<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1999
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 No. 333-13523
DADE BEHRING INC.
(Formerly Dade International Inc.)
(Exact name of Registrant as specified in its charter)
Delaware 36-3949533
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1717 Deerfield Road, Deerfield, Illinois 60015-0778
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 267-5300
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 the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock, $.01 par value per
share, outstanding as of August 16, 1999, the latest practicable date, was
1,000 shares.
<PAGE>
DADE BEHRING INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I Financial Information Page No.
------ --------------------- --------
<C> <S> <C>
Item 1. Financial Statements (unaudited)............................
Condensed Consolidated Balance Sheets as of December 31,
1998 and June 30, 1999 (unaudited).......................... 2
Condensed Consolidated Statements of Operations and
Comprehensive Income (unaudited) for the three months ended
and for the six months ended June 30, 1998 and June 30,
1999........................................................ 3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1998 and June 30, 1999.... 4
Notes to the Condensed Consolidated Financial Statements
(unaudited)................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 12
<CAPTION>
Part II Other Information
------- -----------------
<C> <S> <C>
Item 1. Legal Proceedings........................................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
Signature................................................... 13
</TABLE>
1
<PAGE>
DADE BEHRING INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share-related data)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1998 1999
------ ------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 25.8 $ 30.4
Accounts receivable, net............................ 353.5 353.6
Inventories......................................... 265.9 273.1
Prepaid expenses and other current assets........... 7.3 9.7
Deferred income taxes............................... 76.8 86.9
-------- --------
Total current assets.............................. 729.3 753.7
-------- --------
Property, plant and equipment, net.................... 304.7 350.6
Debt issuance costs, net.............................. 31.2 46.8
Goodwill, net......................................... 126.5 123.0
Deferred income taxes................................. 269.7 279.5
Other assets.......................................... 72.0 84.0
-------- --------
Total assets...................................... $1,533.4 $1,637.6
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt................... $ 13.0 $ 4.5
Short-term debt..................................... 96.4 101.0
Accounts payable.................................... 130.7 133.9
Accrued liabilities................................. 228.4 265.6
-------- --------
Total current liabilities......................... 468.5 505.0
-------- --------
Long-term debt, less current portion.................. 373.0 871.1
Senior subordinated notes............................. 350.0 350.0
Other liabilities..................................... 92.6 88.1
-------- --------
Total liabilities................................. 1,284.1 1,814.2
-------- --------
Commitments and contingencies......................... -- --
Stockholder's equity (deficit):
Common stock, $.01 par value, 1,000 shares
authorized, issued and outstanding................. -- --
Additional paid-in capital.......................... 493.0 516.9
Unearned stock-based compensation................... (11.5) (7.5)
Notes receivable on capital contribution............ (0.2) --
Accumulated deficit................................. (209.4) (651.9)
Accumulated other comprehensive loss................ (22.6) (34.1)
-------- --------
Total stockholder's equity (deficit).............. 249.3 (176.6)
-------- --------
Total liabilities and stockholder's equity
(deficit)........................................ $1,533.4 $1,637.6
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
DADE BEHRING INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Three Months Ended Ended
June 30, June 30,
-------------------- --------------
1998 1999 1998 1999
--------- --------- ------ ------
<S> <C> <C> <C> <C>
Net sales................................ $ 318.8 $ 322.6 $644.7 $641.6
Operating costs and expenses:
Cost of goods sold..................... 128.5 145.4 259.0 273.6
Marketing and administrative expenses.. 122.8 165.5 254.0 290.8
Research and development expense....... 21.9 22.0 44.5 43.0
Goodwill amortization expense.......... 1.1 1.6 2.7 3.1
Restructuring expense.................. -- 16.5 -- 16.5
--------- --------- ------ ------
Income (loss) from operations............ 44.5 (28.4) 84.5 14.6
--------- --------- ------ ------
Other income (expense):
Interest expense, net.................. (20.7) (21.1) (40.8) (41.6)
Other.................................. (0.1) 3.6 (0.3) 5.6
--------- --------- ------ ------
Income (loss) before income taxes........ 23.7 (45.9) 43.4 (21.4)
Income tax expense (benefit)............. 8.8 (18.4) 16.1 (8.6)
--------- --------- ------ ------
Income (loss) before extraordinary items. 14.9 (27.5) 27.3 (12.8)
Extraordinary loss related to early
retirement of debt (net of $5.9 million
income tax benefit)..................... -- (8.8) -- (8.8)
--------- --------- ------ ------
Net income (loss)........................ $ 14.9 $ (36.3) $ 27.3 $(21.6)
--------- --------- ------ ------
Other comprehensive income (loss), before
tax:
Foreign currency translation
adjustments........................... 1.7 0.8 0.6 (11.9)
Unrealized gain (loss) on marketable
securities............................ (0.1) 0.2 (0.1) 0.4
--------- --------- ------ ------
Other comprehensive income (loss)........ 1.6 1.0 0.5 (11.5)
Income tax expense related to items of
comprehensive income (loss)............. -- -- -- --
--------- --------- ------ ------
Other comprehensive income (loss), net of
tax..................................... 1.6 1.0 0.5 (11.5)
--------- --------- ------ ------
Comprehensive income (loss).............. $ 16.5 $ (35.3) $ 27.8 $(33.1)
========= ========= ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DADE BEHRING INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Six
Months Ended
June 30,
-------------
1998 1999
----- ------
<S> <C> <C>
Operating Activities:
Net income (loss)............................................. $27.3 $(21.6)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization expense....................... 26.9 32.3
Stock-based compensation expense............................ 6.0 27.3
Writeoff of debt issuance costs............................. -- 14.7
Deferred income taxes....................................... 16.5 (19.9)
Changes in balance sheet items:
Accounts receivable, net.................................. (10.2) (19.4)
Inventories............................................... 4.1 (18.0)
Prepaid expenses and other current assets................. -- (2.4)
Accounts payable.......................................... (12.2) 8.5
Accrued liabilities....................................... (15.4) (11.9)
Other, net................................................ 2.8 (13.9)
----- ------
Net cash flow provided (utilized) by operating
activities............................................. 45.8 (24.3)
----- ------
Investing Activities:
Acquisitions, net of acquired cash............................ -- (7.4)
Capital expenditures.......................................... (52.0) (65.5)
----- ------
Net cash flow utilized by investing activities.......... (52.0) (72.9)
----- ------
Financing Activities:
Proceeds from issuance of short-term debt, net of repayments.. 43.9 15.3
Debt issuance costs........................................... -- (33.2)
Proceeds from borrowings under revolving credit facility...... -- 218.5
Repayment of borrowings under revolving credit facility....... -- (237.5)
Proceeds from borrowings under bank credit agreement.......... -- 875.0
Retirement of previous bank credit agreement.................. -- (369.1)
Repayment of borrowings under bank credit agreement........... (1.9) (0.8)
Dividend to parent............................................ -- (366.1)
----- ------
Net cash flow provided by financing activities.......... 42.0 102.1
----- ------
Effect of foreign exchange rates on cash........................ (0.2) (0.3)
----- ------
Net increase in cash and cash equivalents............... 35.6 4.6
Cash and Cash Equivalents:
Beginning of period........................................... 20.5 25.8
----- ------
End of period................................................. $56.1 $ 30.4
===== ======
Non-Cash Supplemental Disclosure of Cash Flow Information:
Unpaid dividend declared...................................... -- 54.8
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Business
Dade Behring Inc. (the "Company"), formerly Dade International Inc., was
incorporated in Delaware in 1994 and is a wholly-owned subsidiary of Dade
Behring Holdings, Inc. ("Holdings"), formerly Diagnostics Holding Inc. Bain
Capital, Inc., GS Capital Partners, L.P. (an affiliate of Goldman Sachs Group,
L.P.), their respective related investors ("Bain" and "Goldman Sachs"),
Hoechst A.G. and certain of its affiliates ("Hoechst") and the management of
the Company own substantially all of the capital stock of Holdings. The
Company develops, manufactures and markets in vitro diagnostic equipment,
reagents, consumable supplies and services worldwide.
Effective December 16, 1994, the Company acquired (the "Dade Acquisition")
the worldwide in vitro diagnostics products manufacturing and services
businesses and net assets of Baxter Diagnostics Inc. and certain of its
affiliates, from Baxter International Inc. and its affiliates ("Baxter"). The
Dade Acquisition was accounted for as a purchase.
Effective May 1, 1996, the Company acquired (the "Chemistry Acquisition")
the worldwide in vitro diagnostics business ("Dade Chemistry") of E.I. du Pont
de Nemours and Company. The operating results and acquired assets and assumed
liabilities of the Chemistry Acquisition, which was accounted for as a
purchase, have been reflected in the Company's consolidated financial
statements since May 1, 1996.
Effective October 1, 1997, Holdings acquired (the "Behring Combination")
the stock and beneficial interest of various subsidiaries of Hoechst that
operated its worldwide in vitro diagnostic business ("Behring"). The stock and
beneficial interest was contributed to the Company effective October 1, 1997.
The operating results and acquired assets and assumed liabilities of the
Behring Combination, which was accounted for as a purchase, have been
reflected in the Company's consolidated financial statements since October 1,
1997.
2. Basis of Presentation
The consolidated condensed financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations. The Company believes the disclosures included in
the unaudited condensed consolidated financial statements, when read in
conjunction with the consolidated financial statements of the Company as of
December 31, 1998 and notes thereto, are adequate to make the information
presented not misleading. In management's opinion, the condensed consolidated
financial statements reflect all adjustments necessary to summarize fairly the
consolidated financial position, results of operations, and cash flows for
such periods. The results of operations for the six months ended June 30, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1999.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes materials, labor and manufacturing overhead costs.
Market for raw materials is based on replacement costs and, for other
inventory classifications, on net realizable value. Appropriate consideration
is given to deterioration, obsolescence and other factors in evaluating net
realizable value. Inventories consist of the following (in millions):
5
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
<S> <C> <C>
Raw materials....................................... $ 48.8 $ 50.7
Work-in-process..................................... 52.3 52.7
Finished products................................... 164.8 169.7
------ ------
Total inventories................................. $265.9 $273.1
====== ======
</TABLE>
4. Restructuring
In June 1999, in connection with a reorganization of the Company's
management structure to reduce operating costs and plans to increase
productivity primarily in the Company's U.S. and European sales and service
and R&D groups, the Company recorded a $16.5 million restructuring charge. The
Company expects to incur 65% of this restructuring charge in fiscal 1999 and
the remainder in fiscal 2000. Nearly all of the restructuring charges are
severance-related, with a total of approximately 140 employees identified for
termination resulting from these activities. As of June 30, 1999, $3.4 million
of this restructuring charge had been utilized and 18 employees had been
severed.
5. Recapitalization
In June 1999, Holdings completed a recapitalization and refinancing plan
that included the repurchase by Holdings of a portion of its Common Stock held
or obtainable upon exercise of options by Bain, Goldman Sachs, management and
others, and the refinancing of the Company's bank credit facility.
Under the recapitalization, a portion of Class L Common and Common Stock
owned by Bain and Goldman Sachs was repurchased by Holdings for $365.4
million. Additionally, a portion of Holdings' management-owned stock options
and Class L Common and Common Stock was repurchased for $33.4 million and
$21.4 million, respectively. Holdings funded the cost of the recapitalization
from the proceeds of a $420.9 million dividend from the Company.
Subsequent to the recapitalization, Hoechst's ownership percentage of
Holdings increased to approximately 46%, excluding the warrant held by Hoechst
to purchase 1,275,816 shares of voting Common Stock, with Bain, Goldman Sachs,
management and others owning the remaining ownership interests. The voting
rights percentage of Hoechst remained unchanged at 31.2%.
Advisory fees and out-of-pocket expenses of $16.8 million associated with
the Company's review and consideration of strategic alternatives and mergers
and acquisitions leading up to the recapitalization transaction were expensed
in June 1999.
6. Debt
In June 1999, the Company refinanced its existing bank credit facility by
entering into a $1.25 billion senior bank credit facility consisting of $875
million of term loans and $375 million of revolving credit facilities, of
which none of the revolving credit facilities had been drawn upon at June 30,
1999. Similar to the prior bank credit facility, the borrowings are secured by
the stock of the Company's U.S. subsidiaries, all tangible and intangible U.S.
assets, and a portion of the stock of the Company's foreign subsidiaries. The
term loans and revolving credit facilities bear interest at variable rates
based on applicable margins ranging from either 1.50% to 2.125% in excess of
the prime lending rate or from 2.50% to 3.125% in excess of LIBOR. At June 30,
1999, the Company's borrowings were funded using the prime lending rate. The
prime lending rate in effect at June 30, 1999 was 8.0%.
6
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The term loans have gradual amortization requirements with minimal
repayment requirements in the first two years and final maturity dates between
2005 and 2007. The final maturity date of the revolving credit facilities is
2005. The revolving credit facilities are subject to a commitment fee of .50%
of the unused portion of the facilities.
The bank credit agreement contains various restrictive covenants, including
mandatory repayments under certain conditions, minimum interest coverage,
maximum leverage ratios, and other covenants, which, among other things, limit
the incurrence of additional indebtedness, dividends, transactions with
affiliates, asset purchases and sales, acquisitions, mergers and
consolidations, prepayments of other indebtedness, liens and encumbrances and
other matters customarily restricted in such agreements.
The Company capitalized approximately $33.2 million in financing fees
related to the refinancing that will be amortized over the life of the loans.
Net deferred financing fees of $14.7 million related to the previous credit
agreement were written off as an extraordinary loss of $8.8 million, net of
taxes, in June 1999.
7. Business Segment and Geographic Information
The business of the Company is in vitro diagnostic ("IVD") products. The
operating segments derive substantially all their revenues from the
manufacture and marketing of IVD products and services. The Company's
operating structure includes the following operating segments: United States,
Germany, Other Europe, Asia-Pacific, and All Other. The business segment
information provided is based on local statutory operating results, adjusted
to conform to U.S. generally accepted accounting principles, and may not be
comparable on a period-over-period basis as intercompany profit is not
allocated to the individual operating segments.
Management evaluates the performance of its operating segments separately
to individually monitor the different factors affecting financial performance.
Management evaluates segment performance based upon EBITDA, which is a widely
accepted measure of a company's ability to incur and/or service indebtedness.
EBITDA represents the sum of net income, depreciation and amortization
expense, non-cash stock-based compensation expense, non-recurring integration
expenses, and other non-recurring operating charges and other non-cash
charges. EBITDA includes substantially all cost of goods sold, marketing and
administrative expenses, and research and development expenses. EBITDA for the
U.S. and Germany includes research and development costs for products that are
sold by all operating segments.
Financial information by segment for the six months ended June 30, 1998 and
1999 is summarized as follows (in millions):
<TABLE>
<CAPTION>
United Other Asia- All
States Germany Europe Pacific Other(1) Total
------ ------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Six Months ended June 30, 1998
Revenue from external
customers..................... $341.8 $ 77.6 $151.3 $56.7 $17.3 $644.7
Intersegment revenue........... 72.3 68.2 18.7 -- -- 159.2
Segment EBITDA................. 44.9 (4.5) 56.1 2.6 28.0 127.1
Six Months ended June 30, 1999
Revenue from external
customers..................... $330.5 $ 80.7 $160.5 $54.5 $15.4 $641.6
Intersegment revenue........... 64.3 87.6 15.8 -- -- 167.7
Segment EBITDA................. 22.9 (10.1) 69.3 9.8 38.9 130.8
</TABLE>
7
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
- --------
(1) Includes the effects of purchase accounting which have not been reflected
in segment accounting records. Consequently, the impact of asset write-
downs resulting from bargain purchases are reflected in the All Other
column. Segment EBITDA includes unallocated intercompany profit.
A reconciliation of segment EBITDA to income (loss) before income taxes for
the six months ended June 30, 1998 and 1999 is summarized as follows (in
millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Segment EBITDA................................ $ 99.1 $ 91.9
Other EBITDA.................................. 28.0 38.9
-------- --------
Total EBITDA................................ 127.1 130.8
Less: Depreciation and amortization......... (26.9) (32.3)
Interest expense, net (1).............. (37.9) (38.7)
Year 2000 remediation costs............ -- (11.8)
Restructuring expense.................. -- (16.5)
Non-recurring advisory fees and out-of-
pocket expenses........................ -- (16.8)
Stock-based compensation............... (6.0) (27.3)
Integration costs...................... (12.6) (7.3)
Non-recurring charges and other........ (0.3) (1.5)
-------- --------
Income (loss) before income taxes............. $ 43.4 $ (21.4)
======== ========
</TABLE>
- --------
(1) Differs from the income statement by the amount of amortization of
deferred financing fees, which is included within depreciation and
amortization above.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company's 1998 Annual Report on Form 10-K contains management's
discussion and analysis of the Company's financial condition and results of
operations as of and for the year ended December 31, 1998. The following
management's discussion and analysis focuses on material changes since that
time and should be read in conjunction with the 1998 Annual Report on Form 10-
K. Relevant trends that are reasonably likely to be of a material nature are
discussed to the extent known.
Certain statements included in this discussion are forward-looking, such as
statements relating to estimates of operating and capital expenditure
requirements, future revenue and operating income levels, estimated Year 2000
expenditures and remediation plans, and cash flow and liquidity. Such forward-
looking statements are based on management's current expectations and are
subject to a number of risks and uncertainties that could cause actual results
in the future to differ significantly from results expressed or implied in any
forward-looking statements made by, or on behalf of, the Company. These risks
and uncertainties include, but are not limited to, uncertainties relating to
global economic and business conditions, governmental and regulatory policies,
Year 2000 remediation actions of suppliers and others, and the competitive
environment in which the Company operates. These and other risks are discussed
in some detail below as well as in other documents filed by the Company with
the Securities and Exchange Commission.
8
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Results of Operations
Net Sales. Net sales for the three months ended June 30, 1999 totaled
$322.6 million as compared to $318.8 million in the comparable year-ago
quarter. Net sales for the six months ended June 30, 1999 totaled $641.6
million as compared to $644.7 million in the comparable year-ago period.
The $3.8 million or 1.2% increase for the quarter is attributable primarily
to strong sales growth from Dimension(R), Stratus CS(R), Hemostasis and other
core products offset by planned declines in non-core Paramax(R), Stratus(R),
aca(R) and other product lines and the impact of non-strategic business
divestitures that occurred in third quarter 1998. Excluding sold businesses,
revenues grew by $11.9 million or 3.8% as compared to the comparable year-ago
quarter results.
The $3.1 million or 0.5% decrease for the six month period is attributable
primarily to the impact of non-strategic business divestitures that occurred
in third quarter 1998. Excluding sold businesses, revenues grew by $13.1
million or 2.1% compared to the comparable year-ago period results. The
company experienced 9% sales growth from core product lines, offset by planned
declines in non-core product lines.
Gross Profit. Gross profit for the three months ended June 30, 1999
decreased $13.1 million or 6.9% to $177.2 million as compared to $190.3
million in the comparable year-ago quarter. Gross margins for the three months
ended June 30, 1999 were 54.9% compared to 59.7% in the comparable year-ago
quarter. Gross profit for the six months ended June 30, 1999 decreased $17.7
million or 4.6% to $368.0 million as compared to $385.7 million in the
comparable year-ago period. Gross margins for the six months ended June 30,
1999 were 57.4% compared to 59.8% in the comparable year-ago period.
The decrease in gross profit for the quarter and the six months ended June
30, 1999 is attributable primarily to increased depreciation expense, non-
recurring costs related to the Behring integration and Year 2000 remediation
expenses. Excluding these non-recurring costs, gross margins for the six
months ended June 30, 1999 are 58.5%.
Marketing and Administrative Expense. Marketing and administrative expense
for the three months ended June 30, 1999 increased $42.7 million or 34.8% to
$165.5 million as compared to $122.8 million in the comparable year-ago
quarter. Marketing and administrative expense for the six months ended June
30, 1999 increased $36.8 million or 14.5% to $290.8 million as compared to
$254.0 million in the comparable year-ago period.
The increase in marketing and administrative expense for the quarter and
the six months ended June 30, 1999 is attributable primarily to the non-
recurring June 1999 stock-based compensation expense due to recapitalization,
non-recurring advisory fees and out-of-pocket expenses associated with the
Company's review and consideration of strategic alternatives and mergers and
acquisitions leading up to the recapitalization transaction and nonrecurring
Year 2000 remediation expenses.
Research and Development Expense. Research and development expense for the
three months ended June 30, 1999 totaled $22.0 million as compared to $21.9
million in the comparable year-ago quarter. Research and development expense
for the six months ended June 30, 1999 totaled $43.0 million as compared to
$44.5 million in the comparable year-ago period.
The $1.5 million or 3.4% decrease for the six month period is attributable
primarily to cost synergies related to eliminating overlapping or redundant
R&D projects, partially offset by increased investment in new products.
Research and development expenditures are primarily focused on the
development of new instrument platforms, expansion of test menus and
investment in advanced diagnostics and point of care technologies.
9
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Income (Loss) from Operations. Income from operations for the quarter
decreased $72.9 million to a loss of $28.4 million as compared to income of
$44.5 million in the comparable year-ago quarter. Income from operations for
the six months ended June 30, 1999 decreased $69.9 million to $14.6 million as
compared to $84.5 million in the comparable year-ago period.
The decrease in income from operations for the quarter and the six months
ended June 30, 1999 is due to increased depreciation expense, the non-
recurring June 1999 stock-based compensation expense due to recapitalization,
non-recurring advisory fees and out-of-pocket expenses associated with the
Company's review and consideration of strategic alternatives and mergers and
acquisitions leading up to the recapitalization transaction, nonrecurring Year
2000 remediation expenses, and the nonrecurring June 1999 restructuring
charge.
Net Interest Expense. Net interest expense for the three months ended June
30, 1999 totaled $21.1 million, a $0.4 million or 1.9% increase over the same
period in 1998. Net interest expense for the six months ended June 30, 1999
totaled $41.6 million, a $0.8 million or 2.0% increase over the same period in
1998. The increase in net interest expense for the quarter and the six months
ended June 30, 1999 is attributable to higher borrowing levels offset
partially by lower interest rates.
Income Taxes. The effective income tax rate for the quarter and six months
ended June 30, 1999 was approximately 40%, an increase of 3% from the rate
recorded for the quarter and six months ended June 30, 1998 to reflect the
estimated full year effective tax rate for 1999.
Other Income. Other income of $5.6 million for the six months ended June
30, 1999 includes a gain of $2.3 million from the settlement of a patent
infringement matter.
Net Income (Loss). Net loss for the three months ended June 30, 1999
totaled $36.3 million, a $51.2 million decrease as compared to the same period
in 1998. Net loss for the six months ended June 30, 1999 totaled $21.6
million, a $48.9 million decrease as compared to the same period in 1998. The
decrease in net income for the quarter and the six months ended June 30, 1999
is attributable primarily to lower income from operations, partially offset by
the gains included in other income.
Liquidity and Capital Resources
The Company's primary liquidity requirements are for working capital,
capital expenditures, restructuring expenditures and debt service.
Historically, the Company has funded its liquidity needs with a combination of
cash flows from operations, borrowings under its revolving credit facility and
other short-term borrowing arrangements.
During the second quarter of 1999, working capital decreased $46.2 million
to $236.9 million. The 16.3% decrease was attributable primarily to increased
liabilities recorded in connection with the June 1999 recapitalization and
restructuring, partially offset by a 5% increase in accounts receivable and a
3% increase in inventory levels.
During the six months ended June 30, 1999, working capital decreased $30.7
million. The 11.4% decrease was attributable primarily to liabilities recorded
in connection with the June 1999 recapitalization and restructuring, partially
offset by a 3% increase in inventory levels.
Capital expenditures, including instrument placements in customer
locations, totaled $31.5 million for the three months ended June 30, 1999, a
$0.3 million or 0.9% decrease over the same period in 1998. Capital
10
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
expenditures, including instrument placements in customer locations, totaled
$65.5 million for the six months ended June 30, 1999, a $13.5 million or 26.0%
increase over the same period in 1998. The increase in capital expenditures
for the quarter and the six months ended June 30, 1999 is attributable
primarily to integration-related investments for stand-alone infrastructure,
integration-related expenditures for information systems and increased
investment in gross profit generating instrument placements with customers.
Inflation affects the cost of goods and services used by the Company.
Inflation has been modest in recent years. Overall product prices have been
relatively stable during the past three years, and the Company continues to
mitigate the adverse effects of inflation primarily through new product
offerings, improved productivity and cost containment and improvement
programs.
Management believes cash flows from operating activities, together with
available short-term and revolving credit facilities under the Company's
existing credit agreements, will be sufficient to permit the Company to meet
its foreseeable financial obligations, exclusive of the planned share
repurchase program described above, and to fund its operations and planned
investments.
Other Matters
Delaware Product Distribution System Issue
In July 1999, a warehouse of the Company located in Delaware experienced
start-up problems with its new warehouse management system that went live on
July 5, 1999. The Company expects to incur approximately $6.0 million of non-
recurring remediation costs in the quarter ended September 30, 1999 related to
these systems issues.
Year 2000 Readiness
Certain information systems in use today may not be able to interpret dates
after December 31, 1999 because such systems allow only two digits to indicate
the year in a date. As a result, such systems are unable, for example, to
distinguish January 1, 2000 from January 1, 1900. Such inability to properly
distinguish between dates could have adverse consequences on the operations of
a business and the integrity of information processing. This potential problem
is commonly referred to as the "Year 2000" or "Y2K" issue.
The Company has completed a review of substantially all of its information
systems and product offerings for Year 2000 issues. The scope of this review
included information technology infrastructure components (such as hardware,
operating systems and communication equipment), business application software,
production and research equipment, laboratory products and associated
applications, buildings' and facilities' systems, personal computers, and the
status of all key suppliers' Year 2000 remediation efforts.
Based on the results of the review, a formal plan has been established by
the Company to address Year 2000 issues. The plan is monitored by the
Company's Year 2000 Program Office, comprised of senior management in key
functional areas, which reports on a regular basis to executive management on
the plan's status. Although the identification and successful remediation of
all Year 2000 issues cannot be assured with certainty, the Company expects a
successful execution of its Year 2000 plan. The inability of the Company or
third parties on which it relies to resolve Year 2000 issues could have a
material adverse effect on the Company's results of operations and financial
condition.
The plan, which provides a process for periodic progress reporting on a
site and region basis, prioritizes mission-critical and urgent Year 2000
issues. Substantial progress was made in the second quarter in both
11
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
categories. Approximately 90% of all internal business applications,
infrastructure items, and embedded systems were remediated and validated as of
June 30, 1999, as were approximately 60% of all installed products. Virtually
all remaining remediations are expected to be completed by the end of the
third quarter. Contingency plans are now being formulated and are expected to
be completed by the end of the third quarter.
In connection with the resolution of Year 2000 issues, the Company incurred
expenses of approximately $8.0 million in the three months ended June 30,
1999, bringing year-to-date expenses to $11.8 million. The Company expects to
incur expenses of approximately $11.5 million in the remaining two quarters of
1999. Expenses in 2000 are expected to be immaterial. However, there can be no
assurance that these costs will not be greater than anticipated.
Item 3. Qualitative and Quantitative Disclosures about Market Risk.
The Company's 1998 Annual Report on Form 10-K contains qualitative and
quantitative disclosures about market risk as of and for the year ended
December 31, 1998. No material changes in the Company's market risk have
occurred since December 31, 1998.
PART II
Item 1. Legal Proceedings.
The Company is involved in a number of legal proceedings arising in the
ordinary course of its business, none of which is expected to have a material
adverse effect on the Company's business or financial condition.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are included herein:
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
On July 26, 1999, the Registrant filed a Current Report on Form 8-K
reporting that:
(a) it has closed in June 1999 under a new $1.25 billion senior bank credit
facility which replaces its current senior bank credit facility. The new
senior bank credit facility consists of (i) a $275 million A term loan
facility, (ii) a $300 million B term loan facility, (iii) a $300 million C
term loan facility, (iv) a $225 million A revolving loan facility and (v) a
$150 million B revolving loan facility. Of the $1.25 billion senior credit
facility, the Registrant will use the $875 million term loan facilities and
approximately $37.5 million of the A revolving loan facility to retire its old
credit facility and pay fees and expenses, in an aggregate amount of
approximately $493 million, and to repurchase stock options and shares of
Class L Common and Common Stock from certain optionholders and stockholders of
Dade Behring Holdings, Inc., in an aggregate amount of $420.9 million; and
(b) the Registrant is a wholly-owned subsidiary of Dade Behring Holdings,
Inc. which announced that it has repurchased shares of Common Stock from
certain stockholders with the result that Hoechst AG's economic ownership in
Dade Behring Holdings, Inc. has increased to approximately 46%, excluding the
warrant held by Hoechst to purchase 1,275,816 shares of voting Common Stock,
while the Bain Capital and Goldman Sachs & Co. investment funds continue to
hold voting control.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DADE BEHRING INC.
(Registrant)
/s/ Glenn R. Richter
Date: August 16, 1999 By: _________________________________
Glenn R. Richter
Senior Vice President and Chief
Financial Officer (Duly authorized
Officer of Registrant)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
June 1999 Form 10-Q of Dade Behring Inc. and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 30,400 30,400
<SECURITIES> 0 0
<RECEIVABLES> 399,300 399,300
<ALLOWANCES> 45,700 45,700
<INVENTORY> 273,100 273,100
<CURRENT-ASSETS> 753,700 753,700
<PP&E> 672,900 672,900
<DEPRECIATION> 322,300 322,300
<TOTAL-ASSETS> 1,637,600 1,637,600
<CURRENT-LIABILITIES> 505,000 505,000
<BONDS> 350,000 350,000
0 0
0 0
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<OTHER-SE> (176,600) (176,600)
<TOTAL-LIABILITY-AND-EQUITY> 1,637,600 1,637,600
<SALES> 322,600 641,600
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<CGS> 145,400 273,600
<TOTAL-COSTS> 351,000 627,000
<OTHER-EXPENSES> (3,600) (5,600)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 21,100 41,600
<INCOME-PRETAX> (45,900) (21,400)
<INCOME-TAX> (18,400) (8,600)
<INCOME-CONTINUING> (27,500) (12,800)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (8,800) (8,800)
<CHANGES> 0 0
<NET-INCOME> (36,300) (21,600)
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