maturity Date" means July 29, 2010, or, if such day is not a Business Day, the next preceding Business Day. "Maximum Rate" has the meaning set forth in Section 9.13. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate makes or is obligated to make contributions, or during the preceding five plan years, has made or been obligated to make contributions. "Non-Increasing Lender" has the meaning set forth in Section 2.09(d)(i). "Note Purchase Agreement" means the Note Purchase Agreement dated as of July 28, 2000, among the Borrower and the Purchasers identified therein, pursuant to which the Borrower issued the 7.83% Notes. "Obligations" means all advances to, debts, liabilities, obligations, covenants and duties of, and fees, expenses, indemnities and other amounts payable by, any Loan Party arising under any Loan Document or otherwise with respect to any Loan or Letter of Credit, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against any Loan Party or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding. "Other Taxes" means any and all present or future recording, stamp, documentary, excise, transfer, sales, property or similar taxes, charges or levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document. "Outstanding Amount" means (i) with respect to Loans and Swingline Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowings and prepayments or repayments of Loans and Swingline Loans, as the case may be, occurring on such date; and (ii) with respect to any LC Exposure on any date, the amount of such LC Exposure on such date after giving effect to any Letter of Credit Extension occurring on such date and any other changes in the aggregate amount 20 of the LC Exposure as of such date, including as a result of any reimbursements by the Borrower of Unreimbursed Amounts. "Participant" has the meaning set forth in Section 9.04(c)(i). "Patriot Act" means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Title III of Pub. L. No. 107-56 (signed into law October 26, 2001)). "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "Pension Plan" means any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by the Borrower or any ERISA Affiliate or to which the Borrower or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer or other plan described in Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five plan years. "Permitted Acquisition" means an acquisition (whether pursuant to an acquisition of Equity Interests, assets or otherwise) by the Borrower or any of the Subsidiaries from any Person or Persons of a business that is substantially similar (a) to any line of business conducted by the Borrower and/or the Subsidiaries on the date hereof or (b) to any business substantially related to or incidental to those lines of business conducted by the Borrower and/or the Subsidiaries on the date hereof and in which the following conditions are satisfied: (i) the acquisition shall have been approved by the board of directors or other appropriate governing body of the Person whose business is to be acquired; (ii) immediately before and after giving effect to such acquisition, no Default shall have occurred and be continuing or would result therefrom; (iii) if the acquisition is of Equity Interests of a Person, such Person becomes a Subsidiary; (iv) after giving pro forma effect (in a manner satisfactory to the Administrative Agent) to the consummation of such acquisition and the incurrence of any Indebtedness in connection with such acquisition, the Consolidated Leverage Ratio shall not exceed 2.75 to 1.0; and (e) the Borrower shall have delivered to the Administrative Agent a Compliance Certificate for the period of four full fiscal quarters immediately preceding such acquisition for which financial statements have been delivered pursuant to the terms hereof (prepared in good faith and in a manner and using a methodology which is consistent with the most recent financial statements delivered pursuant to Section 5.01) giving pro forma effect to the consummation of such acquisition and the incurrence of any Indebtedness in connection with such acquisition and evidencing compliance with the covenants set forth in Section 6.11. "Permitted Lien" has the meaning set forth in Section 6.01. 21 "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means any "employee benefit plan" (as such term is defined in Section 3(3) of ERISA) established by the Borrower or, with respect to any such plan that is subject to Section 412 of the Code or Title IV of ERISA, any ERISA Affiliate. "Prime Rate" means the rate of interest per annum publicly announced from time to time by JPMCB, as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "Priority Indebtedness" means the sum, without duplication, for the Borrower and the Subsidiaries, of (i) all Indebtedness secured by any Lien on any assets of the Borrower or any Subsidiary and (ii) all Indebtedness referred to in clauses (f) and (i) of the definition of "Indebtedness" and (c) all Sale-Leaseback Transactions. "Public Lender" has the meaning set forth in Section 5.02. "Quotation Date" means (i) with respect to any Eurocurrency Borrowing denominated in any currency other than Sterling for any Interest Period, two Business Days prior to the commencement of such Interest Period and (ii) with respect to any Eurocurrency Borrowing denominated in Sterling for any Interest Period, the first Business Day of such Interest Period. "Register" has the meaning set forth in Section 9.04. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, trustees, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Release" means any actual or threatened release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching or migration into or through the environment or within or upon any building, structure, facility or fixture. "Required Lenders" means, at any time, Lenders having Revolving Exposures and unused Commitments representing more than 50% of the sum of the total Revolving Exposures and unused Commitments at such time; provided that, for purposes of declaring the Loans to be due and payable pursuant to Article VII, and for all purposes after the Loans become due and payable pursuant to Article VII or the Commitments expire or terminate, the outstanding Competitive Loans of the Lenders shall be included in their respective Revolving Exposures in determining the Required Lenders. "Responsible Officer" means the chief executive officer, president, vice-president-finance, controller, chief financial officer, treasurer, director of treasury operations, secretary or general counsel of a Loan Party or any other person authorized 22 by the Board of Directors of a Loan Party to sign Loan Documents on its behalf. Any document delivered hereunder that is signed by a Responsible Officer of a Loan Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Loan Party and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Loan Party. "Restricted Payment" has the meaning set forth in Section 6.06. "Revolving Exposure" means, with respect to any Lender at any time, the sum at such time, without duplication, of (a) the US Dollar Equivalents of the principal amounts of such Lender's outstanding Revolving Loans, (b) the aggregate amount of such Lender's LC Exposure and (c) the aggregate amount of such Lender's Swingline Exposure. "Revolving Loan" means a Loan made pursuant to Sections 2.01 and 2.03. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors. "Sale-Leaseback Transaction" means any arrangement whereby the Borrower or a Subsidiary shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and, as part of such arrangement, rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property sold or transferred. The amount of any Sale-Leaseback Transaction as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date. "SEC" means the Securities and Exchange Commission. "Securitization Entity" means any wholly owned subsidiary of the Borrower that is engaged solely in the purchase of accounts receivable of the Borrower or any Subsidiary or interests therein and the resale or financing of such accounts receivable or interests, in each case as part of a Securitization Transaction. "Securitization Transaction" means any transfer by the Borrower or any Subsidiary of accounts receivable or interests therein (a) to a trust, partnership, corporation or other entity, which transfer is funded in whole or in part, directly or indirectly, by the incurrence or issuance by the transferee or any successor transferee of Indebtedness, fractional undivided interests or securities that are to receive payments from, or that represent interests in, the cash flow derived from such accounts receivable or interests, or (b) directly to one or more investors or other purchasers. The amount of any Securitization Transaction shall be deemed at any time to be the aggregate principal or stated amount of the Indebtedness, fractional undivided interests or other securities referred to in the preceding sentence or, if there shall be no such principal or stated amount, the uncollected amount of the accounts receivable transferred pursuant to such Securitization Transaction net of any such accounts receivable that have been written off as uncollectible. 23 "Senior Notes" means, collectively, (a) the 7.83% Notes and (b) the 6.00% Senior Notes. "Solvent" shall mean with respect to any Person as of the date of determination thereof that (a) the amount of the "present fair saleable value" of the assets of such Person will, as of such date, exceed the amount of all "liabilities of such Person, contingent or otherwise," as of such date, as such quoted terms are determined in accordance with applicable Federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required on its debts as such debts become absolute and matured, (c) such Person will not have as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature in each case after giving effect to any right of indemnification and contribution of such Person from or to any Affiliate. "Statutory Reserve Rate" means, with respect to any currency, a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve, liquid asset, fees or similar requirements (including any marginal, special, emergency or supplemental reserves or other requirements) established by any central bank, monetary authority, the Board, the Financial Services Authority, the European Central Bank or other Governmental Authority for any category of deposits or liabilities customarily used to fund loans in such currency, expressed in the case of each such requirement as a decimal. Such reserve percentages shall, in the case of US Dollar denominated Loans, include those imposed pursuant to Regulation D of the Board. Eurocurrency Loans shall be deemed to be subject to such reserve, liquid asset or similar requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under any applicable law, rule or regulation, including Regulation D. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve, liquid asset, fee or similar requirement. The Statutory Reserve Rate shall in no event include any reserve, liquid asset, fee or similar requirement for which the Lenders are entitled to compensation under Section 2.20. "Sterling" or "(pound)" means the lawful currency of the United Kingdom. "Subordinated Indebtedness" means all Indebtedness which is subordinated in right of payment to the obligations of the Borrower and/or of its Subsidiaries to the Lenders hereunder and under any other Loan Document. "Subsequent Borrowings" has the meaning set forth in Section 2.09(d)(ii). "subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other 24 ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, Controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" means any direct or indirect subsidiary of the Borrower. "Subsidiary Loan Party" means any Subsidiary that is not an Excluded Subsidiary. "Swap Contract" means (a) any rate swap transaction, basis swap, credit derivative transaction, forward rate transaction, commodity swap, commodity option, forward commodity contract, equity or equity index swap or option, bond or bond price or bond index swap or option or forward bond or forward bond price or forward bond index transaction, interest rate option, forward foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option, spot contract, or any other similar transaction or any combination of any of the foregoing (including any option to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a "Master Agreement"), including any such obligations or liabilities under any Master Agreement. The amount of any net obligation under any Swap Contract on any date shall be deemed to be the Swap Termination Value thereof as of such date. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of a Lender). "Swingline Exposure" means, at any time, the aggregate principal amount of all Swingline Loans outstanding at such time. The Swingline Exposure of any Lender at any time shall be its Applicable Percentage of the total Swingline Exposure at such time. "Swingline Lender" means JPMorgan Chase Bank, N.A., in its capacity as lender of Swingline Loans hereunder. 25 "Swingline Loan" means a Loan made pursuant to Section 2.05. "Synthetic Lease Obligation" means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment). The amount of any Synthetic Lease Obligation as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date. "TARGET" means the Trans-European Automated Real Time Gross Settlement Express Transfer (TARGET) payment system. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Threshold Amount" means $10,000,000. "Transactions" means the execution, delivery and performance by each Loan Party of the Loan Documents to which it is or is to be a party, the satisfaction of the Guarantee Requirement, the borrowing of Loans and the issuance of Letters of Credit hereunder. "Type", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate, the Alternate Base Rate or, in the case of a Competitive Loan or Borrowing, the LIBO Rate or a Fixed Rate. "Unreimbursed Amount" has the meaning set forth in Section 2.06(e). "US Dollar Equivalent" means, on any date of determination, (a) with respect to any amount in US Dollars, such amount, and (b) with respect to any amount in any Alternative Currency, the equivalent in US Dollars of such amount, determined by the Administrative Agent pursuant to Section 1.05 using the Exchange Rate with respect to such Alternative Currency at the time in effect under the provisions of such Section. "US Dollars" or "US$" means the lawful currency of the United States of America. "Utilization" means, on any date, the aggregate Revolving Exposures on such date expressed as a percentage of the total Commitments. "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. "Yen" or "(Yen)" means the lawful currency of Japan. 26 SECTION 1.02. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a "Revolving Loan") or by Type (e.g., a "Eurocurrency Loan") or by Class and Type (e.g., a "Eurocurrency Revolving Loan"). Borrowings also may be classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a "Eurocurrency Borrowing") or by Class and Type (e.g., a "Eurocurrency Revolving Borrowing"). SECTION 1.03. Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 1.04. Accounting Terms; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision shall have been amended in accordance herewith. SECTION 1.05. Currency Translation. (a) For purposes of any determination under Section 6.01, 6.02 or 6.03 or under paragraph (e) or (h) of Section 7.01, all amounts incurred, outstanding or proposed to be incurred or outstanding in currencies other than US Dollars shall be translated into US Dollars at currency exchange rates in effect on the date of such determination; provided that no Default or Event of Default shall arise as a result of any limitation set forth in US Dollars in Section 6.01, 6.02 or 6.03 being exceeded solely as a result of changes in currency exchange rates from those rates applicable at the time or times any transactions were initially 27 consummated in reliance on the exceptions under such Sections. For purposes of any determination under Section 6.05, the amount of each Disposition or other applicable transaction denominated in a currency other than US Dollars shall be translated into US Dollars at the applicable currency exchange rate in effect on the date such Disposition or other transaction is consummated. Such currency exchange rates shall be determined in good faith by the Borrower. (b) The Administrative Agent shall (A) determine the US Dollar Equivalent of any Borrowing denominated in an Alternative Currency as of the date of the commencement of the initial Interest Period therefor and as of the date of the commencement of each subsequent Interest Period therefor, in each case using the Exchange Rate for the applicable currency in relation to US Dollars in effect on the date that is three Business Days prior to the date on which the applicable Interest Period shall commence, and each such amount shall be the US Dollar Equivalent of such Borrowing until the next required calculation thereof pursuant to this paragraph and (B) notify the Borrower and the Lenders of each calculation of the US Dollar Equivalent of each Borrowing. ARTICLE II The Credits SECTION 2.01. Commitments. Subject to the terms and conditions set forth herein, each Lender agrees to make Revolving Loans to the Borrower, denominated in US Dollars or Alternative Currencies, from time to time during the Availability Period in amounts that will not at any time result in (a) such Lender's Revolving Exposure exceeding its Commitment, (b) the sum of the total Revolving Exposures plus the aggregate principal amount of outstanding Competitive Loans exceeding the total Commitments or (c) the aggregate amount of the US Dollar Equivalents of all the outstanding Revolving Loans denominated in Alternative Currencies exceeding US$50,000,000. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans. SECTION 2.02. Loans and Borrowings. (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans of the same Class, Type and currency made by the Lenders ratably in accordance with their respective Commitments. Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.04. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments and Competitive Bids of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Subject to Section 2.14, (i) each Revolving Borrowing denominated in US Dollars shall be comprised entirely of ABR Loans or Eurocurrency Loans as the Borrower may request in accordance herewith, (ii) each Revolving Borrowing denominated in a Alternative Currency shall be comprised entirely of Eurocurrency Loans, and (iii) each Competitive Borrowing shall be comprised entirely of Eurocurrency 28 Loans or Fixed Rate Loans as the Borrower may request in accordance herewith. Each Swingline Loan shall be an ABR Loan. Each Lender at its option may make any Eurocurrency Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurocurrency Revolving Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of the Borrowing Multiple and not less than the Borrowing Minimum. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of US$100,000 and not less than US$500,000; provided that an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.06(e). Each Competitive Borrowing shall be in an aggregate amount that is an integral multiple of the US$1,000,000 and not less than US$10,000,000. Each Swingline Loan shall be in an amount that is an integral multiple of US$100,000 and not less than US$100,000. Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of five Eurocurrency Revolving Borrowings outstanding. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date. SECTION 2.03. Requests for Revolving Borrowings. To request a Revolving Borrowing, the Borrower shall notify the Applicable Agent of such request by telephone or telecopy (a) in the case of a Eurocurrency Borrowing denominated in US Dollars, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing, (b) in the case of a Borrowing denominated in an Alternative Currency, not later than 11:00 a.m., London time, four Business Days before the date of the proposed Borrowing, or (c) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, on the date of the proposed Borrowing. Each such Borrowing Request shall be irrevocable and, if made by telephone, shall be confirmed promptly by hand delivery or telecopy to the Applicable Agent of a written Borrowing Request in a form approved by the Applicable Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the currency and the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurocurrency Borrowing; and 29 (iv) in the case of a Eurocurrency Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period". If no currency is specified with respect to any requested Eurocurrency Borrowing, then the Borrower shall be deemed to have selected US Dollars. If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be (A) in the case of a Borrowing denominated in US Dollars, an ABR Borrowing and (B) in the case of a Borrowing denominated in any other currency, a Eurocurrency Borrowing. If no Interest Period is specified with respect to any requested Eurocurrency Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Applicable Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. SECTION 2.04. Competitive Bid Procedure. (a) Subject to the terms and conditions set forth herein, from time to time during the Availability Period the Borrower may request Competitive Bids and may (but shall not have any obligation to) accept Competitive Bids and borrow Competitive Loans denominated in US Dollars in an aggregate principal amount that will not result in the sum of the total Revolving Exposures plus the aggregate principal amount of outstanding Competitive Loans exceeding the total Commitments. To request Competitive Bids, the Borrower shall notify the Administrative Agent of such request by telephone, in the case of a Eurocurrency Borrowing, not later than 11:00 a.m., New York City time, four Business Days before the date of the proposed Borrowing and, in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing; provided that the Borrower may submit up to (but not more than) three Competitive Bid Requests on the same day, but a Competitive Bid Request shall not be made within five Business Days after the date of any previous Competitive Bid Request, unless any and all such previous Competitive Bid Requests shall have been withdrawn or all Competitive Bids received in response thereto rejected. Each such telephonic Competitive Bid Request shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Competitive Bid Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Competitive Bid Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be a Eurocurrency Borrowing or a Fixed Rate Borrowing; (iv) the Interest Period to be applicable to such Borrowing, which shall be a period contemplated by the definition of the term "Interest Period"; and 30 (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.07. Promptly following receipt of a Competitive Bid Request in accordance with this Section, the Administrative Agent shall notify the Lenders of the details thereof by telecopy, inviting the Lenders to submit Competitive Bids. (b) Each Lender may (but shall not have any obligation to) make one or more Competitive Bids to the Borrower in response to a Competitive Bid Request. Each Competitive Bid by a Lender must be in a form approved by the Administrative Agent and must be received by the Administrative Agent by telecopy, in the case of a Eurocurrency Competitive Borrowing, not later than 9:30 a.m., New York City time, three Business Days before the proposed date of such Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the proposed date of such Competitive Borrowing. Competitive Bids that do not conform substantially to the form approved by the Administrative Agent may be rejected by the Administrative Agent, and the Administrative Agent shall notify the applicable Lender as promptly as practicable. Each Competitive Bid shall specify (i) the principal amount (which shall be a minimum of US$5,000,000 and an integral multiple of US$1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the Borrower) of the Competitive Loan or Loans that the Lender is willing to make, (ii) the Competitive Bid Rate or Rates at which the Lender is prepared to make such Loan or Loans (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) and (iii) the Interest Period applicable to each such Loan and the last day thereof. (c) The Administrative Agent shall promptly notify the Borrower by telecopy of the Competitive Bid Rate and the principal amount specified in each Competitive Bid and the identity of the Lender that shall have made such Competitive Bid. (d) Subject only to the provisions of this paragraph, the Borrower may accept or reject any Competitive Bid. The Borrower shall notify the Administrative Agent by telephone or telecopy and, if made by telephone, the Borrower shall confirm by telecopy in a form approved by the Administrative Agent, whether and to what extent it has decided to accept or reject each Competitive Bid, in the case of a Eurocurrency Competitive Borrowing, not later than 10:30 a.m., New York City time, three Business Days before the date of the proposed Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City time, on the proposed date of the Competitive Borrowing; provided that (i) the failure of the Borrower to give such notice shall be deemed to be a rejection of each Competitive Bid, (ii) the Borrower shall not accept a Competitive Bid made at a particular Competitive Bid Rate if the Borrower rejects a Competitive Bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the aggregate amount of the requested Competitive Borrowing specified in the related Competitive Bid Request, (iv) to the extent necessary to comply with clause (iii) above, the Borrower may accept Competitive Bids at the same Competitive Bid Rate in part, which acceptance, in 31 the case of multiple Competitive Bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such Competitive Bid, and (v) except pursuant to clause (iv) above, no Competitive Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of US$5,000,000 and an integral multiple of US$1,000,000; provided further that if a Competitive Loan must be in an amount less than US$5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of US$1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple Competitive Bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of US$1,000,000 in a manner determined by the Borrower. A notice given by the Borrower pursuant to this paragraph shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Lender by telecopy whether or not its Competitive Bid has been accepted (and, if so, the amount and Competitive Bid Rate so accepted), and each successful bidder will thereupon become bound, subject to the terms and conditions hereof, to make the Competitive Loan in respect of which its Competitive Bid has been accepted. (f) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such Competitive Bid directly to the Borrower at least one quarter of an hour earlier than the time by which the other Lenders are required to submit their Competitive Bids to the Administrative Agent pursuant to paragraph (b) of this Section. SECTION 2.05. Swingline Loans. (a) Subject to the terms and conditions set forth herein, the Swingline Lender agrees to make Swingline Loans denominated in US Dollars to the Borrower from time to time during the Availability Period, in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of outstanding Swingline Loans exceeding US$10,000,000 or (ii) the sum of the total Revolving Exposures plus the aggregate principal amount of outstanding Competitive Loans exceeding the total Commitments; provided that the Swingline Lender shall not be required to make a Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Swingline Loans. (b) To request a Swingline Loan, the Borrower shall notify the Administrative Agent of such request by telephone (confirmed by telecopy), not later than 12:00 noon, New York City time, on the day of a proposed Swingline Loan. Each such notice shall be irrevocable and shall specify the requested date (which shall be a Business Day) and amount of the requested Swingline Loan. The Administrative Agent will promptly advise the Swingline Lender of any such notice received from the Borrower. The Swingline Lender shall make each Swingline Loan available to the Borrower by means of a credit to the general deposit account of the Borrower with the Swingline Lender (or, in the case of a Swingline Loan made to finance the reimbursement of an LC Disbursement as provided in Section 2.06(e), by remittance to 32 the Issuing Bank) by 3:00 p.m., New York City time, on the requested date of such Swingline Loan. (c) The Swingline Lender may by written notice given to the Administrative Agent not later than 10:00 a.m., New York City time, on any Business Day require the Lenders to acquire participations on such Business Day in all or a portion of the Swingline Loans outstanding. Such notice shall specify the aggregate amount of Swingline Loans in which the Lenders will participate. Promptly upon receipt of such notice, the Administrative Agent will give notice thereof to each Lender, specifying in such notice such Lender's Applicable Percentage of such Swingline Loan or Loans. Each Lender hereby absolutely and unconditionally agrees, upon receipt of notice as provided above, to pay to the Administrative Agent, for the account of the Swingline Lender, such Lender's Applicable Percentage of such Swingline Loan or Loans. Each Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this paragraph is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Lender shall comply with its obligation under this paragraph by wire transfer of immediately available funds, in the same manner as provided in Section 2.07 with respect to Loans made by such Lender (and Section 2.07 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the Swingline Lender the amounts so received by it from the Lenders. The Administrative Agent shall notify the Borrower of any participations in any Swingline Loan acquired pursuant to this paragraph, and thereafter payments in respect of such Swingline Loan shall be made to the Administrative Agent and not to the Swingline Lender. Any amounts received by the Swingline Lender from the Borrower (or other party on behalf of the Borrower) in respect of a Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Administrative Agent; any such amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent to the Lenders that shall have made their payments pursuant to this paragraph and to the Swingline Lender, as their interests may appear; provided that any such payment so remitted shall be repaid to the Swingline Lender or to the Administrative Agent, as applicable, if and to the extent such payment is required to be refunded to a Loan Party for any reason. The purchase of participations in a Swingline Loan pursuant to this paragraph shall not relieve the Borrower of any default in the payment thereof. SECTION 2.06. Letters of Credit. (a) General. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of Letters of Credit denominated in US Dollars for its own account, in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, at any time and from time to time during the Availability Period. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. From and after the Effective Date, each Existing Letter of 33 Credit, as set forth in Schedule 2.06, shall be deemed to be a Letter of Credit for all purposes hereof and shall be deemed to have been issued hereunder on the Effective Date. Any Lender that issued an Existing Letter of Credit shall have the rights of an Issuing Bank as to such Letter of Credit for purposes of this Section 2.06. (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit other than an Existing Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Issuing Bank, the Borrower also shall submit a letter of credit application on the Issuing Bank's standard form in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed US$50,000,000 and (ii) the sum of the total Revolving Exposures plus the aggregate principal amount of outstanding Competitive Loans shall not exceed the total Commitments. (c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Maturity Date; provided that at the request of the Borrower any Letter of Credit may contain customary "evergreen" provisions pursuant to which such Letter of Credit will, in the absence of a notice given by the Issuing Bank, be automatically renewed (but in no event beyond the date that is five Business Days prior to the Maturity Date) for successive one-year periods. (d) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each LC Disbursement made by the Issuing Bank and not reimbursed by the Borrower on the date due as provided in paragraph (e) of this Section, or of any 34 reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. On the Effective Date and without any further action by any party hereto, each Issuing Bank that has issued an Existing Letter of Credit shall be deemed to have granted to each Lender, and each Lender shall be deemed to have acquired from such Issuing Bank, a participation in each such Existing Letter of Credit in accordance with the foregoing provisions of this paragraph (d). (e) Reimbursement. If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 3:00 p.m., New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 10:00 a.m., New York City time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 3:00 p.m., New York City time, on (i) the Business Day that the Borrower receives such notice, if such notice is received prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; provided that, if the Maturity Date shall not have occurred, the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.03 or 2.05 that such payment be financed with an ABR Revolving Borrowing (if such LC Disbursement is not less than US$1,000,000) or Swingline Loan (if such LC Disbursement is not less than US$500,000) in an equivalent amount and, to the extent so financed, the Borrower's obligation to make such payment shall be discharged and replaced by the resulting ABR Revolving Borrowing or Swingline Loan. If the Borrower fails to make such payment when due, the Administrative Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof (the "Unreimbursed Amount") and such Lender's Applicable Percentage thereof. Promptly following receipt of such notice, each Lender shall pay to the Administrative Agent its Applicable Percentage of the Unreimbursed Amount, in the same manner as provided in Section 2.07 with respect to Loans made by such Lender (and Section 2.07 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Lenders and the Issuing Bank as their interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than the funding of ABR Revolving Loans or a Swingline Loan as contemplated above) shall not 35 constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement. (f) Obligations Absolute. The Borrower's obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower's obligations hereunder. None of the Agents, the Lenders or the Issuing Bank, or any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or wilful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. (g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice 36 shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Lenders with respect to any such LC Disbursement. (h) Interim Interest. If the Issuing Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to ABR Revolving Loans; provided that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.13(d) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to paragraph (e) of this Section to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment. (i) Replacement of the Issuing Bank. The Issuing Bank may be replaced at any time by written agreement among the Borrower, the Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.12(b). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement (including the right to receive fees under Section 2.12(b)), but shall not be required to issue additional Letters of Credit. (j) Cash Collateralization. If any Event of Default shall occur and be continuing, on the Business Day that the Borrower receives notice from the Administrative Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Lenders with LC Exposure representing greater than 50% of the total LC Exposure) demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit ("Cash Collateralize") in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders and the Issuing Bank, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest thereon; provided that the obligation to Cash Collateralize shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (f) of Section 7.01. Each such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Administrative Agent shall have exclusive dominion and control, including the exclusive 37 right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrower's risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of Lenders with LC Exposure representing greater than 50% of the total LC Exposure), be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived. SECTION 2.07. Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds in the applicable currency (a) in the case of an ABR Borrowing, by 1:00 p.m., New York City time and (b) in all other cases, by 12:00 noon, Local Time, to the account of the Applicable Agent most recently designated by it for such purpose by notice to the Lenders; provided that Swingline Loans shall be made as provided in Section 2.05. The Applicable Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to the following account: JPMorgan Chase Bank, ABA # 021000021, Account # 3141073233, or such other or additional accounts as shall be designated in a written notice signed by a Financial Officer and delivered to the Applicable Agent; provided that ABR Revolving Loans or Swingline Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.06(e) shall be remitted by the Administrative Agent to the Issuing Bank. (b) Unless the Applicable Agent shall have received notice from a Lender prior to the proposed time of any Borrowing that such Lender will not make available to the Applicable Agent such Lender's share of such Borrowing, the Applicable Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Applicable Agent, then the applicable Lender and the Borrower severally agree to pay to the Applicable Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Applicable Agent, at (i) in the case of such Lender, the greater of (x)(A) the Federal Funds Effective Rate, in the case of Loans denominated in US Dollars, and (B) the rate reasonably determined by the London Agent to be the cost to it of funding such amount, in the case of Loans denominated in a Alternative Currency, and (y) a rate determined by the Applicable Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, if denominated in US 38 Dollars, the interest rate applicable to ABR Loans and (B) if denominated in a Alternative Currency, the interest rate applicable to the subject Loan. SECTION 2.08. Interest Elections. (a) Each Revolving Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurocurrency Revolving Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurocurrency Revolving Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Competitive Borrowings or Swingline Borrowings, which may not be converted or continued. (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone or by telecopy by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such Interest Election Request shall be irrevocable and, if telephonic, shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. Notwithstanding any other provision of this Section, the Borrower shall not be permitted to (i) change the currency of any Borrowing or (ii) elect an Interest Period for Eurocurrency Loans that does not comply with Section 2.02(d). (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02 and paragraph (e) of this Section: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurocurrency Borrowing; and (iv) if the resulting Borrowing is a Eurocurrency Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". 39 If any such Interest Election Request requests a Eurocurrency Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurocurrency Revolving Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall (i) in the case of a Borrowing denominated in US Dollars, be converted to an ABR Borrowing and (ii) in the case of any other Eurocurrency Borrowing, become due and payable on the last day of such Interest Period. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Revolving Borrowing denominated in US Dollars may be converted to or continued as a Eurocurrency Borrowing and (ii) unless repaid, each Eurocurrency Revolving Borrowing denominated in US Dollars shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. SECTION 2.09. Termination and Reduction of Commitments; Increase of Commitments. (a) Unless previously terminated, the Commitments shall terminate on the Maturity Date. (b) The Borrower may at any time terminate, or from time to time reduce, the Commitments; provided that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of the Borrowing Multiple for US Dollar denominated Loans and not less than the Borrowing Minimum for US Dollar denominated Loans and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.11, the sum of the Revolving Exposures plus the aggregate principal amount of outstanding Competitive Loans would exceed the total Commitments. (c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments shall be permanent. Each reduction of the Commitments 40 shall be made ratably among the Lenders in accordance with their respective Commitments. (d) (i) The Borrower may, at any time, by written notice to the Administrative Agent, request that the total Commitments be increased (a "Commitment Increase") in integral multiples of US$5,000,000; provided that at no time shall the aggregate amount of Commitment Increases effected pursuant to this paragraph exceed US$100,000,000. Each such notice shall set forth the amount of the requested Commitment Increase and the date on which such adjustment is requested to become effective (which shall be not less than 20 days or more than 45 days after the date of such notice), and shall offer each Lender the opportunity to increase its Commitment by its Applicable Percentage of the proposed increased amount. Each Lender shall, in its sole discretion, by notice to the Borrower and the Administrative Agent given not more than 10 Business Days after the date of the Borrower's notice, either agree to increase its Commitment by all or a portion of the offered amount (each Lender so agreeing being an "Increasing Lender") or decline to increase its Commitment (and any Lender that does not deliver such a notice within such period of 10 Business Days shall be deemed to have declined to increase its Commitment) (each Lender so declining or deemed to have declined being a "Non-Increasing Lender"). In the event that on the 10th Business Day after the Borrower shall have delivered a notice pursuant to the first sentence of this paragraph the Increasing Lenders shall have agreed pursuant to the preceding sentence to increase their Commitments by an aggregate amount less than the increase in the total Commitments requested by the Borrower, the Borrower may arrange for one or more banks or other financial institutions (any such bank or other financial institution being called an "Augmenting Lender"), which may include any Lender, to extend Commitments in an aggregate amount equal to the unsubscribed amount; provided that each Augmenting Lender, if not already a Lender hereunder, shall be subject to the approval of the Administrative Agent and the Issuing Bank (which approval in each case shall not be unreasonably withheld) and the Borrower and each Augmenting Lender shall execute all such documentation as the Administrative Agent shall reasonably specify to evidence the Commitment of such Augmenting Lender and/or its status as a Lender hereunder. Any Commitment Increase may be made in an amount less than the Commitment Increase requested by the Borrower if the Borrower is unable to arrange for, or chooses not to arrange for, Augmenting Lenders. (ii) On the effective date of any Commitment Increase pursuant to this paragraph (d) (the "Increase Effective Date"), (A) the aggregate principal amount of the Revolving Loans outstanding (the "Initial Loans") immediately prior to giving effect to the applicable Commitment Increase on the Increase Effective Date shall be deemed to be repaid, (B) after the effectiveness of the Commitment Increase, the Borrower shall be deemed to have made new Borrowings (the "Subsequent Borrowings") in an aggregate principal amount equal to the aggregate principal amount of the Initial Loans and of the Types and for the Interest Periods specified in a Borrowing Request delivered to the Administrative Agent in accordance with Section 2.03, (C) each Lender shall pay to the Administrative Agent in same day funds an amount equal to the difference, if positive, between (x) such Lender's Applicable Percentage (calculated after 41 giving effect to the Commitment Increase) of the Subsequent Borrowings and (y) such Lender's Applicable Percentage (calculated without giving effect to the Commitment Increase) of the Initial Loans, (D) after the Administrative Agent receives the funds specified in clause (C) above, the Administrative Agent shall pay to each Lender the portion of such funds that is equal to the difference, if positive, between (1) such Lender's Applicable Percentage (calculated without giving effect to the Commitment Increase) of the Initial Loans and (2) such Lender's Applicable Percentage (calculated after giving effect to the Commitment Increase) of the amount of the Subsequent Borrowings, (E) each Non-Increasing Lender, each Increasing Lender and each Augmenting Lender shall be deemed to hold its Applicable Percentage of each Subsequent Borrowing (each calculated after giving effect to the Commitment Increase) and (F) the Borrower shall pay each Increasing Lender and each Non-Increasing Lender any and all accrued but unpaid interest on the Initial Loans. The deemed payments made pursuant to clause (A) above in respect of each Eurocurrency Loan shall be subject to indemnification by the Borrower pursuant to the provisions of Section 2.16 if the Increase Effective Date occurs other than on the last day of the Interest Period relating thereto and breakage costs result. (iii) Commitment Increases and new Commitments created pursuant to this paragraph (d) shall become effective on the date specified in the original notice delivered by the Borrower pursuant to the first sentence of subparagraph (i) above. Nothing in this paragraph (d) shall have the effect of increasing or requiring the increase of the Commitment of any Non-Increasing Lender. (iv) Notwithstanding the foregoing, no increase in the Commitments (or in any Commitment of any Lender) or addition of an Augmenting Lender shall become effective under this paragraph (d) unless, on the date of such increase, the conditions set forth in paragraphs (a) and (b) of Section 4.02 shall be satisfied and the Administrative Agent shall have received a certificate to that effect dated such date and executed by a Financial Officer. SECTION 2.10. Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay (i) to the Applicable Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan of such Lender on the Maturity Date, (ii) to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Competitive Loan on the last day of the Interest Period applicable to such Loan and (iii) to the Swingline Lender the then unpaid principal amount of each Swingline Loan on the earlier of the Maturity Date and the first date after such Swingline Loan is made that is the 15th or last day of a calendar month and is at least two Business Days after such Swingline Loan is made; provided that on each date that a Revolving Borrowing denominated in US Dollars (including any ABR Borrowing) or Competitive Borrowing is made, the Borrower shall repay all outstanding Swingline Loans. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the Indebtedness of the Borrower to such Lender 42 resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (e) Any Lender may request that Loans of any Class made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in substantially the form attached hereto as Exhibit E. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). SECTION 2.11. Prepayment of Loans. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to the requirements of this Section; provided that the Borrower shall not have the right to prepay any Competitive Loan without the prior consent of the Lender thereof. (b) If the sum of the aggregate Revolving Exposures and the aggregate principal amount of the outstanding Competitive Loans shall at any time exceed the aggregate Commitments, then (i) on the last day of any Interest Period for any Eurocurrency Revolving Borrowing and (ii) on any other date in the event any ABR Revolving Borrowing shall be outstanding, the Borrower shall prepay Revolving Loans in an amount equal to the lesser of (A) the amount necessary to eliminate such excess (after giving effect to any other prepayment of Loans on such day) and (B) the amount of the applicable Borrowings referred to in clause (i) or (ii), as applicable. If, on any date, the sum of the aggregate Revolving Exposures and the aggregate principal amount of the outstanding Competitive Loans shall exceed 105% of the aggregate Commitments, then the Borrower shall, not later than the next Business Day, prepay one or more Borrowings in an aggregate principal amount sufficient to eliminate such excess. (c) Prior to any optional or mandatory prepayment of Borrowings hereunder, the Borrower shall select the Borrowing or Borrowings to be prepaid and shall 43 specify such selection in the notice of such prepayment pursuant to paragraph (d) of this Section. (d) The Borrower shall notify the Applicable Agent (and, in the case of prepayment of a Swingline Loan, the Swingline Lender) by telephone (confirmed by telecopy) or by telecopy of any prepayment hereunder (i) in the case of a Eurocurrency Borrowing denominated in US Dollars, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment, (ii) in the case of a Borrowing denominated in a Alternative Currency, not later than 11:00 a.m., London time, four Business Days before the date of prepayment, (iii) in the case of prepayment of an ABR Revolving Borrowing, not later than 11:00 a.m., New York City time, on the date of prepayment or (iv) in the case of prepayment of a Swingline Loan, not later than 12:00 noon, New York City time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of optional prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.09, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.09. Promptly following receipt of any such notice relating to a Revolving Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest and other amounts to the extent required by Section 2.13. SECTION 2.12. Fees. (a) The Borrower agrees to pay to the Administrative Agent, in US Dollars, for the account of each Lender, a facility fee, which shall accrue at the Applicable Rate on the daily amount of the Commitment of such Lender (whether used or unused) during the period from and including the date of this Agreement to but excluding the Maturity Date; provided that, if such Lender continues to have any Revolving Exposure after the Maturity Date, then such facility fee shall continue to accrue on the daily amount of such Lender's Revolving Exposure from and including the Maturity Date to but excluding the date on which such Lender ceases to have any Revolving Exposure. Accrued facility fees shall be payable in arrears on the last day of March, June, September and December of each year, on any date prior to the Maturity Date on which all the Commitments shall have terminated and on the Maturity Date, commencing on the first such date to occur after the date hereof; provided that any facility fees accruing after the Maturity Date shall be payable on demand. All facility fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) The Borrower agrees to pay (i) to the Administrative Agent for the account of each Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at the same Applicable Rate used to determine the interest rate applicable to Eurocurrency Revolving Loans on the average daily amount of such Lender's LC Exposure (excluding any portion thereof attributable to unreimbursed LC 44 Disbursements) during the period from and including the Effective Date to but excluding the later of the date on which such Lender's Commitment terminates and the date on which such Lender ceases to have any LC Exposure, and (ii) to the Issuing Bank a one-time fronting fee, of 0.125% of the LC Exposure with respect to the initial amount of any Letter of Credit issued hereunder (other than the Existing Letters of Credit pursuant to third sentence of Section 2.06(a)), as well as the Issuing Bank's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees accrued or becoming payable in respect of Letters of Credit issued through and including the last day of March, June, September and December of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Effective Date; provided that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 10 days after demand. All participation fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Borrower agrees to pay to the Agents, for their own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Agents. (d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent (or to the Issuing Bank, in the case of fees payable to it) for distribution, in the case of facility fees and participation fees, to the Lenders. Fees paid shall not be refundable under any circumstances. SECTION 2.13. Interest. (a) The Loans comprising each ABR Borrowing (including each Swingline Loan) shall bear interest at the Alternate Base Rate. (b) The Loans comprising each Eurocurrency Borrowing shall bear interest (i) in the case of a Eurocurrency Revolving Loan, at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate, or (ii) in the case of a Eurocurrency Competitive Loan, at the LIBO Rate for the Interest Period in effect for such Borrowing plus (or minus, as applicable) the Margin applicable to such Loan. (c) Each Fixed Rate Loan shall bear interest at the Fixed Rate applicable to such Loan. (d) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such 45 Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section. (e) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Revolving Loans and Swingline Loans, upon the termination of the Commitments; provided that (i) interest accrued pursuant to paragraph (d) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan or a Swingline Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurocurrency Revolving Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion. All interest shall be payable in the currency in which the applicable Loan is denominated. (f) All interest hereunder shall be computed on the basis of a year of 360 days, except that (i) interest on Borrowings denominated in Sterling and (ii) interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or, except in the case of Borrowings denominated in Sterling, 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate or Adjusted LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.14. Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurocurrency Borrowing denominated in any currency: (i) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or (ii) the Administrative Agent is advised by the Required Lenders (or, in the case of a Eurocurrency Competitive Loan, the Lender that is required to make such Loan) that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining the Loans (or Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Eurocurrency Borrowing in such currency shall be ineffective, and 46 unless repaid such Borrowing shall be converted to or continued on the last day of the Interest Period applicable thereto (A) if such Borrowing is denominated in US Dollars, as an ABR Borrowing, or (B) if such Borrowing is denominated in any Alternative Currency, as a Borrowing bearing interest at such rate as Administrative Agent shall determine adequately and fairly reflects the cost to the affected Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period plus the Applicable Rate, (ii) if any Borrowing Request requests a Eurocurrency Revolving Borrowing in such currency, such Borrowing shall be made (A) if such Borrowing is denominated in US Dollars, as an ABR Borrowing, or (B) if such Borrowing is denominated in any Alternative Currency, as a Borrowing bearing interest at such rate as the Administrative Agent shall determine adequately and fairly reflects the cost to the affected Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period plus the Applicable Rate and (iii) any request by the Borrower for a Eurocurrency Competitive Borrowing shall be ineffective; provided that (A) if the circumstances giving rise to such notice do not affect all the Lenders, then requests by the Borrower for Eurocurrency Competitive Borrowings may be made to Lenders that are not affected thereby and (B) if the circumstances giving rise to such notice affect only one Type of Borrowing, then the other Type of Borrowings shall be permitted. SECTION 2.15. Increased Costs. (a) If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or the Issuing Bank; or (ii) impose on any Lender or the Issuing Bank or any applicable interbank market any other condition affecting this Agreement or Eurocurrency Loans or Fixed Rate Loans made by such Lender or any Letter of Credit or participation therein; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurocurrency Loan or Fixed Rate Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or the Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender or the Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters 47 of Credit issued by the Issuing Bank, to a level below that which such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender or the Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender or the Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 180 days prior to the date that such Lender or the Issuing Bank, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's or the Issuing Bank's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 180-day period referred to above shall be extended to include the period of retroactive effect thereof. (e) Notwithstanding the foregoing provisions of this Section, a Lender shall not be entitled to compensation pursuant to this Section in respect of any Competitive Loan if the Change in Law that would otherwise entitle it to such compensation shall have been publicly announced prior to submission of the Competitive Bid pursuant to which such Loan was made. SECTION 2.16. Break Funding Payments. In the event of (a) the payment of any principal of any Eurocurrency Loan or Fixed Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurocurrency Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Eurocurrency Loan or Fixed Rate Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.11(d) and is revoked in accordance therewith), (d) the failure to borrow any Competitive Loan after accepting the Competitive Bid to make such Loan, or (e) the assignment of any Eurocurrency Loan or Fixed Rate Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.19, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event, including, to the extent that any of the foregoing 48 Loans are denominated in any Alternative Currency, the costs and expenses of such Lender attributable to the premature unwinding of any hedging agreement entered into by such Lender in respect to the foreign currency exposure attributable to such Loan. In the case of a Eurocurrency Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for deposits in the applicable currency of a comparable amount and period from other banks in the eurocurrency market. A certificate of any Lender setting forth in reasonable detail any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.17. Taxes. (a) Any and all payments by or on account of any obligation of the Borrower hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Applicable Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify each Agent, each Lender and the Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by such Agent, such Lender or the Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower hereunder or under any other Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate setting forth the amount of such payment or liability delivered to the Borrower by a Lender or the Issuing Bank, or by the Administrative Agent on its own behalf or on behalf of a Lender or the Issuing Bank, shall be conclusive absent manifest error. 49 (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement or under any other Loan Document shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate. SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-offs. (a) The Borrower shall make each payment required to be made by it hereunder or under any other Loan Document (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Section 2.15, 2.16 or 2.17, or otherwise) prior to the time expressly required hereunder or under such other Loan Document for such payment or, if no such time is expressly required, prior to 12:00 noon, Local Time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Applicable Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Applicable Agent to the applicable account specified by it for the account of the Lenders or, in any such case, to such other account as the Applicable Agent shall from time to time specify in a notice delivered to the Borrower, except payments to be made directly to the Issuing Bank or Swingline Lender as expressly provided herein and except that payments pursuant to Sections 2.15, 2.16, 2.17 and 9.03 shall be made directly to the Persons entitled thereto and payments pursuant to other Loan Documents shall be made to the Persons specified therein. The Applicable Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment under any Loan Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder of principal or interest in respect of any Loan or LC Disbursement shall, except as otherwise expressly provided herein, be made in the currency of such Loan or LC Disbursement; all other payments hereunder and under each other Loan Document shall be made in US Dollars. Any payment required to be made by either Agent hereunder shall be deemed to have been made by the time required if such Agent shall, at or before such time, have taken the necessary steps to make such payment in accordance with the regulations or operating procedures of the clearing or settlement system used by such Agent to make such payment. 50 (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal of the Loans and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans or funded participations in LC Disbursements or Swingline Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans and participations in LC Disbursements and Swingline Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans and participations in LC Disbursements and Swingline Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans and participations in LC Disbursements and Swingline Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. (d) Unless the Applicable Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Applicable Agent for the account of the Lenders or the Issuing Bank hereunder that the Borrower will not make such payment, the Applicable Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the Issuing Bank, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or the Issuing Bank, as the case may be, severally agrees to repay to the Applicable Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Applicable Agent, at (i) the greater of the 51 Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation (in the case of an amount denominated in US Dollars) and (ii) the rate reasonably determined by the London Agent to be the cost to it of funding such amount (in the case of an amount denominated in any Alternative Currency). (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.05(c), 2.06(d) or (e), 2.07(b) or 2.18(d), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by either Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.19. Mitigation Obligations; Replacement of Lenders. (a) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if the Borrower is required to pay any additional interest to any Lender pursuant to Section 2.20, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15, 2.17 or 2.20, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If (i) any Lender requests compensation under Section 2.15, (ii) the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, (iii) the Borrower is required to pay any additional interest to any Lender pursuant to Section 2.20 or (iv) any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement (other than any outstanding Competitive Loans held by it) to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (x) the Borrower shall have received the prior written consent of the Administrative Agent (and, if a Commitment is being assigned, the Issuing Bank), which consent, in each case, shall not unreasonably be withheld, (y) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans (other than Competitive Loans) and funded participations in LC Disbursements and Swingline Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal, funded participations and accrued interest and fees) or the Borrower (in the case of all other amounts) and (z) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments 52 required to be made pursuant to Section 2.17 or additional interest required pursuant to Section 2.20, such assignment will result in a material reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. SECTION 2.20. Additional Reserve Costs. (a) If and so long as any Lender is required by the Bank of England or any other monetary or other authority of the United Kingdom to make special deposits, to maintain reserve asset ratios or to pay fees, in each case in respect of such Lender's Eurocurrency Loans, such Lender may require the Borrower to pay, contemporaneously with each payment of interest on each of such Loans, additional interest on such Loan at a rate per annum equal to the Mandatory Costs Rate calculated in accordance with the formula and in the manner set forth in Exhibit D hereto. (b) If and so long as any Lender is required to comply with reserve assets, liquidity, cash margin or other requirements of any monetary or other authority (including any such requirement imposed by the European Central Bank or the European System of Central Banks, but excluding requirements reflected in the Statutory Reserve Rate or the Mandatory Costs Rate) in respect of any of such Lender's Eurocurrency Loans, such Lender may require the Borrower to pay, contemporaneously with each payment of interest on each of such Lender's Eurocurrency Loans subject to such requirements, additional interest on such Loan at a rate per annum specified by such Lender to be the cost to such Lender of complying with such requirements in relation to such Loan. (c) Any additional interest owed pursuant to paragraph (a) or (b) above shall be determined by the relevant Lender, which determination shall be conclusive absent manifest error, and notified to the Borrower (with a copy to the Agents) at least five Business Days before each date on which interest is payable for the relevant Loan, and such additional interest so notified to the Borrower by such Lender shall be payable to the London Agent for the account of such Lender on each date on which interest is payable for such Loan. (d) A reference to a Lender in this Section 2.20 includes any domestic or foreign branch or Affiliate of such Lender making a Loan as contemplated by Section 2.02(b). SECTION 2.21. Redenomination of Certain Alternative Currencies. (a) Each obligation of any party to this Agreement to make a payment denominated in the national currency unit of any member state of the European Union that adopts the Euro as its lawful currency after the date hereof shall be redenominated into Euro at the time of such adoption (in accordance with the EMU Legislation). If, in relation to the currency of any such member state, the basis of accrual of interest expressed in this Agreement in respect of that currency shall be inconsistent with any convention or practice in the London Interbank Market for the basis of accrual of interest in respect of the Euro, such expressed basis shall be replaced by such convention or practice with 53 effect from the date on which such member state adopts the Euro as its lawful currency; provided that if any Borrowing in the currency of such member state is outstanding immediately prior to such date, such replacement shall take effect, with respect to such Borrowing, at the end of the then current Interest Period. (b) Each provision of this Agreement shall be subject to such reasonable changes of construction as the London Agent (in consultation with the Borrower) may from time to time specify to be appropriate to reflect the adoption of the Euro by any member state of the European Union and any relevant market conventions or practices relating to the Euro. ARTICLE III Representations and Warranties The Borrower represents and warrants to the Lenders that: SECTION 3.01. Existence, Qualification and Power; Compliance with Laws. Each Loan Party and each other Subsidiary (a) is duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority and all requisite governmental licenses, authorizations, consents and approvals to (i) own its assets and carry on its business and (ii) execute, deliver and perform its obligations under the Loan Documents to which it is a party, (c) is duly qualified and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license, and (d) is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its properties; except in each case referred to in clause (b)(i), (c) or (d), to the extent that failure to do so could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.02. Authorization; No Contravention. The execution, delivery and performance by each Loan Party of each Loan Document to which it is a party have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of any of such Person's charter, by-laws or other organizational documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, or require any payment to be made under (i) any agreement, instrument or undertaking to which such Person is a party or affecting such Person or the properties of such Person or any of its subsidiaries or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; or (c) violate any law, rule or regulation. Each Loan Party and each other Subsidiary is in compliance with all agreements, instruments and undertakings referred to in clause (b)(i), except to the extent that failure to be in compliance could not reasonably be expected to result in a Material Adverse Effect. 54 SECTION 3.03. Governmental Authorization; Other Consents. No registration with or consent or approval of, or other action by, any Governmental Authority or any other Person is required in connection with the execution, delivery and performance of this Agreement by the Borrower or any Subsidiary Loan Party, or with the execution and delivery of other Loan Documents to which it is a party or, with respect to the Borrower, the borrowings and each other extension of credit hereunder, other than registrations, consents and approvals received prior to the date hereof and which are in full force and effect or such registrations, consents and approvals referred to in Section 3.01 hereof. SECTION 3.04. Binding Effect. This Agreement has been, and each other Loan Document, when delivered hereunder, will have been, duly executed and delivered by each Loan Party that is a party thereto. This Agreement constitutes, and each other Loan Document when so executed and delivered will constitute, a legal, valid and binding obligation of each Loan Party that is party thereto, enforceable against each such Loan Party in accordance with its terms except to the extent that enforcement may be limited by applicable bankruptcy, reorganization, moratorium, insolvency and similar laws affecting creditors' rights generally or by equitable principles of general application, regardless of whether considered in a proceeding in equity or at law. SECTION 3.05. Financial Statements; No Material Adverse Effect. (a) The Audited Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the consolidated financial condition of the Borrower and the Subsidiaries as of the date thereof and their consolidated results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; and (iii) show all material indebtedness and other liabilities, direct or contingent, of the Borrower and the Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Indebtedness. (b) The unaudited consolidated balance sheet of the Borrower and the Subsidiaries as at April 30, 2005, and the related unaudited consolidated statements of earnings and cash flows for the nine-month period ended on that date, (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and (ii) fairly present the financial condition of the Borrower and the Subsidiaries as of the date thereof and their results of operations for the period covered thereby, subject, in the case of clauses (i) and (ii), to the absence of footnotes and to normal year-end audit adjustments. (c) Since the date of the Audited Financial Statements, there has been no event or circumstance, either individually or in the aggregate, that has resulted, or could reasonably be expected to result, in a Material Adverse Effect. The Borrower and each Subsidiary Loan Party is Solvent. SECTION 3.06. Litigation. (a) There are no actions, suits or proceedings (whether or not purportedly on behalf of the Borrower or any Subsidiary) pending or, to 55 the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary at law or in equity or before or by any Governmental Authority, which involve any of the Transactions or which could reasonably be expected to result in a Material Adverse Effect (b) Neither the Borrower nor any Subsidiary is in default with respect to any judgment, writ, injunction, decree, rule or regulation of any Governmental Authority which could reasonably be expected to result in a Material Adverse Effect. SECTION 3.07. No Default. Neither the Borrower nor any Subsidiary is a party to any agreement, indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter or other corporate restriction or any judgment, order, writ, injunction, decree or regulation which could reasonably be expected to result in a Material Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party, which default could reasonably be expected to result in a Material Adverse Effect. SECTION 3.08. Ownership of Property; Liens. The Borrower and each Subsidiary has good title to its respective properties and assets, and all such properties and assets are free and clear of all Liens other than Permitted Liens. SECTION 3.09. Environmental Compliance. Except as disclosed in Schedule 3.09 hereto, the Borrower and each Subsidiary are in compliance with all applicable Environmental Laws and neither the Borrower nor any Subsidiary has used Hazardous Materials on, from, or affecting any property now owned or occupied or hereafter owned or occupied by the Borrower or any such Subsidiary in any manner which violates any applicable Environmental Law, except to the extent any such noncompliance or violation could not reasonably be expected to result in a Material Adverse Effect. To the best actual knowledge of any officer of the Borrower, no prior owner of any such property or any tenant, subtenant, prior tenant or prior subtenant have used Hazardous Materials on, from, or affecting such property in any manner which violates any applicable Environmental Law, except to the extent any such violation could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.10. Insurance. The properties of the Borrower and the Subsidiaries are insured with financially sound and reputable insurance companies in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Borrower or the applicable Subsidiary operates. SECTION 3.11. Taxes. The Borrower and the Subsidiaries have filed all Federal, state and other material tax returns and reports required to be filed, and have paid all Federal, state and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except (a) where the failure to file such tax returns or pay such taxes, charges or levies could not reasonably be expected to result in a Material Adverse Effect 56 and (b) taxes, assessments and governmental charges and levies being contested in good faith by appropriate proceedings and with respect to which adequate reserves in conformity with GAAP consistently applied have been provided on the books of the Borrower and the Subsidiaries. There is no proposed tax assessment against the Borrower or any Subsidiary that would, if made, result in a Material Adverse Effect. Except as set forth in Schedule 3.11 hereto, neither any Loan Party nor any Subsidiary is a party to any tax sharing agreement. SECTION 3.12. ERISA Compliance. No material liability under ERISA or the Code (other than for PBGC premiums due but not delinquent), has been imposed, or could reasonably be expected to be imposed, upon the Borrower or any ERISA Affiliate. No ERISA Event has occurred, or could reasonably be expected to occur, that, when taken together with any other ERISA Events that have occurred, could reasonably be expected to result in a material liability to the Borrower or any ERISA Affiliate. No lien imposed under the Code or ERISA on the assets of the Borrower or any of its ERISA Affiliates exists or to the knowledge of the Borrower is likely to arise on account of any Plan. The excess of the present value of all projected benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87), as of the date of the most recent financial statements reflecting such amounts, over the fair market value of the assets of such Plan, if any, could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.13. Subsidiaries; Equity Interests. Attached hereto as Schedule 3.13 is a correct and complete list of each of the Subsidiaries and Affiliates (other than directors and officers of the Borrower) as of the Closing Date showing as to each (a) Subsidiary, its name, the jurisdiction of its incorporation, its shareholders or other owners of interests in such Subsidiary and the number of outstanding shares or other ownership interests owned by each shareholder or other owner of interests and (b) Affiliate in which the Borrower or any of its Subsidiaries owns an interest, the number of shares or other ownership interests of such Affiliate owned directly or indirectly by the Borrower. SECTION 3.14. Margin Regulations; Investment Company Act; Public Utility Holding Company Act. (a) Neither the Borrower nor any of the Subsidiaries is engaged or will engage, principally or as one of its important activities, in the business of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board), or extending credit for the purpose of purchasing or carrying margin stock. Following the application of the proceeds of each Borrowing and each issuance of a Letter of Credit, not more than 25% of the value of the assets (either of the Borrower only or of the Borrower and the Subsidiaries on a consolidated basis) subject to any provision of this Agreement under which the sale, pledge or disposition of assets is restricted (within the meaning of Regulation U) will be margin stock. (b) None of the Borrower, any Person Controlling the Borrower, or any Subsidiary (i) is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 57 1935, or (ii) is or is required to be registered as an "investment company" under the Investment Company Act of 1940. SECTION 3.15. Disclosure. None of this Agreement, any other Loan Document or any other document, certificate or written statement furnished to the Administrative Agent, the Issuing Bank or any Lender by or on behalf of the Borrower or any of the Subsidiaries for use in connection with the transactions contemplated by this Agreement contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which they were made. SECTION 3.16. Compliance With Laws. The Borrower and each Subsidiary is in compliance with all laws, rules, regulations, orders and decrees which are applicable to the Borrower or such Subsidiary, or to any of their respective properties, the failure to comply with which could reasonably be expected to result in a Material Adverse Effect. SECTION 3.17. Permits and Licenses, Etc. The Borrower and each Subsidiary has all permits, licenses, certifications, authorizations and approvals required for it lawfully to own and operate its respective business except to the extent the failure to have any such permit, license, certification, authorization or approval could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.18. Labor Disputes and Acts of God. Neither the business nor the properties of the Borrower or any Subsidiary are affected by any accident, loss, theft, destruction, strike, lockout or other labor dispute, embargo, condemnation, act of God or of the public enemy or other casualty (whether or not covered by insurance), which could reasonably be expected to result in a Material Adverse Effect. SECTION 3.19. Specially Designated Nationals or Blocked Persons List. None of the Borrower, the Subsidiaries or any Affiliates of the Borrower are named on the United States Department of the Treasury's Specially Designated Nationals or Blocked Persons list. ARTICLE IV Conditions SECTION 4.01. Effective Date. The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02): (a) The Administrative Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement. 58 (b) The Guarantee Requirement shall be satisfied. (c) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of Carter Ledyard & Milburn LLP, counsel for the Loan Parties, substantially in the form of Exhibit B. The Borrower hereby requests such counsel to deliver such opinion. (d) The Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of each Loan Party, the authorization of the Transactions and any other legal matters relating to the Loan Parties, the Loan Documents or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel. (e) The Administrative Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02 and paragraphs (b) and (f) of this Section. (f) There shall not have occurred since July 31, 2004, any event, condition or circumstance that has resulted, or could reasonably be expected to result, in a Material Adverse Effect. (g) The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses (including fees, charges and disbursements of counsel) required to be reimbursed or paid by the Borrower hereunder or under any other Loan Document. (h) All outstanding 7.83% Senior Notes shall have been repaid, repurchased or redeemed in full. (i) The Existing Credit Agreement and the commitments thereunder shall have been terminated, the loans and other amounts outstanding or payable thereunder shall have been paid in full and all letters of credit outstanding thereunder shall have expired or been terminated. (j) The Lenders shall have received, to the extent requested, all documentation and other information reasonably requested by the Lenders or the Administration Agent under applicable "know your customer" and anti-money laundering rules and regulations, including the USA Patriot Act. The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or prior to 3:00 p.m., New York City 59 time, on July 28, 2005 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time). SECTION 4.02. Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing, and of the Issuing Bank to issue, amend, renew or extend any Letter of Credit, is subject to the satisfaction of the following conditions: (a) The representations and warranties of the Loan Parties set forth in the Loan Documents shall be true and correct in all material respects on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable. (b) At the time of and immediately after giving effect to such Borrowing or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, no Default shall have occurred and be continuing. Each Borrowing and each issuance, amendment, renewal or extension of a Letter of Credit shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section. ARTICLE V Affirmative Covenants So long as any Lender shall have any Commitment hereunder, any Loan or other Obligation hereunder shall remain unpaid or unsatisfied or any Letter of Credit shall remain outstanding, the Borrower shall, and shall (except in the case of the covenants set forth in Sections 5.01, 5.02, and 5.03) cause each Subsidiary to: SECTION 5.01. Financial Statements. Deliver to the Administrative Agent, in form and detail satisfactory to the Administrative Agent and the Lenders: (a) as soon as available, but in any event within 90 days after the end of each Fiscal Year of the Borrower or at such earlier time as the SEC may require the Borrower to deliver its Form 10-K (commencing with the Fiscal Year ended July 31, 2005), a consolidated balance sheet of the Borrower and the Subsidiaries as at the end of such Fiscal Year, and the related consolidated statements of earnings, shareholders' equity and cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all in reasonable detail and prepared in accordance with GAAP consistently applied throughout the periods covered thereby, except as otherwise expressly noted therein, audited and accompanied by a report and opinion of an independent certified public accountant of nationally recognized standing reasonably acceptable to the Required Lenders, which report and opinion shall be prepared in accordance with generally accepted auditing standards and shall not be subject to any "going concern" or like qualification or exception or any qualification or exception as to the scope of such financial statement audit; provided that the 60 requirements of this paragraph shall be deemed satisfied by delivery within the time period specified above of (i) a copy of the Borrower's Annual Report on Form 10-K for such Fiscal Year (together with the Borrower's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) ("Form 10-K") prepared in accordance with the requirements therefor and filed with the SEC, or (ii) a notice setting forth a written reference to a website that contains such Form 10-K (together with the Borrower's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act); and (b) as soon as available, but in any event within 45 days after the end of each of the first three fiscal quarters of the Borrower or at such earlier time as the SEC may require the Borrower to deliver its Form 10-Q (commencing with the fiscal quarter ended October 31, 2005), (i) a consolidated balance sheet of the Borrower and the Subsidiaries as at the end of such quarter, and (ii) consolidated statements of earnings of the Borrower and its Subsidiaries for such quarter and (in the case of the second and third quarters) for the portion of the Fiscal Year ending with such quarter, and a statement of cash flows for the portion of the Fiscal Year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous Fiscal Year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally consistently applied throughout the periods covered thereby, except as otherwise expressly noted therein, and certified by a Responsible Officer of the Borrower as fairly presenting, in all material respects, the financial position of the Borrower and its Subsidiaries being reported on and their results of operations and cash flows, subject to the changes resulting from year-end adjustments; provided that the requirements of this paragraph shall be deemed satisfied by delivery within the time period specified above of (i) a copy of the Borrower's Quarterly Report on Form 10-Q ("Form 10-Q") prepared in compliance with the requirements therefor and filed with the SEC, or (ii) a notice setting forth a written reference to a website that contains such Form 10-Q. As to any information contained in materials furnished pursuant to Section 5.02(c), the Borrower shall not be separately required to furnish such information under clause (a) or (b) above, but the foregoing shall not be in derogation of the obligation of the Borrower to furnish the information and materials described in clauses (a) and (b) above at the times specified therein. SECTION 5.02. Certificates; Other Information. Deliver to the Administrative Agent, in form and detail satisfactory to the Administrative Agent and the Required Lenders: (a) concurrently with the delivery of the financial statements referred to in Section 5.01(a), a certificate of its independent certified public accountants certifying such financial statements and stating that in making the examination necessary therefor no knowledge was obtained of any Default or, if any such Default shall exist, stating the nature and status of such event; 61 (b) concurrently with the delivery of the financial statements referred to in Section 5.01(a) and (b), a duly completed Compliance Certificate signed by a Responsible Officer of the Borrower; (c) promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of the Borrower, and copies of all annual, regular, periodic and special reports and registration statements which the Borrower may file or be required to file with the SEC under Section 13 or 15(d) of the Securities Exchange Act of 1934, and not otherwise required to be delivered to the Administrative Agent pursuant hereto; (d) promptly after the furnishing thereof, copies of any statement or report furnished to any holder of debt securities of any Loan Party or any Subsidiary pursuant to the terms of any indenture, loan or credit or similar agreement and not otherwise required to be furnished to the Lenders pursuant to Section 5.01 or any other clause of this Section; (e) promptly, and in any event within five Business Days after receipt thereof by any Loan Party or any Subsidiary thereof, copies of each notice or other correspondence received from the SEC or the U.S. Department of Justice concerning any investigation or possible investigation or other inquiry by such agency regarding financial or other operational results of any Loan Party or any Subsidiary thereof; and (f) promptly, such additional information regarding the business, financial or corporate affairs of the Borrower or any Subsidiary, or compliance with the terms of the Loan Documents, as the Administrative Agent or any Lender may from time to time reasonably request. Documents required to be delivered pursuant to Section 5.01(a) or (b) or paragraph (c) of this Section (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower's website on the Internet at www.pall.com; or (ii) on which such documents are posted on the Borrower's behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent has access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that the Borrower shall notify the Administrative Agent (by telecopier or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents. Notwithstanding anything contained herein, in every instance the Borrower shall be required to provide paper copies of the Compliance Certificates required by Section 5.02(b) to the Administrative Agent. Except for such Compliance Certificates, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request for delivery. 62 The Borrower hereby acknowledges that (a) the Administrative Agent may make available to the Lenders and the Issuing Bank materials and/or information provided by or on behalf of the Borrower hereunder (collectively, "Borrower Materials") by posting the Borrower Materials on IntraLinks or another similar electronic system (the "Platform") and (b) certain of the Lenders may be "public-side" Lenders (i.e., Lenders that do not wish to receive material non-public information with respect to the Borrower or its securities) (each, a "Public Lender"). The Borrower hereby agrees that (w) all Borrower Materials that are to be made available to Public Lenders shall be clearly and conspicuously marked "PUBLIC" which, at a minimum, shall mean that the word "PUBLIC" shall appear prominently on the first page thereof; (x) by marking Borrower Materials "PUBLIC," the Borrower shall be deemed to have authorized the Administrative Agent, the Issuing Bank and the Lenders to treat such Borrower Materials as either publicly available information or not material information (although it may be sensitive and proprietary) with respect to the Borrower or its securities for purposes of United States Federal and state securities laws; (y) all Borrower Materials marked "PUBLIC" are permitted to be made available through a portion of the Platform designated "Public Investor"; and (z) the Administrative Agent and the Arranger shall be entitled to treat any Borrower Materials that are not marked "PUBLIC" as being suitable only for posting on a portion of the Platform not designated "Public Investor". SECTION 5.03. Notices. Promptly notify the Administrative Agent: (a) of the occurrence of any Default or Event of Default which shall have occurred or the occurrence or existence of any event or circumstance that in the reasonable judgment of the Borrower is likely to become a Default or Event of Default; (b) of any matter that has resulted or could reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, any agreement, instrument or other undertaking to which the Borrower or any Subsidiary is a party or by which any of the Borrower or the Subsidiaries or any of their respective properties are bound; (ii) any dispute, litigation, investigation, proceeding or suspension between the Borrower or any Subsidiary and any Governmental Authority; or (iii) the commencement of, or any material development in, any litigation or proceeding affecting the Borrower or any Subsidiary, including pursuant to any applicable Environmental Laws; (c) of the occurrence of any ERISA Event; (d) of any material change in accounting policies or financial reporting practices by the Borrower or any Subsidiary not mandated by GAAP; and (e) of any announcement by Moody's or S&P of any change in a rating by S&P or Moody's of the Index Debt. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred 63 to therein and stating what action the Borrower has taken and proposes to take with respect thereto. Each notice pursuant to paragraph (a) of this Section shall describe with particularity any and all provisions of this Agreement and any other Loan Document that have been breached. SECTION 5.04. Payment of Obligations. (a) Pay all material indebtedness and obligations, now existing or hereafter arising, as and when due and payable except where (i) the validity or amount thereof is being contested in good faith and by appropriate proceedings, which proceedings shall include good faith negotiations, and (ii) the Borrower or any Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP, and (iii) the failure to make such payment pending such contest could not reasonably be expected to result in a Material Adverse Effect, and (b) pay and discharge or cause to be paid and discharged promptly all taxes, assessments and government charges or levies imposed upon it or upon its income and profits, or upon any of its property, real, personal or mixed, or upon any part thereof, as and when due and payable, as well as all lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a lien or charge upon such properties or any part thereof or except where the failure to make such payment could not reasonably be expected to result in a Material Adverse Effect; provided, however, that neither the Borrower nor any Subsidiary shall be required to pay and discharge or cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity thereof shall be contested in good faith by appropriate proceedings, and the Borrower or such Subsidiary, as the case may be, shall have set aside on its books adequate reserves determined in accordance with GAAP with respect to any such tax, assessment, charge, levy or claim so contested; provided further that, subject to the foregoing proviso, the Borrower and each Subsidiary will pay or cause to be paid all such taxes, assessments, charges, levies or claims upon the commencement of proceedings to foreclose any lien which has attached as security therefor. SECTION 5.05. Preservation of Existence, Etc. (a) Preserve, renew and maintain in full force and effect its legal existence and good standing under the laws of the jurisdiction of its organization except in a transaction permitted by Section 6.04 or 6.05; (b) take all reasonable action to maintain all rights, privileges, permits, licenses and franchises (other than as expressly permitted herein) necessary or desirable in the normal conduct of its business, except to the extent that failure to do so could not reasonably be expected to result in a Material Adverse Effect; and (c) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to result in a Material Adverse Effect. SECTION 5.06. Maintenance of Properties. (a) Maintain, preserve and protect all of its material properties and equipment necessary in the operation of its business in good working order and condition, ordinary wear and tear excepted; (b) make all necessary repairs and improvements thereto and renewals and replacements thereof so that the business carried on in connection therewith may be properly and advantageously conducted in the ordinary course at all times in the manner and custom of similar 64 businesses; and (c) use the standard of care typical in the industry in the operation and maintenance of its facilities. SECTION 5.07. Maintenance of Insurance. Maintain with financially sound and reputable insurance companies that are not Affiliates of the Borrower, or through self insurance, if adequate reserves are maintained with respect thereto, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types (including hazard, business interruption, public liability and product liability) and in such amounts (including deductibles and co-insurance, if adequate reserves are maintained with respect thereto) as are customarily carried under similar circumstances by such other Persons. SECTION 5.08. Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority, the breach of which could reasonably be expected to result in a Material Adverse Effect, including, without limitation, the rules and regulations of the Board. SECTION 5.09. Books and Records. Maintain adequate records and proper books of record and account in which full, true and correct entries will be made in a manner to enable the preparation of financial statements in accordance with GAAP, and which shall reflect all financial transactions of the Borrower and each Subsidiary and matters involving the assets and business of the Borrower and each Subsidiary. SECTION 5.10. Inspection Rights. At any time during normal business hours, upon reasonable advance notice and subject to compliance by the Administrative Agent with the Borrower's normal confidentiality requirements, permit the Administrative Agent or any agents or representatives thereof to examine and make copies of and abstracts from the books and records of such information which the Administrative Agent or such Lender reasonably deems necessary or desirable (including the financial records of the Borrower and the Subsidiaries) and to visit the properties of the Borrower or any of the Subsidiaries and to discuss the affairs, finances and accounts of the Borrower or any of the Subsidiaries with any of their respective executive officers or, in the presence of a Responsible Officer or a person designated in writing by a Responsible Officer, the Borrower's independent accountants. SECTION 5.11. Use of Proceeds. Use the proceeds of the Loans and the Letters of Credit for the purposes set forth in the recitals hereto, and not in contravention of any law or of any Loan Document. SECTION 5.12. Guarantee Requirement. Notify the Administrative Agent at the time that any Person becomes a Domestic Subsidiary, and promptly thereafter (and in any event within 30 days), (a) cause the Guarantee Requirement to be satisfied with respect to such Person and (b) deliver to the Administrative Agent documents comparable to those referred to in Section 4.01(c) and (d) with respect to such Person and the Loan Documents to which it shall be a party. 65 SECTION 5.13. Environmental Laws. Comply in all material respects with the requirements of all applicable Environmental Laws, provide to the Lenders all documentation in connection with such compliance that the Lenders may reasonably request, and defend, indemnify, and hold harmless the Administrative Agent and each Lender and their respective employees, agents, officers, and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs, or expenses of whatever kind or nature, known or unknown, contingent or otherwise, arising out of, or in any way related to, (a) the presence, disposal, or release of any Hazardous Materials on any property at any time owned or occupied by the Borrower or any Subsidiary; (b) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Materials; (c) any lawsuit brought or threatened, settlement reached, or government order relating to such Hazardous Materials, and/or (d) any violation of applicable Environmental Laws, including reasonable attorney and consultant fees, investigation and laboratory fees, court costs, and litigation expenses. SECTION 5.14. Borrower Ratings. Arrange for an annual reassessment and review of the ratings by S&P and Moody's of the Index Debt and maintain ratings by S&P and Moody's of the Index Debt at all times. ARTICLE VI Negative Covenants So long as any Lender shall have any Commitment hereunder, any Loan or other Obligation hereunder shall remain unpaid or unsatisfied or any Letter of Credit shall remain outstanding, the Borrower shall not, nor shall it permit any Subsidiary to, directly or indirectly: SECTION 6.01. Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, other than the following (collectively, "Permitted Liens"): (a) Liens created under any Loan Document; (b) Liens existing on the date hereof and listed on Schedule 6.01; (c) Liens for taxes, assessments or other governmental charges (i) not yet due or (ii) which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP; (d) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not yet due and payable or the payment of which is not at the time required; (e) pledges or deposits in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation, other than any Lien imposed by ERISA; 66 (f) deposits to secure (or obtain letters of credit that secure) the performance of tenders, statutory obligations, surety bonds, appeal bonds, bids, leases (other than Synthetic Lease Obligations), performance bonds, purchase, construction or sales contracts and other similar obligations, in each case not incurred or made in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of property; (g) leases or subleases granted to others, easements, rights-of-way, restrictions (including zoning restrictions) and other similar encumbrances affecting real property which, in the aggregate could not result in a Material Adverse Effect; (h) Liens securing judgments for the payment of money not constituting an Event of Default under Section 7.01(h) or securing appeal or other surety bonds related to such judgments, unless the judgment it secures shall not, within 60 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within 60 days after the expiration of any stay; (i) Liens securing leases (other than Synthetic Lease Obligations); and (j) Liens not expressly permitted by clauses (a) through (i) above securing or deemed to exist in connection with Priority Indebtedness permitted under Section 6.03; provided that such Liens shall not secure any other obligations (other than interest, fee, expense reimbursement, indemnity and similar obligations associated with such permitted Priority Indebtedness). SECTION 6.02. Investments. Make any Investments, except: (a) Investments held by the Borrower or any Subsidiary in the form of Eligible Investments; (b) Investments of the Borrower in any Subsidiary and Investments of any Subsidiary in the Borrower or in another Subsidiary; (c) Investments consisting of extensions of credit in the nature of accounts receivable or notes receivable arising from the grant of trade credit in the ordinary course of business, and Investments received in satisfaction or partial satisfaction thereof from financially troubled account debtors to the extent reasonably necessary in order to prevent or limit loss; (d) Investments constituting Permitted Acquisitions; (e) Investments (including by the purchase of Equity Interests) (other than Investments listed on Schedule 6.02 hereto, such Investments being permitted by clause (g) below) by the Borrower in any Person which is not a Subsidiary; provided that such entities are engaged in a business which is related to the business of the Borrower, and provided further that the aggregate amount of all 67 Investments made pursuant to this paragraph, calculated at the time of the incurrence of each such Investment, is in an amount not in excess of 10% of the Consolidated Tangible Assets of the Borrower and the Subsidiaries; (f) Investments in the Borrower's benefits protection trust, established for the purpose of satisfying certain supplemental retirement benefit obligations for eligible executives in the event of a change of control of the Borrower, consistent with past practices; and (g) Investments not otherwise specified in clauses (a) through (f) hereof that are described on Schedule 6.02 hereto. SECTION 6.03. Priority Indebtedness. Permit the aggregate Priority Indebtedness of the Borrower and the Subsidiaries at any time to exceed 15% of Consolidated Net Tangible Assets as of the most recent fiscal quarter end of the Borrower. SECTION 6.04. Fundamental Changes. Merge, dissolve, liquidate, consolidate with or into another Person, or Dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person or purchase or otherwise acquire all or substantially all of the assets of any Person (or any division thereof) whether in one transaction or a series of transactions, except that, so long as no Default exists or would result therefrom: (a) any Domestic Subsidiary may merge with (i) the Borrower; provided that the Borrower shall be the continuing or surviving Person, or (ii) any one or more other Domestic Subsidiaries; provided that when any Subsidiary Loan Party is merging with another Domestic Subsidiary, the Subsidiary Loan Party shall be the continuing or surviving Person; (b) any non-Domestic Subsidiary may merge with any one or more other non-Domestic Subsidiaries; (c) any Subsidiary may Dispose of all or substantially all its assets (upon voluntary liquidation or otherwise) to the Borrower or to another Subsidiary; provided that if the transferor in such a transaction is a Subsidiary Loan Party, then the transferee must either be the Borrower or a Subsidiary Loan Party that is party to the Guaranty Agreement; (d) the Borrower and any Subsidiary may make Investments permitted under Section 6.02 and Permitted Acquisitions; and (e) the Borrower may merge with and into a Domestic Subsidiary; provided that (i) the Borrower shall notify the Administrative Agent not less than thirty days prior to such event and (ii) the surviving entity shall, if applicable, assume the obligations of the merged entity pursuant to this Agreement or any of 68 the other Loan Documents and shall execute such documents and agreements as may be reasonably required by the Administrative Agent. SECTION 6.05. Dispositions. Make any Disposition or enter into any agreement to make any Disposition, except: (a) Dispositions of properties or assets no longer used or useful in the conduct of their respective businesses; (b) Dispositions of inventory in the ordinary course of business; (c) Dispositions of property by the Borrower or any Subsidiary to the Borrower or to a Subsidiary; provided that if the transferor of such property is a Loan Party, the transferee thereof must be a Loan Party that, if not the Borrower, is party to the Guaranty Agreement; (d) Dispositions of all or substantially all the assets of the Borrower or a Subsidiary permitted by Section 6.04; (e) Dispositions of notes, accounts receivable or other obligations owing to the Borrower or any Subsidiary of the Borrower, with or without recourse, including for collections in the ordinary course of business; (f) the making of Investments permitted by Section 6.02 and the making of Restricted Payments permitted by Section 6.06; and (g) Dispositions by the Borrower and the Subsidiaries not otherwise permitted under this Section; provided that (i) at the time of each such Disposition, no Default shall exist or would result from such Disposition and (ii) the aggregate book value of all property Disposed of in reliance on this clause (g) in any Fiscal Year shall not exceed the amount expressed in dollars which is equal to 15% of the aggregate book value of the assets of the Borrower and the Subsidiaries on a consolidated basis calculated at the time such Disposition is made; provided, however, that any Disposition pursuant to clauses (a) through (f) shall be for fair market value. SECTION 6.06. Restricted Payments. If a Default shall have occurred and is continuing, declare any dividend on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of any shares or any class of stock of the Borrower whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash, securities or property or in obligations of the Borrower or in any combination thereof (each of the foregoing being a "Restricted Payment"). 69 SECTION 6.07. Change in Nature of Business. Engage in any material line of business which is substantially different (i) from those lines of business conducted by the Borrower and the Subsidiaries on the date hereof and (ii) from any business substantially related or incidental to those lines of business conducted by the Borrower and the Subsidiaries on the date hereof. SECTION 6.08. Transactions with Affiliates. Enter into any transaction of any kind with any Affiliate of the Borrower, except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's or any of the Subsidiaries' business and on fair and reasonable terms substantially as favorable to the Borrower or such Subsidiary as would be obtainable by the Borrower or such Subsidiary at the time in a comparable arm's length transaction with a Person other than an Affiliate; provided that the foregoing restriction shall not apply (i) to transactions between or among the Borrower and any Subsidiary Loan Party that is party to the Guaranty Agreement or between and among any Subsidiary Loan Parties that are party to the Guaranty Agreement, (ii) Investments in Subsidiaries permitted under Section 6.02 and (iii) the tax sharing agreements set forth on Schedule 3.11 hereto. SECTION 6.09. Burdensome Agreements. Enter into any agreement, instrument or undertaking (other than this Agreement or any other Loan Document) that limits the ability (a) of any Subsidiary to make Restricted Payments to the Borrower or any Subsidiary Loan Party or to otherwise transfer property to the Borrower or any Subsidiary Loan Party, (b) of any Subsidiary to Guarantee the Indebtedness of the Borrower or (c) of the Borrower or any Subsidiary to create, incur, assume or suffer to exist Liens on property of such Person; provided, however, that this clause (c) shall not prohibit any negative pledge incurred or provided in favor of any holder of Indebtedness permitted hereunder solely to the extent any such negative pledge relates to the property financed by or the subject of such Indebtedness. SECTION 6.10. Use of Proceeds. Use the proceeds of any Loan or any Letter of Credit, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or carry margin stock (within the meaning of Regulation U of the Board) or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund indebtedness originally incurred for such purpose. SECTION 6.11. Financial Covenants. (a) Permit the Consolidated Net Interest Coverage Ratio as of the end of any fiscal quarter of the Borrower to be less than 5.0 to 1.0. (b) Permit the Consolidated Leverage Ratio at any time to be greater than 3.0 to 1.0. SECTION 6.12. Hazardous Materials. Cause or permit any of its properties or assets to be used to generate, manufacture, refine, transport, treat, store, handle, dispose of, transfer, produce or process Hazardous Materials, except in compliance with all applicable Federal, state and local laws or regulations, or cause or permit, as a result of any intentional or negligent act or omission on the part of the 70 Borrower or any of its Subsidiaries, a release of Hazardous Materials onto such property or asset or onto any other property, except in compliance with such laws and regulations. SECTION 6.13. Certain Agreements, Amendment and Waivers. Enter into, amend or waive any provision of any agreement, instrument or undertaking evidencing or related to Indebtedness of the Loan Party, if such agreement, instrument or undertaking (after giving effect to any such amendment or waiver, as applicable) would contain any financial covenant that would be more restrictive than any financial covenant contained in this Agreement. SECTION 6.14. Inactive Domestic Subsidiaries. No more than $1,000,000 of assets will be held by Inactive Domestic Subsidiaries in the aggregate. ARTICLE VII Events of Default SECTION 7.01. Events of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. The Borrower or any other Loan Party fails to pay (i) when and as required to be paid herein, any amount of principal of any Loan or any LC Disbursement, or (ii) within five days after the same becomes due, any interest on any Loan or on any LC Disbursement, or any fee due hereunder, or any other amount payable hereunder or under any other Loan Document; or (b) Specific Covenants. The Borrower fails to perform or observe any term, covenant or agreement contained in any of Section 5.01, 5.02, 5.03, 5.05, 5.10, 5.11 or 5.12 or Article VI; or (c) Other Defaults. Any Loan Party fails to perform or observe any other covenant or agreement (not specified in subsection (a) or (b) above) contained in any Loan Document on its part to be performed or observed and such failure continues unremedied for 30 days; or (d) Representations and Warranties. Any representation, warranty, certification or statement of fact made or deemed made by or on behalf of the Borrower or any other Loan Party herein, in any other Loan Document or in any document delivered in connection herewith or therewith shall be incorrect or misleading in any material respect when made or deemed made; or (e) Cross-Default. (i) The Borrower or any Subsidiary (A) fails to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) in respect of any Indebtedness or Guarantee (other than Indebtedness hereunder and Indebtedness under Swap Contracts) having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than the Threshold Amount, or (B) fails to 71 observe or perform any other agreement or condition relating to any such Indebtedness or Guarantee or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event occurs, the effect of which default or other event is to cause, or to permit the holder or holders of such Indebtedness or the beneficiary or beneficiaries of such Guarantee (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to be demanded or to become due or to be repurchased, prepaid, defeased or redeemed (automatically or otherwise), or an offer to repurchase, prepay, defease or redeem such Indebtedness to be made, prior to its stated maturity, or such Guarantee to become payable or cash collateral in respect thereof to be demanded; or (ii) there occurs under any Swap Contract an early termination date (however defined in such Swap Contract) resulting from (A) any event of default under such Swap Contract as to which the Borrower or any Subsidiary is the defaulting party (however defined in such Swap Contract) or (B) any termination event (however defined in such Swap Contract) under such Swap Contract as to which the Borrower or any Subsidiary is an affected party (however defined in such Swap Contract) and, in either event, the Swap Termination Value owed by the Borrower or such Subsidiary as a result thereof is greater than the Threshold Amount; or (f) Insolvency Proceedings, Etc. Any Loan Party or any Subsidiary institutes or consents to the institution of any proceeding under any Debtor Relief Law, or makes an assignment for the benefit of creditors, or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of such Person and the appointment continues undischarged or unstayed for 60 calendar days; or any proceeding under any Debtor Relief Law relating to any such Person or to all or any material part of its property is instituted without the consent of such Person and continues undismissed or unstayed for 60 calendar days, or an order for relief is entered in any such proceeding; or (g) Inability to Pay Debts; Attachment. (i) The Borrower or any Subsidiary Loan Party becomes unable or admits in writing its inability or fails generally to pay its debts as they become due, or (ii) any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of any such Person and is not released, vacated or fully bonded within 60 days after its issue or levy; or (h) Judgments. There is entered against the Borrower or any Subsidiary (i) a final judgment or order for the payment of money in an aggregate amount exceeding the Threshold Amount (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage), or (ii) any one or more non-monetary final judgments that result, or could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect and, in either case, (A) enforcement proceedings are commenced by any creditor 72 upon such judgment or order, or (B) there is a period of 30 consecutive days during which a stay of enforcement of such judgment, by reason of a pending appeal or otherwise, is not in effect; or (i) ERISA. (i) An ERISA Event occurs with respect to a Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Borrower under Title IV of ERISA to the Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of the Threshold Amount, or (ii) the Borrower or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of the Threshold Amount; or (j) Invalidity of Loan Documents. Any provision of any Loan Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder or satisfaction in full of all the Obligations, ceases to be in full force and effect; or any Loan Party contests in any manner the validity or enforceability of any provision of any Loan Document; or any Loan Party denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any provision of any Loan Document; or (k) Change of Control. There occurs any Change of Control. SECTION 7.02. Remedies Upon Event of Default. If any Event of Default occurs and is continuing unremedied, the Administrative Agent shall, at the request of, or may, with the consent of, the Required Lenders, take any or all of the following actions: (a) declare the commitment of each Lender to make Loans and any obligation of the Issuing Bank to make Letter of Credit Extensions to be terminated, whereupon such commitments and obligation shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower; (c) require that the Borrower Cash Collateralize the LC Exposure (in an amount equal to the then Outstanding Amount thereof); and (d) exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Loan Documents; provided, however, that upon the occurrence of an actual or deemed entry of an order for relief with respect to the Borrower under the Bankruptcy Code of the United States, the obligation of each Lender to make Loans and any obligation of the Issuing Bank to make 73 Letter of Credit Extensions shall automatically terminate, the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable, and the obligation of the Borrower to Cash Collateralize the LC Exposure as aforesaid shall automatically become effective, in each case without further act of the Administrative Agent or any Lender. SECTION 7.03. Application of Funds. After an Event of Default, any amounts received on account of the Obligations shall be applied by the Administrative Agent in the following order: First, to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (including fees, charges and disbursements of counsel to the Administrative Agent and amounts payable under Article VIII) payable to the Administrative Agent in its capacity as such; Second, to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal and interest) payable to the Lenders and the Issuing Bank (including fees, charges and disbursements of counsel to the respective Lenders and the Issuing Bank (including fees and time charges for attorneys who may be employees of any Lender or the Issuing Bank) and other amounts payable under Article II), ratably among them in proportion to the amounts described in this clause Second payable to them; Third, to payment of that portion of the Obligations constituting accrued and unpaid interest on the Loans, LC Disbursements and other Obligations, ratably among the Lenders and the Issuing Bank in proportion to the respective amounts described in this clause Third payable to them; Fourth, to payment of that portion of the Obligations constituting unpaid principal of the Loans and LC Disbursements, ratably among the Lenders and the Issuing Bank in proportion to the respective amounts described in this clause Fourth held by them; Fifth, to the Administrative Agent for the account of the Issuing Bank, to Cash Collateralize that portion of LC Exposure comprised of the aggregate undrawn amount of Letters of Credit; and Last, the balance, if any, after all of the Obligations have been indefeasibly paid in full, to the Borrower or as otherwise required by law. Subject to Section 2.06(j), amounts used to Cash Collateralize the aggregate undrawn amount of Letters of Credit pursuant to clause Fifth above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on deposit as cash collateral after all Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Obligations, if any, in the order set forth above. 74 ARTICLE VIII The Agents Each of the Lenders and the Issuing Bank hereby irrevocably appoints the Agents as its agents and authorizes the Agents to take such actions on its behalf and to exercise such powers as are delegated to the Agents by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto. Any Person serving as an Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not an Agent, and such Person and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not an Agent hereunder. The Agents shall not have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (a) the Agents shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Agents shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated by the Loan Documents that the Agents are required to exercise in writing as directed by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth in the Loan Documents, the Agents shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of the Subsidiaries that is communicated to or obtained by them or any of their Affiliates in any capacity. The Agents shall not be liable for any action taken or not taken by them with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of their own gross negligence or wilful misconduct. Each Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to such Agent by the Borrower or a Lender, and the Agents shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to such Agent. Each Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. Each Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any 75 liability for relying thereon. Each Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. Each Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by it. Each Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through its respective Related Parties. The exculpatory provisions of the preceding paragraphs and the provisions of Section 9.03 shall apply to any such sub-agent and to the Related Parties of each Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Agent. Subject to the appointment and acceptance of a successor Agent as provided in this paragraph, each Agent may resign at any time by notifying the Lenders, the Issuing Bank and the Borrower. Upon any such resignation, the Required Lenders (in the case of a resignation by the Administrative Agent) or the Administrative Agent (in the case of a resignation by the London Agent) shall have the right, in consultation with the Borrower, to appoint a successor. If no successor Agent shall have been so appointed and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders and the Issuing Bank, appoint a successor Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After an Agent's resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Agent. Each Lender acknowledges that it has, independently and without reliance upon either Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon either Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder. The parties agree that none of the Co-Lead Arrangers and Joint Bookrunners or the Syndication Agent referred to on the cover page shall have any powers, duties or responsibilities under this Agreement or any other Loan Document, 76 except in its capacity, as applicable, as an Agent, a Lender, the Issuing Bank or the Swingline Lender hereunder. ARTICLE IX Miscellaneous SECTION 9.01. Notices. (a) Except in the case of notices and other communications expressly permitted to be given by telephone (and subject to paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (i) if to the Borrower, to it at Pall Corporation, 2200 Northern Blvd., East Hills, NY 11548, Attention of Legal Department (Telecopy No. (516) 484-3529); if to the Administrative Agent, the Issuing Bank or the Swingline Lender, to JPMorgan Chase Bank, N.A., Loan and Agency Services Group, 1111 Fannin, 10th Floor, Houston, Texas 77002, Attention of Maria Giannavola (Telecopy No. (713) 750-2358), with a copy to JPMorgan Chase Bank, N.A., 270 Park Avenue, New York, NY 10017, Attention of Louise Duchi (Telecopy No. (631) 755-5184); (ii) if to the London Agent, to J. P. Morgan Europe Limited, 125 London Wall, London EC2Y 5AJ, Attention of Agency Department (Telecopy No. 44-207-777-2360), with a copy to the Administrative Agent as provided under clause (ii) above; and (iii) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. (b) Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Article II unless otherwise agreed by the Administrative Agent and the applicable Lender. Each Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications. (c) Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 9.02. Waivers; Amendments. (a) No failure or delay by either Agent, the Issuing Bank or any Lender in exercising any right or power hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or 77 partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Agents, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of any Loan Document or consent to any departure by any Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether either Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default at the time. (b) None of this Agreement, any other Loan Document or any provision hereof or thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or, in the case of any other Loan Document, pursuant to an agreement or agreements in writing entered into by the Administrative Agent and each Loan Party that is a party thereto, in each case with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the maturity of any Loan, or the required date of reimbursement of any LC Disbursement, or any date for the payment of any interest or fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.18(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, (v) change any of the provisions of this Section or the percentage set forth in the definition of "Required Lenders" or any other provision of any Loan Document specifying the number or percentage of Lenders required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the written consent of each Lender or (vi) release all or substantially all the Subsidiary Loan Parties from their obligations under the Guaranty Agreement (except as expressly provided in Section 9.15), or limit their liability in respect of such obligations, without the written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of either Agent, the Issuing Bank or the Swingline Lender without the prior written consent of such Administrative Agent, the Issuing Bank or the Swingline Lender, as the case may be. SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Agents and their Affiliates, including the reasonable fees, charges and disbursements of counsel for the Agents, in connection with the syndication of the credit facilities provided for herein, the preparation, execution, delivery and administration of the Loan Documents or any 78 amendments, modifications or waivers of the provisions thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all out-of-pocket expenses incurred by the Agents, the Issuing Bank or any Lender, including the fees, charges and disbursements of any counsel for the Agents, the Issuing Bank or any Lender, in connection with the enforcement or protection of its rights in connection with the Loan Documents, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit. (b) The Borrower shall indemnify the Agents, the Issuing Bank and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the syndication of the credit facilities provided for herein, the preparation, execution, delivery or administration of the Loan Documents or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions or any other transactions contemplated thereby, (ii) any Loan or Letter of Credit or the use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or Release of Hazardous Materials on or from any property currently or formerly owned or operated by the Borrower or any of the Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of the Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto and regardless of whether such matter is initiated by a third party or by the Borrower or any Affiliate thereof; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) To the extent that the Borrower fails to pay any amount required to be paid by it to either Agent, the Issuing Bank or the Swingline Lender under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to such Agent, the Issuing Bank or the Swingline Lender, as the case may be, such Lender's pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against such Agent, the Issuing Bank or the Swingline Lender in its capacity as such. For purposes hereof, a Lender's "pro rata share" shall be determined 79 based upon its share of the sum of the total Revolving Exposures and unused Commitments at the time (or, if there shall be no Revolving Exposures or unused Commitments, based upon its share of the unused Commitments most recently in effect at the time). (d) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with or as a result of this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or any Letter of Credit or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable not later than 10 days after written demand therefor. SECTION 9.04. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that (i) no Loan Party may assign or otherwise transfer any of its rights or obligations hereunder or under any other Loan Document without the prior written consent of each Lender (and any attempted assignment or transfer by a Loan Party without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), Participants (to the extent provided in paragraph (c) of this Section) and, to the extent expressly contemplated hereby, the Related Parties of each of the Agents, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) (i) Subject to the conditions set forth in paragraph (b)(ii) below, any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld) of: (A) the Borrower; provided that no consent of the Borrower shall be required for an assignment to a Lender, an Affiliate of a Lender, an Approved Fund or, if an Event of Default has occurred and is continuing, any other assignee; and (B) the Administrative Agent; and (C) the Issuing Bank. 80 (ii) Assignments shall be subject to the following additional conditions: (A) except in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund or an assignment of the entire remaining amount of the assigning Lender's Commitment or Competitive Loans, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than US$5,000,000 unless each of the Borrower and the Administrative Agent otherwise consents; provided that no such consent of the Borrower shall be required if an Event of Default has occurred and is continuing; (B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement; provided that this clause shall not apply to rights in respect of outstanding Competitive Loans; (C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of US$3,500; and (D) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. For the purposes of this Section 9.04(b), the term "Approved Fund" has the following meaning: "Approved Fund" means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by a Lender, an Affiliate of a Lender or an entity or an Affiliate of an entity that administers or manages a Lender. (iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) of this Section, from and after the effective date specified in each Assignment and Assumption the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 9.04 shall be treated for purposes of this Agreement as a sale by such Lender of a 81 participation in such rights and obligations in accordance with paragraph (c) of this Section. (iv) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent, the Issuing Bank and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (v) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall record the information contained in such Assignment and Assumption in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (c) (i) Any Lender may, without the consent of, or notice to, the Borrower, the Administrative Agent, the Issuing Bank or the Swingline Lender, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (A) such Lender's obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) the Borrower, the Administrative Agent, the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce the Loan Documents and to approve any amendment, modification or waiver of any provision of the Loan Documents; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (c)(ii) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a 82 Lender; provided such Participant agrees to be subject to Section 2.18(c) as though it were a Lender. (ii) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless such Participant agrees, for the benefit of the Borrower, to comply with Section 2.17(e) as though it were a Lender. (d) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. SECTION 9.05. Survival. All covenants, agreements, representations and warranties made by the Loan Parties herein, in the other Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Loan Documents and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof. SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and any separate letter agreements with respect to fees payable to the Agents or the Issuing Bank constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the 83 Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or other electronic transmission shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.07. Severability. Any provision of any Loan Document held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions of such Loan Document; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to and shall not limit other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or any other Loan Document shall affect any right that either Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against the Borrower or its properties in the courts of any jurisdiction. 84 (c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement or any other Loan Document will affect the right of any party hereto or thereto to serve process in any other manner permitted by law. SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 9.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 9.12. Confidentiality. Each of the Agents, the Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective 85 counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to either Agent, the Issuing Bank or any Lender on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, "Information" means all information received from the Borrower relating to the Borrower or its business, other than any such information that is available to either Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by the Borrower; provided that, in the case of information received from the Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. SECTION 9.13. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. SECTION 9.14. Conversion of Currencies. (a) If, for the purpose of obtaining judgment in any court, it is necessary to convert a sum owing hereunder in one currency into another currency, each party hereto agrees, to the fullest extent that it may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures in the relevant jurisdiction the first currency could be purchased with such other currency on the Business Day immediately preceding the day on which final judgment is given. (b) The obligations of the Borrower in respect of any sum due to any party hereto or any holder of the obligations owing hereunder (the "Applicable Creditor") shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than the currency in which such sum is stated to be due hereunder (the "Agreement Currency"), be discharged only to the extent that, on the Business Day following receipt by the Applicable Creditor of any sum adjudged to be so due in the Judgment Currency, the Applicable Creditor may in accordance with normal banking procedures in the relevant jurisdiction purchase the Agreement Currency with the Judgment Currency; if the amount of the Agreement Currency so purchased is less than the sum originally due 86 to the Applicable Creditor in the Agreement Currency, the Borrower agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Applicable Creditor against such loss. The obligations of the Borrower contained in this Section 9.14 shall survive the termination of this Agreement and the payment of all other amounts owing hereunder. SECTION 9.15. Releases of Guarantees. (a) In the event of a disposition of all the Equity Interests in a Subsidiary Loan Party to a Person other than the Borrower or an Affiliate of the Borrower in a transaction not prohibited by any covenant contained in this Agreement, the Administrative Agent is hereby directed and authorized to take such action and to execute such documents as the Borrower may reasonably request, at the Borrower's sole expense, to evidence or effect the release of the Guarantee by such Subsidiary Loan Party under the Guaranty Agreement. (b) Without limiting the provisions of Section 9.05, the Borrower shall reimburse the Administrative Agent for all costs and expenses, including attorney's fees and disbursements, incurred by it in connection with any action contemplated by this Section 9.15. SECTION 9.16. USA Patriot Act. Each Lender and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies each of the Loan Parties that pursuant to the requirements of the Patriot Act, it is required to obtain, verify and record information that identifies Loan Parties, which information includes the name and address of such Loan Parties and other information that will allow such Lender or the Administrative Agent, as applicable, to identify such Loan Parties in accordance with the Patriot Act. SECTION 9.17. Waiver Under Existing Credit Agreement. Each of the Lenders party hereto that is a "Lender" under the Existing Credit Agreement hereby waives advance notice of the termination of the commitments and prepayment of the loans under the Existing Credit Agreement; provided that notice thereof is provided on the Effective Date. [The remainder of this page has been left blank intentionally.] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. PALL CORPORATION, by ------------------------ Name: Title: JPMORGAN CHASE BANK, N.A., as Lender, Swingline Lender and Issuing Bank and as Administrative Agent, by ------------------------ Name: Title: J. P. MORGAN EUROPE LIMITED, as London Agent, by ------------------------ Name: Title: SIGNATURE PAGE TO CREDIT AGREEMENT, AMONG PALL CORPORATION, THE LENDERS PARTY THERETO, JPMORGAN CHASE BANK, N.A., AS ADMINISTRATIVE AGENT AND J. P. MORGAN EUROPE LIMITED, AS LONDON AGENT Name of Institution: ---------------------------------------- by ------------------------ Name: Title: SCHEDULE 2.01 COMMITMENTS Lender Commitment - ------ ---------- JPMorgan Chase Bank, N.A................................... $ 37,000,000.00 Bank of America, N.A....................................... 37,000,000.00 North Fork Bank............................................ 32,000,000.00 UBS Loan Finance LLC....................................... 32,000,000.00 Wachovia Bank, N.A......................................... 32,000,000.00 Sumitomo Mitsui Banking Corporation........................ 25,000,000.00 UFJ Bank Limited........................................... 25,000,000.00 KBC Bank................................................... 25,000,000.00 The Norinchukin Bank....................................... 25,000,000.00 Banca Nazionale del Lavoro SpA, New York Branch............ 20,000,000.00 Comerica Bank.............................................. 20,000,000.00 HSBC Bank USA, National Association........................ 20,000,000.00 The Bank of New York....................................... 20,000,000.00 ------------- TOTAL $350,000,000.00 =============== SCHEDULE 3.06 EXISTING LETTERS OF CREDIT SCHEDULE 3.09 ENVIRONMENTAL COMPLIANCE SCHEDULE 3.11 TAX-SHARING AGREEMENTS SCHEDULE 3.13 SUBSIDIARIES AND AFFILIATES SCHEDULE 6.01 EXISTING LIENS SCHEDULE 6.02 OTHER INVESTMENTS SCHEDULE 6.14 INACTIVE DOMESTIC SUBSIDIARIES Exhibit A FORM OF ASSIGNMENT AND ASSUMPTION [FORM OF] ASSIGNMENT AND ASSUMPTION Reference is made to the Five Year Credit Agreement dated as of July 29, 2005 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Pall Corporation, the Lenders named therein, JPMorgan Chase Bank, N.A., as Administrative Agent and J. P. Morgan Europe Limited, as London Agent. Terms defined in the Credit Agreement are used herein with the same meanings. The Assignor named below hereby sells and assigns, without recourse, to the Assignee named below, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Assignment Date set forth below, the interests set forth below (the "Assigned Interests") in the Assignor's rights and obligations under the Credit Agreement and the other Loan Documents, including, without limitation, the interests set forth below in the Commitments of the Assignor on the Assignment Date and Loans owing to the Assignor which are outstanding on the Assignment Date, together with the participations in Letters of Credit, LC Disbursements and Swingline Loans held by the Assignor on the Assignment Date, but excluding accrued interest and fees to and excluding the Assignment Date. The Assignee hereby acknowledges receipt of a copy of the Credit Agreement. From and after the Assignment Date (a) the Assignee shall be a party to and be bound by the provisions of the Credit Agreement and, to the extent of the Assigned Interests, have the rights and obligations of a Lender thereunder and under the other Loan Documents and (b) the Assignor shall, to the extent of the Assigned Interests, relinquish its rights and be released from its obligations under the Credit Agreement. This Assignment and Assumption is being delivered to the Administrative Agent together with (a) to the extent required, any documentation required to be delivered by the Assignee pursuant to Section 2.17(e) of the Credit Agreement, duly completed and executed by the Assignee, and (b) if the Assignee is not already a Lender under the Credit Agreement, an Administrative Questionnaire in the form supplied by the Administrative Agent, duly completed by the Assignee. The Assignee shall pay the fee payable to the Administrative Agent pursuant to Section 9.04(b) of the Credit Agreement. This Assignment and Assumption shall be governed by and construed in accordance with the laws of the State of New York. 3 - ---------------------------------------- -------------------------------------------------------------------- Legal Name of Assignor: - ---------------------------------------- -------------------------------------------------------------------- Legal Name of Assignee: - ---------------------------------------- -------------------------------------------------------------------- Assignee's Address for Notices: - ---------------------------------------- -------------------------------------------------------------------- Effective Date of Assignment ("Assignment Date"): - ---------------------------------------- -------------------------------------------------------------------- Facility Principal Amount Assigned Percentage Assigned of Facility/Commitment (set forth, to at least 8 decimals, as a percentage of the Facility and the aggregate Commitments of all Lenders thereunder) - ---------------------------------------- ----------------------------------- -------------------------------- REVOLVING COMMITMENT ASSIGNED: - ---------------------------------------- ----------------------------------- -------------------------------- REVOLVING LOAN ASSIGNED: - ---------------------------------------- ----------------------------------- --------------------------------
4 This Assignment and Assumption may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. The terms set forth above are hereby agreed to: [o], as Assignor by --------------------------------- Name: Title: The undersigned hereby consent to the within assignment(1): PALL CORPORATION, JPMorgan Chase Bank, N.A., as Administrative Agent, by by --------------------- --------------------- Name: Name: Title: Title:
- --------------------------- (1) Consents to be included to the extent required by Section 9.04(b) of the Credit Agreement. A-1 Form of Assignment and Assumption 2 Name of Institution: [o], as Assignee by --------------------------------- Name: Title: by --------------------------------- Name: Title: EXHIBIT C FORM OF BORROWER'S COUNSEL'S OPINION July 27, 2005 JPMorgan Chase Bank, N.A. as Administrative Agent and a Lender under the Credit Agreement Identified Below, and Each of the Other Lenders Party to the Credit Agreement Identified Below c/o JPMorgan Chase Bank, N.A. Loan and Agency Services 1111 Fannin, 10th Floor Houston, Texas 77002 Attention: Maria Giannavola Re: Pall Corporation Revolving Credit Facility Ladies and Gentlemen: We have acted as counsel to (1) Pall Corporation, a New York corporation (the "Company"), (2) the "Group I Guarantors," consisting collectively of Pall Aeropower Corporation, a Delaware corporation, Medsep Corporation, a Delaware corporation, Pall International Corporation, a Delaware corporation, Pall-PASS, US Inc., a Delaware corporation, Pall Puerto Rico, Inc., a Delaware corporation, Pall Biomedical, Inc., a Delaware corporation, Pall Filtration and Separations Group Inc., a Delaware corporation, Memtec Finance, Inc., a Delaware corporation, Pall Acquisition LLC, a Delaware limited liability company, and Pall Industrial Membranes, LLC, a Delaware limited liability company, and (3) the "Group II Guarantors," consisting collectively of Russell Associates Inc., a Maryland corporation, and Gelman Sciences, Inc., a Michigan corporation, in connection with the Five-Year Credit Agreement dated as of the date of this opinion among the Company, the Lenders Party to the said Agreement, JPMorgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Europe Limited, as London Agent (the "Agreement"). Each of the Group I Guarantors and the Group II Guarantors is herein sometimes referred to as a "Guarantor," and the Group I Guarantors and the Group II Guarantors are herein collectively sometimes referred to as the "Guarantors." Capitalized terms used but not defined herein shall have the meanings given to them in the Agreement. This opinion is being delivered to you pursuant to Section 4.01(c) of the Agreement. 4 As a basis for the opinions expressed herein, we have examined: (a) a counterpart of the Agreement executed by the Company; (b) a Note executed by the Company in favor of each Lender which has requested a Note; and (c) a counterpart of the Guaranty Agreement executed by each Subsidiary Loan Party. The documents listed in items (a) through (c) above are hereinafter referred to collectively as the "Loan Documents." We have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals, the conformity to the originals of all documents submitted to us as copies, the authenticity of the originals of such copies, and the legal capacity of natural persons. We have also examined originals, or copies certified to our satisfaction, of such corporate records, certificates of public officials, certificates of corporate officers of the Company and each Subsidiary Loan Party, and such other instruments and documents as we have deemed necessary as a basis for the opinions hereinafter set forth. As to questions of fact, we have, to the extent that such facts were not independently established by us, relied upon such certificates. This opinion relates only to the laws of the State of New York, the federal laws of the United States of America and the General Corporation Law and Limited Liability Company Act of the State of Delaware. We express no opinion as to the laws of any other jurisdiction. In particular, we express no opinion, and no opinion should be implied, as to the organization or good standing of the Group II Guarantors or the authority (corporate or otherwise) of the Group II Guarantors to authorize, execute and deliver the Guaranty Agreement or perform its obligations thereunder. This opinion speaks only as of the date above written, and we hereby expressly disclaim any duty to update any part of this opinion. Based upon and subject to the foregoing, we are of the opinion that 1. Each of the Company and the Group I Guarantors (a) is a corporation or, in the case of each of Pall Acquisition LLC and Pall Industrial Membranes, LLC, a limited liability company, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, (b) has all requisite corporate or limited liability company power and authority, and all requisite United States federal and New York State governmental licenses, authorizations, consents and approvals, to execute and deliver the Loan Documents to which it is a party and to perform its obligations thereunder, and (c) has all requisite corporate or limited liability company power and authority to conduct its business substantially as currently conducted by it. 2. The execution, delivery and performance by each of the Company and the Group I Guarantors of each Loan Document to which it is a party have been duly 5 authorized by all necessary corporate action or limited liability company action, as applicable, on the part of the Company and the Group I Guarantors, and do not and will not (a) contravene the terms of any organizational documents of the Company or any Group I Guarantor, (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, or require any payment to be made under, (i) any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument listed in Exhibit I to this opinion, or (ii), to the best of our knowledge, any order, injunction, writ or decree of any United States federal or New York State Governmental Authority or arbitral forum to which the Company or any Group I Guarantor or its property is expressly subject, or (c) violate any law, rule or regulation of the United States of America, the State of New York, or the General Corporation Law or the Limited Liability Company Act of the State of Delaware. Management of the Company has advised us that the documents listed in Exhibit I, other than the documents listed in paragraphs 4 and 5 thereof, are those (a) which the Company, on the date of this opinion, is required to file as exhibits to its periodic reports pursuant to Section 13 of the Securities Exchange Act of 1934, and (b) which are described in Item 601(b)(2) of Regulation S-K of the Securities and Exchange Commission (plan of acquisition, reorganization, arrangement, liquidation or succession), Item 601(b)(4)(ii) of Regulation S-K (instruments defining the rights of holders of long-term debt of the Company and its consolidated subsidiaries) or Item 601(b)(10) of Regulation S-K (material contracts). 3. No registration with or consent or approval of, or other action by, any United States federal or New York State Governmental Authority, or to the extent required under the General Corporation Law and Limited Liability Company Act of the State of Delaware, any Delaware Governmental Authority, is required to be obtained by the Company or any Guarantor in connection with (a) its valid execution and delivery of, and performance of its obligations under, the Loan Documents to which it is a party, or (b) with respect to the Company, the borrowings and each other extension of credit under the Agreement. 4. The Agreement has been duly executed and delivered by the Company, the Guaranty Agreement has been duly executed and delivered by the Group I Guarantors, and each Note, when delivered under the Agreement by the Company, will have been duly executed and delivered by the Company. The Agreement and the Guaranty Agreement constitute, and each Note, when delivered under the Agreement by the Company, will constitute, legal, valid and binding obligations of the Company and the Group I Guarantors, as the case may be, enforceable against the Company and the Group I Guarantors in accordance with their respective terms, except that (a) enforcement 6 may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, or by equitable principles of general application, regardless of whether considered in a proceeding in equity or at law, and (b) the enforceability of Section 9.09(c) of the Agreement and Section 4.11 of the Guaranty Agreement is subject to the discretion of the United States federal or New York State courts with respect to venue, as provided in 28 U.S.C. Section 1404(a) and New York CPLR Section 510, respectively. 5. To the best of our knowledge, (a) there are no actions, suits or proceedings (whether or not purportedly on behalf of the Company or any Subsidiary of the Company) pending or threatened against the Company or any Subsidiary at law or in equity or before or by any Governmental Authority in the United States or any constituent state, territory or possession thereof, which challenge the validity or enforceability of any Loan Document, or which, if determined adversely to the Company, would impair the ability of the Company or any Guarantor to perform its obligations under the Loan Documents to which it is a party, and (b) neither the Company nor any Subsidiary is in default with respect to any judgment, writ, injunction, decree, rule or regulation of any Governmental Authority in the United States or any constituent state, territory or possession thereof, which default could reasonably be expected to result in a Material Adverse Effect. 6. To the best of our knowledge, the Company is not engaged, principally or as one of its important activities, in the business of purchasing or carrying margin stock (within the meaning of Regulation U of the Board), or extending credit for the purpose of purchasing or carrying margin stock. 7. None of the Company, or any Person Controlling the Company, or any Subsidiary (a) is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, or (b) is or is required to be registered as an "investment company" under the Investment Company Act of 1940. 8. The execution, delivery and performance of the Guaranty Agreement by each of the Group II Guarantors do not and will not conflict with or result in any breach or contravention of, or the creation of any Lien under, or require any payment to be made under, (a) any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument listed in Exhibit I to this opinion, or (b) to the best of our knowledge, any order, injunction, writ or decree of any United States federal or New York State Governmental Authority or arbitral forum to which any Group II Guarantor or its property is expressly subject, or (c) violate any law, rule or regulation of the United States of America, the State of New York, or the General Corporation Law or the Limited Liability Company Act of the State of Delaware. 9. The Guaranty Agreement, which in Section 4.10 provides that it is governed by New York law, constitutes a legal, valid and binding obligation of each Group II Guarantor, enforceable against it in accordance with the terms of the Guaranty 7 Agreement, except that (a) enforcement may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or similar laws affecting creditors' rights generally, or by equitable principles of general application, regardless of whether considered in a proceeding in equity or at law, and (b) the enforceability of Section 4.11 of the Guaranty Agreement is subject to the discretion of the United States federal or New York State courts with respect to venue, as provided in 28 U.S.C. Section 1404(a) and New York CPLR Section 510, respectively. In rendering this opinion, we have assumed, with your permission, that (a) each of the Group II Guarantors is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (b) each of the Group II Guarantors has all requisite corporate power and authority to execute and deliver the Guaranty Agreement and to perform its obligations thereunder, and (c) the Guaranty Agreement has been duly authorized, executed and delivered by the Group II Guarantors. Very truly yours, 8 EXHIBIT I Documents described in Item 601(b)(2) of Regulation S-K 1. Stock Purchase Agreement dated February 14, 2002, by and between Pall Corporation (the "Company") and United States Filter Corporation. 2. Amendment dated April 24, 2002, to Stock Purchase Agreement dated February 14, 2002, by and between the Company and United States Filter Corporation. Document described in Item 601(b)(4)(ii) of Regulation S-K 3. Indenture dated as of August 1, 2002, by and among the Company as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York, as Trustee, relating to the Company's 6% Senior Notes due 2012. Documents described in Item 601(b)(4)(iii) of Regulation S-K 4. Amended and Restated Term Note dated as of June 20, 2005, made by the Company, payable to Bank of America, N.A., as amended through the date hereof. 5. Note Purchase Agreement dated as of July 28, 2000, among the Company and the Purchasers Identified therein, relating to the Company's 7.83% Senior Notes due 2010. Documents described in Item 601(b)(10) of Regulation S-K 6. Employment Agreement dated January 21, 2004, between the Company and Eric Krasnoff, as amended effective July 19, 2005. 7. Employment Agreement dated May 1, 2003, between the Company and Marcus Wilson. 8. Employment Agreement dated November 15, 2001, between the Company and Donald B. Stevens. 9. Employment Agreement dated November 15, 2001, between the Company and Steven Chisolm. 10. Employment Agreement dated May 1, 2003, between the Company and Andrew Denver. 11. Employment Agreement dated November 15, 2001, between the Company and John Miller. 12. Employment Agreement dated June 6, 2003, between the Company and Roberto Perez. 9 13. Employment Agreement dated November 15, 2001, between the Company and Reed Sarver. 14. Employment Agreement dated April 8, 2002, between the Company and Gregory Scheessele. 15. Employment Agreement dated August 1, 2004, between the Company and James R. Western, Jr. 16. Service Agreement dated March 1, 2002, between Pall Europe Limited and Neil MacDonald. 17. Service Contract dated February 26, 2001, between Pall Deutschland GmbH Holding and Heinz Ulrich Hensgen. 18. Pall Corporation Supplementary Profit-Sharing Plan, as amended effective July 19, 2005. 19. Pall Corporation Profit-Sharing Plan as amended and restated as of July 1, 1998. 20. Pall Corporation Profit-Sharing Plan amended pursuant to provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001. 21. Pall Corporation Supplementary Pension Plan as amended and restated July 17, 2001. 22. Pall Corporation 2004 Executive Incentive Bonus Plan, as amended effective July 19, 2005. 23. Pall Corporation 1991 Stock Option Plan, as amended effective April 17, 2002. 24. Pall Corporation 1993 Stock Option Plan, as amended effective April 17, 2002. 25. Pall Corporation 1995 Stock Option Plan, as amended effective April 17, 2002. 26. Pall Corporation 1998 Stock Option Plan, as amended effective April 17, 2002. 27. Pall Corporation 2005 Stock Compensation Plan, as amended effective July 19, 2005. 28. Form of Notice of Grant of Restricted Stock Units under the Pall 2005 Stock Compensation Plan. 29. Form of Notice of Grant of Annual Award Units under the Pall Corporation 2005 Stock Compensation Plan. 30. Pall Corporation Stock Option Plan for Non-Employee Directors, as amended effective November 19, 1998. 10 31. Pall Corporation 2001 Stock Option Plan for Non-Employee Directors, as amended September 17, 2004. 32. Pall Corporation Management Stock Purchase Plan, as amended effective July 19, 2005. 33. Pall Corporation Employee Stock Purchase Plan, as amended effective October 17, 2004. 34. Principal Rules of the Pall Supplementary Pension Scheme. 35. Pall Deutschland GmbH Holding, Concept of an Additional Pension Plan for Senior Executives. 11 FORM OF GUARANTY AGREEMENT This GUARANTY AGREEMENT dated as of July 29, 2005 (as amended, supplemented, amended and restated or otherwise modified from time to time, this "Guaranty"), is made by each Subsidiary of PALL CORPORATION, a New York corporation (the "Borrower"), from time to time party hereto, in favor of JPMORGAN CHASE BANK, N.A., as Administrative Agent (together with its successor(s) thereto in such capacity, the "Administrative Agent") for the Lenders under the Five-Year Credit Agreement dated as of July 29, 2005 (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the Lenders party thereto, the Administrative Agent and JPMorgan Europe Limited, as London Agent. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement. The rules of construction set forth in Section 1.03, 1.04 and 1.05 of the Credit Agreement shall apply to this Guaranty. W I T N E S S E T H : WHEREAS pursuant to the Credit Agreement, the Lenders have extended Commitments to the Borrower; and WHEREAS as a condition precedent to the making of a Loan or the issuance, amendment, renewal or extension of a Letter of Credit under the Credit Agreement, each Subsidiary Loan Party is required to execute and deliver this Guaranty. NOW, THEREFORE, each Subsidiary Loan Party jointly and severally agrees, for the benefit of each Lender and Agent, as follows: ARTICLE I GUARANTY PROVISIONS SECTION 1.01. Guaranty. Each Subsidiary Loan Party hereby jointly and severally absolutely, unconditionally and irrevocably: (a) guarantees the full and punctual payment when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, of all Obligations now or hereafter existing, whether for principal, interest (including interest accruing at the then applicable rate provided in the Credit Agreement after the occurrence of any Default set forth in Sections 7.01(f) or (g) of the Credit Agreement, whether or not a claim for post-filing or post-petition interest is allowed under applicable law following the institution of a proceeding under bankruptcy, insolvency or similar laws), fees, Unreimbursed Amounts, expenses or otherwise (including all such amounts which would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code, 11 U.S.C. ss.362(a), and the operation of Sections 502(b) and 12 506(b) of the United States Bankruptcy Code, 11 U.S.C. ss.502(b) and ss.506(b)); and (b) indemnifies and holds harmless each Lender and Agent for any and all costs and expenses (including reasonable attorney's fees and expenses) incurred by such Lender or Agent in enforcing any rights under this Guaranty. provided, however, that each Subsidiary Loan Party shall only be liable under this Guaranty for the maximum amount of such liability that can be hereby incurred without rendering this Guaranty, as it relates to such Subsidiary Loan Party, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer, and not for any greater amount. This Guaranty constitutes a guaranty of payment when due and not of collection, and each Subsidiary Loan Party specifically agrees that it shall not be necessary or required that any Lender or Agent exercise any right, assert any claim or demand or enforce any remedy whatsoever against any Loan Party or any other Person before or as a condition to the obligations of such Subsidiary Loan Party hereunder. SECTION 1.02. Reinstatement, etc. Each Subsidiary Loan Party hereby jointly and severally agrees that this Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment (in whole or in part) of any of the Obligations is invalidated, declared to be fraudulent or preferential, set aside, rescinded or must otherwise be restored by any Lender or Agent, including upon the occurrence of any Default set forth in Sections 7.01(f) or (g) of the Credit Agreement or otherwise, all as though such payment had not been made. SECTION 1.03. Guaranty Absolute, etc. This Guaranty shall in all respects be a continuing, absolute, unconditional and irrevocable guaranty of payment, and shall remain in full force and effect until the all the Commitments have been terminated and all the Obligations have been indefeasibly paid in full. Each Subsidiary Loan Party jointly and severally guarantees that the Obligations will be paid strictly in accordance with the terms of each Loan Document under which they arise, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any Lender or Agent with respect thereto. The liability of each Subsidiary Loan Party under this Guaranty shall be joint and several, absolute, unconditional and irrevocable irrespective of: (a) any lack of validity, legality or enforceability of any Loan Document; (b) the failure of any Lender or Agent: (i) to assert any claim or demand or to enforce any right or remedy against any Loan Party or any other Person (including any other guarantor) under the provisions of any Loan Document or otherwise, or (ii) to exercise any right or remedy against any other guarantor (including any Subsidiary Loan Party) of any Obligations; 13 (c) any change in the time, manner or place of payment of, or in any other term of, all or any part of the Obligations, any other extension, compromise or renewal of any Obligations, or any increase in the amount of any Obligations; (d) any reduction, limitation, impairment or termination of any Obligations for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and each Subsidiary Loan Party hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Obligations or otherwise; (e) any amendment to, rescission, waiver, or other modification of, or any consent to or departure from, any of the terms of any Loan Document; (f) any addition, exchange or release of any Person that is (or will become) a guarantor (including a Subsidiary Loan Party hereunder) of the Obligations, or any amendment to or waiver or release or addition to, or consent to or departure from, any other guaranty held by any Lender or Agent guaranteeing any of the Obligations; or (g) any other circumstance which might otherwise constitute a defense available to, or a legal or equitable discharge of, any Loan Party, any surety or any guarantor. SECTION 1.04. Setoff. Each Subsidiary Loan Party hereby irrevocably authorizes the Administrative Agent and each Lender, without the requirement that any notice be given to such Subsidiary Loan Party (such notice being expressly waived by each Subsidiary Loan Party), upon the occurrence and during the continuance of any Default described in Section 7.01(f) or (g) of the Credit Agreement or, with the consent of the Required Lenders, upon the occurrence and during the continuance of any other Event of Default, to setoff and appropriate and apply to the payment of the Obligations (whether or not then due, and whether or not any Lender or Agent has made any demand for payment of the Obligations), any and all balances, claims, credits, deposits (general or special, time or demand, provisional or final), accounts or money of such Subsidiary Loan Party then or thereafter maintained with such Lender or Agent; provided, however, that any such appropriation and application shall be subject to the provisions of Section 2.18(c) of the Credit Agreement. Each Lender Party agrees to notify the applicable Subsidiary Loan Party and the Administrative Agent after any such setoff and application made by such Lender; provided further, however, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender or Agent under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Lender or Agent may have. SECTION 1.05. Waiver, etc. Each Subsidiary Loan Party hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of 14 the Obligations and this Guaranty and any requirement that any Lender or Agent exhaust any right or take any action against any Loan Party or any other Person (including any other guarantor) or entity, as the case may be. SECTION 1.06. Postponement of Subrogation, etc. Each Subsidiary Loan Party agrees that it will not exercise any rights which it may acquire by way of rights of subrogation under any Loan Document to which it is a party, nor shall any Subsidiary Loan Party seek or be entitled to seek any contribution or reimbursement from any Loan Party, in respect of any payment made under any Loan Document or otherwise, until following the termination of all the Commitments and the indefeasible repayment in full of all the Obligations. Any amount paid to any Subsidiary Loan Party on account of any such subrogation rights prior to the termination of all the Commitments and the indefeasible repayment in full of all the Obligations shall be held in trust for the benefit of the Lenders and Agents and shall immediately be paid and turned over to the Administrative Agent for the benefit of the Lenders and Agents in the exact form received by such Subsidiary Loan Party (duly endorsed in favor of the Administrative Agent, if required), to be credited and applied against the Obligations, whether matured or unmatured, in accordance with Section 1.07 hereof; provided, however, that if any Subsidiary Loan Party has made payment to the Lenders and Agents of all of the Obligations and all the Commitments have been terminated, then at such Subsidiary Loan Party's request, the Administrative Agent (on behalf of the Lenders and Agents) will, at the expense of such Subsidiary Loan Party, execute and deliver to such Subsidiary Loan Party appropriate documents (without recourse and without representation or warranty) necessary to evidence the transfer by subrogation to such Subsidiary Loan Party of an interest in the Obligations resulting from such payment. In furtherance of the foregoing, at all times prior to the termination of all the Commitments and the indefeasible repayment in full of all the Obligations, each Subsidiary Loan Party shall refrain from taking any action or commencing any proceeding against any Loan Party (or its successors or assigns, whether in connection with a bankruptcy proceeding or otherwise) to recover any amounts in respect of payments made under this Guaranty to any Lender or Agent. SECTION 1.07. Payments; Application. Each Subsidiary Loan Party hereby agrees with each Lender or Agent as follows: (a) Each Subsidiary Loan Party agrees that any payment of any Obligation made hereunder shall be made in the currency in which payment is required to be made on such Obligation under the Credit Agreement and shall be made to the Administrative Agent, without setoff, counterclaim or other defense and in accordance with Section 2.10 of the Credit Agreement, free and clear of and without deduction for any Taxes, each Subsidiary Loan Party hereby agreeing to comply with and be bound by the provisions of Section 2.10 of the Credit Agreement in respect of all payments made by it hereunder and the provisions of which Section are hereby incorporated into and made a part of this Guaranty by this reference as if set forth herein; provided, that references to the "Borrower" in such Sections shall be deemed to be references to each Subsidiary Loan Party, and 15 references to "this Agreement" in such Section shall be deemed to be references to this Guaranty. (b) All payments made hereunder shall be applied upon receipt: (i) first, to the payment of all Obligations owing to the Administrative Agent, in its capacity as the Administrative Agent (including the fees and expenses of counsel to the Administrative Agent); (ii) second, after payment in full in cash of the amounts specified in clause (b)(i), to the ratable payment of all interest and fees owing with respect to the Loans and Letters of Credit and all costs and expenses owing to the Lenders and Agents pursuant to the terms of the Credit Agreement, until paid in full in cash; (iii) third, after payment in full in cash of the amounts specified in clauses (b)(i) and (b)(ii), to the ratable payment of the principal amount of the Loans then outstanding, the aggregate Unreimbursed Amounts then owing and the Cash Collateralization for contingent liabilities under LC Exposure and Unreimbursed Amounts; (iv) fourth, after payment in full in cash of the amounts specified in clauses (b)(i) through (b)(iii), to the ratable payment of all other Obligations owing to the Lenders and Agent; and (v) fifth, after payment in full in cash of the amounts specified in clauses (b)(i) through (b)(iv) and following the termination of all the Commitments and the indefeasible repayment in full of all the Obligations, to each applicable Subsidiary Loan Party or any other Person lawfully entitled to receive such surplus. ARTICLE II REPRESENTATIONS AND WARRANTIES In order to induce the Lenders, the Issuing Bank and the Agents to enter into the Credit Agreement and make Loans and issue, amend, renew or extend Letters of Credit thereunder, each Subsidiary Loan Party represents and warrants to each Lender and Agent as set forth below. SECTION 2.01. Credit Agreement Representations and Warranties. The representations and warranties contained in Article III of the Credit Agreement, insofar as the representations and warranties contained therein are applicable to any Subsidiary Loan Party and its properties, are true and correct in all material respects, each such representation and warranty set forth in such Article (insofar as applicable as aforesaid) and all other terms of the Credit Agreement to which reference is made therein, together with all related definitions and ancillary provisions, being hereby incorporated into this Guaranty by reference as though specifically set forth in this Article. 16 SECTION 2.02. Financial Condition, etc. Each Subsidiary Loan Party has knowledge of each other Loan Party's financial condition and affairs and it has adequate means to obtain from each such Loan Party on an ongoing basis information relating thereto and to such Loan Party's ability to pay and perform the Obligations, and agrees to assume the responsibility for keeping, and to keep, so informed for so long as this Guaranty is in effect. Each Subsidiary Loan Party acknowledges and agrees that the Lenders and the Agents shall have no obligation to investigate the financial condition or affairs of any Loan Party for the benefit of such Subsidiary Loan Party nor to advise such Subsidiary Loan Party of any fact respecting, or any change in, the financial condition or affairs of any other Loan Party that might become known to any Lender or Agent at any time, whether or not such Lender or Agent knows or believes or has reason to know or believe that any such fact or change is unknown to such Subsidiary Loan Party, or might (or does) materially increase the risk of such Subsidiary Loan Party as guarantor, or might (or would) affect the willingness of such Subsidiary Loan Party to continue as a guarantor of the Obligations. SECTION 2.03. Best Interests. It is in the best interests of each Subsidiary Loan Party to execute this Guaranty inasmuch as such Subsidiary Loan Party will, as a result of being a Subsidiary of the Borrower, derive substantial direct and indirect benefits from the Loans made from time to time to the Borrower by the Lenders and the Letters or Credit issued, amended, renewed or extended by the Issuing Bank pursuant to the Credit Agreement, and each Subsidiary Loan Party agrees that the Lenders, the Issuing Bank and the Agents are relying on this representation in agreeing to make Loans and issue, amend, renew or extend Letters of Credit to the Borrower. ARTICLE III COVENANTS, ETC. Each Subsidiary Loan Party covenants and agrees that, at all times prior to the termination of all of the Commitments and the indefeasible repayment in full of all of the Obligations, it will perform, comply with and be bound by all of the agreements, covenants and obligations contained in the Credit Agreement (including Articles V and VI and Section 7.01(f) and (g) of the Credit Agreement) which are applicable to such Subsidiary Loan Party or its properties, each such agreement, covenant and obligation contained in the Credit Agreement and all other terms of the Credit Agreement to which reference is made in this Article, together with all related definitions and ancillary provisions, being hereby incorporated into this Guaranty by this reference as though specifically set forth in this Article. ARTICLE IV MISCELLANEOUS PROVISIONS SECTION 4.01. Loan Document. This Guaranty is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly 17 indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof, including Article IX thereof. SECTION 4.02. Binding on Successors. This Guaranty shall remain in full force and effect until the termination of all the Commitments and the indefeasible repayment in full of all of the Obligations, shall be jointly and severally binding upon each Subsidiary Loan Party and its successors, transferees and assigns and shall inure to the benefit of and be enforceable by each Lender and Agent and its successors, transferees and assigns; provided, however, that no Subsidiary Loan Party may (unless otherwise permitted under the terms of the Credit Agreement) assign any of its obligations hereunder without the prior written consent of all Lenders. SECTION 4.03. Amendments, etc. No amendment to or waiver of any provision of this Guaranty, nor consent to any departure by any Subsidiary Loan Party from its obligations under this Guaranty, shall in any event be effective unless the same shall be in writing and signed by the Administrative Agent (on behalf of the Lenders or the Required Lenders, as the case may be, pursuant to Section 9.02 of the Credit Agreement) and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 4.04. Notices. All notices and other communications provided for hereunder shall be in writing or by facsimile and addressed, delivered or transmitted to the appropriate party in accordance with Section 9.01 of the Credit Agreement (in the case of any Subsidiary Loan Party, in care of the Borrower). SECTION 4.05. Additional Guarantors. Upon the execution and delivery by any other Person of a supplement in the form of Annex I hereto, such Person shall become a "Subsidiary Loan Party" hereunder with the same force and effect as if it were originally a party to this Guaranty and named as a "Subsidiary Loan Party" hereunder. The execution and delivery of such supplement shall not require the consent of any other Subsidiary Loan Party hereunder, and the rights and obligations of each Subsidiary Loan Party hereunder shall remain in full force and effect notwithstanding the addition of any new Subsidiary Loan Party as a party to this Guaranty. SECTION 4.06. Release of Guarantor. Upon the termination of all Commitments and the indefeasible repayment in full of all Obligations, this Guaranty and all obligations of each Subsidiary Loan Party hereunder shall terminate, without delivery of any instrument or performance of any act by any party. In addition, at the request of the Borrower, and at the sole expense of the Borrower, a Subsidiary Loan Party shall be released from its obligations hereunder under the circumstances contemplated by the Credit Agreement. SECTION 4.07. No Waiver; Remedies. In addition to, and not in limitation of, Sections 1.03 and 1.05, no failure on the part of any Lender or Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other 18 or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 4.08. Section Captions. Section captions used in this Guaranty are for convenience of reference only, and shall not affect the construction of this Guaranty. SECTION 4.09. Severability. Wherever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty. SECTION 4.10. Governing Law; Entire Agreement, etc. THIS GUARANTY WILL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK). This Guaranty and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and thereof and supersede any prior agreements, written or oral, with respect thereto. SECTION 4.11. Forum Selection And Consent To Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, ANY LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENTS, THE LENDERS OR ANY SUBSIDIARY LOAN PARTY IN CONNECTION HEREWITH OR THEREWITH MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. EACH SUBSIDIARY LOAN PARTY HEREBY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID WITHIN OR WITHOUT THE STATE OF NEW YORK AT THE ADDRESS FOR NOTICES SPECIFIED IN SECTION 4.04. EACH SUBSIDIARY LOAN PARTY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT ANY SUBSIDIARY LOAN PARTY HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF, SUCH SUBSIDIARY LOAN PARTY HEREBY IRREVOCABLY WAIVES TO THE FULLEST EXTENT 19 PERMITTED BY LAW SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THE LOAN DOCUMENTS. SECTION 4.12. Waiver of Jury Trial. THE ADMINISTRATIVE AGENT (ON BEHALF OF ITSELF, EACH LENDER AND THE LONDON AGENT) AND EACH SUBSIDIARY LOAN PARTY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, EACH LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY AGENT, LENDER OR SUBSIDIARY LOAN PARTY IN CONNECTION THEREWITH. EACH SUBSIDIARY LOAN PARTY ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY)AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR EACH AGENT AND EACH LENDER ENTERING INTO THE LOAN DOCUMENTS. SECTION 4.13. Counterparts. This Guaranty may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. 20 IN WITNESS WHEREOF, each Subsidiary Loan Party has caused this Guaranty to be duly executed and delivered by its Responsible Officer as of the date first above written. GELMAN SCIENCES, INC. MEDSEP CORPORATION MEMTEC FINANCE, INC. PALL ACQUISITION LLC PALL AEROPOWER CORPORATION PALL BIOMEDICAL, INC. PALL INTERNATIONAL CORPORATION PALL PUERTO RICO, INC. PALL-PASS US, INC. PALL FILTRATION AND SEPARATIONS GROUP INC. RUSSELL ASSOCIATES INC. PALL INDUSTRIAL MEMBRANES LLC, by ------------------------------------ Lisa McDermott, Responsible Officer of each of the foregoing Subsidiary Loan Parties 21 ACCEPTED AND AGREED FOR ITSELF AND ON BEHALF OF THE LENDERS AND THE LONDON AGENT JPMORGAN CHASE BANK, N.A., as Administrative Agent by ----------------------------- Name: Title: ANNEX I TO THE GUARANTY AGREEMENT THIS SUPPLEMENT dated as of [ ] (this "Supplement"), is to the Guaranty Agreement, dated as of July 29, 2005 (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Guaranty"), among the Subsidiary Loan Parties (such capitalized term, and other terms used in this Supplement, to have the meanings set forth in the Guaranty) from time to time party thereto, in favor of JPMorgan Chase Bank, N.A., as administrative agent (together with its successor(s) thereto in such capacity, the "Administrative Agent") for each of the Lenders and the Agents. WITNESSETH: WHEREAS pursuant to the provisions of Section 4.05 of the Guaranty, each of the undersigned is becoming a Subsidiary Loan Party under the Guaranty; and WHEREAS each of the undersigned desires to become a "Subsidiary Loan Party" under the Guaranty in order to induce the Lenders, the Issuing Bank and the Agents to continue to make Loans or to issue, amend, renew or extend Letters of Credit under the Credit Agreement. NOW, THEREFORE, in consideration of the premises, and for other consideration (the receipt and sufficiency of which is hereby acknowledged), each of the undersigned agrees, for the benefit of each Lender and Agent, as follows. SECTION 1. Party to Guaranty, etc. In accordance with the terms of the Guaranty, by its signature below, each of the undersigned hereby irrevocably agrees to become a Subsidiary Loan Party under the Guaranty with the same force and effect as if it were an original signatory thereto and each of the undersigned hereby (a) agrees to be bound by and comply with all of the terms and provisions of the Guaranty applicable to it as a Subsidiary Loan Party and (b) represents and warrants that the representations and warranties made by it as a Subsidiary Loan Party thereunder are true and correct as of the date hereof. In furtherance of the foregoing, each reference to a "Subsidiary Loan Party" and/or "Subsidiary Loan Parties" in the Guaranty shall be deemed to include each of the undersigned. SECTION 2. Representations. Each of the undersigned hereby represents and warrants that this Supplement has been duly authorized, executed and delivered by it and that this Supplement and the Guaranty constitute the legal, valid and binding obligation of each of the undersigned, enforceable against it in accordance with its terms. SECTION 3. Full Force of Guaranty. Except as expressly supplemented hereby, the Guaranty shall remain in full force and effect in accordance with its terms. SECTION 4. Severability. Wherever possible each provision of this Supplement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Supplement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Supplement or the Guaranty. C-1 Form of Guaranty Agreement 2 SECTION 5. Indemnity; Fees and Expenses, etc. Without limiting the provisions of any other Loan Document, each of the undersigned agrees to reimburse the Administrative Agent for its reasonable out-of-pocket expenses incurred in connection with this Supplement, including reasonable attorney's fees and expenses of the Administrative Agent's counsel. SECTION 6. Governing Law; Entire Agreement, etc. THIS SUPPLEMENT WILL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK). This Supplement and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and thereof and supersede any prior agreements, written or oral, with respect thereto. SECTION 7. Counterparts. This Supplement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. 3 IN WITNESS WHEREOF, each of the undersigned has caused this Supplement to be duly executed and delivered by its Responsible Officer as of the date first above written. [NAME OF ADDITIONAL SUBSIDIARY], by --------------------------- Name: Title: ACCEPTED AND AGREED FOR ITSELF AND ON BEHALF OF THE CREDIT PARTIES: JPMORGAN CHASE BANK, N.A., as Administrative Agent, By ----------------------------- Name: Title: EXHIBIT D RESERVE COSTS 1. The Mandatory Costs Rate is an addition to the interest rate to compensate Lenders for the cost of compliance with (a) the requirements of the Bank of England and/or the Financial Services Authority (or, in either case, any other authority which replaces all or any of its functions) or (b) the requirements of the European Central Bank. 2. On the first day of each Interest Period (or as soon as possible thereafter) the Administrative Agent shall calculate, as a percentage rate, a rate (the "Additional Cost Rate") for each Lender, in accordance with the paragraphs set out below. The Mandatory Costs Rate will be calculated by the Administrative Agent as a weighted average of the Lenders' Additional Cost Rates (weighted in proportion to the percentage participation of each Lender in the relevant Borrowing) and will be expressed as a percentage rate per annum. 3. The Additional Cost Rate for any Lender lending from an office of such Lender in a Participating Member State will be the percentage notified by that Lender to the Administrative Agent. This percentage will be certified by that Lender in its notice to the Administrative Agent to be its reasonable determination of the cost (expressed as a percentage of that Lender's participation in all Loans made from that lending office) of complying with the minimum reserve requirements of the European Central Bank in respect of loans made from that lending office. 4. The Additional Cost Rate for any Lender lending from a lending office in the United Kingdom will be calculated by the Administrative Agent as follows: (a) in relation to a Loan denominated in Pounds Sterling: AB + C(B - D) + E x 0.01 ------------------------ percent per annum 100 - (A + C) (b) in relation to a Loan in any currency other than Pounds Sterling: E x 0.01 -------- percent per annum 300 Where: A is the percentage of Eligible Liabilities (assuming these to be in excess of any stated minimum) which that Lender is from time to time required to maintain as an interest free cash ratio deposit with the Bank of England to comply with cash ratio requirements. B is the percentage rate of interest (excluding the applicable interest rate margin under Section 2.13(a) or (b) and the Mandatory Costs Rate and, if the Loan is due D-1 Reserve Costs 2 and unpaid, the additional rate of interest specified in Section 2.13(d)) payable for the relevant Interest Period on the Loan. C is the percentage (if any) of Eligible Liabilities which that Lender is required from time to time to maintain as interest bearing Special Deposits with the Bank of England. D is the percentage rate per annum payable by the Bank of England to the Administrative Agent on interest bearing Special Deposits. E is designed to compensate Lenders for amounts payable under the Fees Rules and is the most recent rate of charge payable by the Administrative Agent to the Financial Services Authority pursuant to the Fee Rules in respect of the relevant financial year of the Financial Services Authority and expressed in pounds per (pound)1,000,000. 5. For the purposes of this Schedule: (a) "Eligible Liabilities" and "Special Deposits" have the meanings given to them from time to time under or pursuant to the Bank of England Act 1998 or (as may be appropriate) by the Bank of England; (b) "Fees Rules" means the rules on periodic fees contained in the FSA Supervision Manual or such other law or regulation as may be in force from time to time in respect of the payment of fees for the acceptance of deposits; (c) "Fee Tariffs" means the fee tariffs specified in the Fees Rules under the activity group A.1 Deposit acceptors (ignoring any minimum fee or zero rated fee required pursuant to the Fees Rules but taking into account any applicable discount rate); (d) "Participating Member State" means any member state of the European Communities that adopts or has adopted the Euro as its lawful currency in accordance with legislation of the European Community relating to Economic and Monetary Union. (e) "Tariff Base" has the meaning given to it in, and will be calculated in accordance with, the Fees Rules. 6. In application of the above formulae, A, B, C and D will be included in the formulae as percentages (i.e., 5 percent will be included in the formula as 5 and not as 0.05). A negative result obtained by subtracting D from B shall be taken as zero. The resulting figures shall be rounded to four decimal places. 7. Each Lender shall supply any information required by the Administrative Agent for the purpose of calculating its Additional Cost Rate. In particular, but without limitation, each Lender shall supply the following information on or prior to the date on which it becomes a Lender: 3 (a) the jurisdiction of its lending office; and (b) any other information that the Administrative Agent may reasonably require for such purpose. Each Lender shall promptly notify the Administrative Agent of any change to the information provided by it pursuant to this paragraph. 8. The percentages of each Lender for the purpose of A and C above shall be determined by the Administrative Agent based upon the information supplied to it pursuant to paragraphs 7 above and on the assumption that, unless a Lender notifies the Administrative Agent to the contrary, each Lender's obligations in relation to cash ratio deposits and Special Deposits are the same as those of a typical bank from its jurisdiction of incorporation with a lending office in the same jurisdiction as its lending office. 9. The Administrative Agent shall have no liability to any person if such determination results in an Additional Cost Rate which over or under compensates any Lender and shall be entitled to assume that the information provided by any Lender pursuant to paragraphs 3 and 7 above is true and correct in all respects. 10. The Administrative Agent shall distribute the additional amounts received as a result of the Mandatory Costs Rate to the Lenders on the basis of the Additional Cost Rate for each Lender based on the information provided by each Lender pursuant to paragraphs 3 and 7 above. 11. Any determination by the Administrative Agent pursuant to this Exhibit in relation to a formula, the Mandatory Costs Rate, an Additional Cost Rate or any amount payable to a Lender shall, in the absence of manifest error, be conclusive and binding on all parties hereto. 12. The Administrative Agent may from time to time, after consultation with the Borrower and the Lenders, determine and notify to all parties hereto any amendments which are required to be made to this Exhibit in order to comply with any change in law, regulation or any requirements from time to time imposed by the Bank of England, the Financial Services Authority or the European Central Bank (or, in any case, any other authority which replaces all or any of its functions) and any such determination shall, in the absence of manifest error, be conclusive and binding on all parties hereto. EXHIBIT E FORM OF NOTE [FORM OF] PROMISSORY NOTE $[AMOUNT] New York, New York [DATE] FOR VALUE RECEIVED, the undersigned, PALL CORPORATION, a New York corporation (the "Company"), hereby promises to pay to the order of [ ] (the "Lender") or its registered assigns, at the office of JPMorgan Chase Bank, N.A. (the "Administrative Agent") at 270 Park Avenue, New York, New York 10017, on the Maturity Date (as defined in the Five-Year Credit Agreement dated as of July 29, 2005 (as the same may be amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and J. P. Morgan Europe Limited, as London Agent), the lesser of (a) the principal sum of [ ] ($[ ]) and (b) the aggregate unpaid principal amount of all Loans (as defined in the Credit Agreement) made to the Company by the Lender pursuant to the Credit Agreement in lawful money of the United States of America in immediately available funds, and to pay interest from the date hereof on the principal amount hereof from time to time outstanding, in like funds, at said office, at the rate or rates per annum and payable on the dates provided in the Credit Agreement. The Company promises to pay interest, on demand, on any overdue principal and, to the extent permitted by law, overdue interest from their due dates at the rate or rates provided in the Credit Agreement. The nonexercise by the holder hereof of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. All borrowings evidenced by this Note and all payments and prepayments of the principal hereof and interest hereon and the respective dates thereof shall be endorsed by the holder hereof on the schedule attached hereto and made a part hereof or on a continuation thereof that shall be attached hereto and made a part hereof, or otherwise recorded by such holder in its internal records; provided, however, that the failure of the holder hereof to make such a notation or any error in such a notation shall not affect the obligations of the Company under this Note. E-1 Form of Note 2 This Note is given subject to the provisions of the Credit Agreement, which, among other things, contains provisions for the acceleration of the maturity hereof upon the happening of certain events, for optional prepayment of the principal hereof prior to the maturity hereof and for the amendment or waiver of certain provisions of the Credit Agreement, all upon the terms and conditions therein specified. This Note is entitled to the benefit of the Credit Agreement and is guaranteed as provided therein and in the other Loan Documents (as defined in the Credit Agreement). This Note shall be governed by, and construed in accordance with, the laws of the State of New York. PALL CORPORATION, By ------------------------------------- Name: Title: 3 LOANS AND PAYMENTS
Date Amount Maturity Principal Interest Unpaid Name of Person and Type of Date Principal Making Notation Loan Balance of Note
EXHIBIT F FORM OF COMPLIANCE CERTIFICATE Financial Statement Date:_______ __, 20__ To: JPMorgan Chase Bank, N.A., as Administrative Agent Ladies and Gentlemen: Reference is made to that certain Credit Agreement, dated as of July [ ], 2005 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the "Agreement;" the terms defined therein being used herein as therein defined), among Pall Corporation, a New York corporation (the "Borrower"), the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, Issuing Bank and Swingline Lender. The undersigned Responsible Officer hereby certifies as of the date hereof that he/she is the of the Borrower, and that, as such, he/she is authorized to execute and deliver this Certificate to the Administrative Agent on the behalf of the Borrower, and that: [Use following paragraph 1 for Fiscal Year-end financial statements] 1. Attached hereto as Schedule 1 are the year-end audited financial statements required by Section 5.01(a) of the Agreement for the Fiscal Year of the Borrower ended as of the above date, together with the report and opinion of an independent certified public accountant required by such section. [Use following paragraph 1 for fiscal quarter-end financial statements] 1. Attached hereto as Schedule 1. are the unaudited financial statements required by Section 5.01(b) of the Agreement for the fiscal quarter of the Borrower ended as of the above date. Such financial statements fairly present the financial condition, results of operations and cash flows of the Borrower and its Subsidiaries in accordance with GAAP as at such date and for such period, subject only to normal year-end audit adjustments and the absence of footnotes. 2. The undersigned has reviewed and is familiar with the terms of the Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and condition (financial or otherwise) of the Borrower during the accounting period covered by the attached financial statements. 3. A review of the activities of the Borrower during such fiscal period has been made under the supervision of the undersigned with a view to determining whether during such fiscal period the Borrower performed and observed all its Obligations under the Loan Documents, and [SELECT ONE:] [THE BORROWER PERFORMED AND OBSERVED EACH COVENANT AND CONDITION OF THE LOAN DOCUMENTS APPLICABLE TO IT.] --OR-- [THE FOLLOWING COVENANTS OR CONDITIONS HAVE NOT BEEN PERFORMED OR OBSERVED AND THE FOLLOWING IS A LIST OF EACH SUCH DEFAULT AND ITS NATURE AND STATUS:] 4. The representations and warranties of the Borrower contained in Article III of the Agreement, and any representations and warranties of any Loan Party that are contained in any document furnished at any time under or in connection with the Loan Documents, are true and correct on and as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, and except that for purposes of this Compliance Certificate, the representations and warranties contained in subsections (a) and (b) of Section 3.05 of the Agreement shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 3.01 of the Agreement, including the statements in connection with which this Compliance Certificate is delivered. 5. The financial covenant analyses and information set forth on Schedule 2 attached hereto are true and accurate on and as of the date of this Certificate. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of __________________, __________. PALL CORPORATION By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- F-2 Form of Compliance Certificate For the Quarter/Year ended_______________("Statement Date") SCHEDULE 2 to the Compliance Certificate ($ in 000's) I. SECTION 6.03 - PRIORITY INDEBTEDNESS A. Priority Indebtedness as of the Statement Date: $ ----------------------- B. Consolidated Net Tangible Assets as of the Statement Date: $ ----------------------- C. 15% of Consolidated Net Tangible Assets as of the Statement Date (Line I.B (times) 15%): $ ----------------------- II. SECTION 6.11 (A) - CONSOLIDATED NET INTEREST COVERAGE RATIO. A. Consolidated EBITDA for four consecutive fiscal quarters ending on above date ("Subject Period"): 1. Consolidated Net Income (Net Loss) for Subject Period: $ ----------------------- 2. Consolidated Interest Charges for Subject Period: $ ----------------------- 3. Provision for income taxes for Subject Period: $ ----------------------- 4. Depreciation expenses for Subject Period: $ ----------------------- 5. Amortization expenses for Subject Period: $ ----------------------- 6. Non-cash non-recurring charges or losses for Subject Period: $ ----------------------- 7. Non-cash non-recurring gains for Subject Period $ ----------------------- 8. Income tax credits or refunds for Subject Period: $ ----------------------- 9. Interest income for Subject Period: $ ----------------------- 10. Consolidated EBITDA (Lines II.Al + 2 + 3 + 4 + 5 + 6 - 7 - 8 - 9): $ ----------------------- B. Consolidated Interest Charges for Subject Period less interest income earned by the Borrower and its Subsidiaries for Subject Period: $ ----------------------- C. Consolidated Net Interest Coverage Ratio (Line II.A.10 (divided by) Line II.B): $ to 1 ----------------- Minimum required: III. SECTION 6.11(B) - CONSOLIDATED NET LEVERAGE RATIO. A. Consolidated Funded Indebtedness at Statement Date: $ ----------------------- B. Consolidated EBITDA for Subject Period (Line II.A.10 above): $ ----------------------- C. Consolidated Leverage Ratio (Line III.A (divided by) Line III.B): $ to 1 ------------------ Maximum permitted:
F-3 Form of Compliance Certificate For the Quarter/Year ended_______________("Statement Date") SCHEDULE 3 to the Compliance Certificate ($ in 000's) CONSOLIDATED EBITDA (in accordance with the definition of Consolidated EBITDA as set forth in the Agreement)
- -------------------------------------------------------------------------------------------------------------------- Quarter Ended Quarter Ended Quarter Ended Quarter Ended Twelve Months CONSOLIDATED Ended EBITDA __________ __________ __________ __________ __________ - -------------------------------------------------------------------------------------------------------------------- Consolidated Net Income - -------------------------------------------------------------------------------------------------------------------- + Consolidated Interest Charges - -------------------------------------------------------------------------------------------------------------------- + income taxes - -------------------------------------------------------------------------------------------------------------------- + depreciation expense - -------------------------------------------------------------------------------------------------------------------- + amortization expense - -------------------------------------------------------------------------------------------------------------------- + non-cash non-recurring charges and losses - -------------------------------------------------------------------------------------------------------------------- - non-cash non-recurring gains - -------------------------------------------------------------------------------------------------------------------- - income tax credits and refunds - -------------------------------------------------------------------------------------------------------------------- - interest income - -------------------------------------------------------------------------------------------------------------------- = Consolidated EBITDA - --------------------------------------------------------------------------------------------------------------------
F-4 Form of Compliance Certificate EX-10.11 5 b409199_ex10-11.txt EMPLOYMENT AGREEMENT EXHIBIT 10.11 [Assistant Vice President Single Bonus] EMPLOYMENT AGREEMENT dated June 1, 2004 between PALL CORPORATION, a New York corporation (the "Company"), and Lisa McDermott ("Executive"). In consideration of the mutual agreements hereinafter set forth, the parties hereto agree as follows: SECTION 1. EMPLOYMENT AND TERM The Company hereby employs Executive, and Executive hereby agrees to serve, as an executive employee of the Company with the duties set forth in ss.2, for a term (hereinafter called the "Term of Employment") beginning June 1, 2004 (the "Term Commencement Date") and ending, unless sooner terminated under ss.4, on the effective date specified in a notice of termination given by either party to the other except that such effective date shall not be earlier than the first anniversary of the date on which such notice is given. SECTION 2. DUTIES (a) Executive agrees that during the Term of Employment she will hold such offices or positions with the Company, and perform such duties and assignments relating to the business of the Company, as the Chief Executive Officer of the Company shall direct except that Executive shall not be required to hold any office or position or to perform any duties or assignment inconsistent with her experience and qualifications. (b) If the Chief Executive Officer of the Company so directs, Executive shall serve as an officer of one or more subsidiaries of the Company (provided that the duties of such office are not inconsistent with Executive's experience and qualifications) and part or all of the compensation to which Executive is entitled hereunder may be paid by such subsidiary or subsidiaries. However, such employment and/or payment of Executive by a subsidiary or subsidiaries shall not relieve the Company from any of its obligations under this Agreement except to the extent of payments actually made to Executive by a subsidiary. (c) During the Term of Employment Executive shall, except during customary vacation periods and periods of illness, devote substantially all of her business time and attention to the performance of her duties hereunder and to the business and affairs of the Company and its subsidiaries and to promoting the best interests of the Company and its subsidiaries and she shall not, either during or outside of such normal business hours, engage in any activity inimical to such best interests. SECTION 3. COMPENSATION DURING TERM OF EMPLOYMENT (a) Base Salary. With respect to the period beginning on the Term Commencement Date and ending on the 31st day of July next following the Term Commencement Date, the Company shall pay Executive a Base Salary (in addition to the compensation provided for elsewhere in this Agreement) at the rate of $180,000 per annum (hereinafter called the "Original Base Salary"). With respect to each Contract Year beginning with the Contract Year which starts on the first day of August next following the Term Commencement Date, the Company shall pay Executive a Base Salary at such rate as the Chief Executive Officer may determine but not less than the Original Base Salary adjusted as follows: The term "Contract Year" as used herein means the period from August 1 of each year through July 31 of the following year. The term "Consumer Price Index" as herein used means the "Consumer Price Index for all Urban Consumers" compiled and published by the Bureau of Labor Statistics of the United States Department of Labor for "New York - Northern N. J. - Long Island, NY-NJ-CT-PA". For each Contract Year during the Term of Employment beginning with the Contract Year which starts on the first day of August next following the Term Commencement Date, the minimum compensation payable to Executive under this ss.3(a) (hereinafter called the "Minimum Base Salary") shall be determined by 2 increasing (or decreasing) the Original Base Salary by the percentage increase (or decrease) of the Consumer Price Index for the month of June immediately preceding the start of the Contract Year in question over (or below) the Consumer Price Index for the month of June next preceding the Term Commencement Date. [To illustrate the operation of the foregoing provisions of this paragraph: In an Employment Agreement as to which the Term Commencement Date was August 1, 2004, the executive's base salary for the Contract Year August 1, 2005 through July 31, 2006 would be not less than the Original Base Salary under that Employment Agreement adjusted by the percentage increase (or decrease) of the Consumer Price Index for June 2005 over (or below) said Index for June 2004.] Further adjustment in the Minimum Base Salary shall be made for each ensuing Contract Year, in each case (i) using the Consumer Price Index for the month of June next preceding the Term Commencement Date as the base except as provided in the immediately following paragraph hereof and (ii) applying the percentage increase (or decrease) in the Consumer Price Index since said base month to the Original Base Salary to determine the Minimum Base Salary. The Base Salary shall be paid in such periodic installments as the Company may determine but not less often than monthly. If with respect to any Contract Year (including the Contract Year beginning on the first day of August next following the Term Commencement Date) the Chief Executive Officer fixes the Base Salary at an amount higher than the Minimum Base Salary, then (unless the order fixing such higher Base Salary provides otherwise), for the purpose of determining the Minimum Base Salary for subsequent Contract Years: (i) the amount of the higher Base Salary so fixed shall be deemed substituted for the Original Base Salary wherever the Original Base Salary is referred to in the immediately preceding paragraph hereof, and (ii) the base month for determining the Consumer Price Index adjustment shall be June of the calendar year in which the Contract Year to which such higher Base Salary is applicable begins. [To illustrate the operation of the foregoing provisions of this paragraph: If the Chief Executive Officer were to fix a Base Salary for a Contract Year beginning, say, August 1, 2006 which is higher than 3 the Minimum Base Salary for that Contract Year, then June 2006 would become the base month for the purposes of making the Consumer Price Index adjustment to determine the Minimum Base Salary for subsequent Contract Years unless and until the Chief Executive Officer were to fix a Base Salary higher than the Minimum Base Salary for a subsequent Contract Year.] (b) Bonus Compensation. (i) With respect to each Fiscal Year of the Company falling in whole or in part within the Term of Employment beginning with the Fiscal Year ending on the Saturday nearest to the 31st day of the month of July next following the Term Commencement Date, Executive shall be entitled to receive a Bonus pursuant to this Agreement in an amount determined in accordance with, and subject to all of the terms of, the Pall Corporation Executive Incentive Bonus Plan adopted by the Compensation Committee of the Board of Directors of the Company on October 16, 2003, approved by shareholders at the annual meeting of shareholders on November 19, 2003 effective for the Fiscal Year beginning August 3, 2003, a copy of which is annexed hereto and incorporated herein by reference (the "Bonus Plan"). Words and terms used herein with initial capital letters and not defined herein are used herein as defined in the Bonus Plan. For purposes of determining the amount of the Bonus payable to Executive for any Fiscal Year under the Bonus Plan (the "Plan Bonus"), Executive's Target Bonus Percentage shall be 82.5% of her Base Salary for such Fiscal Year. (ii) Executive's Bonus Compensation shall be paid in accordance with ss.5 of the Bonus Plan. With respect to any Fiscal Year which falls in part but not in whole within the Term of Employment, the pro rata portion of the Bonus Compensation to which Executive is entitled under this ss.3(b) shall be determined in accordance with ss.3(c) of the Bonus Plan. (c) Fringe Benefits and Perquisites. During the Term of Employment, Executive shall enjoy the customary perquisites of office, including, but not limited to, office space and furnishings, secretarial services, expense reimbursements and 4 any similar emoluments customarily afforded to senior executive officers of the Company at the same level as Executive. Executive shall also be entitled to receive or participate in all "fringe benefits" and employee benefit plans provided or made available by the Company to its executives or management personnel generally (such as, but not limited to, group hospitalization, medical, life and disability insurance, and pension, retirement, profit-sharing and stock option or purchase plans), at such time and on such terms and conditions as each such plan provides. (d) Vacations. Executive shall be entitled to three weeks vacation through December 6, 2004 and to four weeks vacation thereafter in accordance with the policies of the Company as determined by the Board or by an authorized senior officer of the Company from time to time. The Company shall not pay Executive any additional compensation for any vacation time not used by Executive. SECTION 4. TERMINATION BY REASON OF DISABILITY, DEATH, RETIREMENT OR CHANGE IN CONTROL (a) Disability or Death. If, during the Term of Employment, Executive, by reason of physical or mental disability, is incapable of performing her principal duties hereunder for an aggregate of 130 working days out of any period of twelve consecutive months, the Company at its option may terminate the Term of Employment effective immediately by notice to Executive given within 90 days after the end of such twelve-month period. If Executive shall die during the Term of Employment or if the Company terminates the Term of Employment pursuant to the immediately preceding sentence by reason of Executive's disability, the Company shall pay to Executive, or to Executive's legal representatives, or in accordance with a direction given by Executive to the Company in writing, the following: (i) Executive's Base Salary to the end of the month in which such death or termination for disability occurs and Executive's Bonus Compensation prorated to said last day of the month and (ii) for each month in the period from the end of the month in which such death or termination for disability occurs until the earlier of (x) the first 5 anniversary of the date of death or termination and (y) the date on which the Term of Employment would have ended but for such death or termination for disability, monthly payments of an amount equal to 1/12th of 91.25% of the annual rate of Base Salary in effect for Executive immediately prior to the date on which Executive's death or termination for disability occurs (such 91.25% being comprised of one-half of such Base Salary and one-half of Executive's Target Bonus Percentage set forth in ss.3(b) hereof). (b) Retirement. (i) The Term of Employment shall end automatically, without action by either party, on Executive's 65th birthday unless, prior to such birthday, Executive and the Company have agreed in writing that the Term of Employment shall continue past such 65th birthday. In that event, unless the parties have agreed otherwise, the Term of Employment shall be automatically renewed and extended each year, as of Executive's birthday, for an additional one-year term, unless either party has given a Non-Renewal Notice. A Non-Renewal Notice shall be effective as of Executive's ensuing birthday only if given not less than 60 days before such birthday, and shall state that the party giving such notice elects that this Agreement shall not automatically renew itself further, with the result that the Term of Employment shall end on Executive's ensuing birthday. (ii) If the Term of Employment ends pursuant to this paragraph by reason of a notice given by either party as herein permitted or automatically at age 65 or any subsequent birthday, the Company shall pay to Executive, or to another payee specified by Executive to the Company in writing, Executive's Base Salary and Bonus Compensation prorated to the date on which the Term of Employment ends. (iii) Anything hereinabove to the contrary notwithstanding, if any provision of this paragraph violates federal or applicable state law relating to discrimination on account of age, such provision shall be deemed modified or suspended to the extent necessary to eliminate such violation of law. If at a later date, by reason of changed circumstances or otherwise, the enforcement 6 of such provision as set forth herein would no longer constitute a violation of law, then it shall be enforced in accordance with its terms as set forth herein. (c) Change in Control. In event of a Change in Control (as defined in the Bonus Plan), Executive shall have the right to terminate the Term of Employment, by notice to the Company given at any time after such Change in Control, effective on the date specified in such notice, which date shall not be more than (but can be less than) one year after the giving of such notice. SECTION 5. COVENANT NOT TO COMPETE For a period of eighteen months after the end of the Term of Employment if the Term of Employment is terminated by notice to the Company given by Executive under ss.1 or ss.4 hereof, or for a period of twelve months after the end of the Term of Employment if the Term of Employment is terminated by notice to Executive given by the Company under ss.1 or ss.4 hereof or terminates under ss.4 by reason of Executive attaining the age of 65, Executive shall not render services to any corporation, individual or other entity engaged in any activity, or herself engage directly or indirectly in any activity, which is competitive to any material extent with the business of the Company or any of its subsidiaries, provided, however, that if the Company terminates under ss.1 following a Change in Control (as defined in the Bonus Plan), the foregoing covenant not to compete shall not apply. SECTION 6. COMPANY'S RIGHT TO INJUNCTIVE RELIEF Executive acknowledges that her services to the Company are of a unique character, which gives them a peculiar value to the Company, the loss of which cannot be reasonably or adequately compensated in damages in an action at law, and that therefore, in addition to any other remedy which the Company may have at law or in equity, the Company shall be entitled to injunctive relief for a breach of this Agreement by Executive. SECTION 7. INVENTIONS AND PATENTS All inventions, ideas, concepts, processes, discoveries, improvements and trademarks (hereinafter collectively referred to as intangible rights), whether patentable or registrable or not, which are conceived, made, invented or suggested either by Executive alone 7 or by Executive in collaboration with others during the Term of Employment, and whether or not during regular working hours, shall be disclosed to the Company and shall be the sole and exclusive property of the Company. If the Company deems that any of such intangible rights are patentable or otherwise registrable under any federal, state or foreign law, Executive, at the expense of the Company, shall execute all documents and do all things necessary or proper to obtain patents and/or registrations and to vest the Company with full title thereto. SECTION 8. TRADE SECRETS AND CONFIDENTIAL INFORMATION Executive shall not, either directly or indirectly, except as required in the course of her employment by the Company, disclose or use at any time, whether during or subsequent to the Term of Employment, any information of a proprietary nature owned by the Company, including but not limited to, records, data, formulae, documents, specifications, inventions, processes, methods and intangible rights which are acquired by her in the performance of her duties for the Company and which are of a confidential information or trade-secret nature. All records, files, drawings, documents, equipment and the like, relating to the Company's business, which Executive shall prepare, use, construct or observe, shall be and remain the Company's sole property. Upon the termination of her employment or at any time prior thereto upon request by the Company, Executive shall return to the possession of the Company any materials or copies thereof involving any confidential information or trade secrets and shall not take any material or copies thereof from the possession of the Company. SECTION 9. MERGERS AND CONSOLIDATIONS; ASSIGNABILITY In the event that the Company, or any entity resulting from any merger or consolidation referred to in this ss.9 or which shall be a purchaser or transferee so referred to, shall at any time be merged or consolidated into or with any other entity or entities, or in the event that substantially all of the assets of the Company or any such entity shall be sold or otherwise transferred to another entity, the provisions of this Agreement shall be binding upon and shall inure to the benefit of the continuing entity in or the entity resulting from such merger or consolidation or the entity to which such assets shall be sold or transferred. Except as provided in the immediately preceding sentence of this ss.9, this Agreement shall not be assignable by the Company or by any entity referred to in such immediately preceding sentence. This Agreement 8 shall not be assignable by Executive, but in the event of her death it shall be binding upon and inure to the benefit of her legal representatives to the extent required to effectuate the terms hereof. SECTION 10. CAPTIONS The captions in this Agreement are not part of the provisions hereof, are merely for the purpose of reference and shall have no force or effect for any purpose whatsoever, including the construction of the provisions of this Agreement, and if any caption is inconsistent with any provisions of this Agreement, said provisions shall govern. SECTION 11. CHOICE OF LAW This Agreement is made in, and shall be governed by and construed in accordance with the laws of, the State of New York. SECTION 12. ENTIRE CONTRACT This instrument contains the entire agreement of the parties on the subject matter hereof except that the rights of the Company hereunder shall be deemed to be in addition to and not in substitution for its rights under the Company's standard printed form of "Employee's Secrecy and Invention Agreement" or "Employee Agreement" if heretofore or hereafter entered into between the parties hereto so that the making of this Agreement shall not be construed as depriving the Company of any of its rights or remedies under any such Secrecy and Invention Agreement or Employee Agreement. This Agreement may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. SECTION 13. NOTICES All notices given hereunder shall be in writing and shall be sent by registered or certified mail or overnight courier service such as Federal Express or UPS Air or delivered by hand, and, if intended for the Company, shall be addressed to it (if sent by mail or overnight courier service) or delivered to it (if delivered by hand) at its principal office for the attention of the Corporate 9 Secretary of the Company, or at such other address and for the attention of such other person of which the Company shall have given notice to Executive in the manner herein provided, and, if intended for Executive, shall be delivered to her personally or shall be addressed to her (if sent by mail or overnight courier service) at her most recent residence address shown in the Company's employment records or at such other address or to such designee of which Executive shall have given notice to the Company in the manner herein provided. Each such notice shall be deemed to be given on the date of mailing thereof or delivery to the overnight courier service, or if delivered personally, on the date so delivered. SECTION 14. TERMINATION OF ANY EXISTING AGREEMENT Any employment agreement between the parties hereto which is in effect on the date hereof is hereby terminated and replaced and superseded by this Agreement, effective on the Term Commencement Date. All payments, of Base Salary or otherwise, made by the Company under any such existing agreement with respect to any period commencing on or after the Term Commencement Date shall be credited against the corresponding payment obligations of the Company under this Agreement with respect to such period. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PALL CORPORATION By:____________________________ Name: Title: EXECUTIVE _______________________________ Lisa McDermott [Form prepared 2/03] revised by MAB 6/04 10 PALL CORPORATION EXECUTIVE INCENTIVE BONUS PLAN ----- 1. PURPOSE This document sets forth the Pall Corporation Executive Incentive Bonus Plan as adopted by the Committee on and effective July 17, 2001, approved by shareholders on November 14, 2001 and amended by the Committee on July 16, 2002 and November 1, 2002 effective for the Fiscal Year beginning August 4, 2002. The purpose of the Plan is to encourage greater focus on performance among the key executives of the Corporation by relating a significant portion of their total compensation to the achievement of annual financial objectives. 2. CERTAIN DEFINITIONS As used herein with initial capital letters, the following terms shall have the following meanings: "AVERAGE EQUITY" shall mean, for any Fiscal Year, the average of stockholders' equity as shown on the fiscal year-end consolidated balance sheet of the Corporation and its subsidiaries as of the end of such Fiscal Year and as of the end of the immediately preceding Fiscal Year except that the amounts shown on said balance sheets as "Accumulated other comprehensive" income or loss, as the case may be, shall be disregarded. "BASE SALARY" shall mean, with respect to any Executive and for any Fiscal Year, the annual rate of base salary in effect for the Executive as of the first day of such year or, if later, as of the first day of the Executive's Term of Employment, as determined under the Executive's Employment Agreement. "BOARD OF DIRECTORS" shall mean the Board of Directors of the Corporation. "BONUS" shall mean the bonus payable to an Executive under this Plan for any Fiscal Year. "CEO" shall mean the Chief Executive Officer of the Corporation. "CHANGE IN CONTROL" means the occurrence of any of the following: (a) the "Distribution Date" as defined in Section 3 of the Rights Agreement dated as of November 17, 1989 between the Corporation and United States Trust Company of New York as Rights Agent, as amended by Amendment No. 1 thereto dated April 20, 1999, and as the same may have been further amended or extended to the time in question or in any successor agreement (the "Rights Agreement"); or (b) any event described in Section 11(a)(ii)(B) of the Rights Agreement; or (c) any event described in Section 13 of the Rights Agreement; or (d) the date on which the number of duly elected and qualified directors of the Corporation who were not either elected by the Board of Directors or nominated by the Board of Directors or its Nominating Committee for election by the shareholders shall equal or exceed one-third of the total number of directors of the Corporation as fixed by its by-laws; provided, however, that no Change in Control shall be deemed to have occurred, and no rights arising upon a Change in Control as provided in Section 6 shall exist, to the extent that the Board of Directors so determines by resolution adopted prior to the Change in Control. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMMITTEE" shall mean the Compensation Committee of the Board of Directors. "CORPORATION" shall mean Pall Corporation. "COVERED EXECUTIVE" shall mean, with respect to any Fiscal Year, each individual who is a "Covered Employee" of the Corporation for such year for the purpose of section 162(m) of the Code. "EMPLOYMENT AGREEMENT" shall mean, with respect to any executive employee of the Corporation, an employment agreement between the Corporation and such employee which provides that the employee shall be eligible to receive annual bonuses under this Plan. "EXECUTIVE" shall mean an executive employee of the Corporation with whom the Corporation has entered into an Employment Agreement. "FISCAL YEAR" shall mean the fiscal year of the Corporation ending on August 3, 2002, and each subsequent fiscal year of the Corporation. "MAXIMUM R.O.E. TARGET" shall mean, for any Fiscal Year, the Return on Equity that must be achieved or exceeded in order for the Performance Percentage for the year to equal 100%, as determined by the Committee prior to the first day of such year or within such period of time thereafter as may be permitted under the regulations issued under section 162(m) of the Code. "MINIMUM R.O.E. TARGET" shall mean, for any Fiscal Year, the Return on Equity that must be exceeded in order for any Bonus to be paid to any Executive for the year, as determined by the Committee prior to the first day of such year or within such period of time 2 thereafter as may be permitted under the regulations issued under section 162(m) of the Code. "NET EARNINGS" shall mean, for any Fiscal Year, the after-tax consolidated net earnings of the Corporation and its subsidiaries as certified by the Corporation's independent accountants for inclusion in the annual report to shareholders ("Annual Report"), adjusted so as to eliminate the effects of any decreases in or charges to earnings for (a) the effect of foreign currency exchange rates, (b) any acquisitions, divestitures, discontinuance of business operations, restructuring or any other special charges, (c) the cumulative effect of any accounting changes, and (d) any "extraordinary items" as determined under generally accepted accounting principles, to the extent such decreases or charges referred to in clauses (a) through (d) are separately disclosed in the Corporation's Annual Report for the year. "PLAN" shall mean the Pall Corporation Executive Incentive Bonus Plan, as set forth herein and as amended from time to time. "RETURN ON EQUITY" shall mean, for any Fiscal Year, the percentage determined by dividing the Net Earnings for the year by the Average Equity for the year. "TARGET BONUS PERCENTAGE" shall mean, with respect to any Executive, the target bonus percentage specified for such Executive in his or her Employment Agreement. 3. DETERMINATION OF BONUS AMOUNTS For each Fiscal Year falling in whole or in part within an Executive's Term of Employment, as defined in his or her Employment Agreement, the Executive shall be entitled to receive a Bonus in an amount determined in accordance with the provisions of this Section 3, subject, however, to the provisions of Section 4. (a) The amount of the Bonus payable to an Executive for each such Fiscal Year shall be equal to (i) the Target Bonus Percentage of the Executive's Base Salary for such year, multiplied by (ii) the Performance Percentage for such year, as determined under (b) below. (b) The Performance Percentage for any Fiscal Year shall be determined in accordance with the following provisions: (i) If the Return on Equity equals or exceeds the Maximum R.O.E. Target for the year, the Performance Percentage for the year shall be 100%. (ii) If the Return on Equity is less than the Maximum R.O.E. Target for the year but exceeds the Minimum R.O.E. Target for the year, the Performance Percentage for the year shall be equal to the quotient resulting from dividing (A) the excess of the Return on Equity for the year over the Minimum R.O.E. Target for the year, by (B) the excess of the Maximum R.O.E. Target for the year over the Minimum R.O.E. Target for the year. 3 (iii) If the Return on Equity equals or is less than the Minimum R.O.E. Target for the year, the Performance Percentage for the year shall be zero, and no Bonus shall be payable under the Plan for such year to any Executive. (c) If an Executive's Term of Employment commences after the start of a Fiscal Year, or ends prior to the close of a Fiscal Year, the amount of the Bonus payable to the Executive for the Fiscal Year in which the Executive's Term of Employment commences, or for the Fiscal Year in which the Executive's Term of Employment ends, as determined in accordance with the other applicable provisions of the Plan, shall be prorated on the basis of the number of days of such Fiscal Year that fall within the Executive's Term of Employment; provided, however, that (i) if an Executive's Term of Employment ends within 5 days prior to the close of a Fiscal Year, there shall be no proration and the Executive shall be entitled to receive the entire amount of the Bonus payable to the Executive for such year, as determined in accordance with such other provisions, and (ii) if the Executive's Term of Employment ends within 5 days following the start of a Fiscal Year, the Executive shall not be entitled to receive any Bonus with respect to such Fiscal Year. 4. ADJUSTMENT OF AND LIMITATION ON BONUS AMOUNTS The amount of the Bonus otherwise payable to an Executive for any Fiscal Year in accordance with Section 3 shall be subject to the following adjustments and limitation: (a) The Committee may, in its discretion, reduce the amount of the Bonus otherwise payable to any Executive in accordance with Section 3, (i) to reflect any decreases in or charges to earnings that were not taken into account in determining Net Earnings for the year pursuant to clause (a), (b), (c) or (d) contained in the definition of such term in Section 2, (ii) to reflect any credits to earnings for extraordinary items of income or gain that were taken into account in determining Net Earnings for the year, (iii) to reflect the Committee's evaluation of the Executive's individual performance, or (iv) to reflect any other events, circumstances or factors which the Committee believes to be appropriate in determining the amount of the Bonus to be paid to the Executive for the year. (b) The Committee may, in its discretion, increase the amount of the Bonus otherwise payable to any Executive who is not a Covered Executive, as determined under Section 3, to reflect the Committee's evaluation of the Executive's individual performance, or to reflect such other circumstances or factors as the Committee believes to be appropriate in determining the amount of the Bonus to be paid to the Executive for the year. The Committee shall not have any discretion to increase the amount of the Bonus payable to any Covered Executive for the year, as determined under Section 3. (c) Notwithstanding any other provision herein to the contrary, the amount of the Bonus otherwise payable to any Executive for any Fiscal Year shall not exceed the lesser of (i) $1.0 million and (ii) 100% of the Executive's Base Salary for the Fiscal Year ending August 3, 2002 and 150% of the Executive's Base Salary for each subsequent Fiscal Year. 4 5. PAYMENT OF BONUSES The Bonus payable to an Executive for any Fiscal Year shall be paid in accordance with the following provisions: (a) Except as otherwise provided in (b) or (c) below, (i) if the Executive is not a Covered Executive for such year, 50% of the estimated amount of the Executive's Bonus shall be paid to the Executive on such date in September next following the close of such year as the Committee in its discretion shall determine (the first "Bonus Payment Date"), and the remaining amount of the Executive's Bonus shall be paid to the Executive by no later than January 15 next following the close of such year; (ii) if the Executive is a Covered Executive for such year, 50% of the amount of the Executive's Bonus shall be paid to the Executive as soon as practicable after the Committee has certified in writing that all conditions for the payment of such Bonus to the Executive for such year have been satisfied, and the remaining amount of the Executive's Bonus shall be paid to the Executive by no later than January 15 next following the close of such year; (iii) each amount payable to an Executive under (i) and (ii) above, reduced by the amount of all federal, state and local taxes required by law to be withheld therefrom, shall be paid to the Executive in the form of a single lump sum cash payment. (b) To the extent that an Executive has elected under the applicable provisions of the Pall Corporation Management Stock Purchase Plan (the "MSPP") to have any part of the Bonus payable to the Executive for any Fiscal Year paid in the form of Restricted Units to be credited to the Executive's account under the MSPP, no cash payments shall be made to the Executive pursuant to (a) above with respect to the part of the Executive Bonus that is subject to such election; and the obligation of the Corporation under this Plan with respect to payment of such part of the Executive's Bonus shall be fully discharged upon the crediting of Restricted Units to the Executive's account under the MSPP in accordance with the applicable provisions of such Plan. (c) To the extent that an Executive has elected under the applicable provisions of the Pall Corporation Profit-Sharing Plan (the "Profit-Sharing Plan") to have any part of the Bonus payable to the Executive for any Fiscal Year reduced, and to have an amount equal to such part of the Executive's Bonus contributed to the Profit-Sharing Plan as a 401(k) Contribution on the Executive's behalf, an amount equal to such part of the Executive's Bonus shall be contributed to the Profit-Sharing Plan on behalf of the Executive; and thereupon, the obligation of the Corporation under this Plan with respect to payment of such part of the Executive's Bonus shall be fully discharged. However, no such contribution shall be made to the extent it would cause any limitation applicable under the 401(k) Plan to be exceeded. 5 6. CHANGE IN CONTROL Notwithstanding any other provision in the Plan to the contrary (but subject to the "provided, however" clause contained in the definition of "Change in Control" in Section 2), upon the occurrence of a Change in Control, the following provisions shall apply. (a) The amount of the Bonus payable to any Executive for the Fiscal Year in which a Change in Control occurs shall be at least equal to the Target Bonus Percentage of the Executive's Base Salary for such year or, in the case of any Executive whose Term of Employment commences after the start of such year or ends prior to the close of such year, a pro rata portion thereof determined on the basis of the number of days of such Fiscal Year that fall within the Executive's Term of Employment. (b) Each Executive whose Term of Employment has not ended prior to the occurrence of a Change in Control shall be entitled to receive a Bonus for each Contract Year (as defined in the Executive's Employment Agreement) that falls in whole or in part within the Executive's Term of Employment and that ends after the Fiscal Year in which the Change in Control occurs. The amount of the Bonus payable to the Executive for each such Contract Year shall be at least equal to the Target Bonus Percentage of the Executive's Base Salary for such Contract Year or, in the case of any Executive whose Term of Employment ends after the start of such Contract Year but prior to the close of such year, a pro rata portion thereof determined on the basis of the number of days of such Contract Year that fall within the Executive's Term of Employment. (c) The entire amount of the Bonus payable to an Executive for any Fiscal Year or Contract Year pursuant to (a) or (b) above, reduced by the amount of all federal, state and local taxes required to be withheld therefrom, shall be paid to the Executive in a single cash lump sum as soon as practicable after the close of such Fiscal Year or Contract Year. 7. RIGHTS OF EXECUTIVES An Executive's rights and interests under the Plan shall be subject to the following provisions: (a) An Executive's rights to payments under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Executive. (b) Neither the Plan nor any action taken hereunder shall be construed as giving any Executive any right to be retained in the employment of the Corporation or any of its subsidiaries. 8. ADMINISTRATION The Plan shall be administered by the Committee. A majority of the members of the Committee shall constitute a quorum. The Committee may act at a meeting, including a 6 telephone meeting, by action of a majority of the members present, or without a meeting by unanimous written consent. In addition to the responsibilities and powers assigned to the Committee elsewhere in the Plan, the Committee shall have the authority, in its discretion, to establish from time to time guidelines or regulations for the administration of the Plan, interpret the Plan, and make all determinations considered necessary or advisable for the administration of the Plan. The Committee may delegate any ministerial or nondiscretionary function pertaining to the administration of the Plan to any one or more officers of the Corporation. All decisions, actions or interpretations of the Committee under the Plan shall be final, conclusive and binding upon all parties. Notwithstanding the foregoing, any determination made by the Committee after the occurrence of a Change in Control that denies in whole or in part any claim made by any individual for benefits under the Plan shall be subject to judicial review, under a "de novo", rather than a deferential standard. 9. AMENDMENT OR TERMINATION The Board of Directors may, with prospective or retroactive effect, amend, suspend or terminate the Plan or any portion thereof at any time; provided, however, that (a) no amendment, suspension or termination of the Plan shall adversely affect the rights of any Executive with respect to any Bonus that has become payable to the Executive under the Plan, without his or her written consent, and (b) following a Change in Control, no amendment to Section 6, and no termination of the Plan, shall be effective if such amendment or termination adversely affects the rights of any Executive under the Plan. 10. SUCCESSOR CORPORATION The obligations of the Corporation under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Corporation, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Corporation. The Corporation agrees that it will make appropriate provision for the preservation of Executives' rights under the Plan in any agreement or plan which it may enter into or adopt to effect any such merger, consolidation, reorganization or transfer of assets. 11. GOVERNING LAW The Plan shall be governed by and construed in accordance with the laws of the State of New York. 12. EFFECTIVE DATE The Plan was adopted effective as of July 17, 2001 by the Board of Directors, acting by the Committee, subject, however, to approval by the shareholders of the Corporation by a majority of the votes cast in person or by proxy at the 2001 annual meeting of the 7 Corporation's shareholders, including any adjournment thereof. The Plan was approved by shareholders on November 14, 2001 and amended by the Committee on July 16, 2002 and November 1, 2002 effective for the Fiscal Year beginning August 4, 2002. 8 EX-21 6 b409199_ex21.txt SUBSIDIARIES OF PALL CORPORATION EXHIBIT 21 SUBSIDIARIES OF PALL CORPORATION Pall Corporation owns 100% of the outstanding capital stock of those companies listed below, except where otherwise noted: State or Other Jurisdiction Name of Company of Incorporation Medsep Corporation Delaware Pall Acquisition LLC Delaware Pall Aeropower Corporation Delaware Pall Biomedical, Inc. Delaware Pall Industrial Membranes LLC Delaware Pall International Corporation Delaware Pall Puerto Rico, Inc. Delaware Pall - PASS US, Inc. Delaware Russell Associates Inc. Maryland Gelman Sciences, Inc. Michigan Pall Austria Filter GmbH Austria Pall (Canada) Limited Canada Pall Europe Limited (a) England Pall France S.A. France Pall Deutschland Beteiligungs GmbH Germany Pall Deutschland Holding GmbH & Co. KG Partnership (c) Germany Pall Italia S.R.L. Italy Gelman Ireland Ltd. Ireland Pall Netherlands B.V. (a) The Netherlands PLLN C.V. Partnership (b) The Netherlands Pall Norge AS Norway Pall Espana S.A. Spain Pall Norden AB Sweden Pall (Schweiz) A.G. Switzerland Argentaurum A.G. Switzerland Pall Filter (Beijing) Co., Ltd. China Pall Asia International Ltd. Hong Kong Nihon Pall Ltd. Japan Pall Filtration Pte. Ltd. Singapore Pall Korea Ltd. South Korea Pall India Private Ltd. India PT Pall Filtration Indonesia Indonesia Pall New Zealand Limited New Zealand Pall Corporation Filtration and Separations (Thailand) Ltd. Thailand (a) Contributed to PLLN C.V. a Netherlands Partnership (b) General Partner: Pall-PASS US, Inc.; Limited Partner: Pall Corporation (c) General Partner: Pall Deutschland Beteiligungs GmbH; Limited Partner: Pall Corporation All subsidiaries listed above are included in the Company's consolidated financial statements. The list does not include inactive subsidiaries. EX-23 7 b409199_ex23.txt CONSENT OF PUBLIC ACCOUNTING FIRM EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Pall Corporation: We consent to the incorporation by reference in the registration statements (Nos. 33-44399, 33-51151, 33-64751, 333-68371, 333-51090, 333-76976, 333-82469, 333-111218, 333-87655, 333-111212 and 333-121547) on Form S-8 of Pall Corporation and subsidiaries of our reports dated October 12, 2005, with respect to the consolidated balance sheets of Pall Corporation and subsidiaries as of July 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 2005, and the related financial statement schedule, management's assessment of the effectiveness of internal control over financial reporting as of July 31, 2005 and the effectiveness of internal control over financial reporting as of July 31, 2005, which reports appear in the July 31, 2005 annual report on Form 10-K of Pall Corporation. /s/ KPMG LLP -------- KPMG LLP Melville, New York October 14, 2005 EX-31.1 8 b409199_ex31-1.txt CERTIFICATION EXHIBIT 31.1 CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Eric Krasnoff, Chairman of the Board and Chief Executive Officer of Pall Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of Pall Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 14, 2005 /s/ ERIC KRASNOFF -------------------------------- Eric Krasnoff Chairman of the Board and Chief Executive Officer EX-31.2 9 b409199_ex31-2.txt CERTIFICATION EXHIBIT 31.2 CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Marcus Wilson, Chief Financial Officer of Pall Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of Pall Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 14, 2005 /s/ MARCUS WILSON ------------------------------ Marcus Wilson Chief Financial Officer EX-32.1 10 b409199_ex32-1.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Pall Corporation (the "Company") on Form 10-K for the period ending July 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eric Krasnoff, Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge: (i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. October 14, 2005 /s/ ERIC KRASNOFF ----------------------- Eric Krasnoff Chief Executive Officer EX-32.2 11 b409199_ex32-2.txt CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Pall Corporation (the "Company") on Form 10-K for the period ending July 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marcus Wilson, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge: (i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. October 14, 2005 /s/ MARCUS WILSON ----------------------- Marcus Wilson Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----