<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 September 30, 2000
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 November 14, 2000, 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, 1999 and 2
September 30, 2000 (unaudited)
Condensed Consolidated Statements of Operations and Comprehensive Income 3
(Loss) (unaudited) for the three months and nine months ended September 30,
1999 and September 30, 2000
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine 4
months ended September 30, 1999 and September 30, 2000
Condensed Consolidated Statements of Changes in Stockholder's Equity (Deficit) 5
for the years ended December 31, 1998 and 1999 and for the nine months
ended September 30, 1999 and September 30, 2000 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 12
Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II OTHER INFORMATION
----------------------------------------------------------------------------------------------------
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
</TABLE>
1
<PAGE>
DADE BEHRING INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share-related data)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1999 2000
------ ------------ -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 49.8 $ 24.3
Restricted cash ............................................ 11.4 --
Accounts receivable, net ................................... 330.9 291.8
Inventories ................................................ 256.2 251.9
Prepaid expenses and other current assets .................. 28.7 16.8
Deferred income taxes ...................................... 78.2 78.0
-------- --------
Total current assets ................................... 755.2 662.8
-------- --------
Property, plant and equipment, net ............................. 341.0 347.0
Debt issuance costs, net ....................................... 43.3 38.4
Goodwill, net .................................................. 125.8 121.3
Deferred income taxes .......................................... 286.7 316.8
Other assets ................................................... 113.8 123.4
-------- --------
Total assets ........................................... $1,665.8 $1,609.7
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current portion of long-term debt .......................... $ 6.0 $ 26.6
Short-term debt ............................................ 74.9 19.1
Accounts payable ........................................... 125.9 102.5
Accrued liabilities and other .............................. 241.9 191.7
-------- --------
Total current liabilities .............................. 448.7 339.9
-------- --------
Long-term debt, less current portion ........................... 902.4 1,044.2
Senior subordinated notes ...................................... 350.0 350.0
Other liabilities .............................................. 107.5 93.8
-------- --------
Total liabilities ...................................... 1,808.6 1,827.9
-------- --------
Commitments and contingencies .................................. -- --
Stockholder's equity (deficit):
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding ................................... -- --
Additional paid-in capital ................................. 184.1 184.1
Unearned stock-based compensation .......................... (8.1) (6.0)
Accumulated deficit ........................................ (247.9) (306.3)
Accumulated other comprehensive loss ....................... (70.9) (90.0)
-------- --------
Total stockholder's equity (deficit) ................... (142.8) (218.2)
-------- --------
Total liabilities and stockholder's equity (deficit) ... $1,665.8 $1,609.7
======== ========
</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>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 2000 1999 2000
------ ------ ------ -------
<S> <C> <C> <C> <C>
Net sales........................................................ $313.2 $292.3 $959.4 896.8
Cost of goods sold............................................... 133.3 148.2 406.9 422.1
------ ------ ------ -------
Gross Profit..................................................... 179.9 144.1 552.5 474.7
Operating costs and expenses:
Marketing and administrative expenses.......................... 131.5 122.1 422.6 362.6
Research and development expenses.............................. 24.1 23.9 71.4 74.4
Goodwill amortization expense.................................. 1.4 1.1 4.5 3.2
Non-recurring cost reduction programs.......................... - 5.3 16.5 15.0
------ ------ ------ -------
Income (loss) from operations.................................... 22.9 (8.3) 37.5 19.5
------ ------ ------ -------
Other income (expense):
Interest expense, net.......................................... (34.7) (39.4) (76.3) (109.2)
Other.......................................................... 5.1 6.9 10.7 8.7
------ ------ ------ -------
Income (loss) before income taxes................................ (6.7) (40.8) (28.1) (81.0)
Income tax expense (benefit)..................................... (2.6) (10.4) (11.2) (22.6)
------ ------ ------ -------
Income (loss) before extraordinary items......................... (4.1) (30.4) (16.9) (58.4)
Extraordinary loss related to early retirement of debt (net of
$5.9 million income tax benefit)............................... - (8.8) -
------ ------ ------ -------
Net Income (loss)................................................ $ (4.1) (30.4) $(25.7) (58.4)
------ ------ ------ -------
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments....................... (16.8) (14.0) (28.7) (19.1)
Unrealized gain on marketable securities....................... - 0.4 -
------ ------ ------ -------
Other comprehensive income (loss)................................ (16.8) (14.0) (28.3) (19.1)
Income tax expense related to items of comprehensive
income (loss).................................................. - - - -
------ ------ ------ -------
Other comprehensive income (loss), net of tax.................... (16.8) (14.0) (28.3) (19.1)
------ ------ ------ -------
Comprehensive income (loss)...................................... $(20.9) $(44.4) $(54.0) $ (77.5)
====== ====== ====== =======
</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>
Nine months Ended
September 30,
------------------
1999 2000
------- -------
<S> <C> <C>
Operating Activities:
Net loss ............................................................ $ (25.7) $ (58.4)
Adjustments to reconcile net loss to net cash utilized by operating
activities:
Depreciation and amortization expense ........................... 47.5 68.2
Stock-based compensation expense ................................ 28.4 2.1
Write-off of debt issuance costs ................................ 14.7 --
Deferred income taxes ........................................... (11.2) (22.6)
Loss on disposal of assets ...................................... 4.4 6.0
Sale of trade accounts receivables .............................. 12.5 31.2
Changes in balance sheet items:
Accounts receivable, net..................................... (43.2) (14.4)
Inventories ................................................. (34.5) (8.9)
Prepaid expenses ............................................ (4.4) (6.0)
Accounts payable ............................................ (39.5) (16.5)
Accrued liabilities ......................................... 15.5 (40.3)
Other, net .................................................. (24.4) (11.3)
------- -------
Net cash flow utilized by operating activities .......... (59.9) (70.9)
------- -------
Investing Activities:
Acquisitions and purchase price adjustments, net of acquired cash ... (7.6) (1.0)
Capital expenditures ................................................ (84.2) (90.8)
------- -------
Net cash flow utilized by investing activities .......... (91.8) (91.8)
------- -------
Financing Activities:
Change in restricted cash ........................................... -- 11.4
Net proceeds/repayments related to short-term debt .................. 2.0 0.2
Proceeds from borrowings under revolving credit facility ............ 425.8 435.9
Repayment of borrowings under revolving credit facility ............. (354.0) (301.3)
Repayment of borrowings under long-term loans ....................... (2.3) (4.5)
Debt issuance costs ................................................. (33.2) --
Proceeds from borrowings under bank credit agreement ................ 875.0 --
Retirement of previous bank credit agreement ........................ (369.1) --
Capital contribution from parent .................................... 80.0 --
Dividend to parent .................................................. (420.1) --
------- -------
Net cash flow provided by financing activities .......... 204.1 141.7
------- -------
Effect of foreign exchange rates on cash ................................ (0.1) (4.5)
------- -------
Net increase (decrease) in cash and cash equivalents .... 52.3 (25.5)
Cash and Cash Equivalents:
Beginning of period ................................................. 25.8 49.8
------- -------
End of period ....................................................... $ 78.1 $ 24.3
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DADE BEHRING INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
(Dollars in millions)
<TABLE>
<CAPTION>
Notes Accumulated Total
Common Stock Additional Receivable Unearned Other Stockholder's
-------------- Paid-in on Capital Stock-Based Accumulated Comprehensive Equity
Shares Amount Capital Contribution Compensation Deficit Loss (Deficit)
------ ------ ---------- ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .... 1,000 $ -- $ 490.2 $(0.7) $(21.8) $(252.9) $(10.7) $ 204.1
----- ---- ------- ----- ------ ------- ------ -------
Net income ...................... 43.5 43.5
Payments on notes receivable .... 0.5 0.5
Issuance of unearned stock-based
compensation .................. 3.6 (3.6) --
Adjustment of unearned stock-
based compensation ............ (0.8) 0.8 --
Amortization of unearned stock-
based compensation ............ 13.1 13.1
Unrealized loss on marketable
securities .................... (0.3) (0.3)
Cumulative translation adjustment (11.6) (11.6)
----- ---- ------- ----- ------ ------- ------ -------
Balance at December 31, 1998 .... 1,000 -- 493.0 (0.2) (11.5) (209.4) (22.6) 249.3
----- ---- ------- ----- ------ ------- ------ -------
Net loss ........................ (38.5) (38.5)
Capital contribution from parent 80.0 80.0
Cash dividend to parent on
recapitalization .............. (420.1) (420.1)
Payments on notes receivable .... 0.2 0.2
Issuance of unearned stock-based
compensation .................. 8.8 (8.8) --
Cancellation of stock options ... (1.2) 1.2 --
Amortization of unearned stock-
based compensation ............ 11.0 11.0
Issuance of stock-based
compensation .................. 1.3 1.3
Adjustment of stock-based
compensation .................. (1.0) (1.0)
Compensation expense related to
recapitalization .............. 22.7 22.7
Unrealized gain on marketable
securities .................... 0.4 0.4
Tax benefit of option exercises . 0.6 0.6
Minimum pension liability
adjustment .................... (1.8) (1.8)
Cumulative translation adjustment (46.9) (46.9)
----- ---- ------- ----- ------ ------- ------ -------
Balance at December 31, 1999 .... 1,000 -- 184.1 -- (8.1) (247.9) (70.9) (142.8)
(Unaudited) ----- ---- ------- ----- ------ ------- ------ -------
Net loss ........................ (58.4) (58.4)
Amortization of unearned stock
based compensation ............ 2.1 2.1
Cumulative translation adjustment (19.1) (19.1)
----- ---- ------- ----- ------ ------- ------ -------
Balance at September 30, 2000 ... 1,000 $ -- $ 184.1 $ -- $ (6.0) $(306.3) $(90.0) $(218.2)
===== ==== ======= ===== ====== ======= ====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<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"), Aventis
S.A., formerly Hoechst A.G., and certain of its affiliates ("Aventis S.A.")
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 Aventis S.A. that
operated its worldwide human 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 condensed consolidated 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 included in the Company's 1999
Annual Report on Form 10-K and notes thereto, are adequate to make the
information presented not misleading. Certain reclassifications have been made
to prior period balances to conform to the current year presentation. 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 nine months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2000.
Due to the issuance of a new U.S. GAAP pronouncement in July, 2000 (EITF 00-
10), beginning in the third quarter of 2000, the Company has reported the
amounts billed to customers for shipping and handling costs as a component of
net revenue. These amounts were previously reported as a reduction of operating
expense. Reclassification of prior period balances has been made to conform to
the current year presentation. As a result of this new pronouncement, $8.5
million and $6.9 million of freight billings were reclassified from operating
expense to net revenue in the nine month periods ending September 30, 2000 and
1999, respectively. $51.1 million and $55.4 million of gross shipping, handling
and other warehousing costs are reported as operating expense in the nine-month
periods ending September 30, 2000 and 1999, respectively.
6
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133. Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 is effective for all
fiscal years beginning after June 15, 2000 (fiscal year 2001 for the Company).
SFAS 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction, Management of the Company anticipates that the
adoption of SFAS 133 will not have a significant effect on the Company's results
of operations or its financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which was amended by SAB No. 101A in March 2000 and SAB No. 101B in
June 2000. SAB 101A and 101B delayed the implementation date of SAB No. 101.
These SAB's which provide guidance on the recognition, presentation and
disclosure of revenue in financial statements, are effective in the fourth
quarter of 2000. The Company believes that the adoption of SAB 101, SAB 101A
and SAB 101B will not have a significant effect on the Company's results of
operations or its financial position.
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):
<TABLE>
December 31, September 30,
1999 2000
------------ -------------
<S> <C> <C>
Raw materials...................... $ 45.9 $ 46.4
Work-in-process.................... 43.1 46.2
Finished products.................. 167.2 159.3
------ ------
Total inventories............ $256.2 $251.9
====== ======
</TABLE>
4. Debt
In 2000, the Company extended the maturity dates of approximately $50.0
million of German debt previously classified as short term debt. The debt is now
due at June 30, 2004 and is classified as long term debt on the Condensed
Consolidated Balance Sheet at September 30, 2000.
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. The Company has sufficient capacity under its current
credit facilities to fund short-term cash needs. However, rising interest rates,
the declining Euro, restructuring costs and the Allegiance transition have had a
significant adverse impact on the Company's cashflow and its financial position.
The Company is currently in compliance with the financial covenants under
its Credit Agreement. However, as a result of the above adverse impacts, the
Company intends to seek financial covenant waivers or amendments from its bank
group to reflect the Company's current financial position and outlook. Although
amendments to the Credit Agreement have been granted in the past, no assurance
can be given that such waivers or amendments will be obtained.
7
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
As currently scheduled, beginning in 2001 and continuing thereafter, the
Company will be required to make debt amortization payments on its existing
indebtedness which would require the Company to raise sufficient funds from
operations or other sources or to refinance or restructure maturing
indebtedness. As a result of the adverse impacts described above, the Company is
taking action currently to improve liquidity, including further cost and capital
expenditure reductions. In addition, the Company has engaged a financial advisor
to explore various strategic alternatives that could provide further liquidity,
including partnerships, joint ventures, mergers, acquisitions, divestitures,
sales of assets, direct investments and other strategic alternatives. The
Company is in preliminary discussions with several third parties with respect to
certain of these potential strategic alternatives. There can be no assurance
that these actions, if required, would generate the liquidity necessary to
operate the business and service its indebtedness.
5. Non-Recurring Cost Reduction Programs
During 1999, the Company substantially completed its integration efforts
related to the Behring Combination.
In June 2000 the Company reviewed its cost structure and announced a global
cost reduction program having the stated objective of reducing the Company's
overall cost structure by approximately $50 million annually with one-time
restructuring costs of approximately $85 million. Virtually all of the Company's
global operations are affected by this plan, including sales, manufacturing,
marketing and support services. The Company expects to eliminate a number of
redundant positions under this program in 2000 and 2001, while adding staff in
key areas, such as the direct distribution centers. The net effect of these
changes will be a reduction of approximately 450 positions.
Pursuant to the programs described above, management has approved and
initiated several actions contemplated by the cost reduction program and has
recorded a pre-tax reserve of $10.8 million as of September 30, 2000. Also
included in the non-recurring cost reduction program line on the condensed
Consolidated Statements of Operations for the quarter and year ended September
30, 2000 are $4.0 and $9.2 million, respectively, of costs which relate to the
cost reduction initiatives which did not qualify for reserve treatment.
Management intends to continue to initiate the remaining actions under the above
programs in the fourth quarter of 2000 and first half of 2001.
During the second quarter of 2000, excess severance accruals recorded under
the 1999 Reserve of $4.6 million were identified and credited to income. In
August 2000, excess facility exit cost reserves of $4.3 million recorded under
the Behring Allocation Reserve were identified and credited to negative goodwill
recorded in the Behring Combination.
8
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
A summary of the Company's current and prior year cost reduction program
reserves follows:
<TABLE>
<CAPTION>
Facility and
Other Severance and
Exit Costs Relocation Total
---------- ------------ -----
<S> <C> <C> <C>
1997 Behring Allocation Reserve
Reserve balance, December 31, 1999................................ $18.5 $ 1.5 $20.0
Cash payments............................................... (2.3) (0.6) (2.9)
Reversal to negative goodwill (4.3) - (4.3)
----- ----- -----
Reserve balance, September 30, 2000 $11.9 $ 0.9 $12.8
1999 Reserve
Reserve balance, December 31, 1999................................ $ 0.4 $10.5 $10.9
Cash payments............................................... - (2.8) (2.8)
Reversal to income.......................................... (0.4) (4.2) (4.6)
----- ----- -----
Reserve balance, September 30, 2000 $ - $ 3.5 $ 3.5
2000 Reserve
Reserve balance, December 31, 1999................................ $ - $ - $ -
Reserve established......................................... 0.8 10.0 10.8
Cash payments............................................... - (1.3) (1.3)
Reversal to income.......................................... (0.4) - (0.4)
----- ----- -----
Reserve balance, September 30, 2000............................... $ 0.4 $ 8.7 $ 9.1
</TABLE>
6. 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
manufacturing and marketing of IVD products and services. The Company's
operating structure includes the following segments: United States, Europe,
Asia-Pacific and All Other.
Bank EBITDA, as defined by the Company and its lenders, represents the sum
of net income (loss), interest, taxes, depreciation and amortization,
non-cash charges including non-cash stock-based compensation expenses, and loss
on disposal of fixed assets and non-recurring charges, including Y2K remediation
costs, integration costs and restructuring charges. Integration costs include
personnel retention and severance, moving and start-up costs associated with the
transfer of manufacturing capacity from various sites, consulting and costs
related to the consolidation of information technology. Non-recurring charges
include costs related to the shutdown of product lines, the costs of a mandatory
relabeling initiative in Europe, and the impact of transitioning from Allegiance
Healthcare Corporation ("Allegiance") to direct distribution of Hemostasis and
MicroScan products in the U.S. The Allegiance distribution agreement transition
costs include gross profit from delayed sales to end-user customers and other
transition costs such as inventory write-offs and one-time implementation costs
(See Note 7). Bank EBITDA is in management's opinion a financial indicator of
the Company's ability to service or incur indebtedness. While the Company does
not advocate Bank EBITDA to be considered as a substitute for net income or cash
flows, it is the primary financial metric used by management.
9
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Financial information by segment for the nine months ended September 30,
1999 and 2000 is summarized as follows (in millions):
<TABLE>
<CAPTION>
United Asia-
States Europe Pacific All Other Total
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
Nine months ended September 30, 1999
Revenue from external customers........... $500.3 $349.3 $83.35 $26.5 $959.4
Intersegment revenues..................... 225.3 38.5 - - 263.8
Segment Bank EBITDA....................... 72.5 97.0 15.7 7.0 192.2
Nine months ended September 30, 2000
Revenue from external customers........... 478.1 303.1 86.6 29.0 896.8
Intersegment revenues..................... 108.1 42.1 - 0.1 150.3
Segment Bank EBITDA....................... 41.4 79.3 21.4 4.7 146.8
</TABLE>
A reconciliation of segment Bank EBITDA to income (loss) before income
taxes for the nine months ended September 30, 1999 and 2000 is summarized as
follows (in millions):
<TABLE>
<CAPTION>
Nine months Ended
September 30, 2000
------------------
1999 2000
------ -------
<S> <C> <C>
Segment Bank EBITDA.............................................................. $185.2 142.1
Other Bank EBITDA................................................................ 7.0 4.7
------ -------
Total Bank EBITDA............................................................... 192.2 146.8
Less: Depreciation and amortization............................................ (47.5) (68.2)
Interest expense, net (1)................................................... (71.7) (103.9)
Non-cash charges:
-----------------
Loss on disposal of assets.................................................. (4.4) (6.0)
Charge related to purchase accounting adjustment............................ - (2.8)
Stock-based compensation.................................................... (28.4) (2.1)
Charge related to earnings in equity investment............................. - (1.2)
Non-recurring charges:
----------------------
Allegiance distribution agreement transition ............................... - (16.2)
Non-recurring cost reduction programs, net of reversals..................... (16.5) (15.0)
Final Miami facility closure costs.......................................... - (3.4)
Charges related to shutdown of product line................................. - (2.4)
European IVDD relabeling initiative......................................... - (1.4)
Integration costs........................................................... (12.8) (1.5)
Year 2000 remediation costs................................................. (17.1) (0.6)
Advisory fees and expenses related to 1999 recapitalization................. (16.8) -
DDC warehouse remediation costs............................................. (5.0) -
Other non-recurring charges................................................. (.1) (3.1)
------ -------
Income (loss) before income taxes................................................ $(28.1) $ (81.0)
====== =======
</TABLE>
________
(1) Differs from the income statement by the amount of amortization of deferred
financing fees, which is included within depreciation and amortization
above.
10
<PAGE>
DADE BEHRING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
7. U.S. Product Distribution Transition
As part of the cost of reduction program disclosed in Note 5, in August
2000, the Company finalized the details and reached an agreement regarding its
decision not to renew its U.S. distribution agreement with Allegiance and has
begun the transition to direct distribution of its Hemostasis and MicroScan
products in the U.S. There are significant benefits associated with this change.
Specifically this change is focused on providing customers with enhanced sales
and service capabilities. The Company already directly distributes more than 80%
of its products in the U.S. The transition to direct distribution of this
remaining 20% will be complete in June 2001 and will provide an ongoing annual
benefit of approximately $10.0 million in Bank EBITDA. This benefit is primarily
the result of eliminating the distributor margin paid to Allegiance. The Company
has paid a $2.0 million transition service fee to Allegiance pursuant to the
terms and as a consequence of the Company's decision not to renew the U.S.
distribution agreement. In addition, the transition to direct distribution will
have a negative non-recurring impact on sales and gross profit in 2000 and 2001.
This negative impact is the result of inventory reductions at Allegiance as
customer specific Hemostasis inventory lots held by Allegiance for up to
eighteen months are sold to end-user customers, as well as the write-off of any
unsaleable product. As customers transition to new specific lots, they will
order directly from the Company. The Company does not anticipate a change in
end-user purchases of Hemostasis and MicroScan products as a result of this
transition.
The Company's decision not to renew its U.S. distribution arrangement with
Allegiance is expected to provide net annual cash flow benefits of $10.0 million
beginning in 2002. A portion of this annual benefit will also be realized in
2001, as the transition to direct distribution is completed in June 2001. The
net cash flow requirements of this transition however are expected to be $28.0
million and $17.0 million in 2000 and 2001, respectively, in the form of delayed
gross profit, inventory write-offs absorbed by the Company, capital
expenditures, working capital and one-time implementation costs. Year to date
one-time gross profit impact and implementation costs at September 30, 2000 are
$12.6 million and $3.6 million, respectively.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Company's 1999 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, 1999. The following management's
discussion and analysis focuses on material changes since that time and should
be read in conjunction with the 1999 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, 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 such as healthcare reimbursement policies, 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.
Results of Operations
Net Sales. Net sales for the three months ended September 30, 2000 totaled
$292.3 million as compared to $313.2 million in the comparable year-ago quarter.
Net sales for the nine months ended September 30, 2000 totaled $896.8 million as
compared to $959.4 million in the comparable year-ago period.
The $20.9 million or 6.7% decrease in net sales for the quarter is
attributable primarily to foreign currency rate changes, which accounted for a
$12.1 million decrease in revenues, $1.4 million relating to businesses sold in
1999 and $14.3 million resulting from declines in the Coagulation business. The
decline in Coagulation is driven primarily by the decision to discontinue our
distribution relationship with Allegiance in the U.S. (see Note 7 above).
Excluding these impacts, sales increased $6.9 million or 2.3%.
The $62.6 million or 6.5% decrease in net sales for the nine-month period
ended September 30, 2000 is also attributable to foreign currency rate changes
($36.3 million), sold businesses ($13.9 million), and declines in our
Coagulation business ($28.1 million). The decline in Coagulation is driven
primarily by the decision to discontinue our distribution relationship with
Allegiance. Excluding the impact of these items, sales as compared to the year
ago nine-month period increased $15.7 million or approximately 1.7%. The
Company's Dimension and Stratus C5 product line revenues increased 26% globally
as compared to the same period in the prior year adjusted for foreign exchange.
Gross Profit. Gross profit for the three months ended September 30, 2000
decreased $35.8 million or 19.9% to $144.1 million as compared to $179.9 million
in the comparable year-ago quarter. Gross profit for the nine months ended
September 30, 2000 decreased $77.8 million or 14.1% to $474.7 million as
compared to $552.5 million in the comparable year-ago period. The decrease in
gross profit for the nine-month period ended September 30, 2000 is attributable
primarily to foreign currency rate changes ($30.4 million), sold businesses
($6.3 million), the Coagulation business ($23.1 million), an increase in
depreciation expense related to Behring purchase accounting ($16.8 million),
partially offset by incremental one-time expense in 1999 ($1.6 million). The
Coagulation decline is driven primarily by the Allegiance transition. Excluding
these impacts, gross profit decreased by $2.8 million.
12
<PAGE>
Gross margins for the nine months ended September 30, 2000 were 52.9%
compared to 57.6% in the comparable year-ago period. The 470 basis points
decrease in the nine months ended September 30, 2000 is primarily due to foreign
currency rate changes and sold businesses (90 basis points), the Coagulation
impact (70 basis points) and the increase in depreciation expense noted above
(190 basis points), partially offset by incremental one-time expenses in 1999
(20 basis points). Excluding these impacts, gross profit margin decreased by 140
basis points primarily as a result of increased third-party product revenues
which has lower margins and is offsetting the managed declines of our mature
product lines.
Marketing and Administrative Expense. Marketing and administrative expense
for the three months ended September 30, 2000 decreased $9.4 million or 7.1% to
$122.1 million as compared to $131.5 million in the comparable year-ago quarter.
Marketing and administrative expense for the nine months ended September 30,
2000 decreased $60.0 million or 14.2% to $362.6 million as compared to $422.6
million in the comparable year-ago period.
The decrease in marketing and administrative expense for the quarter ended
September 30, 2000, is attributable primarily to $4.5 million of benefit from
foreign currency rate changes and sold businesses, $4.1 million of Y2K
remediation/integration and other non-recurring costs in the comparable year ago
quarter, which did not reoccur in 2000, and $.5 million of fewer non-cash
charges in 2000.
The decrease in marketing and administrative expense for the nine-month
period ended September 30, 2000 is attributable primarily to $14.8 million of
benefit from foreign currency rate changes and sold businesses, $16.8 million of
advisory fees and $22.7 million of stock compensation expense related to the
June 1999 recapitalization, as well as incremental one-time expenses in 1999 of
$3.5 million and $.9 million of fewer non-cash charges in 2000. Excluding these
impacts, marketing and administrative costs have decreased by $1.3 million as
the Company's cost cutting actions have more than offset inflationary impacts.
Given the recent financial performance, the Company is carefully evaluating all
investments and has reduced spending.
Research and Development Expense. Research and development expense for the
three months ended September 30, 2000 totaled $23.9 million as compared to $24.1
million in the comparable year-ago quarter. Research and development expense for
the nine months ended September 30, 2000 totaled $74.4 million as compared to
$71.4 million in the comparable year-ago period.
The $3.0 million or 4.2% increase in the comparable year ago nine-month
period is attributable to increased investment in new products which was
partially offset by the benefit from foreign currency rate changes ($1.9
million). However, given the recent financial performance, the Company is
carefully evaluating all investments and has reduced spending.
Research and development expenditures are primarily focused on the
development of new instrument platforms and expansion of test menus.
Income (loss) from Operations. Loss from operations for the quarter
increased $31.2 million to $8.3 million as compared to $22.9 million income from
operations in the comparable year-ago quarter. Income from operations for the
nine months ended September 30, 2000 decreased $18.0 million to $19.5 million as
compared to $37.5 million in the comparable year-ago period.
The decrease in income from operations for the quarter and the nine months
ended September 30, 2000 is due primarily to reduced gross profit offset by
decreased marketing and administrative expense.
13
<PAGE>
Net Interest Expense. Net interest expense for the three months ended
September 30, 2000 totaled $39.4 million, a $4.7 million increase over the same
period in 1999. Net interest expense for the nine months ended September 30,
2000 totaled $109.2 million, a $32.9 million increase over the same period in
1999. The increase in net interest expense is primarily attributable to
increased borrowing levels as a result of the June 1999 recapitalization and
higher interest rates.
Other Income/Expense. Other income for the quarter ended September 30,
2000 totaled $6.9 million, as compared to $5.1 million in the comparable
year-ago quarter. Other income for the nine months ended September 30, 2000
totaled $8.7 million, as compared to $10.7 million in the comparable year-ago
period.
The other income recognized during the quarter ended September 30, 2000 is
primarily the result of the settlement of two separate litigation matters.
Income Taxes. The effective income tax rate for the quarter and nine-month
period ended September 30, 2000 was approximately 25% and 28%, respectively, to
reflect the estimated full year effective tax rate for 2000.
In July 2000, the German Parliament passed a broad set of tax reforms that
in addition to a number of changes, would reduce the "base" German corporate tax
rate to 25% from 40% effective January 1, 2001. This rate change was enacted in
October 2000 and will impact the fourth quarter of 2000, reducing the Company's
German deferred tax asset and increasing tax expense by approximately $2.0
million.
Net Income (Loss). Net loss for the three months ended September 30, 2000
totaled $30.4 million, a $26.3 million increase from net loss as compared to the
same period in 1999.
Net loss for the nine months ended September 30, 2000 totaled $58.4
million, a $32.7 million increase from net loss as compared to the same period
in 1999.
The increase in net loss for the nine-month and three-month periods ended
September 30, 2000 is due primarily to higher net interest expense and lower
income from operations.
Bank EBITDA. Bank EBITDA for the three months ended September 30, 2000
totaled $43.1 million, an $18.3 million decrease from Bank EBITDA as compared to
the same period in 1999. Adjusting for foreign currently rate changes of $4.2
million, sold businesses of $2.5 million, the Coagulation shortfall of $6.7
million and incremental non-recurring income recognized in 1999 of $4.0 million,
Bank EBITDA for the quarter ended September 30, 2000 was flat compared to the
same period in 1999.
Bank EBITDA for the nine month period ended September 20, 2000 totaled
$146.8 million, a $45.4 million decrease from Bank EBITDA as compared to the
same period in 1999. Adjusting for foreign currency rate changes of $18.4
million, sold businesses of $6.5 million, Coagulation shortfall of $10.5 million
and incremental non-recurring income from royalties, licenses and legal
settlements recorded in 1999 of $10.2 million, Bank EBITDA for the nine month
period ended September 30, 2000 was flat compared to the same period in 1999.
The Coagulation shortfall is primarily driven by the transition away from
Allegiance as a distributor in the U.S.
Liquidity and Capital Resources
In 2000, the Company extended the maturity dates of approximately $50.0
million of German debt previously classified as short term debt. The debt is
now due at June 30, 2004 and is classified as long term debt on the Condensed
Consolidated Balance Sheet at September 30, 2000.
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. The Company has sufficient capacity under its current
credit facilities to fund short-term cash needs. However, rising interest rates,
the declining Euro, restructuring costs and the Allegiance transition have had a
significant adverse impact on the Company's cashflow and its financial position.
14
<PAGE>
The Company is currently in compliance with the financial covenants under
its Credit Agreement. However, as a result of the above adverse impacts, the
Company intends to seek financial covenant waivers or amendments from its bank
group to reflect the Company's current financial position and outlook. Although
amendments to the Credit Agreement have been granted in the past, no assurance
can be given that such waivers or amendments will be obtained.
As currently scheduled, beginning in 2001 and continuing thereafter, the
Company will be required to make debt amortization payments on its existing
indebtedness which would require the Company to raise sufficient funds from
operations or other sources or to refinance or restructure maturing
indebtedness. As a result of the adverse impacts described above, the Company is
taking action currently to improve liquidity, including further cost and capital
expenditure reductions. In addition, the Company has engaged a financial advisor
to explore various strategic alternatives that could provide further liquidity
including partnerships, joint ventures, mergers, acquisitions, divestitures,
sales of assets, direct investments and other strategic alternatives. The
Company is in preliminary discussions with several third parties with respect to
certain of these potential strategic alternatives. There can be no assurance
that these actions, if required, would generate the liquidity necessary to
operate the business and service its indebtedness.
For the quarter ended September 30, 2000, net working capital, adjusted for
foreign exchange, decreased $39.4 million or 12.9% due to the following:
. Accounts receivable decreased $25.6 million primarily as a result of
factoring of European receivables.
. Inventories increased $3.5 million as the Company prepared for its year
end seasonally high sales.
. Accrued liabilities increased $11.5 million.
. Accounts payable increased $8.3 million.
. Prepaid expenses increased by $2.4 million.
For the nine-month period ended September 30, 2000, adjusted for foreign
exchange, working capital increased $54.9 million to $266.3 million. The 26%
increase is attributable primarily to uses of cash in the accounts payable and
accrued liabilities areas in the first quarter of 2000, which typically
increase as the year progresses.
The Company's decision not to renew its U.S. distribution arrangement with
Allegiance is expected to provide net annual cash flow benefits of $10.0 million
beginning in 2002. A portion of this annual benefit will also be realized in
2001, as the transition to direct distribution is completed in June 2001. The
net cash flow requirements of this transition however are expected to be $28.0
million and $17.0 million in 2000 and 2001, respectively, in the form of delayed
gross profit, inventory write-offs absorbed by the Company, capital
expenditures, working capital and one-time implementation costs. Year to date
one-time gross profit and implementation costs at September 30, 2000 are $12.6
million and $3.6 million, respectively.
In June 2000, the Company announced a global cost reduction program having
the stated objective of reducing the Company's overall cost structure by
approximately $50 million annually with one-time restructuring costs of
approximately $85 million. Virtually all of the Company's global operations are
affected by this plan, including sales, manufacturing, marketing and support
services. The Company expects to eliminate a number of redundant positions under
this program in 2000 and 2001, while adding staff in key areas, such as the
direct distribution centers. The net effect of these changes will be a reduction
of approximately 450 positions.
Pursuant to the programs described above, management has approved and
initiated several actions contemplated by the non-recurring cost reduction
program and has recorded a pre-tax reserve of $10.8 million as of September 30,
2000. Also included in the cost reduction program line on the Condensed
Consolidated Statements of Operations for the quarter and year ended September
30, 2000 are $4.0 and $9.2 million, respectively, of costs which relate to the
cost reduction initiatives which did not qualify for reserve treatment.
Management intends to continue to initiate the remaining actions under the above
programs in the fourth quarter of 2000 and first half of 2001.
15
<PAGE>
Capital expenditures, including instrument placements in customer
locations, totaled $90.8 million for the nine months ended September 30, 2000, a
$6.6 million or 7.8% increase as compared to the same period in 1999. The
increase in capital expenditures for the period is attributable primarily to
increased investments in information technology infrastructure. Given the recent
financial performance, the Company is carefully evaluating all investments and
has reduced spending.
Pursuant to the $1.25 billion Senior Bank Credit Facility Agreement, in the
first quarter of 2000, the Euro-denominated credit facility commitment was
permanently reduced to an amount equal to the sum of all commitments to provide
lines of credit to the German subsidiary. As a result, the borrowing capacity
under the Euro-denominated credit facility was reduced by approximately $50
million.
In addition, in 2000, the Company extended the maturity dates of
approximately $50.0 million of German debt previously classified as short term
debt. The debt is now due at June 30, 2004 and is classified as long term debt
on the Condensed Consolidated Balance Sheets at September 30, 2000.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's 1999 Annual Report on Form 10-K contains quantitative and
qualitative disclosures about market risk as of and for the year ended
December 31, 1999. No material changes in the Company's market risk have
occurred since December 31, 1999.
16
<PAGE>
PART II
Item 1. Legal Proceedings.
The Registrant 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 Registrant's business or financial condition.
Item 5. Other Information.
The Registrant announced that James Reid-Anderson was promoted to President
and Chief Executive Officer and that Jeffrey G. Naylor was joining the
Registrant as Senior Vice President, Chief Financial and Administration Officer.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See the Index to Exhibits.
(b) Reports on Form 8-K.
None.
17
<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)
Date: November 14, 2000 By: /s/ Jeffrey G. Naylor
--------------------------------------------
Jeffrey G. Naylor
Senior Vice President, Chief
Financial and Administration Officer
(Duly authorized Officer of Registrant)
18
<PAGE>
Index to Exhibits
10.1 Credit Agreement dated as of June 29, 1999 by and among Dade Behring
Holdings, Inc., the Registrant, Dade Behring Holdings GmbH, the lenders
from time to time a party thereto, Donaldson, Lufkin & Jenrette Securities
Corporation and Morgan Stanley Senior Funding, Inc., as Co-Documentation
Agents, Goldman Sachs Credit Partners L.P., as Syndication Agent, Co-
Arranger and Co-Lead Book Runner, and Bankers Trust Company, as
Administrative Agent, Co-Arranger and Co-Lead Book Runner.*
10.2 First Amendment to Credit Agreement dated as of August 3, 2000 by and
among Dade Behring Holdings, Inc., the Registrant, Dade Behring Holdings
GmbH, the lenders from time to time a party to the Credit Agreement dated
as of June 29, 1999, Donaldson, Lufkin & Jenrette Securities Corporation
and Morgan Stanley Senior Funding, Inc., as Co-Documentation Agents,
Goldman Sachs Credit Partners L.P., as Syndication Agent, Co-Arranger and
Co-Lead Book Runner, and Bankers Trust Company, as Administrative Agent,
Co-Arranger and Co-Lead Book Runner.
10.3 Fourth Amendment to the Amended and Restated Exclusive Distribution
Agreement dated as of August 9, 2000 by and between Registrant and
Allegiance Healthcare Corporation.
10.4 Amendment to Production and Supply Agreement dated as of October 30,
2000 by and between Dade Behring Marburg GmbH and Messer Cutting and
Welding AG.
10.5 Employment Agreement effective as of September 1, 2000 by and between
Registrant and James Reid-Anderson.
10.6 Employment Agreement Addendum effective as of September 1, 2000 by and
between Registrant and James Reid-Anderson.
10.7 Restricted Stock Unit Agreement effective as of September 1, 2000 by and
between Dade Behring Holdings, Inc. and James Reid-Anderson.
10.8 Employment offer letter dated August 28, 2000 from Registrant; accepted as
of August 31, 2000 by Jeffrey G. Naylor.
10.9 Separation Agreement dated as of September 1, 2000 by and between Dade
Behring Holdings, Inc. and Steve Barnes.
10.10 Employment Termination and General Release Agreement dated as of May
12, 2000 by and between Registrant and Marc Casper.
27.1 Financial Data Schedule
* Replaces Exhibit 10.1 to Registrant's Form 8-K under the Securities Exchange
Act of 1934 as filed on July 26, 1999.
